Small Business Strategies

Small Business Strategies: Refining Strategic Management Theory

for the Entrepreneurial and Small Business Contexts

ABSTRACT

Research in entrepreneurship has debated the differences between entrepreneurial and

small business ventures for quite some time, arguing that entrepreneurial ventures are small

growth-oriented, strategically-innovative firms, while small business ventures are neither growth

oriented nor strategically innovative. However, scholars often treat both types of ventures

analogously in terms of both construct and theory, which poses clear problems given their

differences. As a result, we may have missed opportunities to advance both our understanding of

new firm survival and growth and our understanding of how theoretical perspectives in strategic

management apply to entrepreneurial and small business ventures. Since we understand far less

about the strategies of small firms than the strategies of large firms, these problems present a

substantial opportunity to refine strategic management theory for the entrepreneurial and small

business contexts. Thus, in this study we examine the extent to which small firms may engage in

strategic pursuits of competitive advantage to determine the applicability of strategic

management theories to the contexts. We do so by empirically examining the types of strategies

employed by entrepreneurial and small business ventures. Contrary to common assumptions, we

find the essence of small firm strategy is to stay small. We discuss the implications of our

findings for future research and practice.

Electronic copy available at: http://ssrn.com/abstract=1348632

 Small Business Strategies

INTRODUCTION

What do Apple, Dell Computer, Microsoft, and McDonalds all have in common? They all

started as small businesses. While virtually all businesses start out small (Aldrich & Auster,

1986), many never move beyond small business ventures, which are businesses that are

independently owned and operated, not dominant in its field, and does not engage in any new

marketing or innovative practices, while a select few become entrepreneurial ventures which

pursue profitability and growth through innovative strategic practices (Carland, Hoy, Boulton, &

Carland, 1984: 358). Yet, strategic management theories at their essence are growth-oriented

(e.g. Penrose, 1959) and the predominant assumption is that small firm strategy should be

growth oriented as well (Aldrich & Auster, 1986; Covin & Slevin, 1989; Merz, Weber, & Laetz,

1994). However, 99.5% of all businesses in the U.S. (U.S. SBA, 2007) are defined as small, with

the overwhelming majority of firms being neither growth-oriented nor strategically innovative

(Carland et al. 1984). In fact, only a very tiny fraction of small businesses ever grow into

successful large firms (Bracker & Pearson, 1986). This gap between the theories in strategic

management and the business contexts, to which they are applied, raises an important question:

Do the growth-seeking tenets of strategic management theory apply only to 0.5% of firms in the

U.S., or do our theories also apply to the context of small business?

Entrepreneurial ventures and small businesses both play important roles for economic

growth and job creation in society (Solomon, 1986; Storey 1994). Given their importance, can

we accept the Carland and colleagues (1984) assertion that small firms are neither innovative

nor strategic? If we assume that most firms face competition of some sort, then should not all

such small firms theoretically pursue some form of strategy? If so, most prior research on small

firm strategy, which tends to lump non-growth-oriented small firms with growth-oriented firms,

Electronic copy available at: http://ssrn.com/abstract=1348632

 Small Business Strategies

may have missed substantial opportunities to understand better, how theoretical perspectives in

strategic management apply to entrepreneurial and small business ventures. Specifically, we

believe opportunities have been missed to: 1) Differentiate forms of strategy among different

types of small firms; and 2) To help explore the relevance and applicability of strategic

management theories to the context of small firms. Therefore, the purpose of this paper is to

explore the types of strategies that small firms may theoretically pursue and then to test how

these strategies may affect their performance. Through this study, we seek to contribute by (1)

examining the extent to which small firms may engage in strategic behaviors to determine the

applicability of strategic management theories to the contexts; (2) improving our understanding

of the effectiveness and performance implications of different strategies for the context, and, (3)

enriching our understanding of the strategic management practices that dominate economic

activity.

We organize this paper in the following manner. First, we explore important differences

between small and large firms to determine how these differences might affect the applicability

of strategic management theories and the strategy choices available to small businesses. Then we

examine specific approaches to strategy preferred most strongly by small businesses (NFIB,

2003) and test hypotheses relating these strategy approaches to performance measures. We then

present and discuss our results and conclude with implications for researchers and practitioners.

