business strategies for entrepreneurial small firms.pdf

Strat. Change 10: 311324 (2001)DOI: 10.1002/jsc.554

Business strategies for entrepreneurialsmall firmsAlistair R. Anderson and Martin H. AtkinsDepartment of Management Studies, University of Aberdeen, Old Aberdeen, UK

This paper addresses the issue of the nature and context of business strategies inentrepreneurial small firms.

It examines a number of existing models of strategic planning and suggests that theycannot adequately cope with environmental uncertainty.

Developing the idea that effective strategy formation is processual in a stochasticenvironment, the paper proposes four alternative high-level approaches (Metastrategies) entrepreneurial firms might use to cope with uncertainty.

These stress the notion of evolution as a direction rather than a series of staged events.Copyright 2001 John Wiley & Sons, Ltd.

IntroductionThe first part of this paper discusses thecurrent evidence on the nature and pur-pose of strategic planning in entrepreneurialsmall firms. The second part develops an ana-lytic approach to planning analysis, whichshows that few of the earlier approaches tostrategic planning are appropriate for theentrepreneurial small firm. Instead, four Metastrategies are proposed that firms might em-ploy to cope with uncertain environments.The management of the enterprise needs tobe focused more on the strategic level in thecontext of the overall aims and objectives ofthe organization and less attention should bepaid to the tactical level that implies a beliefin the linearity of action and effect.

Strategy and planning inentrepreneurial firmsQuinn (1980) provided a useful definition ofstrategy:

* Correspondence to: Alistair R. Anderson, Departmentof Management Studies, University of Aberdeen,Edward Wright Building, Old Aberdeen, AB24 3QY,UK.E-mail: [email protected]

A strategy is the pattern or plan thatintegrates an organizations major goals,policies and action sequences into acohesive whole.

This definition of strategy included plan-ning as part of the strategy-formationprocess. Subsequent definitions of strat-egy for example, Mintzbergs 5Ps of strat-egy (Mintzberg, 1987) recognized thatstrategy is a broader concept than just Plan-ning. It also can be seen as Ploy, Position,Perspective and Pattern. In consequencestrategy formation is a multi-faceted activ-ity. In this paper we have used Planning toencompass the activity of preparing forecasts,in greater or less detail, of future businessactions, activities, and possibly outcomessuch as sales and profits. Another way ofdistinguishing between the strategy conceptand planning is that they are seen to be on dif-ferent levels one at an ideas level and theother at an actions level. Organizations artic-ulate their business plans at the actions levelbut the other facets of strategy are not eas-ily articulated or written down. Instead, theycan be regarded as higher-level ideas that

Copyright 2001 John Wiley & Sons, Ltd. Strategic Change, SeptOct 2001

312 Alistair R. Anderson and Martin H. Atkins

we call Meta strategies that transcend formalwritten planning documents. Further, theycan be separated into ex ante and ex post cat-egories reflecting in Mintzberg and Waters,(1985) terminology, whether the strategy wasdeliberate or emergent. Specifically, Ploy,Position or Plan strategies might be seenas deliberate (and hence ex ante) becausethey are frequently the outcome of specificdecisions which have been taken in order toachieve the desired end result. Alternatively,Pattern or Perspective strategies might beseen as emergent (and hence ex post) sincethey can be seen as retrospective rationalisa-tions of past events and actions. Beaver andRoss (2000) note that for large firms strate-gic management is a predictive process butfor small firms it is frequently an adaptiveprocess, principally due to positional andresource disadvantage.

The introduction of time as one frame ofreference for categorizing strategy is impor-tant, as both strategy formation and planningare concerned with the future. There is aninfinite number of possible futures but theextent to which firms choose one or moreof these as templates for shaping action willbe influenced by the nature and involvementof internal and external stakeholders andthe organizations cultural attitude towardsstrategy and planning (Johnson and Scholes,1999: 73). De facto, the future lies exclu-sively in the realm of ideas because the futureis essentially unknowable. McGuinness andMorgan (2000) argue that the use of historyfor strategic planning is limited and possi-bly erroneous. Thus it is our contentionthat, paradoxically, strategy which is basedon ideas can be more useful than a mecha-nistic plan based on what has happened inthe past.

