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THEORIZING ON ENTREPRENEURIAL PERFORMANCE by Tatiana Iakovleva

In the present paper main streams of research in the field of entrepreneurship are identified and discussed. The purpose is to find out what theoretical perspectives could be used to build a framework for explaining performance in small and medium enterprises. Strengths and weaknesses of population ecology, behavioural, resource-based and strategic-adaptation theoretical perspectives in explaining entrepreneurial performance are discussed. These perspectives are integrated into a model that provides the theoretical basis for the future empirical research.

INTRODUCTION

The study of entrepreneurship has become one of the fastest growing research fields during the last few decades (Davidsson and Wiklund, 2001; Gartner, 2001; Landstroom, 1999). Nevertheless, entrepreneurship is quite a new field of research and there is lack of clear-cut definitions of “entrepreneurship”. As Landstroom (1999) pointed out, entrepreneurship is a multidisciplinary phenomenon and involves everything from the single individual to society as a whole. Low and MacMillan (1988:141) pointed, that “The phenomenon of entrepreneurship is intervened with a complex set of contiguous and overlapping constructs such as management of change, innovation, technological and environmental turbulence, new product development, small business management, individualism and industry evolution. Furthermore, the phenomenon can be productively investigated from disciplines as varied as economics, social anthropology, sociology, population ecology, internorganization industry, business administration, organizational behaviour and psychology, each of which uses its own concepts and operates within its own terms of reference.” Studies falling under the rubric “entrepreneurship” have pursued a wide range of purposes and objectives, asked different questions and adopted different unit of analysis, theoretical perspectives and methodologies. This diversity is reflected in many and varied definitions of entrepreneurship. Schumpeter (1934) argued that entrepreneurship is the driving force of the economy and that the entrepreneur trended to break the equilibrium by introducing innovations into the system in the form of new products, new methods of production or new markets. Cole (1968) defined entrepreneurship as a purposeful activity to initiate, maintain, and develop profit-oriented business. Gartner (1985) defined entrepreneurship as the creation of new organizations. As Low and MacMillan (1988) stated: “the problem with these definitions is that though each captures an aspect of entrepreneurship, none captures the whole picture.” Entrepreneurship

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has become a broad label under which a hodgepodge of research is housed (Shane and Venkataraman, 2000). While different definitions are suggested, almost all researchers tries to identify what leads entrepreneurial enterprises to business success. The purpose of entrepreneurship research should be to "explain and facilitate the role of new enterprise in furthering economic progress" (Low and MacMillan, 1988: 141). Such a delineation, they hold, would encourage researchers to consider both micro- and macro-perspectives. This position is widely shared among leading researchers in the field of entrepreneurship (see Aldrich and Martinez, 2001; Davidsson and Wilklund, 2001; Gartner, 2001; Low, 2001; Shane and Venkataraman, 2000) They argue that researchers must acknowledge that entrepreneurship studies could and should be carried out at multiple levels of analysis and that these analyses complement each other. As noticed by Aldrich and Martinex (2001), in entrepreneurship, as in the biblical story, many are called but few are chosen. Understanding how and why some entrepreneurs succeed remains a major challenge for the entrepreneurship research community. One of the indicators of the success is entrepreneurial performance, the concept which can include financial as well as non-financial measures. As Chandler and Hanks (1994: 78) noticed, performance is a yardstick by which the founder measures success. The purpose of this paper is to observe the existing streams of research within the field of entrepreneurship and to build a theoretical framework to answering the following research question: What theoretical perspectives could be used to build a framework for explaining performance in small and medium enterprises?

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MAIN STREAMS OF RESEARCH

One of the central questions in the study of entrepreneurship is concerned with why some new ventures succeed and others do not (Cooper and Gascon, 1992). The important role of business suggests that an understanding of why firms fail and success is crucial to the stability and health of economy (Garter et al., 1999; Storey et al., 1987). Entrepreneurship is of great interest to public policy makers concerned with economic development in many countries (Corman and Lussier, 1991; Gilbert et al. 1990). If we can achieve a better understanding of what influences new venture successful development, this will have implications for prospective entrepreneurs, as well as their advisors and investors. If certain factors increase the odds for success, then entrepreneurs can appraise their own prospects with this in mind (Cooper and Gascon, 1992). To date, there have been many success and failure studies (Lussier and Pfeifer, 2000; Lussier, 1995; Cooper et al., 1990; Cooper et al., 1991; Jenssen, 1991; Reynolds, 1987; Reynolds and Miller, 1989). Both environmental factors as well as personal qualities, resources available and entrepreneurial strategies do affect entrepreneurial success (Gartner, 1985b; Miller 1987; Mugler, 2000; Snuif and Zwart 1994). As Aldrich and Martinez argue “understanding how and why some entrepreneurs succeed remains a major challenge for the entrepreneurship research community” (p. 41). Low and MacMillan (1988: 42) pointed out that entrepreneurs are socially important because they succeed in creating organizations. That why it is stimulating to find out what motivate entrepreneurs and how they differ from others, but also to answer the question of how these individuals manage to create sustain successful organizations, despite severe obstacles (Aldrich and Martinex, 2001).

