Academic journal article Journal of Small Business Management

Contrasting Strategic Response to Economic Recession in Start-Up versus Established Software Firms *

Academic journal article Journal of Small Business Management

Contrasting Strategic Response to Economic Recession in Start-Up versus Established Software Firms *

Article excerpt

Economic recessions represent a period of greatly reduced environmental munificence that threatens the survival of all firms. This is especially the case for smaller, start-up firms, which have been shown to fail at a much higher rate compared with their larger, more established peers. This study surveyed 137 software executives regarding their strategic response to the most recent economic downturn (2001-2003). I draw upon Hofer's framework for turnaround strategies to develop hypotheses to explore how smaller, start-up firms adjust their strategies in response to economic recession. The results suggest that start-up organizations are much more inclined to pursue revenue-generating strategies as a means to weathering recession rather than cost reductions, which tended to be the preferred strategy of larger firms.

Introduction

Much has been written in the literature pertaining to small businesses on the manner in which firm size affects strategic response to environmental change. In general, scholars have predicted two divergent strategic paths based on firm size. On one hand, the traditional strategy literature, rooted in industrial organization field, posits that size proffers competitive advantage derived from economies of scale, economies of scope, and learning effects (Ghemawat 1986; Porter 1980; Bain 1956). However, other scholars have argued that smaller, more entrepreneurial firms may leverage more flexible organizational structure and processes when responding to environmental changes (Carr et al. 2004; Andren, Magnusson, and Sjolander 2003; Dean, Brown, and Bamford 1998; Chen and Hambrick 1995; Bhide 1994; Julien 1993; Peters 1992). Both theoretical positions have received sufficient validation via empirical support, resulting in diametrically opposed evidence regarding the affect of firm size on organizational response to environmental change; thus, the discussion remains open. This research effort engages the preceding theoretical debate by examining the effect firm size plays in responding to the environmental threat represented by economic recession.

For most firms, strategic response to a recession is no simple matter; it is complicated by the inherent nature of recessions (Bigelow and Chan 1992). The sudden shift in environmental munificence greatly complicates managerial decision-making within organizations. Managers must weigh the financial risk of investing against the competitive risk of not investing, which extant research has shown has far-reaching implications for competitiveness and long-term viability (Ghemawat 1993). The complex dynamic is often more dire for smaller businesses, which do not possess the aforementioned advantages of larger, older, and more established firms. Additionally, start-up firms typically lack the resource pools that may afford a "wait-it-out" approach during environmental duress. Empirical research has demonstrated that smaller, start-up firms fail at a higher rate than their larger peers (Lawless and Warren 2005; Geroski and Gregg 1997). Thus, additional research is required to better ascertain the appropriate strategic response for smaller firms that might raise their probability of survival, especially given the critical role smaller entrepreneurial organizations play in the economy.

The study focuses on the last economic downturn (2001-2003) in the software industry, which greatly diminished environmental munificence for both small start-ups, as well as larger organizations (Park and Mezias 2005; Doms 2004; Kliesen 2003a, 2003b). I surveyed 137 software executives at both large, established software organizations and smaller, start-ups to determine the strategies they adopted during the economic downturn. As will be detailed, the software industry offers an appropriate sampling frame for the context of this study because extant research demonstrates that the industry is influenced by economies of scale, economies of scope, and learning effects (Argyres, Bercovitz, and Mayer 2007; Cottrell and Nault 2004; Giarratana 2004; Krishnan and Gupta 2001; Banker, Chang, and Kemerer 1994). …

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