Long Rhnge Planning. Voi. 13. No. 5. pp. 39 to 45, 1981 0024-6301/81 /OSOO3~~7SO~.

OOI(, 39
Printed in Grea; Br:tain Pergamon Press Ltd.
.

Strategic Management: New

Ventures and Small Business
Professor L4rnoId C. Cooper, Kvannert Graduate School of Management? Itzdiana

This paper examines the factors influencing the formulation employees and rely only on the proprietor or
and implementation of strategy in new and small firms. Small members of the family. Their founders often lack
businesses vary substantially in their resource positions, the
formal managerial training, but may have technical
goals of their founders and their potential. They also vary in
stage of development: thus strategic management is examined skills, such as being able to sell real estate, cut hair,
separately in the start-up stage, the e&y-growth stage, and or do automobile repairs. Capital barriers to entry
the later-growth stage. lntracorporate entrepreneurship in are usually low, management methods intuitive,
established firms is also considered. Despite this diversity, and profits moderate or low. Start-ups and
small firms create an environment for strategic management in
discontinuances are frequent and the founders often
which both the opportunities and constraints are different
from those in large organizations. move from blue-collar or clerical jobs to en-
trepreneurship and back again. Some such places of
business need revolving doors, not for the few
customers, but for the entrepreneurs who come and
go*
New and small firms provide a distinctive
environment for the formulation and implemen- Some small retail and service firms and a higher
tation of strategy. This paper, based upon a review percentage of small manufacturing firms might be
of the iiterature. examines the processes by which classified as stable, high-payoff companies. Their
strategy is deveioped in such firms and the nature of founders often have more formal education and
the resulting strategies. Because new ventures higher expectations than the mom and pop
within established firms have many of the founders. Often they enjoy strong competitive
characteristics of nev; and small businesses, strategic positions deriving from specialized know-how,
management within this context will also be patents. or a virtual monopoly in a particuiar local
considered. market. Management methods, although informal
by large company standards, may be very effective.
M03i firms in the United States. the United Without the pressures ofgrowth, the founder may
Kingdom, and other Western countries are small. be able to engage in civic activities or achieving a
For instance, about 95 per cent ofall U.S. firms have lower golf handicap, while maintaining a high
fewer than 20 employees. However, the diversity standard of living.
among these small firms is enormous, so that
statements which are descriptive of some do not
appiy to others. They differ in types offounders. m
management sophistication, in stage of dcvelop-
ment, and in performance. Vesper has suggested
that small, firms might be classified as mom and
pop companies, stable high-payoff companies, and
growth-oriented companies.

By far the majority of small businesses would be

classified as mom and pop firms. particularly in
retailing and service industries. Many have no hired

Arnold C. Cooper is a professor at the Krannert Graduate School of

Management, Purdue University, West Lafayette, Indiana 47907.
U.S.A.
40 Long Range Planning Vol. 14 October 1981

