Strategic planning and small business performance

5 downloads 416686 Views 96KB Size Report
small business. Marko Kohtamäki is Research Director in the Department of Management, University of Vaasa, PO. Box 700 ... strategic planning on small business performance (for example ..... were identified and since the first factor did not account ... Lohmöller, 1989) with the software package SmartPLS. 2.0 (Ringle et al, ...
Strategic planning and small business performance An examination of the mediating role of exploration and exploitation behaviours Marko Kohtamäki, Teemu Kautonen and Sascha Kraus

Abstract: This paper examines the mediating role of opportunity exploration and resource exploitation in the relationship between strategic planning and small business performance. The research model is examined with a sample of 153 small Finnish firms. The results show that exploitation, but not exploration, carries the effect of strategic planning to the performance of a small firm. This implies that strategic plans as such are not sufficient to improve business performance unless they are carefully integrated into the actual processes and behaviour of the firm.

Keywords: strategic planning; performance; exploration; exploitation; small business Marko Kohtamäki is Research Director in the Department of Management, University of Vaasa, PO Box 700, FI-65101 Vaasa, Finland. E-mail: [email protected]. Teemu Kautonen is an Academy Research Fellow at the Turku School of Economics, University of Turku, Rehtorinpellonkatu 3, FI-20500 Turku, Finland. E-mail: [email protected]. Sascha Kraus is a Professor at the Institute for Entrepreneurship, University of Liechtenstein, Fürst-Franz-Josef-Str, FL-9490 Vaduz, Liechtenstein. E-mail: [email protected].

Given the pivotal role of small enterprises in Europe’s economies (Bauer, 2002), there is a clear need to investigate the factors that impact on the survival, success and performance of those companies. Previous research indicates that strategic planning may be one of these success factors (Miller and Cardinal, 1994). However, the extant research on strategic planning in small businesses is still rather limited. Even though a number of studies have already looked at the effect of strategic planning on small business performance (for example, Robinson and Pearce, 1984; Berry, 1998; Gibbons and O’Connor, 2005), a general agreement on the quantity and quality of this effect is yet to emerge. Other empirical studies show that the relationship

between strategic planning and small business performance is weak and possibly even indirect (for example, Gibson and Cassar, 2005). Therefore, scholars have begun to suspect that other factors may mediate the relationship between strategic planning and performance (Hutzschenreuter and Kleindienst, 2007). One of the more recent discussions on small-firm strategic behaviour explores the role of ambidexterity in explaining business performance. Ambidexterity includes the concepts of exploration and exploitation (see, for example, He and Wong, 2004; Gupta et al, 2006; Lubatkin et al, 2006; Raisch and Birkinshaw, 2008), referring to the exploration of new business opportunities and the exploitation of current resources

ENTREPRENEURSHIP AND INNOVATION Vol 11, No 3, 2010, pp 221–229

221

Strategic planning and small business performance

respectively. A central argument of this stream of research is that a simultaneous application of these competencies leads to better performance than an exclusive focus on either element (March, 1991; Gibson and Birkinshaw, 2004). This study seeks to increase our understanding of the relationship between strategic planning and the performance of small enterprises by examining the proposition that exploration and exploitation behaviours carry the effect of strategic planning to performance. The proposition is based on two assumptions. On the one hand, companies need to implement strategic plans before these translate into improved performance and, on the other hand, strategic planning facilitates a more efficient utilization of existing resources and a more systematic approach to the exploration of new business opportunities. The research question addressed in this paper can be summarized as follows: ‘To what extent do opportunity exploration and resource exploitation mediate the relationship between strategic planning and the business performance of a small firm?’ The paper is arranged as follows: the relevant literature concerning the elements and hypothesized relationships in the research model is reviewed first. The methodological design of the empirical study is explained subsequently, followed by the results of the empirical analysis. Finally, the findings are discussed and conclusions and implications drawn.

Theoretical foundations Research model The research model employed in this study proposes that exploration and exploitation behaviours mediate the relationship between strategic planning and performance (Figure 1). The following discussion begins with an examination of the concept of strategic planning in the broader context of strategic management. The analysis

