Strategy formation in the entrepreneurial firm: a New Zealand perspective

Abstract

Entrepreneurial firms (0-50 full-time equivalent employees) comprise 99% of all economically significant firms within New Zealand and provide employment for approximately 32% of New Zealand's total workforce. Their role in maintaining the economic and social well being of our nation is well documented, especially over the last few decades with the move towards an open and deregulated marketplace that is influenced by international and domestic market forces and competition. As a nation of small and medium sized businesses, gaining an understanding of the inner workings of these firms is an important step in understanding New Zealand's future sources of competitive advantage. However, little is known about the strategy formation process in which these competitive advantages are developed. The predominant focus within the strategic management literature is of large, often multi-national organisations that possess the resources, capabilities, and capacity to undertake strategic planning. Here, it is argued that smaller firms are unique and differ from larger organisations along several important dimensions, with the entrepreneurial leader lying at the heart of the strategy formation process as principal and often sole decision-maker. In this vein it is clear that the strategy formation process should differ from that observed within larger organisations, and therefore requires further investigation. The research described in this thesis used an inductive qualitative research methodology based on 'rich' description, to enhance theoretical perspectives. The research focuses on six successful exporting firms in New Zealand, with in-depth and intensive qualitative interviews held with the key decision-maker, the entrepreneurial leader. In studying these six firms it has been found that the strategy formation process within entrepreneurial firms differs from that experienced within larger firms, as put forward by the prevailing literature. This is apparent due to the reduced complexity of the entrepreneurial firm, its smaller scope and scale of operations and activities, and due to its smaller managerial team. This inquiry has found that two strategy-making postures are frequently present at different stages in the entrepreneurial firm's development. The first of these postures - 'Absence in Transition' - is a largely unexplored approach within the available literature. The term has been coined by Inkpen & Choudhury (1995) and refers to situations where the entrepreneurial firm does not exhibit a coherent pattern of decisions that is recognisable as a strategy as this pattern is in the process of emerging and evolving. It has been advanced in this inquiry that entrepreneurial firms may exhibit 'Absence in Transition' in the early start-up phase, as the main driving force is 'survival'. The entrepreneurial leader, faced with limited resources, is forced to adopt a largely reactive and short-term experimentation approach through grasping any opportunities that are presented. This approach is further compounded by the undeveloped nature of the market niches in which the entrepreneurial firms operated within and also the lack of small business management knowledge that the entrepreneurs had. As the entrepreneurial firms grew and developed, a pattern of decisions that is recognisable as a strategy emerged. Rather than adopting a purely planned approach to strategy-making, the entrepreneurial leaders adopted a predominantly incremental approach, with planning used to complement this approach. The trigger for adopting this combined approach lies in the entrepreneurial leader's ability to recognise and capture a defining moment or moments that provide the impetus for further substantial growth. Planning is shown to play an important role in the capturing of the moment, especially when there exists a high level of perceived risk. Furthermore, the introduction of planning initiatives did not revolve solely around the pursuit of opportunities, but rather they also act as a control, co-ordination and communication device. Planning becomes an important tool as the complexity of the entrepreneurial firm reaches a stage where the entrepreneurial leader is no longer able to oversee all the activities of the firm. In positing these two strategy-making postures, it is important to note that due to differing contexts and situations experienced by the firms, not all the entrepreneurial leaders adopted both postures and that the postures do not follow a linear, sequential order. In particular, one firm - Kapiti Cheeses Ltd - was found to adopt an incremental and planning approach from start-up and did not experience a strategy absence period. In contrast, the other five firms studied were found to initially exhibit the Absence in Transition posture and then either moved into an incremental approach with planning introduced later, or straight into an incremental and planning approach. The reasons and factors that led to these divergences are explored throughout the research.