The Management of Small and Medium Enterprises

Matthias Fink, Sascha Kraus

• Publisher: Routledge
• Year: 2009
• eBook ISBN: 9781135227586
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Due to the vital importance of SMEs in developed economies worldwide, this book aims to provide a unique and much-needed investigation into the underlying mechanisms and practices of management within these companies by collecting a wide range of original conceptual and empirical research in the topical area of management in SMEs and new ventures.

Collecting work from dozens of leading scholars in fields ranging from management and entrepeneurship to human resource management and strategy, this book aims to supply readers with an overview of the field of research in management of SMEs and new ventures as well as in depth knowledge on a variety of related topics. The essays collected here are focused and practical, offering a variety of explicit and pragmatic recommendations for action and developing new tools and strategies useful to scholars and students as well as practitioners working in the field of SME and new venture management and consulting.

Part I
Strategic Planning and Management

1 Pre-Startup Planning Sophistication and New Venture Performance

Reinhard Schulte

INTRODUCTION

Surprisingly little empirical work has examined the relationship between planning sophistication and performance in new ventures. The present study reports the results of a survey of initial business plans made by entrepreneurs, whose enterprises have been monitored within the startup panel of Northrhine-Westphalia since the year 2000. This chapter seeks to determine the planning behavior of entrepreneurs, the grade of their planning sophistication and the performance effects of planning features.

Reflections on new venture planning are spread quite widely in the academic entrepreneurship literature (e.g., Diochon et al. 2005; Hisrich et al. 2008; Kuratko and Hodgetts 2004; Timmons 2003; Dollinger 2003; Hormozi et al. 2002; Mugler 1998; Pleschak and Werner 1998; Ripsas 1997; Olson and Bokor 1995; Risseeuw and Masurel 1994; Carter et al. 1994; Unni 1984), as well as in how-to books and papers for practitioners (e.g., McKeever 2005; Hebig 2004; Dowling 2002; Gruber et al. 2002; Barrow et al. 1998). The literature strongly supports the argument that planning is a key issue for startups and that a lack of planning leads to a poor performance of young enterprises. However, some authors even argue that planning delivers only few advantages to new small businesses (Carter et al. 1996). Moreover, theoretical linkages between planning sophistication and performance in new ventures were hardly delineated (Castrogiovanni 1996), and only a few empirical works have been done on this topic.

Brüderl and others (1992, 1998), as well as Jungbauer-Gans and Preisendörfer (1991), inspected the time invested by entrepreneurs for planning activities and the frequency of written business plans. Planning activities exposed no significant effect on survival and growth (in employees), but on growth in gross revenue. Klandt and others (1998) investigated the frequency and partitioning of written quantitative business plans of government-supported startups with interviews. They found no substantial effect on gross revenue per capita. Lussier (1996) examined a small sample of startups in the retail industry, finding accurate planning to be a relevant cause explaining survival. Rüggeberg (1997) analyzed surviving technology startups with a retrospective questionnaire. He reports startup planning to some extent (concerning a commercialization plan and a customer requirements analysis) to have significant impacts on turnover and goal attainment. Pleschak and Werner (1998) examined by interview the circumstances of development of initial business plans within a sample of government-supported technology startups. They concluded that the application for financial support initiates planning processes and affects the quality of business plans. Lumpkin and others (1998) examined the planning behavior and the perception of success. They concluded that preparing financial projections is positively related to profitability. Schutjens and Wever (2000) tested a sample of Dutch business starters. They concluded that thoroughly prepared entrepreneurs in means of making a business plan more often realize growth in employees and turnover. Honig and Karlsson (2004, 2001) inquired about the planning behavior of nascent entrepreneurs in Sweden and their individual perception of their business success. They found no evidence for a positive correlation between planning and performance. But Matthews and Human (2000) indicated that perception of success is problematic when used as a measuring technique for business success, because it cannot be separated from expectations and is therefore biased. They delineated how business plan formalization affects the expectation of growth in new businesses: More formal business plans lower the expectation of growth. Kraus and Schwarz (2007) and Kraus (2006) showed that pre-startup planning leads to ongoing planning in small Austrian businesses, and that the existence of written business plans is beneficial for company success.

In an early work on strategic planning in enterprises based on new technology, Roberts (1983) identifies strategic planning deficiencies in a lack of emphasis on economic performance, an inadequate analysis of the economic and the technical environment, an inadequate perception of competitors and a too broad business approach with an inappropriate multiple product line. Functional planning deficiencies were found lacking in marketing planning, management team planning, R&D planning and financial planning. Spitzer and others (1989) show that using external financial sources highly correlates with making formal plans in new technology-based enterprises. Entrepreneurs who use external financing therefore exhibit a greater propensity to develop formal business plans than those entrepreneurs not using these sources.