In the case of some small businesses, exter-nal forces can dictate whether the businesssurvives (Thomson, 1997). It is generallyless possible for small firms to influencetheir environment because they are lesspowerful. Hall (1995) also suggested thatformal planning might be less importantfor small firms. Until they grow the keyconsideration may be the psychology of

the owners. However, Smith (1998) arguedthat her evidence showed that planning asdefined in the business strategy literature forlarge organizations, can also be effectivelyapplied to the new microfirm. Although smallfirms and entrepreneurship are often linked(Curran, 2000), the desirable outcomes ofentrepreneurial activity wealth creation,new jobs, economic growth, even new indus-tries are only to be found in a minority ofentrepreneurial small firms (Storey, 1994).As Gray (1998: 33) stated:

Very few of Britains self-employed shouldreally be described as entrepreneurs in thesense of being innovative or even beinginterested in growth.

Curran and Blackburn (2000) commentedthat it is fallacious to assume that theobjectives of all, or even many, small businessowners can be termed entrepreneurial inthe sense of creating newness or striving forgrowth. In fact the entrepreneurial small firmcan be distinguished from the typical smallbusiness by the incorporation of novelty inthe firms activity. Schumpeterian novelty or

The entrepreneurialsmall firm can be

distinguished by theincorporation of

novelty in the firmsactivity

innovation is the crucial characteristic thatsets the entrepreneurial small firm apartfrom the rest. This novelty may be inproduct or process but is defined as somenew combination. Growth, as Storey (1994)pointed out, may well be associated withthis novelty but for the working definitionof an entrepreneurial small firm adoptedin this paper, a degree of originality isthe determining demarcation. Accordingly,entrepreneurial small firms have to deal


Business strategies for entrepreneurial small firms 313

with change, since change is an outcome oforiginality. Moreover, the outcomes of thesechanges are essentially unknowable andcannot be predicted by historical analysis.Beaver and Ross (2000) cite Porters (1987)trenchant comment that entrepreneurshipunguided by strategic perspective is morelikely to fail than to succeed.

This presents a dilemma. Entrepreneursare told that planning is a good thing butthe nature of planning and subsequent strat-egy in entrepreneurial small firms raises bothpractical and conceptually interesting issues.The literature indicates while the majority ofnew small firms do not formally plan (Robin-son and Pearce, 1984) but the received andasserted wisdom is that planning is a goodthing (Castrogiovanni, 1996). However, thebenefits of this good thing are not immedi-ately evident (Wickham, 1998). For example,the links between planning and improvedperformance are equivocal (Pearce et al.,1987), if not confusing. At best it can besaid that growing firms tend to plan more(Storey, 1994), but the direction of causalityremains unclear. This raises the question ofwhy entrepreneurial firms plan.

For the entrepreneurial firm the need foroutside finance creates a requirement to pro-duce a plan. Stokes (1995) suggested thatmost small business managers perceive thebusiness plan as a document produced toraise money. Murphy (1996) went furtherand suggested that the plan serves as a writ-ten dialogue between the entrepreneur andthe bank it becomes a means by which out-siders can get a grasp on what the new busi-ness is about. Mason and Harrison (1996)examined informal Venture Capital fundingand found that more than three-quartersof the investor respondents in their surveyrequired to see a business plan before mak-ing an investment decision. They concludedthat a business plan is a necessary but not suf-ficient condition for raising informal venturecapital and that business angels need to seea comprehensive, realistic, investor-orientedbusiness plan but that ad-hocery and rulesof thumb dominate. They confirmed theoverwhelming importance of people and

product/market considerations in an action-based plan.

One of the key business skills that appearin most courses in Entrepreneurship isthe preparation of business plans. Wick-ham (1998) suggested that they are essen-tial because without a carefully preparedbusiness plan no business would standmuch chance of success in securing exter-nal funding. The danger for inexperiencedentrepreneurs is that by highlighting theimportance of the plan for funding purposesthe plan may in fact, become the busi-ness. Given the need to prepare a businessplan that accentuates what the entrepreneurbelieves external stakeholders want to know,most business plans will concentrate ontactics and actions. Given this emphasison action, (Schamp and Deschoolmeester,1998) the typical business plan from a smallfirm is therefore likely to dwell on tactics butbe lacking on strategy (Anderson and Atkins,2001).

The typical businessplan is likely to dwell

on tactics but belacking on strategy

Approaches to strategy formation

The following section moves from generalaspects of planning in small firms, to specificelements of strategy formation. The analysisdraws upon a number of strands of thinkingon strategy formation. It provides a frame-work for analysing different approaches tostrategy formation to identify their appro-priateness for use by entrepreneurial smallfirms. The pictorial form of analysis usedhere also provides a useful link into theMeta strategies proposed later for use inentrepreneurial small firms.