These classifications are duid and it is certainly teristics influence the !ocatlon and C!ICnature of
possible for a firm to move from one category to new firms, as well as the likeiihood of spin-offs;
another. However, in general, these types of firms Uld
btarr with different resources. folloti different
(3) various environmental factors external to the
growth paths, and involve different internal
individual and his organization, wh!ch make
environments tor the formulation &lnd implemen-
:he c!imate more or less fal;orable COthe starting
tdtion of strategy.
of a new firm.
The context within which strategy is tnanaged also Of these factors. the characteristics of the
varies by the stage of dtwelapmenr of the small entrepreneur 1ldvc been most extensively es-
firm. In this paper, we shall think of three stages: amined. Psychological research suggests that
entrepreneurs have a 1II,.Th need for Jchicvemcnr and
(1) tlfe start-q2 stage. including the strategic
a belief that they can control their o.vn fate. One
decisions to found a firm and to position it group of tnanu&cturing entrepreneurs was charac-
within a particular industry with a particular terized as having had pocr relations with their
competitive strategy; fathers, their teachers and their employers. They
(2) &e early-grot.4 s?,.zge,when the initiaI product- seemed to bc driven to entrepreneurship by their
market strategy is being tested and when the need to avoid being In a subordinate relationship to
prqider& maintains direct contact with all others. A number of studies have shown that
r~..r. activities.~ (many firms stabilize at this entrepreneurs often come from families where the
stage); father or a close relative was in business for
himself.. Some sub-groups of societies have
(3) fhe la&r-g~cvth SZQ@, of%en characterized by higher rates ofentrepreneurship than others; young
multiple sites f& retait and wrvice businesses members of such sub-groups (such as the Chinese in
and by some diversification far manuf&turing South-East Asia or the Indians in East Ic?frica) are
firms; orga&a.ticma.lIy the firm usually hss one surrounded by role-models of entrepreneurship.
or moFe levels $06 middIe-management and They may also choose this career path because other
Some delegasion of de&&an-making. career paths are closed CO them in the larger
Ail of the types of firms just considered pass society. The thrust of these findings is that some
through the start-up stage and. if they are people, by virtue of their family background and
successful. move on to an early-growth stage. early childhood induences, are much more likely to
However, only the growth-oriented firms are likely start businesses. However, entreprcneuna! incli-
to be found in the !ater-growth stage. nations, iikc tnusical talent, may or may not be
capitalized upon. A number of uthrr factors,
As a firm grows, at what point is it no longer small? discussed below. interact to create a climate more or
Any answer to this question is somewhat arbitrary, less favorable to starting a necv business.
but the focus here, even for firms in the later-
growth stage, is upon organizations with less than The typical entrepreneur with technical or
300 empioyees. managerial training starts his business when he is in
his thirties.. It is then that he has the track record,
espcricnce. and savings to make founding feasible,
Strategic Management in the Start- while still having the energy level and willingness
to take risks which arc necessary. Thus, the
up Stage
conditions which cxist when potential technical
The decision to found a new firm is, in every sense, entrepreneurs are in their thirties, Including the
a strategic decision by the entrepreneur. It involves organizations they then work for and the
non-routine decisions to commit major resources environmental climate then extant, determine
to create J particular new business at a particular whether thcv will bc like!v to found new businesses.
time and place. The new business then has a strategy However, ebidcnce on the founders of mom and
(which may or may not have been carefully pop tirms suypcst a wider range ofagtss at the time
considered); it provides selected goods or services ot founding.
to particular markets and it emphasizes (whether
wisely or not) particular policies to provide a way 4 second major Actor influencing whether a
of competing. potcntlal entrcprenCui ~111 start a ntw business is
the nature of the organization for which he works.
The decision to found a new firm seems to be This organization, which tnight be termed an
influenced by three broad factors.3 They arc: incubator. scctns to pla_y a particularly important
role in the founding ot high technology firms. It
(1) the entrepreneur, including the many aspects of
locates the potential founder in a particular
his background which affect his motivations,
geographic area which may or may not have a
his perceptions, and his skills and knowledge;
favorable entrcprcncurial chmatr. (A number of
(2) the organization for which the entrepreneur studies have shown that most cntrcprcneurs start
had previously been working, whose charac- their busintasses where they are already living and
 Strategic Management: New Ventures and Small Business 41

working; it is the rare founder who moves at the active or how an area which has been active
time he is starting a new business.)12 becomes less so.

The incubator organization also provides the The three broad factors just discussed influence the
entrepreneur with the experience which leads to entrepreneurial decision as summarized in Figure 1.
particular managerial skills and industry know-
ledge. Since industries vary widely in the extent to The Competitive Strategy of the New Firm
which they offer opportunities for new ventures, The decision to start a new firm is clearly a strategic
this means that the strategy of the incubator decision. However, also of interest here is the
organization determines to a great extent whether cluster of decisions which determine the nature of
its employees will ever be in a position to spin off the new business, including the products of services
and start their own businesses. Thus an established to be offered, the markets to be served, and the
organization in a mature industry with little policies to be emphasized. What has been learned
growth and heavy capital requirements is unlikely about the influences upon these decisions in the new
to have many spin-offs. Its employees, no matter firm and about the relationship between particular
how motivated, are not acquiring the technical and strategies and performance?
market knowledge which can easily be translated
into the strategic decision to start a new business. Since the new business draws primarily upon the
knowledge and skills of the entrepreneur, one
might expect that the product/market choice
The policies of potential incubator organizations would be closely tied to the experience gained in the
also appear to determine, to a marked degree, the incubator organization. For the most part this is
motivations of the entrepreneur. In brief surveys true, although it varies by industry, New
such as questionnaires, founders tend to report the companies are closely related to the nature of the
socially acceptable reasons as to why they became business of the parent firms for about 80-85 per cent
entrepreneurs; these include such factors as the of high technology firms; for nontechnical
desire for independence and financial gain. manufacturing and service firms, the corresponding
However, depth interviews often disclose that the percentages are 50-55 per cent.** For new
founder was pushed from the parent organization franchises, the percentage is probably very low,
by frustration .3. Studies of spin-off rates from
established organizations show that internal factors
influence spin-off rates, with internal problems
being associated with high rates of spin-off and Antecedent Influences
Upon Entrepreneur
placid times being associated with low rates. Thus,
the extent to which the strategic and operating
decisions of the established firm satisfy or frustrate
its employees influences whether spin-offs occur.