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Review of Literature on Small Firm Performance

Small firm performance is a widely studied field in entrepreneurship research today (see Capon, Farly, and Hoeng, 1990; Cooper and Gascon, 1992; Lerner, Brush and Histich, 1997; Singh, Reynolds and Muhammad, 2001; Wiklund, 1998). Performance and success seems to be conceptualised, operationalised and measured in different ways. Over 320 empirical studies on performance, published between 1921 and 1987, were examined by Capon et al. (1990). It was noticed that authors adopt different theoretical perspectives and use different sets of variables in their work. They examine relationship between environmental, strategic and organisational factors on the one hand and financial performance on the other. Chandler and Hanks (1994: 77) argue, that models of individual job performance indicate that performance is a function of ability, motivation and opportunity. The performance of a business founder is measured by performance of the organisation (Schein, 1978), which is influenced in turn by the environment in within which organisation emerges (Covin and Slevin, 1989; Hofer and Sandberg, 1987; Tsai et al., 1991). Chandler and Hanks (1994) argue, that better understanding of the relationship of the founder’s role to firm performance requires research and theory development at three levels of analysis: individual, organisational and environmental. It also requires cross-level and multi-level theories to explain how constructs at different levels of analysis relate to each other. Cooper and Gascon (1992) conducted literature review of the individual factors, affecting performance. This includes such factors as experience, education, occupation of parents, gender, race, age, and entrepreneur’s goals. This summary, drawn from the previous literature examining performance (Stevenson and Jarillo, 1990; Vesper; 1990; Gartner, 1985; Cooper, 1981) concluded that individual characteristics such as motivation, ability to manage risk and planning are important determinates of performance. Another overview of the latest research on entrepreneurial performance of over

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70 empirical studies can be found in the work of Wiklund (1998). Wiklund (1998: 19) noticed the lack of the discussion of the conceptual meaning of performance, while discussion of appropriate measures was more common. Such labels as strategy, resources, motivation and environment cover the vast majority of variables in studies. However, these labels should be viewed as theoretical constructs or theoretical variables on a high level of abstraction, which can be given different theoretical manifestations. Below an overview of the leading theoretical perspectives in the entrepreneurship is presented. A theoretical perspectives are broader, less restrictive and on a higher level of abstraction than a theory accumulation of ideas (Wiklund, 1998: 23). They focus on general concepts and how they influence each other. Astley and Van de Ven (1983: 245) called them “meta-theoretical” constants. Those theoretical perspectives are evaluated in respect to their power to explain and predict performance.

The Population Ecology Perceptive General overview of the perspective In many cases, the development of biological system has been regarded as intellectual models to describe the development of new firms (Hannan and Freeman, 1977). Employing a biological analogy, they suggested that those organizations that are well adapted to their environment would survive, and those that are not will die. Through this selection mechanism environment will determine the characteristics of populations of organizations (Nelson and Winter, 1982). Adherents of the population ecology perspective suggest that the process of carrying capacity, density, legitimation and competition play a determining role in the size of organizational populations (Hannan and Carroll, 1992). According to Bygrave and Hofter (1991) “in their basic form, population ecology models predict the probability of birth and death within a population of businesses in a given industry niche” (p.81). Within the evolutionary perspective, Aldrich (1990) suggests that the founding of new organizations can

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be influenced by intra-population, inter-population and institutional factors. This perspective suits best for macro-level interpretation of organizational survival (Westhead and Birley, 1994). “The advantage of an ecological approach to entrepreneurship is that it offers an opportunity to focus on environmental antecedents of business start-ups without having to obtain information about the motivations of the firms “founders” (Pennings, 1982:141). This stream of research can be labelled deterministic, as it assumes that environment or external control predefines which firms would survive and which would not. Usually this theoretic perspective theory adopt aggregative level of analysis, which the main concern toward populations of firms. Regional studies, comparing differences within several industries in different regions, are the most typical example of applying evolutionary theory. In particular, industry has received a lot of attention inn strategy oriented small business performance literature dealing with objective environmental variables (Brush and Chaganti, 1997; Covin et al., 1990: Sandberg and Hofer, 1987). However, small firms often operate on a narrow markets, and thus characteristics of an industry may affect them very differently (Wiklund, 1998). Other researchers concentrate on the perceived environment and its influence toward performance through business strategies. They argue there is a fit between perceived and objective environment (Dess and Bread, 1984). However, some researchers suggest that managers construct and enhance environment themselves (Aldrich and Zimmer, 1986). Whether the environment is enacted or perceived is important from a conceptual standpoint but not necessarily empirically (Wiklund, 1998). Authors who study the environment in terms of manager’s perceptions tend to measure the characteristics of the environment. It is then possible to trace environmental differences at the individual firm level. Empirical findings. Environmental

influences

presume

that

factors

including

the

differential

structure

of

opportunity, location, sectoral activities and sociopolitical variables (i.e. availability of

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government assistance) are critical determinants of performance. Economic measures of venture profitability revenues and number of the employees are related to environmental economic conditions, such as the market structure, regional opportunities, investment climate, availability of labour and other features (Covin and Slevin, 1989; Gibb, 1988; Tsai et al., 1991). Similarly, resource availability, including venture capital, technical labour force, loans, support services and a favourable entrepreneurial subculture are also a major influence on performance. In study of Lerner et al.(1997) environmental factors were significantly related to performance. Criticism The predictive limitations of the population ecology perspective with regard to types of organizations established and their performance have been widely discusses (Aldrich, 1990; Bygrave and Hofter, 1991; Romanielly, 1989). Evolutionary theory in the management context until recently has been predominantly phylogenistic, because it has dealt with understanding the evolution of industries (Hannan and Freeman, 1977). The firm was treated as “the back box”, and firm or individual level was not taken into the account. Environment was treated as the main force determining survival of the firm and only those organizations that fit to the environment said to have a chance to survive. However, firm behaviour is also important, since it is on this level that analogies to heredity should be found. Concepts of adaptation, learning, search and path-dependence mostly relate to the level of the firm. A number of attempts have been made to apply evolutionary thinking to firm-level analysis (Burgelman and Rosenbloom, 1989; Covin and Slevin, 1989; Specht, 1993). However, the kinds of resources most often discussed are knowledge-related ones, particularly the knowledge aspects that Nelson and Winter (1982) call “routines - the skills of the organization”. Other resources such as physical assets and patents are not factored into the same extent.