The strategic plan

The first approach to strategy formation isone we have simply termed strategic and



Figure 1. The strategic approach.

is illustrated in Figure 1. This is a genre ofstrategy formation described by Mintzberg(1990) as The Design School. From aparticular starting point, a specific end-pointis identified and the strategy justifies thechoice of the end-point and the means takento get there.

This model of strategy might be consideredtotally conventional to anyone who haspassed through a business school educationin the USA or Europe. It would includean analysis of the industry together with areview of the key forces determining thedirection and profitability in that industry(STEP or PEST analysis). This is likely to befollowed by an analysis of the structure of theindustry and the determinants of profitabilityof individual firms (probably using Portersfive-forces framework). It would probablyinclude a review of the internal strengthsand weaknesses of the organization and thethreats and opportunities (SWOT). Thesecomponents will form the background andrationale for a preferred strategic choicethat will be presented as the best wayforward.

Obviously this describes only the bareoutline of this type of strategic plan andmost plans will contain considerable amountof detail and financial analysis. In manyrespects it is similar to what Mintzberg andWaters (1985) described as the vision intheir comparison of deliberate and emer-gent strategies. Indeed, in the contextof entrepreneurship it is useful to quoteMintzberg and Waters:

Because such strategies are rather com-mon in entrepreneurial firms, tightly con-trolled by their owners, they can be calledentrepreneurial strategies.

In his critique of the Design Schoolapproach to strategy formation and its ped-agogical foundations, Mintzberg pointed out

the dangers of a rigorous adherence to theplan. Essentially two factors are advanced forthis. First, the strategy itself may be ill con-ceived and second, there may be slippage ordrift in the implementation of the strategy,either because of a change in the environ-ment or because of organizational resistance.However, a key part of Mintzbergs argumentis that strategy formulation and implemen-tation ought not to be distinct activitiesand both should be carried out together.Mintzberg described the assumptions of theDesign School:

That environments can always be known,currently and for a period well into thefuture in one central place, at least by thecapable strategists there.

These assumptions, he claimed, are veryambitious and he discussed how organiza-tions might cope in unstable environments.Coping might be possible he argued, if thenecessary information can be comprehendedin one brain:

Such close control of a leader overboth formulation and implementationis characteristic of the entrepreneurialmode of strategy making.

In larger organizations a number of possi-ble relationships between thought and actionare possible, one of which is organizationallearning with allusions to logical incremen-talism (Quinn, 1980a) and implementationas evolution (Majone and Wildavsky, 1978).These are important issues and ones to whichthis paper returns later.

The implementation plan

An implementation plan approach beginswith an assumption or an acceptance thata particular course of action is correct and inthis sense it lacks the vision of the strategicapproach. Mintzberg and McHugh (1985:160) described this type of strategy as thesystematic formulation and articulation ofdeliberate, premeditated strategies, whichare then implemented.



Figure 2 characterizes this approach by aseries of actions, stages or building blocksnecessary for the successful conclusion of astrategy. The approach may not be dissimilarfrom (and in certain types of organizationmay closely resemble) a network used forCritical Path Analysis planning. This typeof plan is likely to be typical of the plansentrepreneurial businesses use to supportfunding applications because it appearsto offer certainty. Courses of action arecarefully detailed and programmed activitiesare checked. In short, the production ofthis planned strategy implies knowledge offuture events. Belief in this form of plancan often result in the business comingto grief. In one case known personally tothe authors, the two novice entrepreneursunswervingly believed the advice in thebusiness plan given by the Local EnterpriseAgency and another provider of assistanceto small firms. However, financial disastercould not ultimately be avoided becauseforecasts of some of the basic elementssuch as price and market share wereincorrect.

The implementation plan approach canonly be appropriate in the very short run orin environments that are inherently stable.For environments that are turbulent, or forinitiatives that will take more than a veryshort time to come to fruition, this planningform is likely to be inappropriate. A weaknessof this approach is its deterministic nature.It assumes almost mechanistically, that therewill be a direct relationship between inputand output. Such an assumption appliedto human organizations is heroic if notperverse! When the environment withinwhich organizations operate is turbulentthere are countless ways in which outputsfail to match expectations.

