Journal of Small Business Management 2005 43(2), pp.

170–186

Influences on Strategic Planning Processes

among Irish SMEs*
by Patrick T. Gibbons and Tony O’Connor

In this study we argue that the approach to strategy formation reflects organiza-
tional and individual influences. The study, based on questionnaire responses from
359 firms, examines a number of organizational and individual factors influenc-
ing the type of strategy formation process adopted. The constructs of strategic posture,
organization structure, management ownership, and Chief Executive Officer (CEO)
experience are measured. Three models predicting strategy formation approaches are
explored. First, an organizational model emphasizing the impact of strategic posture
and organization structure is analyzed. Second, a model is tested dealing with CEO
and top management team characteristics reflecting the effects of agency costs and
experience base. Finally, an integrative model combining both organizational and
individual factors is evaluated. The results highlight the importance of organiza-
tional factors and show, for instance, that entrepreneurial firms tend to adopt more
formal strategic planning approaches, while conservative firms adopt more incre-
mental approaches. In addition, both management shareholding and CEO experi-
ence are negatively related to formal strategic planning activities.

Introduction sultants advocate the necessity of

Strategy development has received enhancing strategic thinking within firms
renewed attention from both practition- (for example, Hamel and Prahalad 1994).
ers and scholars as environments One specific modality of strategy devel-
become more competitive (Bettis and opment, namely strategic planning, has
Hitt 1995) and as academics and con- received significant research attention.

Dr. Gibbons is Jefferson Smurfit Professor of Corporate Planning at University College

Dublin in Ireland. Current areas of research interest include strategy processes, firm-level tech-
nology policy, and corporate entrepreneurship.
Dr. O’Connor is management consultant in the areas of strategy and operations manage-
ment and also lectures at University College Dublin in these topics. Current areas of research
interest include the strategy formation process, technology policy, entrepreneurship, and the
strategic objectives adopted by high technology startup operations.
*The authors thank the National Institute of Technology Management for assistance in making
this research possible and Colm O’Gorman for helpful comments on an earlier version of this
paper.

170 JOURNAL OF SMALL BUSINESS MANAGEMENT

The evaluation of the performance ment, leadership, strategy, and structure
effects of strategic planning has been a underlie many organizational processes
central concern of researchers over the and outcomes. The imperatives we use
past three decades (for example, Brews are strategy, structure, and leadership.
and Hunt 1999; Bracker, Keats, and (The omitted imperative is environment,
Pearson 1988; Robinson and Pearce which has been extensively studied in
1984). While results have varied, evi- the planning literature.) Thus, in this
dence suggests that formal strategic paper we propose and test three models
planning is related to superior perform- predicting strategy formation approaches
ance. For example, Schwenk and in SMEs. First, an organizational model is
Schrader (1993) conducted a meta- specified that assesses the impact of
analysis of studies into the effects of strategic and structural properties on the
formal strategic planning on the financial strategy development process. A second
performance of small firms and con- model incorporating chief executive
cluded that strategic planning has a officer (CEO) and top management team
significant, positive association with characteristics is then specified. This
financial performance. Brews and Hunt model emphasizes the effect of agency
(1999), in a sample survey among rela- costs and CEO experience in explaining
tively large firms, found that more formal the strategy development approach
methods of planning outperformed less employed. Finally, an integrated per-
formal approaches. Recently, Perry spective is taken, combining the two pre-
(2001) found that although the overall vious models.
level of strategic planning was low in
small firms, successful firms did more Background and
systematic planing than failed firms. Literature Review
However, in his critical review of There are different views on what
strategic planning literature, Mintzberg form the strategic planning process
(1994) comments that the “missing should take. Ramanujam and Venkatra-
detail” in the area is an understanding of man (1987) point out that much of the
how strategies are made. This echoes literature on planning has generally
Capon, Farley, and Hoening (1990)’s tended to characterize firms as planners
conclusion that the role of organization or non-planners. While these labels may
in strategic planning is “badly in need have been appropriate in another era,
of more work” (p. 1158). Moreover, the prevalence of strategy development
Matthews and Scott (1995) assert that the activities has undoubtedly expanded.
antecedent conditions of planning One critical dimension that has domi-
remain poorly understood, particularly in nated recent discourse and debate in the
small and medium enterprises (SMEs).1 strategic management field is the con-
This paper explores the role of organi- troversy surrounding the efficacy of syn-
zational and individual features as optic formalism versus more adaptive
antecedents to the strategic planning learning styles (Ansoff 1991; Mintzberg
practices of SMEs. 1991). Ansoff (1991), echoing earlier
As a basis for explaining planning views of Andrews (1987), argues that the
activity, we use three of the four “imper- planning process may be approached in
atives” identified by Miller (1987a) as a rational manner. This involves the
influencing organizational variety. He explicit identification of ends/objectives
argues that the constructs of environ- and the selection of the most effective

