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DOI: 10.1016/j.jm.2002.11.002 2004; 30; 29 Journal of Management

Benson Honig and Tomas Karlsson Institutional forces and the written business plan

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Journal of Management 2004 30(1) 2948

Institutional forces and the written business plan

Benson HonigGraduate School of Business, and International Affiliate, University of Haifa,

Mount Carmel, 31905 Haifa, Israel

Tomas KarlssonJnkping International Business School, Box 1026 SE-55111, Jnkping, Sweden

Received 1 March 2002; received in revised form 9 October 2002; accepted 19 November 2002

In this study, we examined factors that led nascent organizations to write business plans, fol-lowing 396 nascent entrepreneurs during a two-year period. We examined both the productionand the outcomes of written business plans produced in nascent organizations. Our findingsshow that institutional variables, such as coercion and mimetic forces, are important pre-dictors influencing the propensity of new organizations to write business plans. Our resultsare contrary to rationalist predictions of planning-performance, and are more in line withinstitutional predictions. Interestingly there was no evidence to support positive outcomes,in terms of profitability, for those nascent organizations that produced business plans duringa two-year initial period. We discuss the implications for institutional theory and studies ofnascent businesses, as well as for the literature on business planning. 2003 Elsevier Inc. All rights reserved.

The writing of a business plan is an activity extensively endorsed by recent litera-ture, venture capital firms, governmental support agencies, and universities (Ames, 1989;Hindle, 1997; Kahrs, 1995; Maitland, 1996). In fact, business planning can be consideredto be one of the most widely regarded aspects of pre-startup planning. We define a businessplan as a written document that describes the current state and the presupposed future of anorganization. Despite their ubiquity, a serious research gap exists regarding why new orga-nizations write business plans, and what consequences result from them (Castrogiovanni,1996). The value and positive effects of business plans have been taken for granted ratherthan critically studied. In this research, we examine a number of factors influencing whyindividuals expend effort writing business plans, as well as exploring outcomes to assesswhat, if any, effect the planning process has on new organizations.

Corresponding author. Tel.:+972-4-8249582; fax:+972-4-8249194.E-mail addresses: [email protected] (B. Honig), [email protected] (T. Karlsson).

0149-2063/$ see front matter 2003 Elsevier Inc. All rights reserved.doi:10.1016/j.jm.2002.11.002



30 B. Honig, T. Karlsson / Journal of Management 2004 30(1) 2948

Scholars in a variety of disciplines have been interested in identifying conditions thatfacilitate the spread of common practices. Research examining the diffusion of planningfrequently emphasizes the rational aspects of planning (Rhyne, 1986). From this perspective,business plans should yield more efficient and economically viable new firms. Plans areclaimed to provide practical benefits to new organizations, such as greater profits and othercompetitive advantages that may lead to a higher probability of long-term survivability.In the rational view, more successful firms will have been planning firms, and so they willsignal to the market the positive attributes to be gained through effective planning. Empiricalresearch on the economic outcomes of business planning has been inconclusive, with somemaintaining that planning assists with the growth and success of new firms (Bracker, Keats& Pearson, 1998; Schwenk & Shraeder, 1993), and others failing to find any association(Boyd, 1991; Robinson & Pearce, 1983).

One alternative to a strictly rational economic perspective is the institutional view (Mezias,1990; Mezias & Scarselletta, 1994). A key interest in institutional theory is how social re-lationships and actions become taken for granted, and how our cognitive set of sharedmeanings and possible actions are constructed (Dacin, 1997). Benefits claimed to accrue topre-startup planning include both symbolic and legitimating forces that may generate in-direct effects on survival (Castrogiovanni, 1996). In this research, we examine antecedentsto, and outcomes of, writing business plans. We use the results to reflect upon institutionalperspectives as well as that of economic rationality.

Testing the Impact of Institutional Sources

Institutional theory suggests that institutionalization is a social process by which struc-tures, policies, and programs acquire taken for granted status (Meyer & Rowan, 1977).Many studies with an institutional perspective focus on the issue of why organizationsseem not only to take things for granted, but also why assumptions spread and makeorganizations more similar. Institutional forces drive organizations to become similar inthe ways in which they act and in how they develop. Firms homogenize. The conceptthat best captures the process of homogenization is isomorphism (DiMaggio &Powell, 1983). Outside actors assume new organizational managers have written/shouldwrite a business plan. This leads us to believe that institutional pressures play an importantrole in the homogenization of nascent organizations with respect to the written businessplan.