THEORY DEVELOPMENT

Small Firms, Large Firms

In the United States, a business is defined as small if it has 500 or fewer employees

(U.S. SBA, 2007). Two primary reasons why small firms exist are: (1) to provide goods and

Electronic copy available at: http://ssrn.com/abstract=1348632

 Small Business Strategies

services to satisfy customers needs in a manner that they will continue to use and recommend the

firms goods and services (i.e. customer service business) and (2) to create desired goods and

services so that the investment in the firm is converted to cash as quickly as possible (i.e. cash

conversion business) (Reider, 2008: 17). This emphasis on fostering repeat customers

(sustainability) and steady cash flow (rent accrual) indicates that (successful) small firms pursue

strategic behaviors, and helps to explain how small firms survive, but not necessarily why they

remain small. However, there are a number of other factors that limit small firm growth. This is

because small firms have scale, scope, and learning liabilities and disadvantages relative to large

firms (Stinchcombe, 1965; Welsh & White, 1981). For example, small firms tend to produce a

small volume (scale) of a few products (scope) and typically have a limited capacity for

acquiring knowledge (learning) (Nooteboom, 1993). Small firms differ from large firms in that

they are often resource poor (Welsh & White, 1981) and therefore require different approaches

to strategy, especially in the early stage of a firms existence when the two most important issues

are survival and growth (Aldrich & Auster, 1986). Smaller and younger firms both have limited

resources that are also less valuable than those possessed by larger and older firms. One reason

for this is that smaller and younger firms pay lower wages and offer lower returns to their

employees (Oosterbeek and Van Praag, 1995; Van Praag & Versloot, 2007; Wunnava & Ewing,

2000), they employ individuals with lower levels of human capital (Troske, 1999; Winter-Ebmer

& Zweimuller, 1999), and realize lower levels of capital-skill complementarity (Troske, 1999)

than larger and older firms do. This relative scarcity of resources in small and young firms makes

them more vulnerable to external threats and internal missteps than larger and older firms

(Moore, 2001).

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 Small Business Strategies

Despite differences in resource endowments between small and large firms, small firms

do have advantages. First, it is much easier for a small firm manager to attend to the countless

details in running a competitive business when the business is small and the details involve only

a handful of employees and (Slevin & Covin, 1995). Therefore, unlike the managers in most

large firms, the manager(s) of small firms have the ability to influence directly the performance

of their organizations (Wiklund, 1998). Further, in many small firms the owner is typically very

personally involved (often as the hands on manager), has often made a high investment in the

business, and has motives for the firm other than simple maximization of shareholder returns

(Reid & Smith, 2000). Small firms can also often adapt more quickly and benefit more

effectively to changes in the environment than large firms can (Slevin & Covin, 1995).. For

example, recent consolidation of the banking industry, has created a dissatisfied, underserved

customer base opening opportunities for small local and regional banks, who can provide much

better customer service (Tatge, 2003). Given these advantages, small firms are often better off

using their simplicity, flexibility, and ability to respond to opportunities more quickly than large

firms and/or by specializing in niche markets where they can avoid head-to-head competition

with larger, more resource rich, firms. In general, smaller firms have been successful by

identifying and exploiting niches in specialization, quality, size (produces only small lots), price

(sell at a discount all the time), service (high level of service), and location (limits itself to

certain geographic boundaries) (Kotler & Turner, 1989).

From a strategic management standpoint, small firms create an environment in which

both the opportunities and constraints are different from those in large organizations (Cooper,

1981). Small firms go through stages inception, survival, growth, expansion, and maturity

differently than large firms that pose unique challenges to their managers (Scott & Bruce, 1987).

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 Small Business Strategies

And most small firms, may not even experienced all the stages of a firms life cycle (some

indeed may reach maturity without ever going through growth or expansion) that their larger

counterparts have (Churchill & Lewis, 1983). Unlike larger and older firms, which have

experience significant growth and expansion, enjoy economies of scale and/or scope, and have

achieved the stage of resource maturity (Churchill & Lewis, 1983; Scott & Bruce, 1987), most

small firms are not growth-seeking and age to maturity operating persistently in the stage of

survival, often until they fail due to an insufficient financial reward to remain in business or a

lack of willingness to continue operating the firm (van Praag, 2003).

