Small business behavior: development and test of a multivariate model

Abstract

Small businesses have been the subject of research interest in at least three independent fields of inquiry: economics, entrepreneurship, and life cycle theory. However, a review of the literature indicates: (1) the absences of theory to explain small firm behavior; and, (2) little knowledge about what differentiates high performing small firms from their low performing counterparts. In the light of these gaps, the study converged on the broad objective of development and testing a model of small business behavior which embraced five research questions: (1) How do environmental characteristics influence the structures, strategies, networking behavior and performance of small business? (2) Is networking a significant explanatory of small business performance? (3) How does management of small business influence performance? (4) Does an entrepreneurial orientation contribute to high performance? (5) Does fit among the environmental elements and characteristics explains performance differences of small businesses? The study, adopting a survey design collected data from 126 small manufacturing firms in three states: Gujarat, Maharashtra, and Tamil Nadu. For each firm the owner/entrepreneur responded to a questionnaire designed for the study. Psychometric properties of the measures employed in the investigation were assessed through item analyses and moderated multiple regression analyses. Structural equation modeling was attempted to uncover preliminary relationships through the major constructs in the research framework. Some of the significant findings among others include: • In environments characterized by low efficiency, firms adopting differentiation strategies report higher performance than firms following cost leadership or focus strategies. • The interaction of environmental opportunity and uncertainty is positively associated with customer and supplier networking. While environmental uncertainty is positively associated with customer and supplier networking, under added conditions of high environmental opportunity, firms apparently have a greater impetus to engage in networking behavior. • High environmental opportunity is positively associated with personal networking. When high opportunity is perceived in the environment, firms attempt to exploit the opportunity through personal networking. • The interaction of environmental opportunity and uncertainty is positively related to organizational innovativeness. Environmental uncertainty is unrelated to organizational innovativeness; however, under added conditions of high environmental opportunity, there is stimulus to reduce uncertainty and unpredictability through increased innovative behavior. • The interaction of environmental opportunity and inefficiency is positively related to organizational innovativeness. Again environmental opportunity is unrelated to organizational innovativeness; however, under added conditions of low environmental efficiency, there is a clear proclivity for innovative behavior. • Environmental opportunity is positively related to firm performance. This is consistent with the normative organization theory literature which posits that under conditions of high environmental munificence (i.e., high growth potential, resource abundance, infrastructure availability etc.) performance of firms is likely to be higher than conditions of environmental scarcity.

• Innovative differentiation is positively related to the use of formal systems in the organization, but unrelated to the extent to which rules are employed. This is contrary to the behavior of large organizations where it is found that in general, innovative differentiation is related to organic structures characterized by few rules and systems, i.e., low levels of formalization. However, in the present study the finding that innovative differentiation is positively associated with systems but unrelated to rules and procedures suggests that small firms will benefit from the creation and maintenance of good systems regardless of the type of business strategy pursued. • Cost leadership strategy is strongly related to both rules and systems in the organization. This finding is consistent with the literature. Cost leadership strategy is associated with cost cutting, and reliance on monitoring and control systems geared to maximize efficiency all of which point to existence of organizational relationship and transactions bound through strong rules and systems. • Personal networking is positively associated with proactiveness and competitive aggressiveness. Proactiveness and competitive aggressiveness are two critical dimensions of firms’ entrepreneurial orientation. Therefore, strong entrepreneurial orientation related to personal networking suggests that the latter may also be an important dimension of entrepreneurial behavior. • Personal networking is positively associated with both profitability and competitive performance. Personal networking has direct positive relationship with both dimensions of performance suggesting that small firm owner/managers who engage in networking behaviors consistently report higher performance than their counterpart who do not engage in networking. Some of the implications include: • The study has found preliminary support for the fit/congruence perspective of organization theory. This perspective posits that high performance is engendered through fit between environment, and organizational elements. The prescription for organization theorists and researchers working under the rubric of this perspective is to investigate the unique configuration of design elements which result in high performance. In the case of small firm behavior the present finding is an important step toward grounded theory-building. This will help in moving towards the ultimate goal of a theory of small business management. • The study has found support for the assertion of a small but burgeoning stream of literature that networking is a critical factor explaining the success of small and entrepreneurial firms. Given this finding small firm owner/managers may find it useful to develop networks which will not only help in reducing supply and demand side uncertainties but also aid in meeting the numerous regulatory requirements, obtaining clearances, accessing distribution channels, obtaining finance and so on. • Science, networking has emerged as an important variable explaining small business performance, it may be useful for small industry associations to devote efforts to providing the services that the entrepreneurs obtain through networks. This will help reduce the time spent by entrepreneurs obtain through networks. This will help reduce the time spent by entrepreneurs on such boundary management activities. The study concludes with a discussion of the study limitations and several pointers to future research.