1
We define SMEs as firms employing less than 500 employees.

GIBBONS AND O’CONNOR 171

courses of action to achieve those ends. types of planning declines as environ-
However, Quinn (1978) argues that the mental uncertainty increases (Matthews
process of strategy formation is typically and Scott 1995). Formal strategic plan-
fragmented, evolutionary, and largely ning may not be popular among SMEs
intuitive and that firms’ strategies evolve because they have inadequate knowl-
over time as a result of small incremen- edge of the processes involved and
tal steps and decisions. Mintzberg (1978) because of a lack of sufficient manage-
further argues that the concept of strat- rial expertise. In addition, SMEs may lack
egy may be viewed as a pattern in a the time to plan in any structured
stream of decisions. In Mintzberg manner (Robinson and Pearce 1984).
(1978)’s view, strategy emerges over time
as the most appropriate tactics, and man- Model and Hypothesis
agerial decisions become known to the Development
strategist. Neither Mintzberg nor Quinn In this paper we argue that the
would argue that there should be a com- approach to strategy development
plete absence of formal planning in reflects both organizational and individ-
firms, as such activities can enable and ual influences, among others. The
facilitate adaptation. models proposed are rooted in contrast-
In fact, strategy development and ing views of the firm, with one empha-
planning processes are increasingly sizing the organizational imperatives of
being identified as a primary source of strategy and structure, and the other
adaptation and learning in organizations emphasizing the leadership imperative
(De Geus 1988). Learning is facilitated as including ownership and experience (cf.
the assumptions that underlie a strategy Hansen and Wernerfelt 1989).
are subjected to critical examination Thus, we expect that firm strategic
through the strategy development characteristics will influence the type of
process. Indeed, as many of the princi- strategy development process enacted in
pal benefits of strategy development are the firm. One of the contested areas in
of a process nature, the focus on eco- the literature is the relationship between
nomic outcomes in much of the strategic strategy and the strategy development
planning–performance literature may be process. Taking an information process-
misplaced (Sinha 1990; Pearce, Freeman, ing perspective (Galbraith 1977), Rogers,
and Robinson 1987). Thus, as stated in Miller, and Judge (1999) point out that
the introduction, while much of the lit- different strategies impose different
erature seems to be fixated on relating information processing requirements on
strategy development activity with actual the firm, thus influencing the type of
firm performance, the antecedents and strategy development approach used. We
process benefits of planning are poorly employ the concept of strategic posture
understood. to capture the firm’s strategy and there-
The question remains as to what fore the information processing require-
extent SMEs engage in strategic planning ments of the strategy. Strategic posture
processes, be they emergent or synoptic. can be broadly defined as the firm’s
It has been noted that, while entrepre- overall competitive orientation (Covin
neurial (startup, highly innovative) ven- and Slevin 1989). There have been many
tures plan more than do other SMEs, the attempts to define typologies of strategic
absolute level of planning is relatively posture in which the basic thrust or
low (Bhide 1994). Entrepreneurial firms overall dimensions of the firm’s strategy
also engage in more sophisticated strate- can be encapsulated. According to Porter
gic and operational planning than do (1985), the firm’s strategic posture
other SMEs, but the incidence of both depends on the position they take in