Small Firm Strategies

As we have discussed thus far, because small firms vary substantially in their resource

positions (Cooper, 1981), the goals and objectives of their founders (Carter, Gartner, Shaver, &

Gatewood, 2003; Evans & Leighton, 1989; 1990), and their potential for survival and interests in

growth (van Praag, 2003), small firms will also likely vary substantially in the types of strategies

they pursue. However, growth is a core assumption of strategic management theories, yet as we

have argued previously, for a variety of reasons, the vast majority of firms are and remain small,

pursuing strategies to survive, either not wishing to, or not successfully pursuing and achieving

the growth strategies of large firms. Such strategies for survival may be characterized by tactics

such as using minimal overhead (Ebben & Johnson, 2006; Winborg & Landstrom, 2001),

choosing an attractive industry (Stearns, Carter, Reynolds, & Williams, 1995), and building a

loyal customer base (Liao & Chuang, 2004). Conversely, strategies for (small firm) growth may

be characterized by tactics such as a focus on management and workforce training to grow the

size of the employee base, issuing equity to external stakeholders to fund growth, developing

technological sophistication to monitor and manage growth, seeking flexibility to adjust to new

6
 Small Business Strategies

and changing markets, and introducing new products (Storey, 1994). Since most small firms

appear to pursue survival strategies (Carland et al. 1984), and survival predominately depends

upon a loyal customer base (Reider, 2008), we decided to narrow our scope of small business

strategies to focus on exploring two strategic approaches consistent with building a loyal

customer base -- providing the highest possible quality, and providing better customer service

(Liao & Chuang, 2004). Since another strategic approach to small business survival includes

minimal use of resources (Ebben & Johnson, 2006; Winborg & Landstrom, 2001), we also retain

this approach within the scope of our study. In the next sections, we review the literature on

these different strategies and offer testable hypotheses about the relationship between their use

and a small firms ability to survive and grow. Through examining the relationship between

these dominant small business strategies and their effects on survival and growth, we can shed

some light on the differences and applicability of strategic management theory to the small

business context.

Hypothesis 1 - High Quality Differentiation and Firm Survival and Growth

A firm is able to differentiate itself from competitors if it can be unique at something that

is valuable to customers beyond simply offering a low price (Porter, 1985). One way of perhaps

the most common was for a firm to differentiate itself from its competitors is to offer products or

services at a higher level of quality. Such differentiation can lead to competitive advantage and

superior performance when the price premium for the differentiation exceeds its additional costs

(Porter, 1985). The resource-based view also suggests that in order to achieve superior

performance through differentiation, a firm must possess and use valuable, rare, costly to imitate,

and nonsubstitutable resources in its strategy (Barney, 1991, 2001). Because small businesses

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 Small Business Strategies

are resource constrained, they must rely on individual-specific resources to compete against

larger firms (Alvarez & Busenitz, 2001). Individual-specific resources can be an advantage for

small firms because it is easier for managers to organize their limited resources in ways that

concentrate on fulfilling the needs of a small customer base (Morris, 2001). As argued earlier, on

advantage of small businesses over large businesses, is that managers of small firms are better

able to focus on running a totally competitive business with only a handful of employees

because their size and control allows adaptability and rapid response (Slevin & Covin, 1995).

Based on these arguments, we expect differentiation strategies based on high quality to be

positively related to at least minimum levels of sustained firm performance and competitive

advantage (measured through survival) in small firms. Stated formally:

Hypothesis 1a: The extent to which a small firm follows a high quality differentiation

strategy will be positively related to survival.

However, if firms who offer a high level of quality in their products and services seek to

grow, they must achieve awareness of their brands in order to reduce advertising costs and

improve customer loyalty. Brand awareness is a dominant choice heuristic in the consumer

choice process (Hoyer & Brown, 1990). Firms advertise with the expectation that increasing

awareness about their brands will increase the likelihood of a consumer purchasing their product

and in turn lead to sales growth (Bogart, 1986). Because smaller firms may have a liability of

newness (Stinchcombe, 1965) and/or have limited resources for advertising, they are less likely

than established, larger firms are to build brand awareness among customer groups. Further,

sales promotions such as advertising are discrete activities that tend to have short-term and

immediate effects on sales (Neslin, 2002). Therefore, a small or new firm may not be able to

8
 Small Business Strategies

build brand awareness through advertising alone, even if it possessed the resources. Therefore, a

differentiation strategy, based on high quality, is perhaps of more importance for a smaller, or

newer, resource constrained firm as they do not have the resources to build perceived brand

awareness, they can only build brand awareness through reputation and word of mouth. Based

on these arguments, we expect differentiation strategies based on high quality to also be

positively related to at least minimum levels of sustained firm performance and competitive

advantage (measured through growth) in small firms. Stated formally:

Hypothesis 1b: The extent to which a small firm follows a high quality differentiation

strategy will be positively related to expected growth.