Exploration

Strategic planning

Performance

then proceeds to the relationship between strategic planning and performance, and concludes with a conceptualization of the mediating effect of exploration and exploitation in this context. Strategic management and strategic planning Strategic management research is, broadly speaking, concerned with identifying differences in performance between different kinds of business enterprises by analysing their efforts to develop sustainable competitive advantages (Ireland et al, 2003). Strategic management mainly focuses on matching the activities of the business to its resources and to the environment in which it operates, with the aim of maximizing the opportunities while minimizing the threats (Tapinos et al, 2005). One principal element of strategic management is strategic planning. Strategic planning is concerned with managing the complexity and the dynamics of the business environment (Eisenhardt and Sull, 2001). It can promote long-term thinking, help to focus on the big picture rather than on operational details, provide a structure for the identification and evaluation of strategic alternatives, and contribute to a reduction of uncertainty for the entrepreneur (Schwenk and Shrader, 1993). In general, strategic planning is regarded as being a long-term process (time span of three years or more), directed towards future potentials – substantial and holistic in nature as well as predominantly associated with the highest management level determining the vision, mission and culture of the company. In small businesses, the owner-manager/entrepreneur tends to represent this level (Kraus et al, 2011). The present study defines strategic planning as a detailed process that aims to explicate strategy through the analysis of various alternative strategic options (Collier et al, 2004; Hutzschenreuter and Kleindienst, 2007). However, the strategy process does not consist of detailed planning only: it also has social characteristics such as the explication of strategy to the company’s personnel. Making the strategy understandable and tangible to the personnel – for example, by setting clear goals that are aligned with the strategy – can contribute to personnel commitment and the success of strategy implementation (Collier et al, 2004).

Figure 1. Conceptual model.

Strategic planning and business performance The relationship between strategic planning and business performance has been one of the major research topics in strategy research, resulting in a respectable number of empirical investigations (Boyd, 1991; Stonehouse and Pemberton, 2002). These investigations have nevertheless mostly been carried out in the context

222

ENTREPRENEURSHIP AND INNOVATION Vol 11, No 3

Exploitation

Strategic planning and small business performance

of established, large companies, and less in small businesses. This is where the present study comes in. Even though strategic planning has been studied increasingly in the context of small enterprises (for example, Robinson and Pearce, 1984; Delmar and Shane, 2003; Gibson and Cassar, 2005), many doubts and contradictory results have been presented concerning the relationship between strategic planning and business performance (Boyd, 1991). While some studies suggest that effective strategic planning can contribute to better business performance (see Schwenk and Shrader, 1993), a number of other studies have found either no relationship or only a weak relationship between the two variables (Gable and Topol, 1987; Schulte, 2008). Nevertheless, the majority of previous studies conclude that the relationship between strategic planning and small business performance is a positive one. This was demonstrated in the literature analysis of 24 empirical studies on this topic by Kraus et al (2008), in which 79% of the reviewed investigations had found such a positive relationship. Also, Berman et al (1997) argue that enterprises that undertake strategic planning obtain better financial results, which implies that resources invested in planning activities would be compensated financially. This hypothesis has been confirmed repeatedly in empirical studies. For example, Schwenk and Shrader (1993) showed in their meta-analysis that the existence of strategic planning correlates significantly and positively with a business enterprise’s financial success. Similar results were presented by Robinson and Pearce (1984) in an earlier meta-analysis, by Bracker and Pearson (1985) in an analysis of small enterprises in the cleaning industry, by Sexton and Van Auken (1982) in an investigation of 357 small enterprises in the USA, by Bracker et al (1988) in a study of 217 managers of small electronics firms, and by Kraus et al (2008) in a study of 468 young small businesses in Austria. Furthermore, Matthews and Scott (1995) found that planning activities could help to reduce the level of uncertainty in the company, whereas Schwenk and Shrader (1993) came to the conclusion that strategic planning promotes long-term thinking, reduces the focus on operational details and provides a structure for the identification and evaluation of strategic alternatives. In their analysis of 51 small enterprises in the USA, Robinson et al (1984) showed that even simple planning activities could have a positive influence on the success of small enterprises. Moreover, the process of planning itself seems to have a positive effect in that it leads to a better understanding of the business and to the recognition of a broader range of strategic alternatives (Lyles et al, 1993). Based on these results, we hypothesize that:

The mediating role of exploration and exploitation While previous investigations have focused on the direct relationship between strategic planning and small business performance, this research proposes that the effect of strategic planning is in fact mediated by behaviours aimed at opportunity exploration and resource exploitation. Mediation means that while there is a significant relationship between an independent variable (strategic planning) and the dependent variable (performance), one or more variables (exploration and exploitation) carry the influence of the independent variable to the dependent variable (Baron and Kenny, 1986). The exploration and exploitation behaviours form the two dimensions of the concept of ambidexterity, which the literature defines as the ‘ability to simultaneously pursue both incremental and discontinuous innovation and change’ (Tushman and O’Reilly III, 1996, p 24) or as the company’s capability to adapt to environmental changes while aligning to today’s business demands (Gibson and Birkinshaw, 2004). Exploration implies firm behaviours characterized by search, discovery, experimentation, risk-taking and innovation, while exploitation entails behaviours characterized by refinement, implementation, efficiency, production and selection (March, 1991; Cheng and Van de Ven, 1996). In other words, the primary purpose of exploration is to create new business opportunities, while exploitation aims at an efficient management of the firm’s current business opportunities. Previous studies have indicated that ambidextrous strategic behaviour, manifested as an interaction of exploration and exploitation, can have a positive effect on business performance (Birkinshaw and Gibson, 2004; Gibson and Birkinshaw, 2004; He and Wong, 2004; Kuckertz et al, 2010). Creating new business opportunities alone is not sufficient to develop a profitable business if the firm does not possess the capability to utilize them effectively and efficiently (Teece et al, 1997; Eisenhardt and Martin, 2000). Furthermore, even though an exclusive exploitation strategy may work in the short run, in the long run it neglects the need for renewing business models, developing new products and other innovative activities required to keep up with the competition. Since exploitation behaviour focuses on the development of the firm’s current products and resources, strategic planning can facilitate these activities by providing and explicating strategic development targets as well as by involving company personnel in the planning process. Through this involvement, the shared strategic planning process may develop the motivation

