Environmental Contacts and Financial Performances of the Small Firm

The "key idea" behind any successful business is a strategy which is the product of the entrepreneurial mind. Entrepreneurial strategy is embodied in "the patterns of decisions in a company that determine and reveal its objectives, purposes or goals, produce policies and plans for achieving those goals, and define the range of business the company is to pursue." These activities include identifying market opportunities, marshalling the firm's resources in accordance with the entrepreneur's personal values and aspirations, and engaging in transactions with customers, suppliers and other organizations to implement the plan. This is especially true for the entrepreneur of the small business. In large organiztions entrepreneurial strategy is likely to evolve into a complex administrative strategy, but in the smaller firm the entrepreneur is the "commander" of organizational strategy, balancing the interests of the firm with the constraints imposed by the environment. This entrepreneurial balancing act was examined by the author by focusing on the nature of environmental contact and the relationship between environmental contact and performance. The subjects for this study were the owner/operators of over eighty small businesses. (Brockhaus has noted that most researchers have considered the owner/operators of small businesses as entrepreneurs.) The advantages of studying the strategy-performance relationship in the small business are that most small busineses have simple goals, a clear proximate environment, and a direct chain of command between goal formulation and implementation. This provides near-laboratory condictions (in comparison to large complex organizations) for the study of strategic management. The disadvantages are that the entrepreneur may not have an explicity stated strategy or a conscious awareness of goals and objectives. But if entrepreneurs behave purposefully, entrepreneurial strategy is revealed in actions taken and decisions made by them. One can thus circumvent the problem of inexplicit goals and strategies by identifying the set of activities performed by the entrepreneur which can be considered "strategic." In this study, the entrepreneur's contacts with the environment are considered as a set of strategic activities. Contact with the environment (sometimes referred to as "boundary spanning activity") is goal-directed behavior performed by a member of an organization in interaction with individuals or members of other organizatoins. Five types of environmental contact are distinguished: filtering, transacting, buffering, representing, and protecting. These contacts occur with a wide variety of people in the environment, including customers, suppliers, competitors, and regulatory organizations. Other contacts involve consultants, creditors and stockholders, and financial institutions. These contacts supply the information required for strategic planning. In order to plan, the entrepreneur must understand the climate in which he or she operates by monitoring customers, competitors, current technology, new products or services, and financial sources. Furthermore, the owner/operator usually executes the plan personally, as the key player in the firm. The hypothesis is that the entrepreneur's environmental contacts tend to improve the firm's performance. The organization's ability to adapt to the environment depends on the entrepreneur's ability to select, transmit, and interpret information. The entrepreneur must achieve a compromise between organizational policy and environmental constraints, and then choose strategic manuevers to overcome constraints or minimize challenges to the organization's autonomy. The alert owner/operator seeks firsthand knowledge and exposure to intelligence sources and formulates strategic plans based on this information. HYPOTHESIS AND METHODS The general hypothesis of the study is that a positive relationship exists between the entrepreneur's contact with the environment and the financial performance of the firm for all of the following nine categories of contact: 1. …