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The perspective’s contribution to the present research context Today population ecology theory has significantly matured, developing from a simplistic and deterministic biological metaphor into a rich theoretical framework capable of incorporating other theoretical perspectives. There have been many attempts to reconcile population ecology with extant organizational theory (Hannan and Freeman, 1989, Hrebiniak and Joyce, 1985, Singh et al., 1986). As per Aldrich and Martinez (2001): “Today evolutionary approach studies the creation of new organizational structures (variation), the way in which entrepreneurs modify their organizations and use resources to survive in changing environment (adaptation, the circumstances under which such organizational arrangements lead to success and survival (selection), and the way in which successful arrangements tend to be imitated and perpetuated by other entrepreneurs (retention)”. Delaroix and Carroll (1983) have shown that organizational births may better be explained by macro variables such as technological or demographic shifts, whereas survival of new entrepreneurial firms may better be explained by micro variables such as strategy. Summarizing, it is possible to use Aldrich and Marinex (2001) reasoning: “organizational survival does not depend on strategic choices or environment forces alone, but rather on the degree of fit between entrepreneurial efforts and environmental forces” (p. 44). That means that taking into consideration explanatory power of environmental influence on performance, there is a need to include into the model other variables, such as personal characteristics and strategy applied by entrepreneurs.

The Behavioural and Psychological Perspective General overview of the perspective One level of inquiry into the “causes” of observed entrepreneurial behaviour conceptualises entrepreneurship as “a psychological characteristic of individuals, which can be described in terms such as creativity, daring, aggressiveness, and the like” (Wilken, 1979:58) It was

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Collins and Moore (1964) who put at the core of entrepreneurship the “desire for independence”. Further Brockhaus studied the locus of control belief of entrepreneurs (1975) and

their

risk-tendency

(1980).

Marcin

and

Cockrum

(1984)

study

psychological

characteristics of entrepreneurs across different countries. A second level of inquiry conceptualises entrepreneurship “as social role…that may be enhanced by individuals in different social positions”(Wilken, 1979: 58). This approach was developed by McClelland (1961). The essence of this approach that entrepreneurial behaviour is dependent upon personal motivations which in turn are dependent on environmental characteristics. McClellan demonstrated the link between the countries need for achievement and its economic development. He concluded that countries that are economically better developed are characterized by a lesser focus on institutional norms and a greater focus on openness toward other people and their values, as well as communication between the people. A country’s achievement level is transformed into economic growth through the medium of the entrepreneurs. Entrepreneurs are, in this connection, people who have a high need for achievement, strong self-confidence, independent problem-solving skills, and who prefer situations that are characterized by moderate risk, follow-ups of results and feedback, and acceptance of individual responsibility. More recently, studies have increasingly focused upon the behavioural aspects of entrepreneurs (Chell et al., 1991; Gartner et al., 1992; Lumpkin and Dess, 1996). The cognitive process in the decision making reported by entrepreneurs have also being explored (Baron, 1998; Manimala, 1992; Palich and Bagby, 1995). Empirical findings The influence of previous entrepreneurial experience upon success of small businesses was tested in several studies (Cooper and Gimeno-Gascon, 1992; Neiswander and Drollinger, 1986). Ronstadt (1988) found that longer, more successful entrepreneurial careers were a function of earlier careers starts and involvement in multiple venture. As per Box et al.

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(1993), prior start-ups and years of entrepreneurial experience were significantly correlated with performance. Gaglio (1997) found, that ability of entrepreneurs to learn from previous business ownership experiences can influence the quantity and quality of information subsequently collected. He also argue, that previous entrepreneurial experience may provide a framework or mental schema for processing information. In addition, it allows informed and experienced entrepreneurs to identify and take advantage of disequilibria profit opportunities (Kaish and Gilad, 1991). Chandler and Hanks (1994) found that competence of entrepreneur in identifying business opportunities (entrepreneurial competence) and gathering resources (managerial competence) is directly related to performance. In addition they found, that interaction between those competencies and founder’s environment has a moderating effect on the growth and sales volume of emerging manufacturing firm. The importance of business skills, particularly strength in idea generation and dealing with people, was found to be related to performance in Brush and Hisrich’s (1991) longitudinal study. In study of Lerner et al. (1997) it was found, that index of business skills (obtaining financing, budgeting, labour management, and planning ahead) were highly correlated with revenues and performance. Psychological motivations such as achievement, independence, and locus of control have been widely investigated with regard to their influence on business start-up (Brockhaus and Horwitz, 1986). Fewer studies examined their relationship to business performance. Hisrich and Brush, 1987) have found that individual motivations and owner/founder goals are related to performance in women-owned business, where opportunity motivation was related to survival and independence was associated with “no growth”. Motivation showed a strong relationship to performance in study of Lerner et al. (1997). Sandeberg and Hofer (1987) in their study of venture capitalists, who can be regarded as experts in evaluation of new venture proposals, noticed, that they placed the entrepreneur at the top of their list of factors to

