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Characterizing Profitable and Unprofitable Strategies in Small and Large Businesses

1992; Wiley; Volume: 30; Issue: 2 Linguagem: Inglês

0047-2778

John W. Ballantine, Frederick W. Cleveland, C. Timothy Koeller,

Firm Innovation and Growth

The study of normative prescriptions for successful strategic management has focused, in part, on the content of strategies reflecting how resources are allocated within organizations (e.g., asset intensity, debt burden, and advertising intensity). As suggested by Robinson and Pearce (1984), the content of strategies remains a key focus of management research, particularly for analysts of small businesses. Recent research by Shrader, Mulford, and Blackman (1989) confirms the importance of operational planning for small-firm performance. Noteworthy examples of this general research focus include the Profit Impact of Marketing Strategy (PIMS) studies of profitability, as related to market strategies conducted for large businesses, and a recent attempt by O'Neill and Duker (1986) to address the relevance of PIMS-type strategies for small businesses. O'Neill and Duker conclude that indicators similar to those for large firms as to the content of management strategy can be used as guidelines in assessing the performance of small businesses. However, their empirical analysis is based on a very limited data sample, and the specification of their model of firm success derives from the relatively limited PIMS literature, which has a substantially large-firm, market-share orientation. In this article, we examine the O'Neill-Duker proposition that there is a consistent relationship between selected economic measures of the content of operating and financial strategies and the likelihood that firms will earn profit, with particular attention to differences between small and large corporations and between industries. The objective is to determine which strategic factors have the most consistent effects on the success or failure status of firms. First, the relationship between strategic indicators and profit or loss status for all firm sizes in all industries is considered. This represents a substantial extension of the scope of previous work on these connections. Then, the relationship between the several economic indicators and the likelihood of earning profits for small and large businesses is examined. LITERATURE REVIEW Following the PIMS approach, O'Neill and Duker (1986) select five indicators that reflect familiar functional areas of management. The indicators, which characterize the content of strategic management as it may relate to successful performance, include the level of marketing expenditures, product quality, the quality of service, capital intensity, and the level of debt. Using the results of a questionnaire sent to a sample of successful and unsuccessful (i.e., bankrupt) small businesses, the authors determine that failed firms exhibited significantly lower product quality, higher capital intensity, and higher levels of debt than successful firms. On the basis of their findings, O'Neill and Duker suggest that indicators of possible economic hazards similar to those developed for large firms can be used to enhance the strategic planning and performance of small businesses. However, their survey sample was drawn from business listings for the state of Connecticut only, and yielded data for only 43 firms, of which 11 had failed. Consequently, these findings should be viewed as, at best, preliminary. Serious questions arise about the transferability of these results to other geographic regions, applicability across all industry classifications, and relevance across all firm sizes. Therefore, the question of whether the content of strategies (and the economic hazards involved therein) chosen by successful large firms can be applied to small businesses remains unsettled. In their survey article, Robinson and Pearce (1984) reach a similar conclusion. They indicate that noteworthy research findings on the importance of strategy variables to small-firm performance remain fairly specific to individual sectors of American industry, e.g., Robinson, Logan, and Salem (1986) on retailing, and Dess and Davis (1982) on manufacturing. …