172 JOURNAL OF SMALL BUSINESS MANAGEMENT

relation to issues such as cost leadership more formal technology scanning prac-
and differentiation. Other typologies tices compared to defenders. Similarly,
characterizing a firm’s competitive orien- Collins, Holtzmann, and Mendoza (1997)
tation include Maidique and Patch (1978) found that prospector-like firms used
and Miles and Snow (1978). The latter budgeting to a much greater extent than
typology reflects the firm’s decisions the other Miles and Snow archetypes.
about where and how to compete; about Moreover, Rajagopalan (1996) found that
the core technology used to produce or prospectors employed more longer-term
deliver the product/service, and finally, incentive plans, thereby encouraging
the administrative arrangements used to more longer-term thinking. Similarly,
organize the firm. The internal consis- conservative firms share many traits with
tency of these choices manifests itself in defender firms. Conant, Mokwa, and
four generic strategies. Prospectors Varadarajan (1990) list among the char-
emphasize a rapid rate of new product acteristics of defender firms “inside/out
introduction, deploy flexible technology, control dominated” planning functions,
and are administered with organic struc- “centralised and financially anchored”
tures. At the other extreme, defenders control systems, and having “strong
focus on efficiency of production, make organizational monitoring” systems (p.
dedicated investments, and are adminis- 367). Rajagopolan (1996) also found that
tered with mechanistic structures. Ana- defenders used short-term incentives
lyzers are a hybrid and seek to follow based on quantitative criteria, thereby
prospectors, cautiously, with new rewarding a shorter-term orientation.
product introductions while protecting a Covin and Slevin (1989) describe two
stable set of products. Finally, reactors types of firms: entrepreneurial and con-
make inconsistent choices. servative. They describe entrepreneurial
In relating this typology to strategy firms as those in which “top managers
development, Pearce, Robbins, and have entrepreneurial styles, as evidenced
Robinson (1987) found no systematic dif- by the firm’s strategic decisions and
ference in the formality of planning operating management philosophies” (p.
across the Miles and Snow strategy types. 77). The strategic posture of entrepre-
On the other hand, Segev (1987), in an neurial firms is similar to Miles and
experimental study, found significant Snow’s (1978) prospector category in so
relationships between prospector and far as they both exhibit risk-taking, inno-
analyzer strategies and the adaptive and vative, and proactive styles (Lumpkin
entrepreneurial forms of Mintzberg and Dess 1996). In contrast, conservative
(1974)’s strategy development appro- firms reflect strategic postures typified by
aches, respectively. an aversion to risk, with inertial and reac-
Conant, Mokwa, and Varadarajan tive strategies. (Covin, Slevin, and Schultz
(1990), when listing the characteristics of 1994). Firms with conservative strategic
Miles and Snow’s (1978) Prospectors, postures are similar in many ways to
describe them as exhibiting a problem Miles and Snow’s defender firms in that
and opportunity-finding perspective to the focus of their efforts is to maintain
planning, along with a broad and con- the status quo and to be followers rather
tinuously expanding product market than leaders in the market place.
domain. Simons (1987) found that such Similarly, March (1991) differentiates
firms used forecasting and careful between “explorer” and “exploiter”
monitoring of revenues to a much organizations. The former are interested
greater extent than other types of firms. in enhancing variety and learning across
Raymond, Julien, and Ramangalahy new frontiers. The latter are interested in
(2001) found that prospectors exhibited optimizing their competitive position. In