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consider. Particularly critical, in the opinion of venture capitalists, is the entrepreneur’s dedication, energy and cooperativeness together with entrepreneurial experience. Criticism Trying to explain venture outcomes solely with individual characteristics is not a wise strategy (Davidsson and Wiklund, 2001: 84). Especially this is the case if to seek the link between solely entrepreneur’s characteristics and the performance of the new venture (Begley and Boyd, 1987; Low and MacMillan, 1988). While biological characteristics of entrepreneurs, like education, entrepreneurial and managerial experience are generally important, there are only weak evidence of the influence of these toward firm performance (Sandberg and Hofter, 1987). In study of Lerner et al. (1997) of women entrepreneurs, no significant

relationships

were

found

between

prior

entrepreneurial

experience

and

performance. The same conclusion also seems to hold with respect to the entrepreneur’s psychological characteristics, such as need for achievement, locus of control and risk preferences. Researchers have identified only weak links between new venture performance and these characteristics (Begley and Boyd, 1987). Studies focusing on entrepreneurs’ personalities, backgrounds, early experience and traits have been widely criticized and have generally produced disappointing findings (Gartner, 1990). The perspective’s contribution to the present research context Summarizing, the behavioural approach contributes to the theory in understanding that: (1) It is individuals who carry out entrepreneurship activities, no matter how they are defined. (2) Their characteristics (personality, background, skills, etc.) matter. (3) Environmental variables are also relevant, not only in that they open opportunities to exploit market inefficiencies, but also in the sense that different environments are more or less conductive on entrepreneurship, and can be more favourable to the new venture’s success (Stevenson and Jarillo, 1990). Low and MacMillan (1988) review prior research on the personality and social context of

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entrepreneurs and stress the importance of studying entrepreneurship in a contextual and process-oriented way. Implicit in their review is an emphasis on the entrepreneur as the focus of entrepreneurship, though they recognize that the activities of entrepreneurs are not only based on the characteristics of the entrepreneurs themselves, but on the influences of organizational, environmental, and creation process as well (Carsrud et al., 1986; Gartner, 1985b). It is evident that motivation, experience, business skills, and background can be an importanct explanatory variable to firm performance (Lovereid and Bullvåg, 1996; Miner, 1990; Miner et al., 1992; Wiklund, 1998). Omitting those constructs in the present study could be a severe limitation. They should be included into the model explaining performance together with environmental and strategic factors.

The Resource-Based Perspective General overview of the perspective Scholars adhering to the resource-based view of the firm (Andrews, 1980; Barney, 1991; Grant 1991; Penrose, 1959; Peteraf, 1993) suggest that differences in performance among companies may be best explained through differences in corporate assets and resources and their application, rather than through differences in industry structure. This theoretical perspective is more concerned with the firm-level analysis, and can‘t be labelled deterministic, as in the case with population ecology. According to a resource-based view a firm may be perceived as an aggregation of resources and capabilities, which are translated by management into strengths and weaknesses of the firm (Lerner and Almor, 2002: 110). Andrews (1980) characterized the role of a strategist as one of finding match between what a firm can do (organizational strength and weaknesses) within the universe of what it might do (environmental opportunities and threats). Andrews thought that corporate strategy should define the business in which a company will compete, “preferably in a way that focuses

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resources to convert distinctive competence into competitive advantage” (1980:18-19). Some scholars examined the exogenous variables in a firm’s competitive environment. Drawing on the Bain-Mason paradigm and oligopoly theory (Porter, 1980), they examined the structural forces in a firm’s environment and how this forces influence firm’s performance. More recently some scholars have returned to Andrew’s views. In the tradition of Penrose (1959), Wernerfelt (1984) characterized the firm as a collection of resources rather then a set of product-market positions. He used term “resource” to refer to “anything, which could be thought of as a strength or weakness of a given firm” (Wernerfelt, 1984:172). In a theoretical account, Lippman and Rumelt (1982) showed that “uncertainty imitable” resources may discourage competitors from challenging an incumbent. Another contribution to the approach was work of Barny (1986, 1991). He says that firm’s resources “include all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness (1991: 101)”. Dierickx and Cool (1989) differentiated between resource stocks and flows and argued that strategic assets, those that are necessary for sustainable competitive advantage, must be developed internally and cannot be purchased on the factor markets. The resource-based view tends to see performance differences across firms as the result of differences in efficiency, rather then differences in market power. In explaining theses differences, resource-based theorists tend to focus on resources and capabilities that are long-lived and difficult to imitate (Conner, 1991). To sustain long-run competitive advantage resources should meet four criteria: (1) they must be valuable, in the sense that they exploits opportunities and/or neutralizes threats in a firm’s environment, (2) they must be rare among a firm’s current and potential competitors (3) they must be imperfectly imitable and (4) there can not be strategically equivalent substitutes for these resources that are valuable but neither

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rare or imperfectly imitable (Barney, 1991:106). In resource-based view, routines are often seen as resources, which meet all these criteria. Strategists see routines as proxy for inimitability (Montgomery, 1995). As Peteraf (1993) noted, in the resource-based view “history matters, profits are persistent, and change most often occurs slowly and incrementally”. Scholars adhering to this view argue that the firm’s tangible and intangible resources are central in explaining its performance (Wernerfelt, 1984). On the firm level, human capital is often taken as an important resource. In the recent decade, the sociodemographic characteristics of the entrepreneur often provide the personal abilities which facilitate small firm performance (Bird, 1993; Chandler et al., 1992; Davidsson, 1989, Miller and Touluse, 1988).