Figure 2 portrays a planning model thatidentifies four steps or building blocks. Inpractice most organizations will find thereare many more. This compounds the concern

Figure 2. The implementation plan approach.

that organizations that plan in this way willalmost inevitably, be perceived to have failedto adhere to their carefully laid plans, yetsuccess was never likely given the natureof the assumptions underlying the model.Prahalad and Bettis (1986) criticized this sortof model on the basis of the dominant logicand the presumption of rationality. As Hurstet al. (1989) state:

Facts that can be plotted onto this mapof the business are accepted. Data thatcannot be assigned co-ordinates are notperceived and are ignored if they areperceived or treated as an aberration.

Much earlier than this, Barnard (1934)emphasized the importance of non-logicalprocesses. Thus the advantages of non-mechanistic recognition processes are igno-red in the nave realism of this type ofmodel. Further, such emphasis on logic andrationality precludes it from being helpful inthe innovative, creative processes. As Hurstet al. (1989: 234) noted:

This appeal to rationality measur-ability, efficiency and consistency per-petuates the past. . .. it cannot bring intobeing those new activities which maywell be required as part of tomorrowsbusiness.

Discovery-driven planning

The third approach was proposed relativelyrecently (McGrath and MacMillan, 1995).Figure 3 depicts this approach with fouractions, stages or building blocks that arenumbered in reverse sequence. Essentially,this approach considers first the assump-tions underlying the model. Instead ofemphasizing (for example) particular saleslevels and cost structures which result in agiven profit level, revenues and costs and theassumptions upon which these are basedare identified from the anticipated profit

Figure 3. Discovery-driven planning.



level through an approach which may alsobe described as goal-seeking. This enablesthe organization easily to test assumptionsagainst likely levels. There are considerablestrengths to this model. It is holistic and con-cerned with outcomes and in the sense thatthere is a vision of the outcome, the modelis strategic but also purposeful.

A review of the above approaches tostrategy

For many firms the internal and externalenvironments are marked by substantial andon-going change. This turbulence has beenanalysed in the context of Chaos Theory andit is appropriate to consider its implicationsfor business strategies.

Chaos Theory (see Gleick, 1987) for afull account) suggests that planning is futile,in part because in every business situationthe start-up conditions are distinct fromthose for every other organization. Moreover,because the environmental generators willnot remain as they are for ever, the prospectof forecasting except in the very shortrun is a gloomy one indeed. Using theanalogy of the weather forecast, the mereextrapolation of existing data is unreliablefor making forecasts of the weather twoweeks or more ahead and the alternativemethod of pattern-matching can be moreeffective.

Two significant aspects of business systemssuggest that they can be considered Chaotic.(It must be emphasized that the term Chaoticdoes not imply merely a randomness in aphenomenon; to be Chaotic a system needsto oscillate between states in an unpre-dictable manner but one which has a dis-cernible pattern to it.) First, almost regardlessof the type of system considered whetherit is for production, consumption, or allthe myriad in-between elements businesssystems are complex and dependent upona large number of actors and agents. Thispoint is reinforced when it is recognized thatthe kinds of relationships observed in orga-nizational systems are non-linear and withnumerous feedback loops. Second, in most

instances business systems depend uponhuman beings that do not always behaveas if they are pre-programmed automata.It seems inappropriate therefore, that busi-ness plans should extend one, two or threeyears ahead, when the basis of the primaryassumptions are not correct. The felonyis compounded all too frequently in theview of the present authors when bud-ding entrepreneurs are made to feel guiltyor inadequate about their failure to keepto the plan or yield to the false promiseof an accepted plan. By its very nature,a plan is capable of lending a misleadingsense of certainty to entrepreneurs, per-haps giving the impression that nothingcould go wrong if the plan is adhered to.This point is well stated by Stacey (1993:233234):

. . .Strategic planning exercises will notachieve what they are intended to.They may serve other purposes, such asproviding feelings of certainty, securityand comfort. . .If managers are operat-ing in systems that need to be far-from-equilibrium to be successful andthey approach their task with the plan-ning mentality, they will inevitablyfind themselves repeating what theyhave already done successfully or imi-tating what others have successfullydone.