Although our knowledge regarding the institutional pressures in large/old organizations isextensive, information about the institutional forces on new organizations is scarce. Nascentorganizations are commonly assumed to be strongly subject to market forces.Greenwoodand Hinings (1996)argue that new organizations and new institutional fields are less con-strained than their larger and older counterparts. Using a similar argument, institutionalpressures are said to be more salient in mature institutional fields (Baron, Dobbin &Jennings, 1986). In contrast,Stinchcombe (1970), and laterAldrich and Fiol (1994), arguethat new organizations in new institutional fields are strongly subjected to institutional rules.They point out that new organizations do not yet have access to social networks, and so havea greater need to prove themselves in order to gain legitimacy. Thus, these two competing



B. Honig, T. Karlsson / Journal of Management 2004 30(1) 2948 31

Figure 1. Institutional sources, institutional pressures, and business planning behavior.

institutional views of newness vis--vis institutional forces represent an issue that remainslargely unresolved, and provide an interesting and important issue for empirical study.

Drawing upon an institutional framework, we suggest that business planning behavior innascent organizations is best explained as a result of isomorphism, which is created by insti-tutional agents. While many studies of institutional processes focus on the self-reinforcingprocess of institutionalization, we study who and how institutionalization is reinforced. InFigure 1, the relationship between institutional agents, institutional pressure and behavioris depicted.




Institutional pressures are of three kinds: coercive, mimetic, and normative (DiMaggio &Powell, 1983). We view these primary pressures as upheld by specific institutional sources.Coercive pressures are upheld by government agencies, normative by the educational sys-tem and mimetic by other organizations within the institutional field (Karnoe, 1995). Wehypothesize two outcomes of such conformity: That it leads to improved possibilities forsurvival, and second, that it leads to improved possibilities for creating a profitable busi-ness. While Karnoe tests this analytical framework in a qualitative comparative study of thewind turbine industry in Denmark and the USA, we utilize this analytical framework in aquantitative study on new organizations in Sweden.

Governmental Agencies

Coercive isomorphism is the result of formal pressures on organizations by exogenousforces (Meyer & Rowan, 1977; Oliver, 1991). In the case of business planning, to our knowl-edge there is no legislative framework that coerces organizations to write business plans, butthere are other formalized pressures that influence new organizations into doing so. Nascentfirms frequently have contact with assistance agencies at both national and regional levels.Examples include the SBA (Small Business Association) in the USA, employment offices,regional development facilities and incubators, worldwide. These organizations often placeconstraints on nascent entrepreneurs, mandating that specific resources or various forms ofassistance are contingent on their participation in other unrelated activities (Honig, 1998). InSweden, public agency offices provide potential entrepreneurs with technical and financialsupport on condition that they complete an approved business plan. As one respondent inour pilot study stated:

it (writing a business plan) was really about getting access to the government subsidiesfor starting up your own business, cause they wanted a business plan from everyone whotried to start up their own company.

This leads to our first hypothesis:

Hypothesis 1: Nascent organizations whose founders contact public support agencieshave a greater propensity to produce business plans than those without such contact.

Industrial Field

Mimetic isomorphism is often a result of organizations attempting to limit uncertaintyby modeling their behavior after similar successful organizations in their field (DiMaggio& Powell, 1983; Haunschild, 1994; Haverman, 1993). An entrepreneur familiar with thebusiness plan written by a known successful entrepreneur may endeavor to write one himor herself. From a procedural point of view, TQM, SWOT analyses, and business plansall represent diffusion based on mimetic opportunities that appear in particular sectors. Forexample, in a recent study of manufacturing firms, all 29 cases were found to utilize businessplans, reviewed either annually or at 18-month intervals (Brown, 1998).

Mimetic behavior may also be the result of attempts to gain legitimacy in the eyes of othermembers of the organization. Actors may provide what seems to be a rational approach toplanning, one that appears to have succeeded elsewhere. We theoretically and empirically




distinguish mimetic isomorphism from coercive and normative forces. Thus, we attempt toempirically isolate the individual effects of these forces. Very few studies explicitly controlfor coercive and normative influences, a critical factor when attempting to isolate mimeticisomorphism (Mizruchi & Fein, 1999).