Hypothesis 2 - Customer Service Differentiation and Firm Survival and Growth

Outstanding customer service involves providing a level of service so friendly, efficient,

and professional that your customers expectations are exceeded and they look forward to doing

business with your firm again (Reider, 2008: 78). Given that the consumer experience is as

important as, if not more important than, the consumer good (Bowen & Waldman, 1999: 164-

165), one of the advantages of small firm size is the ability to provide a personal touch to the

customers experience (Gross, 1967). Front-line service employees who reside at the interface of

the firm and the customer represent the face of the firm to its customers and play a critical role

in service encounters (Solomon, Suprenant, Czepeil, & Gutman, 1985). To the extent that

employees are able to deliver high-quality services, customers are more likely to have favorable

evaluations of service encounters, experience higher satisfaction, and increase their purchases

and the frequency of their future visits (Borucki & Burke, 1999; Bowen, Siehl, & Schneider,

1989; Liao & Chuang, 2004). The favorable evaluations, high customer satisfaction, and

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 Small Business Strategies

increased visits and purchases should increase both the likelihood that a small firm will be able

to grow. Therefore, based on these arguments, we expect differentiation strategies, based on

customer service, to be positively related to at least minimum levels of sustained firm

performance and competitive advantage (measured through survival) in small firms. Stated

formally:

Hypothesis 2a: The extent to which a small firm pursues a high customer service strategy

will be positively related to survival.

Further, we expect differentiation strategies based on high customer service to also be

positively related to at least minimum levels of sustained firm performance and competitive

advantage (measured through growth) in small firms. Stated formally:

Hypothesis 2b: The extent to which a small firm pursues a high customer service strategy

will be positively related to expected growth.

Hypothesis 3 - Minimal Resource Strategies and Firm Survival & Growth

A small firms reliance on minimal resource stocks is a commonly used form of

bootstrapping (Winborg & Landstrom, 2001). Bootstrapping is a process of using the minimum

possible amount of all types of resources at each stage in a firms growth (Stevenson, 1984;

Timmons, 1999). This approach is attractive to small firms given their resource poverty positions

because it reduces some of the risk they face in pursuing opportunities by minimizing financial

risks, sunk costs, and fixed costs while optimizing flexibility (Timmons, 1999). Bootstrapping is

essentially a mindset in which the small firm owner begs, borrows, or scavenges the resources it

needs at the time it needs them, instead of accumulating them beforehand (Starr & MacMillan,

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 Small Business Strategies

1990). Like entrepreneurship, bootstrapping is an iterative process based on a multistage

commitment of resources with a minimum commitment at each stage or decision point

(Timmons, 1999: 322) and investing only if conditions are favorable (McGrath, 1999).

One advantage of a minimal resource bootstrapping strategy gives small firms access to

and control of resources without having to own them (Bygrave & Zacharakis, 2008). In practice,

however, entrepreneurs tend to turn to bootstrapping strategies when they perceive the risk

associated with their new firms to be high (Carter & Van Auken, 2005). In other words, small

firm managers may turn to bootstrapping when they believe their firms are in danger of failing.

At the same time, in small service and retail businesses that are at the end of the value chain,

performance variation may be better explained by limited or poorly developed resources than by

a firms choice of strategy (Brush & Chaganti, 1999). This line of reasoning suggests that

entrepreneurs who minimize their resource bases are either on the verge of failing or do not have

access to resources of sufficient quality or quantity to make the business succeed. Therefore,

based on these arguments, we expect minimal resource strategies, to be negatively related to firm

performance and competitive advantage (measured through survival) in small firms. This leads

to the following hypothesis:

Hypothesis 3a: The extent to which a firm relies on a minimal resource strategy will be

negatively related to firm survival.

A firm employing a minimal resource strategy also has the advantage of fewer sunk and

fixed costs, which provides the firm with more degrees of freedom for how to use its resources

(Winborg & Landstrom, 2001). Small firms that learn how to deal with resource limitations

through their customer and supplier relationships can develop routines that incentivize customers

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 Small Business Strategies

to pay up front or earlier and to delay payments to suppliers until the last day possible (Ebben &

Johnson, 2006). Not all small firms will be able to develop such routines, however, because of

differences in their accumulation of experience and how they codify their experience into

organizational routines (Zollo & Winter, 2002). A small firm that is able to develop these

routines creates some leverage with its customers and suppliers as the small firm becomes more

important to them, which in turn imparts legitimacy to the small firm (Ebben & Johnson, 2006).

