INTRODUCTION

This study has two diverse research objectives, which make it both exploratory and confirmatory in nature. First, the present study develops empirical typologies of entrepreneurs based on their approaches to the management of human resources, and on the strategic orientations of their firms. This part of the analysis is purely descriptive and reports upon the relative frequency of different managerial styles and different perspectives on the creation of value in entrepreneurial populations. Second, and most important, the study will attempt to explore the extent to which strategy implementation frameworks developed for much larger and long established firms also hold in the context of small start-up firms.

One of the fundamental assumptions in the strategic management field is that the fit or match between strategy and structure will be directly related to performance (Chandler, 1962; Rumelt, 1974). However, most of the research on the relationships between strategy, structure, and performance to date have dealt with rather broad conceptualizations of structural solutions. On the one hand, the literature at the corporate level has characterized structure mainly according to its divisionalized or departmentalized form (Hoskisson, 1987). On the other hand, at the business level, structure has been defined in terms of gross configurations of structural elements or structural 'archetypes' (Miles & Snow, 1978; Miller, 1986, 1988). A limited number of studies have considered the more detailed level of specific administrative systems, processes, and management styles. As a result, the appropriate use of formal control, compensation, and information systems to implement strategy is still seen as a largely unexplored area in strategic research (Huff & Reger, 1987).

The limited stream of work relating the fit between strategy and administrative systems with performance (Gupta, 1987; Govindarajan, 1988; Govindarajan & Fisher, 1990; Rajagopalan & Finkelstein, 1992) holds much promise for advancement in implementation related issues because it has provided an essential link between the research in strategy and in organizational theory. Strategy researchers have traditionally concentrated on the primacy of strategy in determining structure, while organizational theorists have focused on the role of technology (i.e., characteristics of the tasks to be performed). The main contribution of the studies referred above is the establishment of a link between strategy and the task environment, which allows the strategy researchers to benefit from theoretical models of motivation and control based on traditional contingency theory and agency theory. In particular, the establishment of this theoretical link leads to a series of hypotheses that identify the best form of motivation and control to support the implementation of a given organization's strategy (Gupta, 1987; Govindarajan, 1988; Rajagopalan & Finkelstein, 1992). The purpose of the present study is to contribute to this stream of work by testing the generalizability of these hypotheses --which were developed for large diversified corporations-- in the context of small start-up firms.

There are several reasons why it is interesting to examine the applicability of frameworks on the matching effects of competitive strategies and types of control to a sample of small, newly created, entrepreneurial firms. On the one hand, this framework has never been tested in such a population of firms, and there is lack of empirical evidence on strategy implementation in this context. The closest precedent to such a test is Eisenhardt's (1985, 1988) investigation of several agency theory arguments in a sample of 54 small retail firms. For our purposes here, however, that study has important limitations due to the fact that no distinction was made between start-ups and long established firms, and that neither the moderating effects of strategy nor the performance implications of the use of alternative forms of control were explored. In addition, although control systems will tend to be critical for the success of the entrepreneur during the growth phase (Smith & Gannon, 1987), it is possible that they also have important performance implications in the earlier phase of new venture start-up (Olson, 1987). Finally, start-up firms are an appealing population from a theoretical stand-point, given their high level of performance ambiguity or business riskiness, coupled with a similarly high level of individuals' discrete performance visibility (Jones, 1984).

 

THEORETICAL BACKGROUND AND HYPOTHESES

The organization theory and agency theory frameworks relate the optimal choice between behavior and outcome-based forms of control to the task and performance uncertainty faced by the organization . In short, it is posed that, if task uncertainty is low, so that tasks can be programmed, and outcome uncertainty is high, so that outcomes are a volatile measure of individuals' contributions, behavior-based forms of motivation and control would be more efficient and should be favored. In these conditions the costs of monitoring behavior are low, while the costs of rewarding for results are high due to high risk premiums to be paid to the employee. In turn, if tasks are not programmable, as outcomes become less risky outcome-based control will tend to prove more efficient. In these conditions the costs of monitoring behavior are high and, to the extent that the costs of compensating for exogenous influences on the employee's outcomes are lower, outcome-based control should be favored. Figure 1 summarizes the organization theory-agency theory framework of control strategies.

In her empirical study of a sample of 54 retail stores, Eisenhardt (1985) found that task programmability was a much more important predictor of control practices than outcome uncertainty. In essence, her findings indicated that, for a sample of small firms, outcome-based control was used whenever appropriate behaviors were difficult to dictate and observe, and irrespective of any risk sharing costs (Eisenhardt, 1985). The rationale behind this finding may well be that, in contrast to the standard assumption in the agency literature, the 'principal' of a small firm (i.e., the entrepreneur) will tend to be as risk averse as his or her employees. Further, due to a small-team effect, task visibility will tend to be high for the employees of small firms, so that each individual's discrete contributions to performance will be observable (Jones, 1984). Under these conditions, the risk borne by start-up employees under outcome compensation schemes will be mostly due to business risk, and the entrepreneur will tend to be indifferent between bearing the risk herself or compensating her employees with a risk premium, as both entrepreneur and employees will tend to share the same certainty equivalent. To the extent that Eisenhardt's results are grounded in such a theoretical rationale, the relevant framework for the control strategies of small firms can be simplified to a unidimensional contingency scheme, based on the uncertainty of the tasks to be undertaken, as presented in Figure 2 below.

FIGURE 1
Organization Theory-Agency Theory Framework

* Adapted from Ouchi (1979) and Eisenhardt (1985).

The model of strategy implementation developed by Govindarajan (1988) and Gupta (1987) poses that the organization's strategy determines to a large extent the task uncertainty with which the organization must cope. The choice of a differentiation strategy (versus a low-cost strategy) increases the uncertainty of the organization's task environment, due to increases in both unpredictability and complexity of the tasks (Gupta, 1987). High levels of product innovation and broad product lines are, respectively, some of the sources of unpredictability and complexity for differentiators (Govindarajan, 1988). Capitalizing on the different programmability of activities in each strategy context one can pose a series of hypothesis relative to the fit between strategy and behavior or outcome-based forms of control. Due to the higher programmability of activities in a low-cost strategy context, monitoring costs are lower and behavior-based control is more desirable. On the other hand, the increase in task uncertainty in a differentiation context elevates monitoring costs and makes outcome-based compensation more appropriate. Hence we can pose the following hypotheses, to be tested in the present study:

FIGURE 2
Proposed Organizational Control Framework for Small Firms

Hypothesis 1: The use of different motivation and control systems will have different effects on performance depending on the strategy pursued by the entrepreneur (i.e., existence of a significant interaction effect).

Hypothesis 2: For entrepreneurs pursuing a low cost strategy, performance will be significantly higher for those entrepreneurs with a high propensity to use behavior-based motivators than for those prone to use outcome-based motivators.

Hypothesis 3: For entrepreneurs pursuing a differentiation strategy, performance will be significantly higher for those entrepreneurs with a high propensity to use outcome-based motivators than for those prone to use behavior-based motivators.

Previous Page | Main Menu | Next Page


1997 Babson College All Rights Reserved
Last Updated 1/15/97 by Geoff Goldman & Dennis Valencia

To sign-up for the Center for Entrepreneurial Studies' publication lists,
please register with the
Entrepreneurship WebTeam.