This research area does not seem to be very well explored. Widening the perspective to strategic or operational planning in already existing small businesses, what is supposed to be a roughly comparable context, there are a lot more studies available. Some of them already highlighted the correlation between planning and performance: Jones (1982) detected planning businesses to be more successful in terms of return on assets than nonplanning businesses. Bracker and Pearson (1986) identified different levels of performance to be associated with different levels of planning. Robinson and others (1986) confirmed this for small independent food retailers. Bracker and others (1988) found that structured planning procedures outperform businesses with nonstructured planning procedures. Rue and Ibrahim (1998) found the overall planning sophistication to be a possible determining factor for growth rates in sales, but not for subjective organizational performance or return on investment. Berry (1998) found out that strategic planning in British small high-tech companies fostered their long-term growth. In young Dutch businesses, success leads to increasing planning activities, promoting further success (Van Gelderen and Frese 1998). Perry (2001), describing very little formal planning in U.S. small businesses, deduced that non-failed businesses do more planning than similar failed businesses did prior to failure. Lussier and Pfeiffer (2001) stated that accurate planning is relevant for survival in small businesses in Croatia, in accordance with Delmar and Shane (2003, 2004), who later found that planning in young Swedish small and medium enterprises (SMEs) increased survival rates. Based on a longitudinal analysis, Gibson and Cassar (2005) confirm a relationship between planning activity and performance in small businesses, pointing out that planning is more likely after a time of growth, whereas planning in turn promotes subsequent performance. Yusuf and Saffu (2005) found that planning SMEs outperform nonplanners only in the manufacturing sector.

Ackelsberg and Arlow (1985) concluded that although planning improves performance, formalization of the plan does not affect it. Robinson and Pearce (1983) found performance of small U.S. banks not to benefit yet from highly formalized strategic planning processes and extensive written documentation, as well as Gable and Topol (1987), who found no planning—performance relationship for small retail businesses.

In a meta-analysis containing large and mature companies as well as small businesses, Boyd (1991) reports that earnings growth, sales growth and return on investment benefit modestly from planning activities. The meta-analysis by Schwenk and Shrader (1993) led to similar findings.

Rauch and Frese (1998), as well as Van Gelderen and others (2000a), found a positive relationship between the detailedness of planning and the realization of owner goals. This relationship is moderated by uncertainty and environmental hostility. Rauch and others (2000) complemented the relevance of cultural differences as moderating influences on this relationship. Van Gelderen and others (2000b), using a psychological approach to investigate action strategies of small business owners (see Rauch and Frese 2000; Van Gelderen and Frese 1998), distinguished between different strategic planning variants in small businesses. They found a reactive strategy to be negatively related to the achievement of goals of the business owners, while a strategy focusing on the most crucial issues (critical point strategy) is positively related.

To summarize what has been done so far:

• Relatively few examinations focus on startups (Kraus and Schwarz 2007; Kraus 2006). The vast majority of empirical work on the planning—performance link targets established enterprises.
• Empirical studies targeting startups off and on expose modest hints of the assumption that planning sophistication promotes performance. However, by now there has been no substantial empirical evidence that holds for unfailing levels of significance.

All in all, the level of knowledge seems to be quite marginal. This may be caused by some deficiencies associated with prior research on initial business planning. Apart from limited geographic or industry coverage and an accidental lack of empirical testing, these deficiencies are particularly the following two:

• Survivorship bias: The exclusion of failed enterprises from performance studies due to the fact that they no longer exist biases (resp. overestimates) performance, because only companies that were successful enough to survive until the end of the period are included. To avoid this bias, a longitudinal research design is required.
• Interview bias: Performance studies on startups necessarily depend on an individual recollection of past events when not designed longitudinally. When looking at the later performance of a newly founded enterprise, an interview approach is, therefore, apparently biased by selective perception, selective answering and selective recollection of the past planning behavior. Those retrospective approaches are thus inappropriate.

The objective of this study is to analyze the relationship of planning sophistication and performance of startups in Germany, referring to real business plans. This research design avoids the numerous problems of retrospective approaches.

DATA AND METHODOLOGY

Variable Set

This chapter uses data collected by the Start Up-Panel Northrhine-Westphalia (NRW) (Schulte 2002; Schulte 2001). The panel, which has been run by the author since 2000, underwent its sixth wave of observation in 2005. Until 2005, it has monitored more than ten thousand startups belonging to the crafts business sector. This sector can be viewed as typical for entrepreneurial activities in Germany in terms of sizes, business models, legal types and other (Schulte 2002). The panel covers startups as well as successions and active participations in existing businesses, and contains solely full-time entrepreneurship. The core elements of the Start Up-Panel NRW are standardized written interviews conducted periodically, which allow for a longtime monitoring of a high quantity of entrepreneurs and their new enterprises. The Start Up-Panel NRW excludes survivorship bias. Because all included startups have been monitored through government authorities (Landes-Gewerbeförderungsstelle), no hidden exit is possible. Furthermore, if required all exits could be verified by way of a special crafts register (Handwerksrolle), where all entries and exits have to be recorded.

These regular panel examinations were accompanied by an extra enterprise database with detailed business information and some examinations placed aside the panel waves. One of the latter is an evaluation of 585 randomly selected initial business plans of the monitored enterprises that were made for financial acquisition purposes before starting the business. These written business plans were examined by a document analysis. It has to be pointed out here that data concerning planning activities is not collected by interviews, but by analyzing the written documents in order to avoid the interview biases mentioned earlier. Apart from this methodologic...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• List of Figures
• List of Tables
• Foreword: The Management of Small and Medium Enterprises
• Acknowledgments
• Introduction: The Need for (Entrepreneurial) Management of Small and Medium Enterprises
• Part I Strategic Planning and Management
• Part II Human Resource Management
• Part III Entrepreneurial Teams
• Part IV Experience, Learning and Innovation Management
• About the Editors
• List of Contributors