There are other serious implications ofthe acceptance that business systems areChaotic. The butterfly story from ChaosTheory (Lye, 1994) purports to convey theidea that a butterfly beating its wings mayeventually change weather systems and pat-terns, possibly in an extreme and dramaticway. One does not have to believe thetotality of such a proposition to acceptthat every business faces circumstances thatare similar to but not identical with, thoseof its competitors or colleagues. All themany definitions of entrepreneurship con-tain elements of the notions of novelty,innovation and uncertainty. Thus by defi-nition, the entrepreneurial environment isunpredictable and inherently chaotic. It is



The entrepreneurialenvironment is

unpredictable andinherently chaotic

in the subtlety of the differences betweenindividual organizations both internally andin terms of their relationship with theexternal environment that generates suc-cess or failure. These differences cannot beanticipated and could hardly be measured.Accordingly, a set of prescriptive workingguidelines for entrepreneurs is unlikely toprove appropriate for any one of them.Decisions have to be taken on the basisof the specific situation of the individualfirm and what appears to suit it best atthat time.

The evidence suggests that the environ-ment for entrepreneurial firms is turbulentif not chaotic. This implies that the linkagesbetween the elements in all three approachesdescribed above are going to be stochas-tic. The future is not known with certaintyand the entrance of an entrepreneurial firminto the marketplace is a further disturbanceto the equilibrium. The three approachesto strategy formation (and because it is likelyto be that most favoured by entrepreneurialfirms, particularly the second) are likelyto be wholly inappropriate. Instead, allentrepreneurs (and, inter alia, those thatfund them) should realize the fallacy of mis-placed reliance on forecasts and preparestrategies that reflect a mindset that is opento change.

Some strategies for managing in anunknowable future

In this section a number of meta-strategieswhich may be appropriate for managerswhen the future is unknowable are discussed.Weick (1987, 1995) has suggested that busi-nesses should enact the environment in thesense that they should be aware of and sharein the changes taking place around theminstead of reacting to those changes. These

Meta-strategies go some way to operationaliz-ing this concept particularly if entrepreneurscan see their role as change agents. Meta-strategies avoid the fallacy of a direct linkbetween actions and outcomes. They there-fore reduce the emphasis there might be onactions. As Meta-strategies they are intendedto reflect how entrepreneurs might thinkabout the development of their business,particularly a mindset that acknowledgesthe unknowable nature of the future. Theyemphasize the need for entrepreneurs tobuild a strategic overview of their enter-prise and an openness about tactics. Thefirst two of these Meta-strategies can be anal-ysed using the framework developed above,while the last two must remain as ideas inthe mind.

Robustness

The first strategy for an unknowable futuredraws upon the notion of robustness advo-cated by Rosenhead (1989) and we havelinked to it the concept of the umbrellastrategy proposed by Mintzberg and Waters(1985). (The diagrams of alternative strategicapproaches develop some of the diagram-matic devices used in that paper.) The linksbetween components (i.e. actions, stagesor building blocks) are stochastic and notmechanistic. The organization recognizesthe stochastic nature of the environmentin which it operates. Providing outcomesare within reasonable limits (the bound-aries are set by the resource availability orthe performance specifications determinedinternally or imposed externally), the orga-nization will continue to operate. If actualperformance takes the organization outsidethe boundaries of the umbrella, then failurewill occur. Alternatively, a behavioural viewof the organization (Cyert and March, 1963)would suggest that such an event would pro-vide the trigger for reviewing performancespecifications. The umbrella may change overtime since it will be a function of internalresources that may expand or contract. Inaddition, performance specifications may beset internally or externally which, in the case



of externally determined performance spec-ifications, may also be subject to stochasticchange.

What makes any particular strategy robustis its ability to tolerate deviations fromexpected values, providing those deviationsare within acceptable limits (shown as A1 andA2 on Figure 4). Robustness is not a charac-teristic that has been stressed by the literatureon strategic planning for some time. Theevidence from Mason and Harrison (1996)is that business plans need to build ifnot reinforce external stakeholders confi-dence in the enterprise. We therefore suggest

What makes strategyrobust is its ability to

tolerate deviationsfrom expected values.Business plans need to

build externalstakeholders

confidence in theenterprise

there may be a cultural block to acceptingthe possibility that linkages will be stochasticand not deterministic, reflecting a positivis-tic paradigm and an (understandable) searchfor universal laws of causality. It seems muchsafer to presume that linkages are determinis-tic because a positive viewpoint is considered(erroneously) more likely to persuade thedecision maker that everything is under con-trol. In other words it might be taken as asign of weakness if linkages are recognizedas stochastic.