This legitimacy allows small firms to establish an organizational identity in the minds of their

stakeholders (Clegg, Rhodes, & Kornberger, 2007), to develop other important organizational

routines (Delmar & Shane, 2004), gain access to even more valuable resources (Lounsbury &

Glynn, 2001), and to grow in spite of hostile environments (Ahlstrom & Bruton, 2001).

Therefore, based on these arguments, we expect minimal resource strategies, to be positively

related to firm performance and competitive advantage (measured through growth) in small

firms. This leads to the following hypothesis:

Hypothesis 3b: The extent to which a firm relies on a minimal resource strategy will be

positively related to firm expected growth.

METHODS

Sample

We obtained our data come from a sample of 754 small firms that participated in a survey

on competition sponsored by the National Federation of Independent Businesses and conducted

by the Gallup Organization in late 2003 (NFIB, 2003). Participating firms ranged in size from

one to 249 employees. The Gallup Organization used a random stratified sample design to

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 Small Business Strategies

compensate for the skew toward firms with four or fewer employees (NFIB, 2003). When

necessary, we corrected our data set for missing data as recommended by Roth (1994).

In the sample, two approaches to competing appear to be prevalent strategies among

small-businesses: 1) Offering the highest possible quality; and 2) Offering better service (NFIB,

2003). Over 80 percent of small businesses that participated in a national survey on competition

insist that these approaches represent a major portion of the way they attempt to compete (NFIB,

2003). This observation from the data appears logical and consistent with the expectations of

prior research since providing the highest possible quality and better service is consistent with

the survival strategy of building a loyal customer base (Liao & Chuang, 2004). Thus, there

appears to be high face validity of the sample. A third major small business strategy was

operating with minimal overhead. This observation is also consistent with the expectations of

prior research (Stevenson, 1984; Timmons, 1999). Other, less common ways of competing, also

included (in order of significance): maximum use of technology, targeting missed or poorly

served customers, more choices and selection, unique marketing, lower prices, expansion or

growth, a superior location, new or previously unavailable goods and services, alliances or

cooperation with another firm or firms, and franchising (NFIB, 2003). Most of these less

common strategies are consistent with an orientation toward firm growth. For this reason, as well

as due to their low utilization among the small firms in the sample, we excluded them from the

scope of the current study.

Measures

Dependent variables. The dependent variables in this study are survival and expected

growth. We measure Survival by the number of years a firm has been operating. Larger scale,

older small businesses have higher survival rates over time than smaller, younger firms (Evans,

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 Small Business Strategies

1987; Bates, 1995; Bates & Nucci, 1989), and only a fraction of firms from a given cohort of

new firm startups survive (Aldrich & Martinez, 2001; Katz & Gartner, 1984). We measure

Expected growth using a five-point Likert scale question asking Over the next three years, do

you expect this business to: (1) grow significantly, (2) grow quite a bit, (3) grow some, (4) stay

about the same, OR (5) get smaller. We reverse-coded the responses to associate a higher score

with higher growth expectations.

Independent variables. The independent variables in this study are the types of

strategies small businesses might pursue: highest possible quality, better service, and minimal

overhead (NFIB, 2003). Each independent variable was measured with a single 9-point Likert

scale question in which a value of 1 meant a given strategy play no part in the business

competitive strategy and a value of 9 meant the strategy comprised its entire competitive

strategy.

Controls. We control for industry effects on performance using NAICS categories at the

two-digit level with dummy variables. Controlling for industry effects is important because

general industry environments often influence the performance of firms (Dess et al., 1990;

Rumelt, 1982, 1991). Without controlling for industry effects, researchers may obtain erroneous

results, such as support for opposite relationships, or unsupportable relationships at best

(Armstrong & Shimizu, 2007). We also controlled for firm size by incorporating the natural log

of the number of employees. For tests of hypotheses in which the dependent variable is expected

growth, we controlled for past sales growth. Past sales growth is measured by the percentage

change in last two years sales for each firm using Likert scale values (5 = increased by 30%+; 4

= increased by 20 to 29%; 3 = Increased 10-19%; 4 = changed 10% either way; 1 = decreased by

10% or more).

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 Small Business Strategies

Analysis. We tested our hypotheses using ordinary least squares regression. We included

all control variables and the dependent variables in the first model. We then tested each

hypothesis step-wise in individual models. Testing each of the small business strategies

individually allows us to identify specific effect sizes and significances for each strategy and

separate effects from non-effects (Armstrong & Shimizu, 2007). Further, the individual tests

more accurately portray the activities of small businesses, since no firm likely attempts to

implement all strategies at the same time (citation?).