4. Previous Career Experiences

A complex of factors external to the individual and
to the parent organization also appears to influence Incubator Organization Entrepreneurs
entrepreneurship. Much of the research in this area Decision
1. Geographic Location I
is only suggestive, but it seems that climates can
change over time and that past entrepreneurship
makes future entrepreneurship more likely. The
2. Nature of Skills and Knowledge
Acquired I
L

3. Contact with Possible Fellow

credibility of the act of starting a company appears Founders
to depend: in part, upon whether the founder
4. Motivation to Stay With or to
knows of others who have taken this step. Venture Leave Organization
capital availability and particularly the existence of
5. Experience in a Small Business
well-developed communication channels vary Setting
across geographic regions and help to determine the
feasibility of entrepreneurship. The presence of Environmental Factors
experienced entrepreneurs also influences future 1. Economic Conditions
entrepreneurship; they serve as sources of advice
2. Accessibility and Availability
and venture capital and they sometimes do what of Venture Capital
they know best-start additional new busi-
3. Examples of Entrepreneurial
nesses.3.3 Their companies become excellent Action
incubators for other spin-offs and also offer
consulting opportunities for fledgling founders 4. Opportunities for Interim Consulting

who are seeking income while trying to get started. 5. Availability of Personnel and
It seems clear that past entrepreneurship influences Supporting Services;
Accessibility of Customers
the climate for future entrepreneurship. What is not
so clear and what deserves additional research is Figure 1. Influences upon the entrepreneurial
how an area begins to become enterpreneurially decision
42 Long Range Planning Vol. 14 October 1981

since the franchiser supplies the expertise rather Sometimes, the assumptions underlying the new
than the founder. firms strategy prove to be faulty, and the firm
seems likely to run out of cash before reaching the
Although there has not been much explicit research break-even point. It appears that founders often
on how the founder decides upon a business change their strategies at this point. Thus, an
strategy, we can draw some inferences from general electronics component manufacturer switches to
descriptions of the process and from case studies. sub-contract work or an ice-cream shop becomes a
For larger, more professionally-based ventures, and steak-house. The entrepreneur has the opportunity
particularly for those seeking venture capital, there to change quickly at this point; there is no
typically is a new business plan. Such a plan organization to convince and there is little
describes the way in which the proposed firm is to cotnmitment to the status quo. However, much
compete and often reflects considerable thought. will depend upon how rhe entrepreneur perceives
For that much larger group of new ventures which the environment, whether he perceives it as it really
start without the discipline of seeking outside is or as he would like to see it. Founders are
capital from professional sources, the process of sometimes stubborn people with a dream and not
deciding upon a basis of competition seems to be really amenable to dispassionate analysis of their
informal and intuitive. It may be based upon an plans.
excellent, first-hand feel for the market. However,
many new service businesses of the mom and pop As the new firm becomes established, the extent to
type seem to be started opportunistically, with the which management confronts strategic decisions
availability of particular facilities or sites being . varies with the kind of firm and the characteristics
important determinants. of its industry. For the mom and pop business in a
stable environment, the focus is usually upon
We dont know very, much about the relationships operating decisions. Whether the strategy is re-
between characteristics of founders, the strategies examined and whether opportunities are then
of their firms, and subsequent performance. There pursued appears to depend on the characteristics of
has been some research on high technology firms, management. In experiments conducted in India,
though, which suggests that successful new firms owner-managers who had received achievement-
are more likely to be started by multiple founders, motivation training frequently investigated or
have more initial capital, transfer more technology undertook changes in strategy.ls
from the parent organization, are more likely to
have a marketing function, show greater concern For those businesses which grow to become what
for personnel matters, and are more likely to have we have classified as stable, high payoff firms or
spun-off from large organizations than from small growth-oriented firms, there are decisions as-
ones. * 5.16 With regard to strategy, those new high sociated with evolving successful strategies.
technology firms whose strategies were related to However, we lack systematic research to indicate
the parent firms, in markets served and technology whether these firms have high-potential strategies
utilized, were more likely to be successful. In from the time of founding or whether these
addition, longitudinal study of 95 new manufactur- strategies evolve from the feedback of the market
ing firms indicated that those judged to be place. One study of 370 manufacturing firms
successful were more !ikely to have been started by indicated that companies which achieved annual
two or more founders and more likely to have sales ofSlOO,OOO or more in sales did so in their first
founders with both relevant experience and post 10 years; old small companies usually didnt
high school education.lJ grow. The firms in this sample also showed great
stability in their strategies, with only one in twelve
making substantial product changes in a 9 year
Strategic Management in the Early period.