ENTREPRENEURSHIP AND INNOVATION Vol 11, No 3

223

H1: Strategic planning will have a positive impact on small business performance.

Strategic planning and small business performance

and commitment towards resource development activities and hence increase the efficiency of implementation (Collier et al, 2004). The development activities, rather than strategic planning per se, contribute to business performance. Therefore we postulate that: H2a: The relationship between strategic planning and small business performance will be mediated by exploitation of the firm’s current resources. Further, we suggest that strategic planning can facilitate exploration behaviour by providing appropriate processes, structures and incentives for explorative activities to take place, as well as by systematically fostering a culture in which such behaviour can thrive. If exploration is successful, it is the outcomes of these activities, such as new products and services, which contribute to business performance, while strategic planning fulfils a facilitator role. Thus we propose that: H2b: The relationship between strategic planning and small business performance will be mediated by opportunity exploration.

Methodology Data The following empirical analysis is based on data from a September 2007 survey of small firms from Finland (employing fewer than 50 people). The sample was drawn from the Business Register maintained by Statistics Finland, which is a government agency that maintains and develops official national statistics. The Business Register includes all Finnish businesses that are liable to pay value added tax. The sampling frame included all businesses that had registered in the period from 2000 to 2006, amounting to a total of 97,804 enterprises. A random sample was drawn, and 1,089 questionnaires were sent out by regular mail, which resulted in 153 usable responses (response rate 14%). Although missing values were few (five or less per variable), they were estimated by means of the expectation maximization (EM) algorithm in SPSS in order not to lose any cases in the final analysis. The final sample of owner-managers employed in this analysis comprised 65% males and 35% females, the average age of the respondents was 43 years, approximately one-third had a higher education degree, and 25% had founded at least one business before the current one. Corresponding to the Finnish small business population as a whole (Statistics Finland, 2005), most of the firms in the sample were micro-enterprises: that is, they employed fewer than 10 people (European Commission, 2003). Slightly more than half of the sampled firms operated in the service sector.

224

Measures and questionnaire design The survey instrument used to collect the data was designed specifically to consider the relationships between strategic planning, exploration, exploitation and business performance. All variables were measured on a seven-point Likert scale. This also means that all variables reflect the respondent’s opinions and perceptions, rather than indisputable facts. Measurement instrument item scales were adapted from previous studies, translated into Finnish and slightly modified to suit the context of the present study. The wordings of the scale variables and their means, standard deviations and loadings are displayed in the Appendix. The strategic planning measurement scale was adapted from Collier et al (2004). The scale measures the level of formalization in the company’s strategic planning by capturing various dimensions, such as the level of detail in strategic planning, preciseness of strategic objectives, strategic choice and the explication of strategy. Exploration and exploitation were measured with items adapted from He and Wong (2004; see also Jansen et al, 2006; Kuckertz et al, 2010). The exploration items addressed dimensions such as activeness in seeking new business opportunities, frequency of introducing new products and emphasis placed on expanding the current product portfolio. The measures employed to capture exploitation behaviour included the level of quality development, investments in current resources and development of the company’s current business to become more cost-effective. Performance was measured by means of four items, which were adapted from Wolff and Pett (2006; see also Gibson and Birkinshaw, 2004). The items measure the overall performance of the company, its growth rate and profitability compared with the competition, as well as the owner’s subjective satisfaction with the company’s performance. Perception-based performance measures are commonly used and they have been found to correlate with objective measures of business performance (Murphy and Callaway, 2004; Richard et al, 2009). Common method variance We tested the possible effects of common method variance for the construct variables using Harman’s (1976) one-factor test. If common method variance were a serious problem in the study, we would expect a single factor to emerge from a factor analysis or one general factor to account for most of the covariances in the independent and dependent variables (Podsakoff and Organ, 1986). All 14 items of the main measures of the research model were factor analysed using principal axis factoring in which the unrotated factor solution was examined (Podsakoff et al, 2003). Factor analytic results