Empirical findings In numerous studies it was shown, that different kinds of resources contributes to the firm performance. Some researchers found relationship between firm’s performance and resources at an organisational focus, such as competence and capability of the firm (Chandler and Hanks, 1994a; Chaston and Mangles, 1997; Heeley, 1997), availability of capital (Bamford, Dean and McDougall, 1997; Cooper et al., 1994), organisational or individual networks (Donckels and Lambrecht, 1994; Hansen, 1995). The socio-demographic characteristics of the entrepreneur often provide the personal abilities which facilitate small firm growth and performance (Begley, 1995; Bird, 1993; Chandler et al., 1992; Davidsson, 1989; Miller and Toulouse, 1988). The abilities of founding team also showed to influence performance (Barkham, 1994; Brushand Chaganti, 19997; Siegal, Siegal and MacMillan, 1993). Criticism Despite its considerable progress in a relatively short amount of time, the resource-based view suffers from a number of weaknesses. When faced with the real firm, it is often difficult to

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identify which of firm’s many resources, singly or in combination, account to a firm’s success (Foss et al., 1995). The distinction between variables referring to the resources of the entrepreneur and variables referring other dimensions of characteristics of the entrepreneur (values, attitudes and personality traits) is often lacking in the models showing how characteristics of the individual influence performance. It is likely that those variables related to resources, and those variables related to motivation, influence performance in different ways (Keats and Bracker, 1988). As was noticed by Wiklund (1998), the modelling of how resources contribute to capability, strategy and performance of the firm is usually fairly simplistic in the entrepreneurship literature. If, for example, education and previous experience of entrepreneur is through to be important resources, which facilitate performance, how do those factors affect performance? How do they affect capabilities of the firm? Another important issue is that resource-based perspective uses both equilibrium and process arguments, although the inconsistencies between these are rarely acknowledged. Applying this theoretical perspective in its classical version, researchers often focus on existing firms, and not so much on newly established businesses. The perspective’s contribution to the present research context Resource-based perspective has been widely used in entrepreneurial studies to explain firm’s performance. The major contribution of the resource-based perspective is that it can help us to understand the importance of the internal resources of the firm for its capacity to achieve high performance, and how small firms ca utilise different resources in their strategies (Wiklund, 1998). However, external resources and the ability to use them is also important. It has been suggested by Romanellii (1989) that two factors influence the survival chances of new and young firms. “First, the extent of available resources in an environment will affect the amounts and kinds of resources that young firms can acquire. Second, organizational strategies will influence the kinds and amounts of resources that will actually be acquired”

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(Romanelli, 1989:370-371). This theoretical perspectives operates mainly on firm-level unit of analysis, more rarely on the individual level and suits in a best way to the purpose of explaining firm’s performance. However, taking into considerations all weaknesses of this perspective, it is a need to enrich it with some elements from other theoretical perspectives within entrepreneurship.

The Strategic Adaptation Perspective General overview of the perspective Although resources are crucial to the performance of a venture, resources alone are not sufficient to achieve sustainable competitive advantage (Ucbasaran et al., 2001). It follows that entrepreneurs must develop skills and select competitive strategies to make better use of the resources that are accessible to them. Most empirical research on resource-based perspective has concentrated on large firms or on high-growth firms (Chatterjee and Wenerfelt, 1991; Collis, 1991; Harrison et al., 1991; Tallman, 1992). However, there could be found studies, concerning small ventures in strategic adaptation perspective. Chandler and Hanks (1994) examined resource-based capabilities and new venture performance among small manufacturing business in US. They found that higher levels and broader verities of resource-based capabilities were significantly related to venture performance. A strategic adaptation perspective suggests that the key to entrepreneurial success lies in the decisions of the

individual

entrepreneurs

who

identify

opportunities,

develop

strategies,

assemble

resources and takes initiatives (Low and MacMillan, 1988). Dollinger (1999) argue, that the strategic adaptation perspective within resource-based theory applied to understanding small business creation and management is the most appropriate one because it best describes how business owners themselves build their businesses from the resources and capabilities they currently possess or can acquire. Strategic choice theorists maintain that managers have the

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freedom to choose between different strategic orientations under the same environmental contingencies (Child, 1972), i.e. strategy may depend on, but is not completely determined by environment. With understanding of the complexity of factors, influencing the success and survival of the firm the contingency approach was adopted, that seeks to identify major contingent variables that significantly shape entrepreneurial outcomes (Low and MacMillan, 1988). Contingency approach holds that an interaction between strategy and environment determines firm performance (Child 1972; Lawrence and Dyer 1983, Miles and Snow 1978, Sandberg and Hofter 1987; Tsai et al., 1991). The heart of the contingency perspective is the notion that managers or entrepreneurs consciously select strategies and that their choices, at least in part, reflect their views of the optimal strategy in a given environment (Shane, Kolvereid, 1995). Sandberg and Hofter (1987) have developed and tested contingency model for predicting venture performance based upon characteristic of entrepreneur, the structure of an industry being entered, the venture strategy and the interactive effects of these three factors. They found that entrepreneurial characteristics appear to have little effect on venture performance, whereas interaction between industry structure and strategy appear to be strongly associated with performance. In strategic adaptation perspective characteristics of small firm’s task environment or technical environment such as munificence, turbulence, heterogeneity, hostility, dynamics, customer structure and competition, said to influence performance through strategic choices of entrepreneurs (Bamford et al., 1992; Covin and Slevin, 1989; Kolvereid, 1992; Moyes and Westhead, 1990; Tsai et al., 1991). The need for the external resources determines the dependence of the firm from its operating environment (Boyd, 1990). Because organizations are not able to maintain all necessary resources internally they should enter into transactional relationships with the environment (Westhead and Wright, 2000). That also could include the outsourcing knowledge and competence.