Growth Stage There is substantial wisdom-based literature

As the new firm becomes established, the founder analyzing the characteristics of small firms and
typically continues to be in direct contact with all suggesting the most suitable strategies. Small firms,
activities and decisions. Many businesses of modest particularly in the early stages, have limited
potential stabilize at this point, often with no hired financial and human resources. They have almost
employees: Other firms continue to grow, adding no reputation and little in the way of economies of
employees and sometimes additional management. scale or benefits from experience curves. There is a
At this time the founder or founders may delegate concentration of risk in one or a few products,
operating decisions, but not strategic decisions. markets, and people; there is usually no cushion to
Management methods continue to be informal, absorb the results of bad luck or bad decisions. The
with few policies and with control exercised capabilities of the new firm are often uneven,
primarily through direct contact. reflecting the unbalanced experience of the
entrepreneur.
As the new business get; started, it itnmediately
begins to receive feedback from the market. Against these disadvantages, the new firm has no
 Strategic Management: New Ventures and Small Business 43

ties to the past; it can innovate, without worrying

about the effect on existing sales. This, coupled
with the talents and drive of the founding group, is
undoubtedly one reason why new and small firms
have been such remarkably fertile sources of
technical innovation, accounting for major new The process of strategic planning in small firms has
innovations all out of proportion to their R & D received attention in several articles.24-27 The small
expenditures. 2o (Of course, most small firms are not firm environment makes heavy demands upon
particularly innovative; it is the growth-oriented management for day-to-day operations and there
small firms which are most likely to have this are usually no staff specialists to provide support.
characteristic.) New firms also have the ability to Explicit efforts to set aside blocks of time for
move quickly; the chain of command is short and planning and to shield management from day-to-
decision methods are informal and, if not carefully day pressures may be necessary. Structured
documented, at least timely. Management often has approaches to the process of planning have been
a first-hand feel for the realities of customers and recommended by several authors. Unlike large
operations, based not upon the abstractions of organizations the emphasis is not upon deciding
reports, but upon day-to-day contact. Small firms how to allocate resources among businesses or upon
also can avoid the departmentalization and co- formal planning as a communication mechanism.
ordination problems which characterize large, The primary focus is upon mechanisms for
complex organizations. There maybe a lack of staff identifying problems and for stepping-back to
specialists and formalized analysis, but there is the look at the implications of current strategy.
opportunity to focus the attention of the Recognizing the flexibility of small firms, par-
organization upon opportunities. The small or- ticular emphasis should be placed on short-term
ganization, with its shared sense of the need to planning.28
survive, can create a cost consciousness and
dedication which are difficult to achieve in large,
profitable firms where each individual knows that Strategic Management in the Later
his contributions are only a small part of the whole.
Of course, in all instances these are potential
Growth Stage
advantages which may or may not be realized, Many small businesses stabilize and maintain an
depending upon the competence and commitment environment in which the president is in direct
of management. contact with the key activities, possibly with a
small management team, each member of which is
responsible for a key function. However, growth-
oriented small businesses may continue to grow,
adding additional levels of management.

The internal environment for management then

begins to change, as the sheer volume of activities
compels the founder to turn some duties over to
others. Typicaily, the role of the founder changes,
with doing activities largely delegated and with
the job becoming more managerial in character.
Many operating decisions may be delegated,
although the president continues to be deeply
involved in strategic decisions. One of the
distinguishing characteristics of the very small firm,
the presidents direct contact with employees. with
products, and customers, begins to change. More
formal ways must be developed to keep manage-
ment informed and to control operations. Policies
must be developed and increased formality occurs.
Top managment must try to develop new skills in
managing through others and in developing an
orgamzation. Some entrepreneurs are not suited for
this kind of managerial task and their shortcomings
may prevent the firm from growing successfully or
may lead to the entrepreneurs departure.