RESULTS

Table 1 presents the summary statistics and correlations for the study measures. The

mean values for the independent variables show that the preference for small firm strategies was,

in order, highest possible quality, better service, and minimal overhead. The mean values for

highest possible quality (8.02) and better service (7.80) indicate that these approaches comprised

close to 100% of a small firms competitive strategy. The mean value for minimal overhead

strategies (5.87) shows that small firms incorporated this approach for more than 50% of their

overall competitive strategies. These results suggest that small firm owners prefer simpler, less

resource-intensive strategies to compete: doing what you already do more effectively and

efficiently is simpler than creating a unique marketing strategy, expanding, or offering new

goods or services.

Insert Table 1 about here

Our first two hypotheses address the effects of the two most commonly used small firm

strategies on firm survival and expected growth. In Hypothesis 1a, we predicted that the extent to

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 Small Business Strategies

which a small firm relies on a high quality differentiation strategy would be positively related to

survival. The effect of high quality differentiation strategy was positive, as predicted, but not

significant. Therefore, we fail to observe support for Hypothesis 1a.

In Hypothesis 1b, we predicted that the extent to which a small firm follows a high

quality differentiation strategy would be positively related to expected growth. The effect of a

high quality differentiation strategy on expected growth was positive and significant (p < .05).

Therefore, we observe support for Hypothesis 1b.

In Hypothesis 2a, we predicted that a small firms use of a customer service

differentiation strategy would be positively related to survival. As shown in Model 3 of Table 2,

the effect of a customer service differentiation strategy on firm survival was positive as

predicted, but not significant. Therefore, we fail to observe support for Hypothesis 2a.

In Hypothesis 2b, we argue that a small firms customer service differentiation strategy

would be positively related to expected growth. As Model 3 of Table 3 shows, the effect of better

service on firm expected growth is positive and significant (p < .05). Therefore, we observe

support for Hypothesis 2b.

In Hypotheses 3a, we argued that a small firms use of minimal overhead would be

negatively related to firm survival. We observe that the effects of minimal overhead on small

firm survival were negative and significant (p < .05). Therefore, we observe support for

Hypothesis 3a.

In Hypotheses 3b, we predicted that a small firms use of minimal overhead would be

positively related to expected growth. As shown in Model 4 of Table 3, the effect of a small

firms use of minimal overhead on expected growth was positive and significant (p < .05).

Therefore, we observe support for Hypothesis 3b.

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 Small Business Strategies

Insert Tables 2 and 3 about here

DISCUSSION

Implications

We opened this paper with the assertion that opportunities may have been missed in the

prior research on the strategies of entrepreneurial and small ventures to: 1) Differentiate forms of

strategy among different types of small firms; and 2) To help explore the relevance and

applicability of strategic management theories to the context of small firms. The objective of our

study was to explore the types of strategies that small firms may theoretically pursue and then to

test how these strategies may affect their survival and growth. In these regards, we theorized

differences between the strategies of small and large firms, and explored some of the most

theoretically and practically relevant small firm strategies (high quality differentiation, customer

service differentiation, and minimal resources). We then developed hypotheses for the

relationship between these small business strategies and firm survival and growth, arguing that

the differentiation strategies should be theoretically positively related to both small firm survival

and growth, and that minimal resource strategies would be negatively related to survival, but

positively related to growth. We failed to observe support for our arguments that the strategies to

differentiate on high quality or customer service would be positively related to firm survival. An

interesting implication of these observations is that the dominant survival strategies pursued by

80% of the small businesses in our sample, dont lead to survival. We did, however observe

support for our arguments that the strategies to differentiate on high quality or customer service

would be positively related to firm growth. An interesting implication of these observations is

that the dominant strategies pursued by 80% of the small businesses in our sample, lead to firm

growth and in a sense eventually cause the small firm to cease being small. Finally, we did

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 Small Business Strategies

observe support for our arguments that minimal resource strategies would be negatively related

to firm survival and positively related to firm growth. These observations are consistent with our

expectations and raise some interesting issues for future research on the implications of

bootstrapping.

So, in a sense, our observations may indicate that the essence of small firm strategy is to

pursue a course of action that causes the firm to cease being small (Aldrich & Auster, 1986;

Covin & Slevin, 1989; Merz et al., 1994). Our results indicate, however, that small firms that

pursue a path of growth do so simultaneously increase the likelihood that they will fail. The

correlation between expected growth and firm survival is strongly negative and significant (p <

.01). This finding supports the assertion that small firms suffer from the liabilities of age

(Stinchcombe, 1965) and size (Aldrich & Auster, 1986) that limit the effectiveness of the

strategies they employ in competition. In addition to limiting the effectiveness of strategies, this

finding also supports that assertion that small firms are limited in their choices of strategy due to

size, age, or industry (Brush & Chaganti, 1999).