ENTREPRENEURSHIP AND INNOVATION Vol 11, No 3

Strategic planning and small business performance

indicated the existence of four factors with Eigenvalues greater than 1 (KMO = 0.805). These four factors explained 71% of the variance among the 14 items, while the first factor accounted for 32% of the variance. Since several factors, as opposed to one single factor, were identified and since the first factor did not account for the majority of the variance, there did not appear to be a substantial amount of common method variance. Analysis The research model was examined by utilizing the partial least squares (PLS) approach to structural equation modelling (for example, Wold, 1985; Lohmöller, 1989) with the software package SmartPLS 2.0 (Ringle et al, 2005). We decided in favour of the PLS approach due to its non-parametric nature, which makes it suitable for analysing relatively small datasets with non-normally distributed variables (Chin, 1998). Whereas covariance-based methods of structural equation modelling require relatively large sample sizes (Jöreskog and Sörbom, 1982), PLS requires as a minimum number of cases only 10 times the number of independent variables that affect the dependent latent variable with the most predictors, in case only reflective measurement models are employed (Chin and Newsted, 1999), as is the case in the present study. A model such as the present one in which a maximum of three independent variables predict a dependent variable requires a minimum sample size of just 30 observations for stable and reliable estimates. Thus, our sample size of 153 can be regarded as quite sufficient.

Results Assessment of the measurement model The research model consists of four latent variables in Mode A: that is, they employ reflective measurement models (see Diamantopoulos and Siguaw, 2006). Most item measures show loadings of more than 0.7 to their respective constructs, indicating satisfactory convergent validity, while one loading in the exploitation construct remains below the recommended threshold (see Appendix). This indicates a need to reconsider this item in future studies. However, Chin (1998) argued that this threshold value could be flexible. Therefore, in order to retain theoretical consistency, we decided not to drop any items at this stage. The construct reliability measures for the latent variables are satisfactory (Table 1). Even though the Cronbach alpha value of the exploitation construct remains below the usual threshold value of 0.7 (Nunnally, 1978), the composite reliability scores in all constructs clearly exceed the recommended value of 0.7

ENTREPRENEURSHIP AND INNOVATION Vol 11, No 3

Table 1. Construct reliability measures – Cronbach’s α, composite reliability and average variance extracted (AVE). Construct Performance Exploitation Exploration Strategic planning

Cronbach’s α

Composite reliability

AVE

0.79 0.66 0.83 0.87

0.86 0.81 0.90 0.91

0.61 0.60 0.74 0.72

Table 2. Construct discriminant validity – squared latent variable correlations (off-diagonal elements) versus average variance extracted (AVE) (diagonal elements, italicized).

Performance Exploitation Exploration Strategic planning

Performance

Exploitation

Exploration

Strategic planning

0.61 0.18 0.02 0.02

0.59 0.24 0.15

0.75 0.09

0.72

(Chin, 1998). Moreover, the average variance extracted (AVE) scores indicate that for every construct more than 50% of the variance is explained, thus exceeding the measurement error. Even though the scale for exploitation requires further refinement in future research, the reliability measures as a whole show satisfactory values. Discriminant validity is assessed both at the item level and at the construct level. With respect to item discriminant validity, an inspection of indicator cross-loadings reveals that all indicators are loading at their highest with their respective constructs and that no indicator loads higher on other constructs than on its intended construct. Therefore it is safe to assume item discriminant validity. At the construct level, the comparison of each reflective construct’s AVE and the squared latent variable correlations (Chin, 1998) suggests that there is satisfactory discriminant validity since the AVE for each construct exceeds the respective squared latent variable correlations (Cool et al, 1989). Table 2 presents the favourable results of this test. Overall, the evaluation of the reflective measurement models reveals that all constructs are of satisfactory reliability and validity. Assessment of the structural model The structural model was estimated utilizing the path weighting scheme, which is the only weighting scheme that explicitly considers the directions of the causal relationships between exogenous and endogenous variables (Lohmöller, 1989; Chin, 1998). Following common conventions, the abort criterion for the iterative estimation process was selected as a change of the estimated values of just 10–5% between two iterations. A standard bootstrapping procedure (Efron and

225

Strategic planning and small business performance Exploration R2 = 0.09 Q2 = 0.06 0.31***

–0.06 –0.01

Strategic planning

Performance R2 = 0.18 Q2 = 0.09

exploitation mediates the effect of strategic planning on performance. Thus, Hypothesis 2a receives support. Since the relationship between exploration and performance is non-significant, Hypothesis 2b is not supported.