GIBBONS AND O’CONNOR 173

this instance, we assert that “explorer” However, the study characterized
type organizations, which we see as strategy-making variables across rational,
entrepreneurial, will tend to deploy interactive, and assertive dimensions.
formal synoptic methods of strategy for- While the first two emphasize traditional
mation, while “exploiter” types, which process dimensions, the assertiveness
we equate with conservative postures, dimension, we feel, speaks more to the
will deploy incremental approaches. This strategic posture of the firm rather than
is consistent with Daft and Weick to a process.
(1984)’s view that defender-type organi- Given our focus on SMEs, we were
zations tend to use problemistic search interested in the organizing gestalt of the
routines (March and Simon 1958), which firm. Thus, one can think of the pattern
means that the firm will perform a local of organizing as reflecting a mechanistic
search for problem solutions. We there- to organic continuum (Burns and Stalker
fore hypothesize that 1961). Organic firms are characterized by
high levels of mutual adjustment and
H1: Firms with a conservative strategic interaction. Mechanistic firms, on the
posture are more likely to adopt incre- other hand, are coordinated extensively
mental and emergent strategy forma- through rules and procedures and formal
tion processes, while firms with an integration devices. Given Miller’s
entrepreneurial strategic posture are (1987b) findings and the contrast
more likely to adopt a comprehensive, between the organic and mechanistic
thorough strategy formation process. types reflecting the extent to which for-
mality of interaction is specified, we
In addition to its strategic posture, a propose the following:
key feature of the “administrative her-
itage” (Bartlett and Ghoshal 1989) of an H2: Organic firms are more likely to
organization is the pattern of organizing adopt a strategy formation process
used to coordinate activities within the that is incremental and emergent
firm. The organization structure is central while Mechanistic firms are more
to the firm’s information processing likely to adopt a strategy formation
capability. In terms of organizational process that is comprehensive and
factors, Kukalis (1989) investigated the formal.
effects of size, structure, and capital
intensity on the planning sophistication Given the structure follows strategy
of large firms. He found that size was assertion (Chandler 1962), it is proposed
related to the existence of separate plan- that the strategic posture of the firm will
ning departments. He characterized have a greater impact on the design of
structure in terms of multidivisional the administrative mechanism of strategy
structures, and his sample was drawn development than the administrative her-
from Fortune 500 firms. In a sample of itage as evidenced in the structure of the
smaller firms, Miller (1987b) character- firm. Thus,
ized structures across formalization,
centralization, and structural integration H3: The effect of strategic posture on the
dimensions and found that formalization strategy formation process will be
was significantly and positively related to greater than the effect of organization
rational, synoptic approaches and to structure.
high levels of interaction. In addition, he
found that the use of formal integration In terms of individual imperatives, a
devices had a significant and positive number of appeals have been made in
effect on the “rationality” of approaches. the literature to investigate the effects of

174 JOURNAL OF SMALL BUSINESS MANAGEMENT

leadership variables on planning way to achieve this is to ensure that man-
approaches (Kukalis 1989). Bower (1998) agers have an ownership stake in the
calls for increased attention to be firm (Oswald and Jahera 1991). The
directed at the CEO in strategy-decision second proposition refers to the princi-
making research. He invokes this call to pal’s ability to keep informed of the
reflect the impact that the CEO has on agent’s behavior. The more information
the firm. Hambrick and Finkelstein that is available to the principal con-
(1987) developed the concept of mana- cerning the behavior of the agent, the
gerial discretion to refer to the latitude more likely the agent is to act in the prin-
of action available to top executives. cipal’s best interests. In considering these
They argue that because the CEOs of assertions, it seems likely that, as mana-
large firms have low levels of managerial gerial ownership of the firm decreases,
discretion, it would therefore be the principal(s) will be interested in
expected that in small enterprises, CEOs ensuring that an appropriate “strategy” is
have considerable discretion in the developed for the firm to contribute to
design of the strategy development growth and profitability (Simon 1993).
approach. This assertion is partially Thus, the principal is likely to be inter-
borne out by Miller, Kets de Vries, and ested in seeing either documentation on,
Toulouse (1982), who found that CEO or evidence of a development process
locus of control was strongly associated concerning, such a strategy. This may be
with organizational strategy and struc- particularly important for institutional
ture in small firms but not in larger firms. investors who would require evidence of
One particular aspect of leadership a strategy for their own internal control
that will influence the nature of the strat- activities (Shuman, Shaw, and Sussman
egy development process adopted is the 1985). We therefore hypothesize that
issue of ownership and consequent
agency relationships (Eisenhardt 1989). H4: As managerial ownership of the firm
This is particularly important in SMEs, decreases, there is a greater propensity
where transitions occur in control to employ formal methods of strategy
between owner–managers and profes- development, and as managerial
sional managers. In separating owner- ownership increases, there is a greater
ship from management, owners propensity to use emergent methods of
(principals) incur agency costs. These strategy formation.
costs arise because of the divergence of
interests between principals and agents. On a separate issue, it is likely that as
In order to economize on agency costs, a CEO’s tenure and industry experience
various contractual and control mecha- increases, the industry and organiza-
nisms are instituted to align the interests tional specific knowledge gained may
of agents with principals and to allow reduce the perceived need for compre-
principals monitor agent actions. In a hensive, formal reviews of strategy. This
review of this literature Eisenhardt argument would be consistent with the
(1989) summarizes two major proposi- commitment to the status quo literature
tions informing this study. The first (Hambrick, Geletkanycz, and Fredrick-
proposition states that when the contract son 1993). Commitment to the status quo
between principal and agent is outcome- is defined as “a belief in the enduring
based, the agent is more likely to behave correctness of current organizational
in the best interests of the principal. This strategies and profiles” (p. 402). The
occurs because the principal’s and authors argue that as individuals spend
agent’s interests align around the time in organizations and as they are pro-
outcome, such as profit achieved. One moted, they become convinced of the

