Academic journal article Journal of Business and Entrepreneurship

Evaluating Performance: Referents in Entrepreneurial and Small Businesses

Academic journal article Journal of Business and Entrepreneurship

Evaluating Performance: Referents in Entrepreneurial and Small Businesses

Article excerpt

ABSTRACT

It is widely accepted that performance impacts subsequent strategic action. However, how managers evaluate a business' performance is not well understood. Managers are thought to evaluate their organization's performance by comparison to various referents. Given the differences between entrepreneurial businesses and established small businesses, it is likely that different performance referents are used. Hypotheses that predict which referents entrepreneurial firms and established small businesses use are developed and tested. Results indicate that managers of entrepreneurial firms place more importance on comparing their firms' performance to organizational goals, and the performance of firms managed by acquaintances than do established small businesses.

INTRODUCTION

The relationship between strategic action and performance is a cornerstone of small business research. Although action and performance generally are considered to be reciprocally related (Milliken & Lant, 1991), most research attention has focused on the influence of strategic action on subsequent performance (e.g., Litz & Stewart, 2000; McGee & Peterson, 2000; Miles, Preece, &Baetz, 1999). However, understanding the influence of performance on subsequent actions is equally important because the quality of performance is thought to provide a basis for adjustments in strategy (Milliken 8c Lant, 1991). Yet, little empirical research has examined the performance-action link. In order to help small businesses meet their unique challenges, researchers must develop an understanding of how performance outcomes influence subsequent strategic actions.

With this in mind, the domain of this paper is building knowledge about how small business managers and owners interpret their organization's performance. We do not question the logical assumption that small businesses react to their achieved performance. Instead, we focus on how small businesses attach meaning to performance. Viewed in isolation, a performance indicator provides little information. It is only when compared to a reference point that the meaning of achieved performance emerges.

For example, a small business owner may view inventory turnover as a measure of performance. Consider a retailer that turned over its inventory 3 times in a given year. By itself, this information is equivocal. However, when compared with relevant reference points, assignment of meaning becomes possible. The retailer's performance appears strong if the prior year's inventory turnover was 2 times, but weak if the prior year's turnover was 4 times. External comparisons also may be used. Given the inventory turnover ratio of 3, the retailer's performance appears weak if peer retailers averaged 4 times. In contrast, if the inventory turnover ratio exceeds the average peer ratio, it will be seen more favorably. Thus, referents seem likely to play an important role in shaping decision makers' perceptions about an organization's performance.

Early in the history of small business research, Carland, Hoy, Boulton, and Carland (1984) made an important distinction between entrepreneurial firms (EFs) and established small businesses (ESBs). Subsequent research has affirmed that this distinction is meaningful (e.g., Kaish & Gilad, 1991; McGrath & MacMillan, 1992). EFs and ESBs operate in different environments (Hudson & McArthur, 1994), and, thus, have different objectives (Dodge & Robbins, 1992), internal processes (e.g., strategic planning, Matthews and Scott, 1995) and different contracting strategies (Hudson & McArthur, 1994). Given these distinctions between EFs and ESBs, it is likely that they would not find the same performance referents equally relevant. Accordingly, this study explores one research question: (1) are there differences in the performance referents used by EFs and ESBs?

BACKGROUND AND THEORETICAL DEVELOPMENT

Entrepreneurship research long has held that entrepreneurs are different than the owners and managers of established firms (Carland et al. …

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