Given that venture capitalists are knownto be looking for people they can trust with

Figure 4. The robust approach.

their investment, it may be easy to supposethat strong management or resolute ideasare indicative of trustworthiness. This is apoint on which much more empirical evi-dence is required since we could alternativelyenvisage a situation in which the very sameventure capitalists found it much easier totrust applicants who admit that they donthave all the answers just yet. Admitting toan awareness of some of the pitfalls andexpressing confidence in your ability to over-come them, may be another way of buildingboth trust between people and confidence inthe long-term integrity of the strategy.

Flexibility

The significant difference between this andother strategies is the absence of an ulti-mate goal. Instead, the model suggests thatgiven the stochastic nature of the linkages,there are multiple futures. In some casesthere could be failures which result in theabandonment of an action. Alternatively,there could be a deliberate choice to with-draw from one type of action and substituteanother. This is entirely analogous to theuse of options as an appropriate form ofdecision making. Such advice is not new.Textbooks on decision making have iden-tified for many years how to calculate thevalue of perfect information or the benefitachieved from delaying a decision until moreinformation has been acquired. Nor is suchbehaviour uncommon practice: Consider thefollowing:

Many staff are accepted on trial periodsbefore their contracts are confirmed. Many organizations undertake test mar-keting before deciding to undertake full-scale production. Oil companies have extensive experi-ence of using satellite and seismographicsurveys before making decisions aboutwhether and where to make a test drilling.

All such actions are examples of flexiblebehaviour given that they imply the accep-tance of the possibility of withdrawal from



an action. It is important to consider therelationship between flexibility and otherresponses to the uncertain environment. Inthe context of farm planning, Heady (1952:524) stressed the fact that flexibility:

Allows for changing of plans as timepasses, added information is obtainedand ability to predict the future improves.

He enumerated three forms of flexibility:time flexibility, cost and factor flexibilityand product flexibility. In the contextof time flexibility, the farmer who makesmedium- or long-term investments in, forexample, orchards or cane fruit has lessopportunity to review farm activities fromone year to the next than the farmer whohas not made such a commitment. Costand factor flexibility relates to the choicesthat have to be made about the factorcombinations utilized in the firm. A flexiblecombination may not employ the absolutelylowest cost combination of factors but thechosen technology would permit a longer-term cost-minimization avoiding the needfor frequent changes of direction. Likewise,product flexibility implies the utilization ofresources in such a way as to maximizethe opportunities for switching productionfrom one enterprise to another. This mayinvolve some short-run costs (in terms of notachieving maximum revenues) but the costsof change are reduced and medium- or long-term net revenues are enhanced becausethe likelihood of failure (bankruptcy) isreduced. Headys discussion of farmersreaction to uncertainty provides a very usefulclear distinction between robustness andflexibility in terms of whether a particularaction is intended to stand over time (asin the case of the former) or whether overtime, changes in direction are accepted (andencouraged) as in the case of the latter.

Genus (1995) focused particularly onthe contribution of organizational learningto flexibility and how alliances and net-works can deliver flexibility for the organiza-tion. Nevertheless, organizational structureand culture have to be right for flexibil-ity to occur. Once again, the critical point

Organizationalstructure and culturehave to be right forflexibility to occur

is that the mindset has to be appropri-ate for the entrepreneur to contemplateflexibility.

Furthermore, this flexibility must be dif-ferentiated from Logical Incrementalism(Quinn, 1980a, b). Quinn, who was prin-cipally describing the strategy-formation pro-cess in large firms, saw processes as iterativewhereby the strategy makers evolved strat-egy over time. Once a consensus strategyhad been reached it was followed by theorganization. The emphasis in this paperis to raise the nature of flexibility beyondthat merely of accepting that it may takesome time to reach a consensus, to that ofaccepting that the future is likely to workout differently from the way that had beenanticipated.

Clearly this model is particularly appro-priate in highly turbulent environments orthose where great uncertainties and risksarise. Again there may be a cultural blockon the acceptance of the possibility of uncer-tainties so great that they ultimately threatenthe continued existence of the organization.Nonetheless, the reality is that the new smallbusiness failure rate in the UK is very high(Storey, 1994). This approach may not suitthe first-time entrepreneur or the decisivedecision maker (one who likes to take actionand believes that actions speak louder thanwords). Furthermore, it does not suit thosesituations in which prevarication and delaymay lead to downfall or the loss of any first-mover advantages.

Figure 5. The flexible approach.



The butterfly strategy

The butterfly strategy has nothing to dowith the butterfly phenomenon associatedwith Chaos Theory but can be defined asfollows:

A deliberate attempt to experiment withvarious situations, scenarios or systemswith the intention of learning from eachinstance to gain a wider understandingof the general situation.