Conclusion

Tibishirani, 1993; Yung and Bentler, 1996) with 500 resamples consisting of the same number of cases as in the original sample was applied in order to determine the significance of each estimated path. Prior to estimating the full structural model, we analysed the direct effect of strategic planning on performance without the mediating variables in the model. This is necessary because mediation can only exist when there is a significant relationship between the independent and dependent variables. The path coefficient turned out to be significant at the p < 0.001 level, with strategic planning explaining 5% of the variance in the dependent variable. This finding supports Hypothesis 1, which postulated a positive relationship between strategic planning and performance. Next, the mediating variables were added to the model (Figure 2). Overall, the PLS algorithm results in acceptable explanatory power of the three endogenous variables in the model, with R2 values ranging from 0.09 to 0.18. Moreover, the Q2 values associated with the Stone-Geisser criterion are consistently higher than zero, indicating that the prerequisites of predictive relevance for the model are fulfilled (Krafft et al, 2005). In order for exploration and/or exploitation to mediate the effect of strategic planning on performance, the path coefficients from strategic planning to the mediators and those from the mediators to the dependent variable should be significant (Baron and Kenny, 1986). Moreover, the path coefficient of the direct path from strategic planning to performance should diminish as a result of the introduction of the mediators to the model. An examination of the path coefficients indicates that strategic planning has a significant positive effect on exploration and exploitation at the p < 0.001 level, while the path from strategic planning to performance is now non-significant. Further, since the path model shows a positive and statistically significant (p < 0.001) effect from exploitation to performance, it appears that

This study responds to the recommendation in previous research to seek factors that either mediate or moderate the relationship between strategic planning and business performance (Hutzschenreuter and Kleindienst, 2007) by examining exploration and exploitation behaviours as potential mediators in this context. The empirical results based on a sample of 153 small Finnish enterprises suggest that the processes, routines, methods and structures aimed at enhancing the exploitation of current resources so as to maximize the benefit from existing business opportunities, mediate the impact of strategic planning on small business performance. Hence, the study contributes to previous strategy literature by presenting a construct that carries the effect of strategic planning to the performance of a small firm. We contend that the positive impact of strategic planning on exploitation may at least partially result from setting and explicating clear strategic targets that steer the resource development efforts, and hence create energy and efficiency for strategy implementation (Collier et al, 2004). The results also show that a focus on the exploration of new business opportunities – even though clearly a subject of strategic planning in the sample companies – does not directly translate into improved performance. However, this finding does not mean that the exploration of new business opportunities is irrelevant to business performance. It means rather that the impact of exploration on performance is indirect, and thus likely to be mediated or moderated by other factors, such as the company’s innovation capabilities or the company having an organized innovation process (Raisch and Birkinshaw, 2008). Thus, further research is required to investigate the variables that mediate or moderate the impact of exploration on business performance. Three particular limitations of the study should be considered in further research. One is that all measurement items were reflective and thus based on the respondents’ impressions, opinions or ‘gut feelings’ (Miller and Ireland, 2005), rather than on ‘objective’ facts. A more appropriate way of measuring strategic planning, business performance and perhaps even the exploration and exploitation variables might be to apply formative measures (Diamantopoulos and Siguaw, 2006) either exclusively or, preferably, alongside reflective measures. This way, reflective and formative measures could validate each other. Business performance, for

226

ENTREPRENEURSHIP AND INNOVATION Vol 11, No 3

0.39***

0.45*** Exploitation R2 = 0.15 Q2 = 0.08

Figure 2. Results of the partial least squares analysis. Note: Path coefficients reported. * p < 0.05; ** p < 0.01; *** p < 0.001 (based on one-sided t-test with 500 df).

Strategic planning and small business performance

Baron, R. M., and Kenny, D. A. (1986), ‘The moderator–mediator variable distinction in social psychological research: conceptual, strategic, and statistical considerations’, Journal of Personality and Social Psychology, Vol 51, No 6, pp 1173– 1182. Bauer, B. (2002), Kleine und mittlere Unternehmen – Übersicht über Bedeutung, bereits getroffene und mögliche weitere Maßnahmen auf EU-Ebene und in Österreich, Federal Ministry of Finance, Vienna. Berman, J. A., Gordon, D. D., and Sussmann, G. (1997), ’A study to determine the benefits small business firms derive from sophisticated planning versus less sophisticated types of planning’, Journal of Business and Economic Studies, Vol 3, No 3, pp 1–11. Berry, M. (1998), ‘Strategic planning in small high tech companies’, Long Range Planning, Vol 31, No 3, pp 455–466. Birkinshaw, J., and Gibson, C. (2004), ‘Building ambidexterity into an organization’, Sloan Management Review, Vol 45, No 4, pp 47–55.