GIBBONS AND O’CONNOR 175

appropriateness of the firms’ ways. More- influence the type of strategy formation
over, as industry tenure increases, the process employed and to be most knowl-
individuals become socialized into indus- edgeable about the constructs of interest
try norms (Spender 1989). These effects in the study (Huber and Power 1985).
may reduce the incentive to engage in It was expected that targeting the CEO
systematic, formal reviews of strategy. or managing director would therefore
Thus: offer the best chance of a satisfactory
response.
H5: As CEO tenure increases, there is The first mailing consisted of a per-
a greater propensity to employ sonalized cover letter, forwarded to each
incremental approaches to strategy CEO, together with a copy of the ques-
development. tionnaire and a prepaid reply envelope.
The cover letter set out the content and
Research Design purpose of the research and also in-
Data Collection cluded a commitment to forward a dona-
A sample of 1,000 firms was drawn tion to a nominated charity for every
from the Irish Business and Finance completed questionnaire received. This
magazine database of the top 2,000 firms was followed three weeks later with
in Ireland. All agricultural and financial another mailing to each CEO. The second
services firms were excluded. An initial mailing included another personalized
sample of 1,500 was drawn, sorted by cover letter repeating the request, a copy
reported sales, and within the employ- of the questionnaire, and a prepaid reply
ment parameters of 10 to 500 employees. envelope.
This sample was then perused with the
objective of removing all recognizable Quality of Data Collected
multicompany groups. This was carried A total of 220 usable replies were
out in order to restrict the sample to received from the first mailing and a
single-industry firms because diversified further 139 from the second mailing. This
firms might use different strategy forma- amounted to a total valid response of 359
tion processes across different busi- firms or a response rate of 35.9 percent.
nesses. The first 1,000 firms in the This response rate is much greater than
remaining sample were chosen for inclu- the average top management survey
sion. All of the sampled firms are SMEs response of between 15 and 20 percent
within our definition, with an average (Menon, Bharadway, and Howell 1996).
employment level of 180 and a standard Of the 359 respondents, 89.3 percent
deviation of 138. identified themselves as managing direc-
A modified version of the Total Design tors, CEOs, or financial controllers. The
Method (TDM) (Dillman 1978) was used remainder were senior functional man-
to organize and conduct the survey. The agers. The median years industrial expe-
first part of the total design method con- rience was 20 years.
sisted of the efforts made in choosing the On the basis that the characteristics of
sample, as described above, and design- late respondents are similar to those of
ing and pilot testing the survey instru- nonrespondents, we tested for nonre-
ment. The second part of TDM involved sponse bias by comparing response
the conduct of the actual survey, which means for the major variables from the
was carried out over two mailings. The first and second mailing (Oppenheim
target respondent in each mailing was 1966). The results of t-tests for the vari-
the CEO of the firm. It was felt that the ables size, strategy formation process,
CEO or managing director would be the and strategic posture were not signifi-
person most likely to be in a position to cant. In addition, the correlation matrix