Butterfly behaviour may be random but it isonly random in terms of its action and not itsintent. What is critical to the definition aboveis the intention to learn and it is this aspectof the strategy that classifies it as deliberate.Accordingly, this form of behaviour combinesthe phenomenon of the random walk withthe concept of organizational learning inorder to promote better future performance.Organizations thus need to be organized tolearn and may fail miserably in this respect ifthe systems in place and the techniques theyuse to promote organizational learning areinadequate. It useful to compare this typeof behaviour with an evolutionary modelof organizational behaviour described byStacey (1993: 340342). This developedKauffmans concept (19931995) of fitnesslandscapes that can be used to portraythe evolutionary process as avoiding thetroughs and ascending the peaks of fitness.The implication of this analysis is that theneat strategy of logically incremental moveshas to be abandoned and instead travelhas to be made in a somewhat erraticmanner. It is relevant to question whetherthis erratic manner should really be randomor whether it should be purposeful? Certainlythe aspect of learning is recognized by Stacey(1993: 342):

Systems. . . that combine order anddisorder. . . are capable of learning fasterthan those that are purely orderly.

Mechanisms through which organizationscan learn and manage are fully developedelsewhere in Staceys text and are outsidethe scope of this paper.

Further links between ecological modelsand business systems have recently beenmade by Arthur (1996), Moore (1996),Brandenburger and Nalebuff (1997) andHagel and Armstrong (1997), all reportedin Lewin (1997). These writings address theissue of innovations that can be perceived tobe superior to existing products, yet whichhave failed. A simplistic invisible hand ofcompetition approach might be expected tosuggest that competition would ensure thatsuperior new products would always replaceinferior existing products. In fact innovationssometimes have to be many times superiorto existing offerings to begin to be accepted.Clearly this is an important message for theentrepreneur it is not necessarily goodenough just to be better; success will dependupon being many times better. The reason forthis it is alleged is that the innovator (whocan be seen as a predator in a biologicalecosystem context) enters a complex worldof systems and webs. This network ofconnections between different parts of theweb is well established and even in theabsence of aggressive behaviour of existingincumbents to beat off the new competition,it takes time and resources to break it down.This was well illustrated in one firm withwhich the authors are familiar which hadto give away its products (costing five-figuresums) in order to get drilling contractorsto try them out. Alternatively, for somenew products, a system of new networksand webs may be a prerequisite to success.Examples include distribution networks forfrozen foods and libraries of prerecordedfilms for use in domestic video-recordingequipment. The circumstances in whichthese complementary assets contribute toor detract from the profitability of theinnovations originator were well developedby Teece (1998).

There are two perspectives or contexts forthe link between butterfly behaviour andentrepreneurship. First from a macroeco-nomic view, the function of the small-firmsector to act as a seedbed of new ideas hasbeen accepted philosophy since the days ofthe Bolton Committee, if not before. Most



UK governments in the 30 years since Boltonhave justified the actions they have taken tosupport the small firm sector on this basis.Furthermore, it fits neatly with an evolution-ary model of organizational and commercialchange. It is beneficial to be trying out newideas in terms of products or organizationalstructures and to see which ones are success-ful. Of course, there is a danger that someideas may appear before their time and adeveloped conventional wisdom that Idea Xwill not work because earlier attempts havefailed, may well be erroneous at a later time.This also reflects the time-based nature ofstrategy emphasizing further the need forideas rather than actions.

The second perspective is the microeco-nomic one where one asks the relevance ofbutterfly behaviour to the individual organi-zation. This lies at the heart of entrepreneur-ship in the sense that entrepreneurship isabout doing something new. In a Schum-peterian way then, following a butterflystrategy demands that organizations shouldbe actively seeking out new ways of doingthings. The critical aspect of this, however,is the emphasis on deliberation and learn-ing. The newness should not be randombut deliberately selected. Organizations seekknowledge about products, markets, suppli-ers and the general environment. Adoptinga Chaotic viewpoint implies acceptance thatthis learning process could not be imme-diately implemented in another organiza-tion (given the differences in the startingconditions) but it would develop a betterknowledge of the patterns or structures thatmight enable successful implementation inthe future.

The lottery strategy

In the context of business behaviour, thelottery strategy is defined as follows:

Experimenting with various situations,scenarios or systems by random selectionof actions.