Institutionalization is frequently determined by industry location, where mimetic pro-cesses are easily observed. Mature industries provide the opportunity for mimetic isomor-phism because new entrants have an opportunity to observe and learn from the establishedcompetitors (Castrogiovanni, 1996). The emergence and diffusion of the Hollywood studiosystem is one such example (Lampel & Shamsie, 2000). Jones (2001)demonstrated theliability of new industries by showing how legitimating forces redefined the developmentof the film industry, as it migrated from regulatory to cultural legitimacy. In the emergingfilm industry, institutional rules changed for both technological entrepreneurs and content(cultural) entrepreneurs, so altering the mimetic approaches taken by competitors as theenvironment matured. Only once the rules of the game were well entrenched, were acommon set of strategic mimetic approaches possible and/or desirable.

New organizations imitate existing organizations within their industry, particularly inaspects deeply embedded into the industrial sectors cultural norms. This method of mea-suring mimetic isomorphism has been used by several researchers. Mezias, for example,examined the accounting practices of the largest 200 nonfinancial corporations in the USAfor generally accepted accounting principles, and Burdos examined the adoption of earlyretirement programs in Canadian Universities (Burdos, 2001; Mezias, 1990).

Manufacturing firms are subjected to similar physical and structural constraints, as wellas engaging in more precise, unforgiving, mature and developed processes. They requirehighly specialized plants with similar human capital, technical, and infrastructural resources.They have been observed to engage in mimetic processes irrespective of economic or effi-ciency gains. For example, in a study examining 39 automotive assembly plants worldwide,high-involvement work practices similar to those practiced by Japanese manufacturers dif-fused irrespective of efficiency gains, such as reduced defects. Further, the rate of adoptionof the practices was found to be independent of complementary practices and technologiesor factory productivity (Pil & Macduffie, 1996). We maintain that manufacturing firms aremore likely to undertake similar mimetic planning activities than other sectors, such assales, marketing, and services, whose fundamental processes are more amenable towardnew modes of operation, and are more flexible in their structure.

Hypothesis 2: Nascent organizations in industries where business planning is deeplyrooted have a greater propensity to produce business plans than those in other industrialfields.

Normative

Normative isomorphic forces influence customary and professional procedures and activ-ities deemed socially expected and responsible (Meyer, Ramirez & Soysal, 1992). Writing abusiness plan provides legitimacy, signals professionalism and indicates that the person(s)involved are serious to the outside world. For those individuals who do not otherwiseobtain any particular benefits from the activity, we suspect normative forces to be central.




The entrepreneurship field abounds with normative literature setting out prescriptionsfor the creation of a ventures entrepreneurial business plan (Hindle, 1997: 2). The world-wide growth of the business school at both the undergraduate and MBA level, along withthe increasing professionalization and diffusion of management education, are normativeprocesses in their own right. The interests of such stakeholders converge on a number ofrelevant points. Courses that typically instruct students in the art of writing a businessplan support academic scholarship, appointments, journals, conferences, and doctoral pro-grams. Consequently, the publication of business plan literature that escalated beginning inthe 1980s yielded several influential texts (e.g.,Ames, 1989; Fry & Stoner, 1985; Hisrich &Peters, 1989; McDermott, Vecchi & McKenna, 1986; McKenna & Oritt, 1981; Timmons,1980). Common to these books and articles are a focus on new or small firms, argumentsfor and against business plans, and a structure of anywhere from 13 to 200 bullet points thatentrepreneurs should cover, when he/she writes a business plan. As one of our respondents,a graduate in business studies at the university level, stated in our pilot study:

In school it was very important. A business plan is definitely the first thing that youshould think of (when you start a new firm).

We thus include the importance of business education in our third hypothesis:

Hypothesis 3: Nascent organizations whose founders have a business education havea greater propensity to produce business plans than those whose founders do not have abusiness education.

Outcomes of Institutional Conformity

We test two outcomes of writing a business plan, the first that institutional conformityleads to survival, and the second that it leads to increased profitability. As indicated inFigure1, we test survival and profitability separately, for two different reasons. First, we wish toadd to the debate within institutional theory regarding whether or not conformity leads toprofitability or survival (Greenwood & Hinings, 1996; Scott, 2000). Second, we use theseoutcomes to evaluate the economic rational explanation regarding why business plans arewritten. If the argument is valid, writing a plan should result in beneficial outcomes such assurvival or profitability.