176 JOURNAL OF SMALL BUSINESS MANAGEMENT

for the above construct items for the two work of Miller (1983), who identified
groups were similar. Also, the cumulative three components of strategic posture,
percentage of respondents who fall into namely: innovation, proactiveness, and
the managing director/CEO/financial risk taking. A firm with an entrepre-
controller category was similar for both neurial style will be “characterized by fre-
groups. Finally, the proportion of quent and extensive technological and
responses by industry category reflected product innovation, an aggressive com-
the proportions represented in the petitive orientation, and a strong risk-
mailing. Therefore, we conclude that taking propensity by top management.”
there is no significant evidence of On the other end of the scale, a firm with
response bias. Given that the independ- a conservative style will be “character-
ent and dependent variables are meas- ized by minimal technological and
ured simultaneously with the same product innovation, a cautious competi-
instrument, a concern arises over tive orientation, and a weak risk-taking
common method variance. Following the propensity by top management,” (Covin
recommendations of Podsakoff and and Slevin 1989). The nine-item, seven-
Organ (1986), a factor analysis of the point Likert scale concentrates on these
main independent and dependent items three attributes, with three items for each
revealed that no single factor accounted attribute. The higher the score, the more
for more than 20 percent of the variance. entrepreneurial the strategic posture of
While this ex-post test is relatively weak, the firm, and the lower the score, the
it provides some comfort about conclu- more conservative the strategic posture.
sions on response sets. Reponses to this variable had a mean of
4.39, a standard deviation of 0.9978, a
Measures range of 1.78 to 6.67, and an inter-item
A number of scales developed by reliability coefficient (alpha) of 0.8352.
Slevin and Covin (1997) (details below) Organization structure was measured
were used in this survey as they were by using a seven-item scale, which meas-
developed and validated in the SME envi- ures “organicity,” or the extent to which
ronment. The construct of strategy for- the company is structured in organic or
mation process was measured by using a mechanistic ways. The scale was devel-
five-item seven-point scale designed by oped by Khandwalla (1977) and subse-
Slevin and Covin (1997). This scale meas- quently used by Covin and Slevin (1989).
ures strategy formation patterns as a The alpha for the scale was 0.85. Man-
continuum, with high scores indicating agement shareholding was measured by
a formal, planned strategy formation a single item that asked respondents to
process and low scores indicating an reveal the proportion of ownership held
informal, emergent strategy formation by the top five executives in the firm
process. Responses to this variable had a (mean 28 percent). Experience was
mean of 4.67, a standard deviation of measured by the amount of time the
1.13, a range of 1.6 to 7.0, and an inter- CEO/respondent had spent in the firm
item reliability coefficient (alpha) of 0.75, (mean 9.8 years; S.D. 8.7 years). In addi-
within the acceptable range. The tion, we used firm age and size as control
measure of strategic posture was adapted variables as these could explain variation
from the work of Covin and Slevin in strategy development activity.
(1989), and Covin, Slevin, and Schultz The analysis involved estimating three
(1994). The scale categorizes firms as regression equations. The first reflects
having either an entrepreneurial or a the organizational variables (strategy and
conservative strategic posture. These structure), the second, the leadership
authors developed the scale based on the variables (CEO experience and top

GIBBONS AND O’CONNOR 177

management shareholding), and finally mation process. This means that firms
an integrated model is specified. This with conservative postures use incre-
approach was taken to evaluate the dis- mental methods of strategy formation
crete explanatory power of the organiza- and firms with more aggressive, entre-
tional and leadership variables. preneurial postures use more compre-
hensive and synoptic methods. Likewise,
Results as predicted by H2, firms with organic
Before examining the results of the structures tend to use incremental
regression analysis in relation to the methods, while firms with mechanistic
hypotheses, it is of benefit to look at structures use formal, synoptic methods.
the results of bivariate correlation analy- In addition, consistent with H3, as is
sis between all the variables under study. evident from the standardized weights,
Table 1 sets out descriptive statistics and strategic posture has a greater effect on
Pearson correlations for each variable. the dependent variable than the structure
Slevin and Covin (1997) report positive variable.
and significant correlations between the Model Two (Individual Model)
emergent-to-formal strategy formation regresses the leadership predictors on
process scale and both firm size, as meas- the strategy formation process. As
ured by number of employees, and firm shown, the explanatory power of this
age, as measured by number of years in model is much lower than the previous
operation. They therefore used these two model. However, as predicted by H4, the
variables as control variables in subse- negative coefficient shows that as mana-
quent hypothesis tests. Our results echo gerial shareholding increases, there is
theirs. It was expected from the argu- greater reliance on emergent mecha-
ments put forward above that a positive nisms to develop strategy. Moreover,
correlation would exist between the while the direction of the relationship
strategic posture scale and the strategy between experience and the use of
formation process scale. Our results indi- incremental, emergent approaches is as
cate this positive correlation is signifi- predicted, the relationship marginally
cant. It was similarly expected that there achieves significance at conventional
would be negative correlations between levels.
organization structure; management Model Three (Integrated Model) com-
shareholding and CEO experience and bines the organizational and leadership
formal strategy formation. Our results predictors. The significant predictors
support these negative correlations. from the previous two models retain
In testing the hypotheses, a multivari- their significance, and there is an
ate approach was used to incorporate the increase in explanatory power over the
effects of control variables. The controls previous models. Although the increase
used were size and age, because as firms in explanatory power is slight, the incor-
get larger and older, more formalized, poration of the individual level predic-
bureaucratic procedures might emerge. tors is additive to the explanatory power.
Table 2 displays the results for the
various regressions. Model One (Organi- Discussion
zation Model) regresses the control and The overall pattern of results supports
organizational variables against the strat- the hypotheses. As shown, entrepreneur-
egy formation process. As shown, neither ial firms employ relatively formalized
size or age control variables achieves sig- planning procedures. At the same time,
nificance. As predicted by H1, the strate- conservative firms tend to employ less
gic posture variable is positively and formalized procedures. While this may at
significantly related to the strategy for- first appear surprising, one explanation