Boyd, B. K. (1991), ‘Strategic planning and financial performance: a meta-analytic review’, Journal of Management Studies, Vol 28, No 4, pp 353–374. Bracker, J. S., Keats, B. W., and Pearson, J. N. (1988), ‘Planning and financial performance among small firms in a growth industry’, Strategic Management Journal, Vol 9, No 6, pp 591–603. Bracker, J. S., and Pearson, J. N. (1985), ‘The impact of consultants on small firm strategic planning’, Journal of Small Business Management, Vol 23, No 3, pp 23–30. Cheng, Y. T., and Van de Ven, A. H. (1996), ‘Learning the innovation journey: order out of chaos?’ Organization Science, Vol 7, No 6, pp 593–614. Chin, W. W. (1998), ‘The partial least squares approach to structural equation modeling’, in Marcoulides, G. A., ed, Modern Methods in Business Research, Earlbaum, Hillsdale, NJ, pp 295–336. Chin, W. W., and Newsted, P. R. (1999), ‘Structural equation modeling analysis with small samples using partial least squares’, in Hoyle, R. H., ed, Statistical Strategies for Small Sample Research, Sage, Thousand Oaks, CA, pp 307–341. Collier, N., Fishwick, F., and Floyd, S. W. (2004), ‘Managerial involvement and perceptions of strategy process’, Long Range Planning, Vol 37, No 1, pp 67–83. Cool, K., Dierickx, I., and Jemison, D. (1989), ‘Business strategy, market structure and risk-return relationships: a structural approach’, Strategic Management Journal, Vol 10, No 6, pp 507–522. Delmar, F., and Shane, S. (2003), ‘Does business planning facilitate the development of new ventures?’ Strategic Management Journal, Vol 24, No 12, pp 1165–1185. Diamantopoulos, A., and Siguaw, J. A. (2006), ‘Formative versus reflective indicators in organizational measure development – a comparison and empirical illustration’, British Journal of Management, Vol 17, No 4, pp 263–282. Efron, B., and Tibishirani, R. (1993), An Introduction to the Bootstrap, Chapman & Hall, New York. Eisenhardt, K. M., and Martin, J. A. (2000), ‘Dynamic capabilities: what are they?’ Strategic Management Journal, Vol 21, No 10, pp 1105–1121. Eisenhardt, K. M., and Sull, D. N. (2001), ‘Strategy as simple rules’, Harvard Business Review, Vol 79, No 1, pp 107–116. European Commission (2003), SME Definition: Commission Recommendation of 06 May 2003, European Commission, Brussels. Gable, M., and Topol, M. T. (1987), ‘Planning practices of smallscale retailers’, American Journal of Small Business, Vol 12, No 2, pp 19–32. Gibbons, P. T., and O’Connor, T. (2005), ‘Influences on strategic planning processes among Irish SMEs’, Journal of Small Business Management, Vol 43, No 2, pp 170–186. Gibson, C. B., and Birkinshaw, J. (2004), ‘The antecedents, consequences, and mediating role of organizational ambidexterity’, Academy of Management Journal, Vol 47, No 4, pp 209–226. Gibson, B., and Cassar, G. (2005), ‘Longitudinal analysis of relationships between planning and performance in small firms’, Small Business Economics, Vol 25, No 3, pp 207–222. Gupta, A. K., Smith, K. G., and Shalley, C. E. (2006), ‘The interplay between exploration and exploitation’, Academy of Management Journal, Vol 49, No 4, pp 693–706. Harman, H. H. (1976), Modern Factor Analysis, 3 ed, University of Chicago Press, Chicago, IL. He, Z.-L., and Wong, P.-K. (2004), ‘Exploration vs. exploitation: an empirical test of the ambidexterity hypothesis’, Organization Science, Vol 15, No 4, pp 481–494. Hutzschenreuter, T., and Kleindienst, I. (2007), ‘Strategy-process research: what have we learned and what is still to be explored’, Journal of Management, Vol 32, No 5, pp 673–720. Ireland, R. D., Hitt, M. A., and Simon, D. G. (2003), ‘A model of strategic entrepreneurship: the construct and its dimensions’, Journal of Management, Vol 29, No 6, pp 963–989.

