How to Plan as a Small Scale Business Owner: Psychological Process Characteristics of Action Strategies and Success [*]

A theoretical analysis of individual-level planning and action strategies used by small business owners/managers distinguishes five different strategic approaches: Complete (top-down) Planning, Critical Point, Opportunistic, Reactive, and Routine/Habit. Research on 80 owners of small start-up firms in the Netherlands showed that, as hypothesized, a Reactive Strategy was negatively related to firm success, while a Critical Point Strategy was positively related. The combination of Critical Point and Opportunistic strategies appeared most successful and the combination of Opportunistic and Reactive was found to be least successful. This study takes a psychological approach to investigate the process characteristics of action strategies used by small scale business owners; these strategy characteristics are then related to the firms' success. The objective of this research is to deepen our understanding of how strategies are used and how the owner/manager's strategy-relevant behavior is related to success in the small business. Founders of new ventures always follow some strategy to reach their goals, though these strategies are not always highly rational or explicit. Research on business strategy frequently differentiates types of strategy by content and process characteristics (Austin and Vancouver 1997; Dess, Lumpkin, and Covin 1997; Hart 1992; Olson and Bokor 1995; Rajagopolan, Rasheed, and Datta 1993; Rauch and Frese 2000). "Content" specifies which kind of strategy is used--for example, low costs, differentiation, or focus/niche strategies (Porter 1980). On the other hand, "process" refers to how one formulates and implements the strategy content (Olson and Bokor 1995). This study concentrates on the process of action strategy. In contrast to most strategy process literature which focuses on the firm level, this research investigates the action strategy process as a characteristic of the founder and manager of the firm (Rajagopolan, Rasheed, and Datta 1993). The pervasive influence of founders on their firms and their dominance in making decisions make it possible to assume a high degree of equivalence between the individual and the organizational levels of analysis. Strategies have been researched in psychology under the topic of thinking and problem solving. Strategy is defined by a plan of action, that is, a sequence of means to achieve a goal (Miller, Galanter, and Pribram 1960). Thus, the concept of strategy emphasizes how to reach a goal; the process of developing the goal itself lies outside the concept of strategy. The function of a strategy is to determine appropriate action in uncertain situations. A strategy presents a template that can be applied to a variety of situations, and thus helps one compensate for the limited processing capacity of the human mind (Frese and Zapf 1994; Hacker 1989; Kahneman 1973). Cognitive and action theories have differentiated the following process characteristics of strategies: Complete Planning, Critical Point, Opportunistic, and Reactive Strategies (Hacker 1986; Hayes-Roth and Hayes-Roth 1979; Zempel 1994). A person using a Complete Planning Strategy plans ahead and actively structures the situation. Complete Planning Strategy implies a more comprehensive representation of the work process, a longer time-frame in which to plan ahead, a larger inventory of signals, a better knowledge and anticipation of error situations, and a more proactive orientation (Frese and Zapf 1994; Hacker 1986). The Critical Point Strategy concentrates on the most difficult, most unclear, and most important point first (Zempel 1994). Only after solving the first critical point are further steps planned. This approach constitutes an iterative problem solving strategy--one has a clear goal in mind and concentrates on the tasks relevant to it. In contrast, a person using an Opportunistic Strategy starts ou t with some form of rudimentary planning but deviates from these plans easily when opportunities arise (Hayes-Roth and Hayes-Roth 1979). …