178 JOURNAL OF SMALL BUSINESS MANAGEMENT

 Table 1
Correlation Matrix
Variables Mean S.D. Size Age Strategic Structure Strategy Management CEO
Posture Formation Shareholding Experience

Size 180.0 138.0 1.00

(Employees)
Age (Years) 36.0 43.0 0.042 1.00
Strategic 4.4 1.0 0.18*** -0.13* 1.00
Posture
Structure 4.7 1.0 0.086 -0.068 0.345*** 1.00
Strategy 4.6 1.1 0.046 0.051 0.230** -0.078 1.00
Formation
Management 28.0 40.0 -0.058 -0.008 -0.028 0.018 -0.161*** 1.00
Shareholding

GIBBONS AND O’CONNOR

CEO 9.8 8.7 -0.066 -0.002 0.039 0.053 -0.118* 0.286*** 1.00
Experience

*p < .05
** p < .01
*** p < .001

179
180
Table 2
Regression Results of Organizational, Individual, and Integrated Models Dependent
Variable = Strategy Formulation Process
Models Constant Employees Age Posture Structure Management CEO F Probability R2-adjusted
Shareholding Experience Ratio (%)

1. Organizational
Model
beta coefficient 3.88 -0.037 0.120 0.345 -0.194 — — 8.626 0.000 8.1
(significance) (0.000) (0.597) (.074) (0.000) (0.001)
(standardized — -0.027 0.094 0.313 -0.182
beta)
2. Individual
Model
beta coefficient 4.79 -0.021 0.057 — — -0.004 -0.01 3.1 0.015 2.5
(significance) (0.000) (0.07) (0.422) (0.001) (0.158)
(standardized -0.016 0.044 -0.153 -0.081
beta)
3. Integrated
Model
beta coefficient 4.16 -0.064 0.131 0.353 -0.196 -0.003 -0.011 7.99 0.000 11.2

JOURNAL OF SMALL BUSINESS MANAGEMENT

(significance) (0.000) (0.357) (0.061) (0.000) (0.001) (0.009) (0.08)
(standardized -0.048 0.101 0.323 -0.186 -0.142 -0.094
beta)
is the level of effort put into addressing research. In a field study of owner and
the bases upon which strategy is formu- professional CEOs, Smith et al. (1988)
lated in both types of organization. It is found that the owners were less com-
likely that entrepreneurial firms fre- prehensive in their decision behavior
quently review the bases upon which than professional managers. They
their competitive advantage rests. This defined comprehensiveness as the
may require extensive analysis and degree to which the individual followed
debate within the organization. Such a formal, rational decision process. This
debate may be facilitated through the use difference in decision behavior may
of structured methods of strategic plan- reflect a governance imperative. It is pos-
ning. On the other hand, a conservative sible that plan documents are used as
posture suggests a certain level of inertia “control” devices. The “principals” (such
with respect to addressing the bases as venture capitalists, other angels, and
upon which advantage rests. The basis of business owners) may rely on formal
advantage in conservative firms may not plan documents and processes to
be subject to the same level of question- provide a routine “check” on managerial
ing. Therefore, a more informal or emer- discretion employed by the CEO and top
gent process suffices. Strategic posture management team. It is likely that these
can therefore be identified as an impor- executives are expected to go through a
tant determinant of the approach to scheduled strategy review/development
planning. process periodically. This approach
It is also interesting to highlight the reflects a formal, documented strategy
significant associations between struc- development approach that managers
ture and process. As shown, the organi- may be required to adopt.
cally structured firms emphasize Finally, the negative relationship
incremental and emergent approaches to between CEO experience and formalized
strategy development. This reflects the planning may reflect the custodial or
overall pattern of mutual adjustment evi- defensive nature emanating from a
denced in these firms. Mechanistic firms, strong commitment to the status quo. As
as hypothesized, tend to employ formal experience levels increase, the perceived
methods to communicate with each need to review a strategy formally may
other; therefore, it is not surprising that decrease. However, from a normative
this pattern is repeated within their strat- point of view Rue and Ibrahim (1995)
egy formation process. This finding may found that high-performing small com-
also reflect an “equi-finality” in informa- panies involved their boards in system-
tion processing capability. Organic firms atic business planning more frequently
typically have extensive information pro- than poorer performers. Moreover, it
cessing capability because of their fluid- may be important in owner-managed
ity and extensive communications and firms to engage in formalized strategic
may not employ formal strategy devel- planning, as Upton, Teal, and Felon
opment tools to enhance strategic (2001) found that high growth family
insight. On the other hand, mechanistic firms extensively involved their boards in
firms may compensate for relatively poor strategic planning activity. In addition,
information processing capacity with Smith et al. (1988), in the study cited
synoptic, formalized strategy develop- earlier, found that comprehensiveness of
ment activities. decision process was associated with
The significant, negative association positive performance. This finding
between management shareholding and speaks to the importance of critically
the use of formalized, synoptic reviewing the basis upon which strategy
approaches is consistent with previous is founded.