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Empirical findings Authors that adopt a strategic adaptation perspective usually start by identifying key success factors that enhance the chances of survival. Vesper (1980) identified five key ingredients: technical know-how, product or service idea, personal contacts, physical resources and customer orders. Timmons (1982) reviewed the works of over two dozen authors and concluded that there are “substantial variations in content, assumptions, and emphasis, and little theory to anchor the variety of viewpoints” (p.132). Nevertheless, he notes several recurrent ingredients in discussions of successful venture creation, such as the importance of a lead entrepreneur, building a team with complementary skills, a triggering idea for a product or service, a well developed business plan, a network of people and resources and appropriate financing. Another topic discussed in regard to this perspective is barriers or failure factors. Vesper (1983) identified 12 barriers to entrepreneurship. Another important consideration of strategic adaptation perspective is entry strategy. Such strategies could include new product, new service, imitative product or service, franchising, parent company and other (Vesper, 1980). The most advanced strategic adaptation entrepreneurship research comes from researchers within venture capital field. Venture capitalists are people, making profits from assessing new venture proposals and have developed an expertise in distinguishing between winning and losing ventures. In a number of research actors that venture capitalists evaluate in deciding to find the winners are evaluated (MacMillan et al., 1985; Sandberg and Hofer; 1987; Tyebjee and Bruno, 1981). Roure and Maidique (1986) proved that experienced, wellbalanced venture teams improve performance and found that “successful ventures target product-market segments with high buyer concentration in which their products can attain and sustain competitive advantage”(p. 295).

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Critique The strategic adaptation perspective operated on the firm-level unit of analysis. In contrast to population ecology model, which is deterministic in its nature, this perspective assume the active role of entrepreneurs in affecting firm’s performance. In population ecology, the environmental influence of location or industry on performance is assessed (Begley, 1995; Cooper et al., 1994; Roper, 1997). In these cases, environment is analysed at aggregate level, i.e. environment assumed to have the same effect on all firms in a particular industry and location. In strategic adaptation approach a different view is hold. It examines the influence of environment on performance of individual firms. Research in this area needs to recognise the fact that different strategic responses to environment threats and opportunities are possible and that particular strategies are not inherently better. Rather, the success of any particular strategy is dependent on the environment of small firm. This approach does not include other important factors, which can influence performance of organisation. The perspective’s contribution to the present research context Probably, the major contribution of this perspective is its discussion on environment and its relation to strategy and performance. According to strategic adaptation perspective performance of the firm depends on the environment. However, environment has crucial, but not independent effect on performance. Instead, the firm adapts its strategy to the threats and opportunities of the environment (Wiklund, 1998). Depending on how successful this adaptation process is, small firms will exhibit different levels of growth and performance. A review of the strategic adaptation perspective shows that strategy conceptualisation have advanced from static, overly generalized “key success factors” models to contingency model that consider a range of variables under varied circumstances and take into account the learning effect of past efforts (Low and MacMillan, 1988: 144). Taking into consideration

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environmental influence on performance through strategy can contribute to the explanation of the firm’s performance.

RESEARCH MODEL

Different theoretical perspectives described above, can be subdivided to further subdirections. Besides, modern entrepreneurial schools are prioritising different research purposes. Broad topics areas such as a new venture creation, firm growth, venture capital, corporate entrepreneurship, management succession, family business, technology transfer and developments are kinds of subject different entrepreneurial schools have interests in. The focus of the research, levels of the analysis and methodology among research directions also differs greatly. That is because “entrepreneurship research is in its adolescence” and though significant research efforts have been expended, this brought the field to “only modest level of academic legitimacy” (Low, 2001: 17). Gartner (2001) argue, that there is no “elephant” in current

entrepreneurship

scholarship.

That

is

”the

totality

of

current

academic

entrepreneurship does not espouse (nor can it espouse) an entrepreneurship theory, per se; rather entrepreneurship research espouses a diverse range of theories applied to various kinds of phenomena. The various topics in the field of entrepreneurship do not constitute a congruous whole” (Gartner, 2001: 34). Faced with this rather frustrating situation, entrepreneurship researchers may find comfort in the acknowledgment provided by Amit et al. (1993: 815): “it may be too ambitious to expert a complete and robust theory due to the interdisciplinary nature of entrepreneurship”. Thus, for today, a paradigm of entrepreneurship does not exist (Gartner, 2001). This belief is widely shared among the entrepreneurial researchers. Herron et al. (1991:71) wrote: ”we see evidence that many ”uni-” rather than one or more ”multi-” disciplinary views of our field currently exist”. Bull and Willard (1993: 185)

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wrote that “in many cases, researchers from one discipline have tended to ignore entrepreneurship studies by researchers in the other disciplines”. As Gartner (2001: 34) argue “the development of theory involves the creation of a community of scholars in dialogue about specific set of problems and issues, and holding similar beliefs about the relevance of certain methods of solving these problems. Mac Millan and Katz (1992) argue there should be room for more than one theory in the field of entrepreneurship research. At the same time Gartner et al. (1992) wrote, that there is no need for the development of new theories concerning research on organisational emergence. Instead, existing theories can be integrated. As Wiklund (1998) noticed, suitable theories exist, and it is possible to use insights from different theoretical streams and integrate them. It is important to understand their basic assumptions, their limitations and the compatibility of different theories in order to combine them.