These changes in the internal environment both aid

and hamper effective strategic management. The
growth in the organization may gi\?e the president
more time for planning. The growing firm mav
43 Long Range Planning Vol. 14 October 1981

have more resources to pursue particular activities developed new venture departments to facilitate
and to withstand competitors challenges. intracorporate entrepreneurship. Two surveys,
However, growth may cause management to lose both publishsd in 1973, indicated that the number
touch : control of operations may suffer and of new venture departments was increasing.3.3h As
managements feel for markets. competitors, and might be expected, large tirms have adopted formal
organizational capabilities mav diminish. intracorporate entrepreneurship programs to a
Implementation of strategy, which is typically one greater dcgrce than smaller firms. However, more
area where a small firm has a real advantage. recent research suggests that many new venture
becomes more of a problem as the organization departments are short-lived.
grows.
New venture department organizations may range
Many growth-oriented small firms seem to be from ffn ~OCtask forces with.no formal training, to
positioned in new_ly-developing industries. As departments wirh estabIished budgets, to separate
such, management faces the challenges of adapting legal entities. Typically, these intracorporate
strategy to the changing demands of an evolving tmtrepreneurial groups study proposed ventures
industry. The strategic implications of industry lift and sometimes proceed to start new businesses-
cycles become particularly important for these developing, prodtxing, and mzrketing new pro-
firms. It is widely believed that new industries are ducts. They usually can. c&l upon the Pesources of
characterized by a high rate of new company the Iarger organization, afthough this sometimes
formation and a high rate of entry by established presenrs problems because of lack ofauthority over
firms. both small and large. Later, there is often a otherdepartments. The performance measurement
shake-out as the stronger competitors enlarge system may be modified to place less emphasis on
their market shares. The extent to which small firms short-run. profits. If the product is promising OF
survive and prosper as an industry matures appears becomes firmly estabEshed, it may be transferred to
to vary widely, but the reasons for these differences an existing department or become rhe basis for a
have not been examined systematically. new department.

Growth-oriented small firms sometimes owe their

Practices vary in the extent to which new ventures
success to innovative strategies. A number of
are separate, the timing of when products arc
authors have commented on how the small firm
transferred to chc regular organization, and how
environment is conducive to innovation, with its
venture managers are rewarded. An extreme form
informal decision processes in which relatively few
of venture management might be termed spon-
executives must be convinced, its lack of commit-
sirred s.pi+offs in which. with the parent firms
ment to the status quo, its low sales requirements to
blessing, a separate new enterprise is created,
be successful, and its low costs ofdevelopment.20.30
possibly with the parent company holding some of
However, the small firm may sometimes pioneer
the equlty.3
and then be faced with severe competition. It is
surprising that there has been very litt!e research on
the most appropriate strategies for small firms Some of the issues associated with organizing
which have been successful m innovation, but then venture management departments include dc-
face severe competition in a growing market. tcrmining how- managers are to be rewarded and
how their careers are affected if they return to the
main organization. Other issues relate to the estent
to which they can call upon resources from the main
orgamzation dnd the degree of delegation-the
Strategic Management in extent to which they cm act as if they were
managing their own firms.
Intracorporate Ventures
A number of writers have suggested thatlarge firms Research by Fast indicates that new venture
teem to be better at developing existing businesses departments usually evolve, becoming operating
than at growing new ones.3-)3 The large firm can divisions, staff departments, or new venture
bring great resources to bear upon new opportu- departments which differ in size, objectives, and
nities and can absorb failures. However, perform- corporate impact from their earlier vcrsions.3
ance measurement systems often penalize those Sotnetimes the departments are disbanded. The
divisions and executives who assume risks. New two major in8uences upon the evolution of a new
ventures can disrupt existing manufacturing and venture department appear to be the changing
marketing activities. New ventures often require nature of the firms strategy and its political support
different kinds of people and facilities and an within the organization.
orientation toward working closely with cus-
tomers, short production runs, and continually In general, these approaches have demonstrated
changing technology.3 some success. but many companies are expcriment-
ing with different ways of creating an environment
An increasing number of corporations have for intracorporate entrepreneurship.
 Strategic Management: New Ventures and Small Business 45

(15) Arnold Cooper and Albert Bruno, Success among high-

Conclusion technology firms, Business Horizons, 20 (2). April (1977).

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