GIBBONS AND O’CONNOR 181

 instrument. In a related fashion, the
Conclusion reliance on a single informant per organ-
The most important finding is that ization requires that the results be
entrepreneurial firms employ relatively treated with some degree of caution.
formalized methods of strategic plan- Notwithstanding these limitations, it is
ning. Formalized methods help firms felt that this paper has made a contribu-
learn about their environments and their tion to improved understanding of the
capabilities. Such insight could help predictors of strategy formation pro-
SMEs maintain an edge over their com- cesses. Such understanding could poten-
petitors. The importance of strategic tially help those charged with consulting
posture in explaining planning activity to or assisting smaller businesses in
may also reflect the different manage- developing strategy to be more sensitive
ment styles found in companies follow- to the organizational and individual-level
ing conservative versus entrepreneurial influences on the type of planning
strategies. In particular, it may reflect approach adopted. Moreover, while evi-
differing functional experiences of the dence may be accumulating that “formal”
various top management teams who are methods of planning are superior, the
charged with developing strategy (Miles results of this study highlight the poten-
and Snow 1978). Perhaps, entrepreneur- tial concomitant changes that are
ial firms and top management teams are required in other systems, such as the
dominated by certain functional special- structure and strategic posture of the
ists (such as marketing or R&D people), firm to embed such formalized
while conservative firms are dominated processes. In other words, this study has
by engineering and/or finance people. provided evidence of the likely contrib-
This may be an interesting avenue for utors and inhibitors to introducing for-
future research. malized strategic planning in SMEs.
There are a number of limitations to While an entrepreneurial posture is im-
the study. First, because of the cross- portant, the findings also highlight the
sectional design, causality cannot be potential difficulties of introducing for-
established. A longitudinal study would mal, comprehensive strategy develop-
be required to track changes in orien- ment processes in owner-managed firms.
tation and structure and subsequent This finding is consistent with a recent
changes in planning approach to gain work by Wood and Joyce (2003). They
such insight. A major omission for the surveyed 513 owner–managers and pro-
theoretical framework of the paper is the fessional managers in SMEs. They found
absence of “environment.” While con- that owner–managers had a poorer
scious of the omission (due to concerns understanding of strategic management
over the length of the measurement terms and used strategy tools less exten-
instrument and a simultaneous concern sively than did professional managers.
with maintaining anonymity of response Resistance to such approaches by
which prevented “secondary” measures owner–managers may reflect highly cen-
being used and related back to respon- tralized decision-making structures
dents), future research should incorpo- where debate and open discussion of
rate this crucial dimension. Moreover, a strategic alternatives is eschewed. Alter-
concern could be raised with common natively, it may reflect that owner–
method variance. Although a limited post managers have difficulty prioritizing the
hoc test was employed, the difficulty development of their managerial skills
remains that the predictor and depend- while dealing with the pressures of
ent variables are collected with the same leading and developing the business.

182 JOURNAL OF SMALL BUSINESS MANAGEMENT

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