Further, our finding that the effects of use of minimal overhead strategies were negatively

and significantly related to small firm survival, may indicate that a small firms efforts to find,

acquire and combine resources to create a unique identity can place limits on the scale and scope

of the small firms operations and therefore limit its strategic options (Morris, 2001). The

commitment of resources to pursue differentiation strategies, reach new markets, or offer new

goods and services may reduce the ability of small firms to survive external shocks and adapt to

changing market conditions.

Our results, coupled with the results of the NFIB study (2003), also provide support for

our assertion that all small firms do pursue some form of strategy. Small firms recognize that

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 Small Business Strategies

they all face some form of competition and take strategic actions to differentiate themselves to

survive and grow. The mean values for the independent variables of highest possible quality

(8.02 on a scale of 1 to 9) and better service (7.80 on a scale of 1 to 9) were far greater than the

mean value for minimal resource strategies (5.87), indicating most small firms relied on these

approaches for close to 100% of their overall competitive strategies. This finding suggests that

small firm owners are capable of observing and learning from their experiences in competition

with each other and in their industries.

What do the results say about Carland et als (1984) seminal argument about small

business ventures versus entrepreneurial ventures? First, we conclude that all businesses follow

some form of strategy in their operations. Most of the businesses in this study are indeed

independently owned and operated, not dominant in their fields (Carland et al, 1984), but many

also do attempt to engage in new marketing or innovative practices. The choice to pursue

innovative, growth-oriented practices, however, presents new challenges to small businesses that

can lead to outright failure of the venture. For this reason we believe that researchers and policy

makers should strive to make a finer distinction between small businesses that are not growth

oriented and those that risk their survival in the pursuit of growth.

Limitations

This study has several limitations that should be addressed in future studies of small firm

strategy. First, our data set, while originating from a reputable data gathering agency, was cross-

sectional in nature. This prevented us from making cause-and-effect connections between small

firm strategies, survival, and expected growth. The data set also relied on self-reporting

responses from small business owners, which could cause this study to have a common method

variance (Campbell & Fiske, 1959; Mowday & Sutton, 1993). This could be particularly

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 Small Business Strategies

troublesome in making the connection between preferences and reliance on different small firm

strategies and expectations for growth. A small business owner may, for example, optimistically

believe that his or her use of a variety of strategies will lead to greater future growth, when in

fact he or she may be risking the very survival of the firm.

We used expected growth rather than past growth because we wanted to capture the

effects of small firm strategies on future growth, rather than past growth. Using past growth as

the dependent variable would be illogical for determining the temporal precedent of strategy

choices on future firm performance. In other words, we wanted to make an association between

small firm owners preferences for strategies with the owners performance expectations for the

firm. We capture the effect of past performance for both firm survival and expected growth by

using it as a control variable. Expected growth has been used as the dependent variable in

empirical studies preceding this one (e.g., Beccheti & Trovato, 2002; Dunne, Roberts, &

Samuelson, 1989; Heshmati, 2001).

CONCLUSION

The objective of our study was to explore the types of strategies that small firms may

theoretically pursue and then to test how these strategies may affect their survival and growth.

Through this study, we contribute by (1) examining the extent to which small firms may engage

in strategic behaviors to determine the applicability of strategic management theories to the

contexts; (2) improving our understanding of the effectiveness and performance implications of

different strategies for the context, and, (3) enriching our understanding of the strategic

management practices that dominate economic activity. In conclusion, we found that the essence

of small firm strategy may be to pursue a course of action that causes the firm to grow (Aldrich

& Auster, 1986; Covin & Slevin, 1989; Merz et al., 1994). Small firms that choose this path,

20
 Small Business Strategies

however, risk their very survival if they pursue the most common strategies of differentiating

through high quality and customer service, or minimal use of resources. Therefore, the best

strategy for small firm survival may be to stay small.