Discussion of four theoretic perspectives in explaining performance From the brief review of the various theoretical perspectives within entrepreneurship it is obvious, that many approaches exist, explaining performance from different viewpoints. Indeed, although it could be argued that entrepreneurship research needs to move in a particular direction, there are unavoidable tradeoffs in research and there is no single best approach (Davidsoson and Wiklund, 2001). In the basic version of the population ecology theory the survival of the firm is determined by the environment changes and by the ability of organisation to adapt to such changes (Miller, 1987). The theory uses aggregated level of analysis and can be labelled deterministic. Firm is treated as a “black box”. Industry conditions, geographic location and other factors said to influence performance of the populations of the firms.

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The resource-based approach holds that availability of both internal and external resources is crucial for firm survival. The internal resources are transformed to firm’s capabilities, which influence the performance. This theoretical stream in the opposite of population ecology perspective operates on individual firm’s level. Resources availability together with the strategies used by the firm are crucial to explain firm’s performance. This approach again in contrast to population ecology define the role of management of the firm as determining the outcomes and performance. At the same time, the strategic adaptation perspective holds that success is primarily dependent upon the fit between changes environment and entrepreneur’s ability to develop and execute effective strategies. Both firm and individual are used as the unit of analysis in this approach. This approach takes into consideration both environmental influence and entrepreneurial strategies as determinant of firm’s performance. In turn, according to the behavioural and physiologic perspective, the new venture survival is dependent upon motivational and behavioural characteristics of entrepreneurs. This theoretical perspective tends to use individual entrepreneur as a unit of analysis. In contrast to objectivism of population ecology, this perspective is more subjectivist. Often different theoretical perspectives refer to the same factors from the different viewpoints. For example, both population ecology and strategic adaptation perspective appreciate the importance of the environment. However, adherents of the population ecology perspective suggest that the founding of new organizations can be influenced by intrapopulation, inter-population and institutional factors (Aldrich, 1990). At the same time resource dependent theories views the environment as the pool of resources with organizations entering into transactional relationships with environmental factors because they can not generate all necessary resources internally (Pfeffer and Salancik, 1978).

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Proposed Research Model Actually, all mentioned before theoretical perspectives have matured today from their basic versions and both population ecology perspective, behavioural or psychological perspective, resource-based and strategic-adaptation theoretical streams holds that it is necessity to take into consideration not solely environmental, or personal, or resource, or strategic issues, but rather a combination of all above (Aldrich and Marines, 2001: 44; Stevenson and Jarillo, 1990; Low and MacMillan, 1988: 144). That tendency shows, that theoretical perspectives are complimentary to each other, rather then contradicting. At the same time, each of the perspectives alone has several limitations, which could be minimized in integrating them. There have been a lot of attempts to integrate existing perspectives into more advanced models. However, some of them have not been tested and thus empirically validated (Covin and Slevin, 1991; Keats and Bracker, 1988; Naffzinger et al., 1994). The reason why they have not been validated is in most cases that they are too complex and sophisticated for empirical studies, argue Wiklund (1998). Some models that have been tested are based on the delimited theories, not frequently used in research on firm performance (Chandle and Hanks, 1994a; Davidsson, 1989). Other models are limited in including only fewer factors that can affect performance (Cooper, 1995). At the same time, their still is a need in advanced models which could explain performance and could be empirically tested. Low and MacMillan (1988) stated: “the challenge of entrepreneurship research is to increase the incorporation of multiple levels of analysis into future research designs” (p. 152). Davidsson and Wiklund (2001: 94) called for use of multiple level of analysis and in particular suggests to focus on linking new enterprise at the micro level to societal-level outcomes. They argue that entrepreneurship research often seem to assume that micro-level outcomes translate directly to the aggregate level. Integrated theoretical model should attempt to abstract a large number of low-level manifest variables common in research on small firm’s performance into a limited number of

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theoretical constructs. As Wiklund (1998) argue, by doing so, the framework summaries previous research and can be used for empirical studies focusing on the influence from specific variables as well as those of a more general interest. The model should also facilitate the explanation of how and why different classes of variables influence firm’s performance. By doing so it is possible to provide a comprehensive view of the factors contributing to firm’s performance and the relationships among those factors. Four perspectives, integrated into one model, are depicted in the Figure 1 below. This model is based on basic, well-established theoretical perspectives, which are commonly used in the field of entrepreneurship. Four theoretical perspectives – population ecology, behavioural perspective, resource-based and strategic adaptation streams of research are integrated into one theoretical model which makes it general from a theoretical standpoint. It is assumed this model could be easily tested in empirical study through application of common statistical techniques. With this model the author hopes to contribute to the study of small firm performance.