Survival

The relationship between business planning and survival of the nascent organization hasimplications for arguments based both on economic rationality and institutional theory.From an economic point of view, survival represents the success of the organization. Froman institutional perspective, completing a business plan yields the nascent entrepreneurincreased legitimacy, even in the event of sustained economic losses. Legitimating can bea particularly difficult factor either constraining or supporting growth of the new venture(Aldrich & Fiol, 1994). It can be a matter of life and death for the new organization, asaudiences are more likely to supply resources to organizations that appear desirable, proper,or appropriate (Parsons, 1956) and less likely to do so if they are not (Suchman, 1995).




Institutional theorists often use survival as a dependent variable that, when correlated withconformity, indicates that conformity legitimates (Meyer & Rowan, 1977; Oliver, 1991;Parsons, 1956). Further, survival is a variable commonly used as a dependent variable whenmeasuring performance in nascent organizations.

Hypothesis 4: Producing business plans will increase the probability of a nascent organi-zations survival.

Profitability

Business plans are based on the premise of the rational economic actor. From thisperspective, the business plan is a rational activity that assists the owners of new firms(entrepreneurs) to earn larger profits through efficiency gains and/or increased sales. Theapparent success of the business plan paradigm is seen as proof that most firms receiveconsiderable value from producing business plans. Testing this variable relates our study toprevious studies conducted about business planning and performance (Boyd, 1991; Brackeret al., 1998; Rhyne, 1986; Schwenk & Shraeder, 1993).

From an institutional perspective, there are two ways of looking at the antecedents of iso-morphism; institutional isomorphism and competitive isomorphism (DiMaggio & Powell,1983). Institutional theory holds that organizational conformity to institutional pressuresis a result of a willingness to conform to institutionally prescribed expectations (Meyer &Rowan, 1977). Non-conformity is unwanted, and seen as an awkward or deviant behavior.Such behavior may be shunned, and damages the organizations legitimacy and long-termpossibilities for survival. However, institutional isomorphism occurs even though the actualbehavior is not competitive and profitable. Believers in competitive isomorphism argue thatisomorphism occurs because competitive forces weed out non-competitive forms, or thatcertain environments have different sets of technologies that must be dealt with in specificways (Slack & Hinings, 1994). Thus, arguments from a competitive isomorphic standpointresemble those from an economic rationality standpoint.

Hypothesis 5: Producing business plans is positively correlated with the probability ofa nascent organizationss reaching profitability.

Methods

In this research, we examine the role of business planning for 396 nascent entrepreneursduring four consecutive six-month periods. The study was preceded by interviews with fournascent entrepreneurs. Some anecdotal support for our first three hypotheses was drawn fromthese interviews.

Sample

The study of emerging organizations is important, but is currently in its infancy (Carter,Gartner & Reynolds, 1996; Katz & Gartner, 1988). A major reason is that nascent organiza-tions are inherently difficult to study. Most of them do not show up in firm databases, as they




have not yet registered their firms. Neither are they captured in databases because of taxpayments or the like. Consequently, data about them are not are not readily obtainable fromtraditional sources. This research was therefore uniquely designed to provide populationestimates for business start-up efforts, and to follow a random sample of nascent activitiesleading to the possible start of new businesses by studying so called gestation activities. Assuch, it is one of the first of its kind, studying a representative sample of genuinely neworganizations.

Data are based on two samples of randomly selected individuals living in Sweden, indi-viduals aged between 16 and 70 years and individuals aged between 25 and 44 years. Thepurpose of the first sample was to get a representative sample of the adult population in Swe-den, and the second to increase the yield of nascent entrepreneurs, as indicated by previousresearch (Reynolds, 1997). An enriched 25- to 44-year-old cohort biases our population.This oversampling was done to increase the yield of nascents. Because nascent entrepreneursconstitute a small group in society, every respondent went through a screening interviewwith the objective of selecting out the nascent entrepreneurs. We randomly selected 35,971individuals for telephone interviews. Of those contacted by telephone, 30,427 individuals(84.6%) agreed to participate. Only a few of them were currently starting a business. A finalsample of 396 verified and accessible nascent entrepreneurs were identified, who form thebasis for our analyses.

We believed that six-month periods would provide adequate time for changes in the ges-tation or formulation of the firm to take place, as well as a useful balance between researchresource constraints and respondent cooperation. Successive surveys were conducted onthe nascent entrepreneurs after 6, 12, 18 and 24 months. A range of supplemental longitu-dinal questions were asked, including changes in the profitability or survival of the nascentventure. We were thus able to identify nascent entrepreneurs that failed to survive, or expe-rienced at least one period of profitability, by periodically sampling a 24-month period ofnascent activity.