ENTREPRENEURSHIP AND INNOVATION Vol 11, No 3

227

instance, could be measured with a number of objective proxies, such as increase in turnover or number of employees, in addition to the (subjective) reflective impressions of the owner-manager as in the present study. Similarly, strategic planning could be operationalized as the extent and types of different strategy tools being applied in the company (Kraus et al, 2006), rather than merely as subjective opinions of the entrepreneur concerning the extent to which strategy is planned. Another limitation of the study relates to the cross-sectional survey data, which limit the demonstration of causation. Future studies should thus seek to develop longitudinal research designs. A further limitation is our relatively small and cross-sectoral dataset, which consists primarily of micro-enterprises. Larger samples are required to refine the model further and confirm its findings, while controlling, for example, for the effects of firm size and industry. This is where further empirical research could commence. The results suggest several managerial implications. Since strategic planning impacts on performance via exploitation behaviour, a particular role of strategic planning for small businesses is to facilitate the recognition of resource development requirements, such as investments in production lines or personnel development and the implementation of the respective development initiatives, which contribute to short- or medium-term business performance. Even if this study did not show a direct relationship between exploration behaviour and business performance, the results do indicate that Finnish small businesses consider the exploration of new opportunities in their strategic planning. In order to transform these activities into enhanced business performance, companies may need suitable methods such as structured innovation processes in order not only to recognize, but also to utilize the new business opportunities.

References

Strategic planning and small business performance Jansen, J. J. P., Van Den Bosch, F. A. J., and Volberda, H. W. (2006), ‘Exploratory innovation, exploitative innovation, and performance: effects of organizational antecedents and environmental moderators’, Journal of Management, Vol 52, No 11, pp 1661–1674. Jöreskog, K. G., and Sörbom, D. (1982), ‘Recent developments in structural equation modeling’, Journal of Marketing Research, Vol 19, No 4, pp 404–416. Krafft, M., Götz, O., and Liehr-Gobbers, K. (2005), ‘Die Validierung von Strukturgleichungsmodellen mit Hilfe des Partial-Least-Squares (PLS)-Ansatzes’, in Bliemel, F., et al, eds, Handbuch PLS-Pfadmodellierung, Schäffer-Poeschel, Stuttgart, pp 71–86. Kraus, S., Harms, R., and Schwarz, E. J. (2006), ‘Strategic planning in smaller enterprises – new empirical findings’, Management Research News, Vol 29, No 6, pp 334–344. Kraus, S., Harms, R., and Schwarz, E. (2008), ‘Strategic business planning and success in small firms’, International Journal of Entrepreneurship and Innovation Management, Vol 8, No 4, pp 381-–396. Kraus, S., Kauranen, I., and Reschke, C. H. (2011), ‘Strategic entrepreneurship: identifying domains in a developmental configuration approach’, Management Research Review (formerly Management Research News), Vol 34 (in press). Kuckertz, A., Kohtamäki, M., and Körber, C. (2010), ‘Why the fast eat the slow – the impact of strategy and innovation timing on technology-oriented ventures’, International Journal of Technology Management, Vol 52, No 1/2. Lohmöller, J. (1989), Latent Variable Path Modelling with Partial Least Squares, Physica, Heidelberg. Lubatkin, M. H., et al (2006), ‘Ambidexterity and performance in small- to medium-sized firms: the pivotal role of top management team behavioral integration’, Journal of Management, Vol 32, No 5, pp 646–672. Lyles, M. A., et al (1993), ‘Formalized planning in small business: increasing strategic choices’, Journal of Small Business Management, Vol 31, No 2, pp 38–50. March, J. G. (1991), ‘Exploration and exploitation in organizational learning’, Organization Science, Vol 2, No 1, pp 71–87. Matthews, C. H., and Scott, S. G. (1995), ‘Uncertainty and planning in small and entrepreneurial firms: an empirical assessment’, Journal of Small Business Management, Vol 33, No 4, pp 34–52. Miller, C. C., and Cardinal, L. B. (1994), ‘Strategic planning and firm performance: a synthesis of more than two decades of research’, Academy of Management Journal, Vol 37, No 6, pp 1649–1665. Miller, C. C., and Ireland, R. D. (2005), ‘Intuition in strategic decision making: friend or foe in the fast-paced 21st century?’ Academy of Management Executive, Vol 19, No 1, pp 19–30. Murphy, G. B., and Callaway, S. K. (2004), ‘Doing well and happy about it? Explaining variance in entrepreneurs’ stated satisfaction with performance’, New England Journal of Entrepreneurship, Vol 7, No 2, pp 15–26. Nunnally, J. (1978), Psychometric Theory, McGraw-Hill, New York. Podsakoff, P. M., et al (2003), ‘Common method biases in behavioral research: a critical review of the literature and