What clearly distinguishes this form ofbehaviour from the butterfly is the absence

of deliberation and organizational learning.It is arguable whether such a strategy can beconsidered deliberate or not but this merelyreflects the ambivalence of many aspects ofstrategy (i.e. it may as Mintzberg suggested,be ex ante or ex post). For practical purposeshowever, it may not matter whether it isdeliberate or not.

The decision maker that follows thisstrategy recognizes and accepts the stochasticnature of the business environment andmay use whatever decision-making rulesare appropriate. Accordingly it amounts tolittle more than game playing, knowingthat sometimes losses will be made but onoccasions gains might also be made. We canobserve this form of behaviour among someof the very smallest operators in the NorthSea oil industry. They may invest (almostalways through an equity-sharing partnershipwith other operators) in individual or a smallnumber of blocks in the hope that oil mightbe found. To call these investments is reallya misnomer. It may be more accurate tocall them gambles. From time to time suchgambles do pay out but the reality is that90% of test boreholes drilled in the NorthSea have been dry!

What links may there be between entre-preneurship and lottery playing? While thereis presently no structured evidence on this,it is possible that in many cases the first busi-ness initiatives of entrepreneurs are carefullyplanned and crafted, representing deliber-ate attempts to build upon knowledge, skillsand expertise learnt elsewhere and to deliversomething new in the market. But serialentrepreneurs who create a number of newbusinesses in their lifetime may be different.A number of pull factors can be seen topotentially contribute to the success of sucha strategy. The ownership and access to cap-ital and the prestige and skill networks thatare opened up by earlier success are likely tobe important. The serial entrepreneur may bemore likely to indulge in lottery playing thanothers do on the basis that with an estab-lished capital base, there is less to lose. Thenature of serial entrepreneurship is, how-ever, open to interpretation. Tacit knowledge



of what may work may be better developed inthe serial entrepreneur and if that is the case,the serial entrepreneurs behaviour may bebetter described as butterfly behaviour.

Conclusion

This paper has reviewed three conven-tional approaches to business strategy butall of them were found to be inadequatein situations where the future is unknow-able. Accordingly, they are inappropriatefor entrepreneurial small firms who oper-ate in a turbulent environment. Despite this,small firms are required to prepare busi-ness plans because without them, externalfunding would be unavailable. The dangeris that having written a business plan theentrepreneurs strategic thinking stops. In

The danger is thathaving written abusiness plan the

entrepreneursstrategic thinking

stops

this circumstance the plan is seen to becomeor even replace the strategy so the analogyof the plan as a multi-purpose tool is applied.Instead we have argued that strategic think-ing is an activity which cannot substitute for aplan and is separate from the planning activ-ity. The tool is not multi-purpose after all!

Given the turbulent if not chaotic natureof the business environment, four alternativemeta-strategies have been discussed whichcan provide new insights into ways of direct-ing entrepreneurial small firms. Some maychoose to adopt a robust strategy if survivalis a high priority. Others may choose to beflexible in the belief that changes in direc-tion are inevitable given the dynamic natureof technical and other forms of change.Some entrepreneurs may choose a butterflyapproach seeking out what works for them

and applying their new-found knowledge togood effect. Finally, some entrepreneurs maysee their business involvement as a gambleand behave as if they are playing the lot-tery. It cannot be said that any one of thesestrategies is right or best for any particu-lar firm or circumstance, just as it is notpossible to conclude in the parlance ofMiles and Snow (1978) that it is rightto be a first-mover or a late-mover. Suchan approach reflects an attitude of mindin exactly the same way as the four meta-strategies do. The critical point we believe isthat entrepreneurs should be aware of theirstrategy and select an approach that fits con-text and conditions. The generic strategiesespoused by Miles and Snow have generatedconsiderable research into management styleand performance. The framework presentedin this paper provides similar opportunitiesfor researching the management, survival,growth and performance of entrepreneurialsmall firms.

Biographical Notes

Alistair Anderson is a Senior Lecturerand Deputy Director of the Centre forEntrepreneurship in the Department of Man-agement Studies at Aberdeen University. Thefocus of his research is the entrepreneurialprocess and new venture creation. He haspublished widely on different aspects of thistopic.

Martin Atkins is Senior Lecturer in theDepartment of Management Studies atAberdeen University. He was a member ofthe research team for the Bolton Committeeof Enquiry and since then has held lectur-ing posts at Nottingham, Nottingham Trentand Wollongong Universities before movingto Aberdeen. His research focuses on Busi-ness Strategy and Information TechnologyManagement.

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