21
 Small Business Strategies

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 Small Business Strategies

TABLE 1 - SUMMARY STATISTICS AND CORRELATIONS

Variables Mean s.d. 1 2 3 4 5 6 7 8 9 10 11 12 13 14

1 Years 17.01 14.14
Owned/Operated
Business
2 Expect to Grow 3.26 1.11 -
0.167
3 Highest Possible 8.02 1.77 0.007 0.111
Quality
4 Better Service 7.80 2.05 0.024 0.132 0.563
5 Minimal Overhead 5.87 2.52 - 0.066 0.175 0.207
0.066
6 Past Sales Growth 2.82 1.26 - 0.367 0.080 0.059 -
0.148 0.010
7 Ln Firm Size 2.14 1.27 0.158 0.073 - 0.054 - 0.018
0.006 0.118
8 NAICS 10 0.119 - - - 0.036 0.018 -
0.117 0.028 0.122 0.095
9 NAICS 20 0.053 - - - - 0.010 0.044 -
0.060 0.019 0.056 0.022 0.055
10 NAICS 30 0.122 0.068 0.018 0.032 0.120 - 0.112 - -
0.047 0.054 0.099
11 NAICS 40 0.070 0.006 - 0.016 - 0.014 0.030 - - -
0.037 0.037 0.087 0.193 0.166
12 NAICS 50 - 0.048 - 0.022 - 0.065 - - - - -
0.103 0.006 0.058 0.085 0.100 0.185 0.179 0.349
13 NAICS 60 - 0.022 0.061 - - 0.050 0.017 - - - - -
0.078 0.003 0.006 0.046 0.084 0.082 0.159 0.152
14 NAICS 70 - - 0.004 - 0.024 - 0.106 - - - - - -
0.087 0.056 0.002 0.114 0.060 0.111 0.107 0.209 0.210 0.091
15 NAICS 80 - - 0.013 0.023 0.045 - - - - - - - - -
0.010 0.002 0.020 0.132 0.054 0.100 0.097 0.188 0.181 0.082 0.078
p < .01 for all correlations > |.095|, p < .05 for all correlations > |.073 |

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 Small Business Strategies

TABLE 2 - LINEAR REGRESSION RESULTS FOR FIRM SURVIVAL

Models 1 2 3 4
Hypothesis H1a H2a H3a
Variables
Constant 17.646 *** 15.939 *** 15.194 *** 19.780 ***
Firm size 0.074 *** 0.074 *** 0.073 *** 0.071 ***
NAICS 10 13.223 ** 13.347 ** 13.8 ** 13.805 **
NAICS 20 5.149 5.237 5.399 5.483
NAICS 30 7.168 * 7.206 * 7.238 * 8.008 *
NAICS 40 4.241 4.329 4.36 4.574
NAICS 50 0.653 0.725 0.769 0.945
NAICS 60 -1.096 -1.113 -0.942 -0.712
NAICS 70 -1.829 -1.778 -1.701 -1.349
NAICS 80 2.851 2.895 2.929 3.373
Past Sales Growth -1.689 *** -1.713 *** -1.721 *** -1.687 ***

Strategy
Highest Possible Quality 0.214
Better Service 0.31
Minimal Overhead -0.424 *

F 8.188 *** 7.493 *** 7.598 *** 7.899 ***

2
AdjR 0.087 0.087 0.088 0.092
AdjR2 0 0.001 0.005 **
p < .10, *p < 0.05, **p < .01, *** P < .001 n = 754

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 Small Business Strategies

TABLE 3 - LINEAR REGRESSION RESULTS FOR FIRM EXPECTED GROWTH

Models 1 2 3 4
Hypothesis H1b H2b H3b
Variables
Constant 2.531 *** 2.160 *** 2.169 *** 2.350 ***
Firm size 0.048 0.049 0.044 0.057
NAICS 10 -1.008 ** -0.981 ** -0.923 ** -1.05 **
NAICS 20 -0.506 -0.487 -0.468 -0.534
NAICS 30 0.007 0.014 0.018 -0.061
NAICS 40 -0.275 -0.257 -0.257 -0.302
NAICS 50 -0.227 -0.212 -0.21 -0.249
NAICS 60 -0.270 -0.274 -0.247 -0.301
NAICS 70 -0.332 -0.322 -0.311 -0.372
NAICS 80 -0.225 -0.215 -0.214 -0.263
Past Sales Growth 0.327 *** 0.322 *** 0.322 *** 0.326 ***

Strategy
Highest Possible Quality 0.046 *
Better Service 0.046 *
Minimal Overhead 0.033 *

F 15.415 *** 14.546 *** 14.733 *** 14.556 ***

2
AdjR 0.161 0.165 0.167 0.165
AdjR2 0.004 0.006 * 0.004
p < .10, *p < 0.05, **p < .01, *** P < .001 n = 754

29