recommended remedies’, Journal of Applied Psychology, Vol 88, No 5, pp 879–903. Podsakoff, P. M., and Organ, D. W. (1986), ‘Self-reports in organizational research: problems and prospects’, Journal of Management, Vol 12, No 4, pp 531–544. Raisch, S., and Birkinshaw, J. (2008), ‘Organizational ambidexterity: antecedents, outcomes and moderators’, Journal of Management, Vol 34, No 3, pp 375–409. Richard, P. J., et al (2009), ‘Measuring organizational performance: towards methodological best practice’, Journal of Management, Vol 35, No 3, pp 718–804. Ringle, C. M., Wende, S., and Will, A. (2005), SmartPLS 2.0, University of Hamburg, Website: http://www.smartpls.de. Robinson, R. B., and Pearce, J. A. (1984), ‘Research thrusts in small firm strategic planning’, Academy of Management Review, Vol 9, No 1, pp 128–137. Robinson, R. B., et al (1984), ‘The relationship between stage of development and small firm planning and performance’, Journal of Small Business Management, Vol 22, No 2, pp 45–52. Schulte, R. (2008), ‘Pre-start-up planning sophistication and new venture performance’, in Fink, M., and Kraus, S., eds, The Management in Small and Medium Enterprises, Routledge, London, pp 3–19. Schwenk, C. R., and Shrader, C. B. (1993), ‘Effects of formal strategic planning on financial performance in small firms: a meta-analysis’, Entrepreneurship Theory and Practice, Vol 17, No 3, pp 53–64. Sexton, D. K., and Van Auken, P. (1982), ‘Prevalence of strategic planning in small business’, Journal of Small Business Management, Vol 20, No 1, pp 20–26. Statistics Finland (2005), Enterprises, 2005, Statistics Finland, Helsinki. Stonehouse, G., and Pemberton, J. (2002), ‘Strategic planning in SMEs – some empirical findings’, Management Decision, Vol 40, No 9, pp 853–861. Tapinos, E., Dyson, R. G., and Meadows, M. (2005), ‘The impact of performance measurement in strategic planning’, International Journal of Productivity and Performance Management, Vol 54, No 5/6, pp 370–384. Teece, D., Pisano, G., and Shuen, A. (1997), ‘Dynamic capabilities and strategic management’, Strategic Management Journal, Vol 18, No 7, pp 509–533. Tushman, M. L., and O’Reilly III, C. A. (1996), ‘Ambidextrous organizations: managing evolutionary and revolutionary change’, California Management Review, Vol 38, No 4, pp 8– 30. Wold, H. (1985), ‘Partial least squares’, in Kotz, S., and Johnson, N. L., eds, Encyclopaedia of Statistical Science, Wiley, New York, pp 581–591. Wolff, J. A., and Pett, T. L. (2006), ‘Small-firm performance – modeling the role of product and process improvements’, Journal of Small Business Management, Vol 44, No 6, pp 268–284. Yung, Y., and Bentler, P. M. (1996), ‘Bootstrapping techniques in analysis of mean and covariance structures’, in Marcoulides, G. A., and Schumacker, R. E., eds, Advanced Structural Equation Modelling. Issues and Techniques, Erlbaum, Mahwah, NJ, pp 195–226.

228

ENTREPRENEURSHIP AND INNOVATION Vol 11, No 3

Strategic planning and small business performance

Appendix Construct variables (translated from Finnish) Variable (all measured on a 7-point Likert scale)

Mean

SD

Loading

Performance (adapted from Wolff and Pett, 2006; Gibson and Birkinshaw, 2004). Question: ‘How do you assess the current performance of your business on the following criteria?’ The performance of my business is excellent compared with my competitors. The business has grown rapidly compared with competitors. The business is very profitable compared with competitors. The owners of the business are satisfied with its performance.

5.13 3.85 4.69 4.92

1.24 1.70 1.38 1.55

0.85 0.71 0.78 0.77

Exploitation (adapted from He and Wong, 2004; Kuckertz et al, 2010; Jansen et al, 2006). Question: ‘How well do the following statements describe the development of your company’s operations?’ Our company actively develops the quality of its existing products or services. Our company invests strongly in the development of its existing business. Our company actively develops its current business in order to cut costs.

5.59 5.33 4.68

1.14 1.28 1.48

0.85 0.88 0.54

Exploration (adapted from He and Wong, 2004; Kuckertz et al, 2010; Jansen et al, 2006). Question: ‘How well do the following statements describe the development of your company’s operations?’ Our company actively strives to find new business opportunities in the market. Our company frequently introduces new products or product groups. Our company strives to expand its product portfolio.

4.48 3.96 4.03

1.72 1.86 1.75

0.86 0.86 0.87

Strategic planning (adapted from Collier et al, 2004). Question: ‘How well do the following statements describe your company’s strategic planning?’ Strategy is planned on a detailed level. We analyse multiple alternatives before choosing a strategy. We have precisely defined strategic objectives. Our strategy has been made visible by drafting a detailed plan.

3.74 4.13 3.86 3.25

1.59 1.69 1.66 1.67

0.88 0.82 0.87 0.83

ENTREPRENEURSHIP AND INNOVATION Vol 11, No 3

229