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Figure 1. Theoretic model explaining performance Perceived task environment Industry structure Hostility Heterogeneity Dynamism External resources Finance Consulting Physical resources

Strategy Founder’s entrepreneurial competence Founder’s managerial competence Strategies applied by the firm

P E R F O R M A N C E

Internal firm resources Organisational resources Human capital of the firm Tacit knowledge Founder’s characteristics Experience Education Motivation Psychological characteristics

Environment and external resources The performance of organisation is influenced by the environment within which organisation emerges (Covin and Slevin, 1989; Hofer and Sandberg, 1987; Tsai et al.,1991). Environmental and industry conditions shape the opportunities and are central to the respective frameworks of Cooper (1991; 1992), Gartner (1985), Reynolds (1989, 2000) and Vesper (1990). Industrial structure, hostility, heterogeneity and dynamism of the environment

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would influence performance directly and through the strategies entrepreneurial firm would choose to adapt to the environment (Dess and Beard, 1984; Miller, 1987b; Zahra, 1991). Those characteristic of environment can give a picture of the opportunities which could be found in it. Researches suggest that the quality of the opportunity has a significant direct impact on firm performance. The opportunities are more abundant when product demand is growing

rapidly,

products

are

differentiated,

and

industry

competition

is

relatively

unconcentrated (Hambrick and Lei, 1985; Hofer, 1975; Sandberg, 1986; Yip, 1982). Availability of external resources such as capital availability, commercial and physical infrastructure - all these factors are assumed to be important for successful firm performance. Resources The resources and capabilities mobilized by a firm also have an important impact on the performance of the firm (Chandler and Hanks, 1993; 1994; Pfeffer and Salanchik, 1978). Six major categories of resources have been suggested by Hofer and Schendel (1978): financial resources, technological resources, physical resources, human resources, reputation and organisational resources. Other researchers have used different categories (Barney, 1991; Grant, 1991) basically referring to the same type of resources. However, not always these categorisations may be applicable to small firms (Greene et al., 1997). These authors suggest a typology that recognizes the important role of founder, his or her social resources (networks and relationships), and the features of organisational and physical resources. Founder’s characteristics The personality of entrepreneur as an individual, with his or her background, goals, values and motivations play an important role in the fulfilment of the strategies (Cooper and Gascon, 1992; Stevenson and Jarillo, 1990; VanderWerf, 1989). Founders characteristics like education, experience, collaboration, management practice, genetic factors, family influence do also matter. Sarasvathy (2001: 250) views entrepreneurs as starting out with “their own

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traits, tastes and abilities; the knowledge corridors they are in, and the social networks they are a part of”. McClelland (1967) argued that need for achievement is culturally acquired and a key psychological characteristic of an entrepreneur. Internal locus of control, high risktaking propensity and tolerance of ambiguity are other characteristic that has been attributed to entrepreneurs (Sexton and Bowman, 1985). Motivation is said to be a part of selfperception of competence, which shown to have significant correlation with the performance (Gist, 1987; Chandler and Jansen, 1992). Strategy Although opportunities in a given environment may exist, the quality of the opportunity actually selected and operational zed is contingent upon the founder’s ability to recognize and envision taking advantage of opportunity. In other words, the founder’s entrepreneurial competence moderates the relationship between the scarceness or abundance of opportunity and the performance of the stat-up (Chandler and Hanks, 1994a). The classic entrepreneurial role assume that business founders will scan their environment, select promising opportunities and formulate strategies for taking advantage of those opportunities (Mintzberg and Waters, 1982). This ability has been referred as to the core of entrepreneurship and labels entrepreneurial competence (Timmons et al., 1987; Erikson and Kolvereid, 1999). It is also important to interact with the environment to acquire and utilize resources. The founder must develop programs, budgets, procedures, evaluate performance, and perform other tasks essential to implementing strategy (Wheelen and Hunger, 1989). This requires founders to be competent in the managerial role. They must possess the mental ability to coordinate all the organization’s interests and activities, to demonstrate leadership ability - understand and motivate workers and partners (Hofer and Sandberg, 1987; MacMillan et al., 1985; Schein, 1987). Ibrachim and Goodwin (1987) reported that the abilities to delegate, manage customer and employees relations and exercise interpersonal skills were perceived as important to

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venture success. All these together can be named managerial competence (Chandler and Hanks, 1994a). The entrepreneurial decision process is assumed important for business survival in the works of Gartner (1985), Sandberg and Hofter (1987), Stevenson and Jarillo (1990), and VanderWerf (1989). Idea sources, planning process of individuals, information sources and networking, team working and other strategic issues are important determinates of performance and capacity to identify and pursue opportunities, obtain the necessary external resources, and use the opportunities and resources in order to create value can be treated as the essence of entrepreneurship (Erikson and Kolvereid, 1999). Research has shown significant correlations between the founder’s self-assesed entrepreneurial and managerial competencies and the performance (Chandler and Jansen, 1992; Chandler and hanks, 1994a).

Limitations The proposed model is developed based on a number of theoretical perspectives which seems to explain firm’s performance from a different viewpoints applying for this purposes different levels of analysis. A model is by definition a simplification of a complex reality and there is always a trade-off between including certain factors and relationships in the model and disregarding them. Simplicity and complexity need to be balanced (Ruist, 1990). In order to simplify the model, the reciprocal effects of the environment and entrepreneur and the firm existence toward environment is omitted.

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