Variables

Dependent variables. We examined two outcomes of writing a business plan to testHypotheses 4 and 5. Survival was defined as continuance of a project throughout the timehorizon of the study. A dummy variable was coded as 1 if the project survived throughoutthe time horizon and zero if it was abandoned at any point during that time horizon. Thiswas done to better understand the relationship between business planning and longevityduring the nascent stage. Those firms, whose owners indicated that they were profitable atany of the survey interviews, during the 6-, 12-, 18-, or 24-month intervals, were identifiedasprofitable. As profitability is both nominally essential and a primary goal of SMEs, weconsider this to be a particularly good indicator of successful nascent activity.

We examine those that indicated they wrote a formal business plan for external use.Confirmation of writing a business plan was in response to the following two questions: First,nascents were asked Have you prepared a business plan? We found that some individualswho provided an affirmative response were referring to non-written plans they held in theirminds. We thus followed affirmative replies to the following question: What is the currentform of your plan? Is it unwritten (in your head), informally written for internal use, formally




prepared for external use, or something else? Because we were unable to verify measuresof quality or completeness of the written business plans (e.g., something scribbled on anapkin), we analyzed only those who identified they had formally written plans for externaluse as having completed a business plan. We used this as the dependent variable in the firstthree hypotheses, and as an independent variable to testHypotheses 4 and 5.

Independent variables. As independent variables for Equations 1 and 2, we used the vari-ables deducted from institutional theory. Contact with a business support agency indicatedcoercive pressure. Interviews with both agencies and respondents showed that completinga business plan was frequently a required conditional activity in order to obtain further fi-nancial and/or training assistance. A dummy variable was created identifying those nascententrepreneurs who indicated they had contact with a business support agency. Our indicatorof normative pressure measured if a nascent entrepreneur had completed a business class.During our interviews, individuals who experienced business education cited this experi-ence in support of the importance of writing a business plan, whether or not they themselvesdid so. Business education is well known to follow particular trends and fads (Abrahamson,1991), and we predicted that nascents who experienced business education would demon-strate their exposure to normative planning forces. A dummy variable indicated those whocompleted a business class. We used industry measures to identify mimetic isomorphism byidentifying the completion rates of nascents by industrial sector. We initially coded dummyvariables for industry by service, trading, manufacturing, and undeclared, examining theoutcomes. Manufacturing firms represented the highest percentage of firms that completedbusiness plans. As the previous research and theory discussed earlier supported this finding,we used nascent entrepreneurs in the manufacturing sector to indicate mimetic isomorphism.

Control Variables

We use the same control variables in all equations. Human capital, such as Universityeducation, work experience, and non-formal education, such as adult education, are in-vestments that may produce labor productivity increases (Becker, 1964; Schultz, 1959). Intheory, human capital should provide the entrepreneur with the ability to be more effectivein their organizational activities, administrative systems and routines (Preisendorfer & Voss,1990; Svelby, 1997). Previous research has demonstrated a range of results regarding therelationship between education, entrepreneurship and success, with education frequentlyproducing non-linear effects in supporting the probability of becoming an entrepreneur, orin achieving success (Evans & Leighton, 1989; Honig, 2001; Reynolds, 1997).

We controlled for human capital in several ways. Owners indicated the highest level ofeducation they had completed, and this was coded into number of years. Respondents werealso asked their total years of full time paid work experience in any field, with an additionalvariable for years of supervisory or managerial experience. Individuals who had previouslyattempted a start-up were also noted, indicated by a dummy variable.

Social capital refers to the ability of actors to extract benefits from their social structures,networks, and memberships (Lin, Ensel & Vaughn, 1981; Portes, 1998). Social networksprovided by extended family, community-based, or organizational relationships may en-hance the effects of education, experience, and financial capital (Bourdieu, 1983; Coleman,




1988, 1990; Loury, 1987). Social networks may assist entrepreneurs in creating firms, asthey often start businesses related to their former occupations (Cooper & Dunkelberg, 1986).Most of our social capital control variables were designed to examine individual networks.Parental networks were coded from if either parent had ever owned a business before. Avariable was also constructed for those individuals who indicated that their family, relatives,and close friends were encouraging of their starting a business. We included two factors thatcontrol for family structure in our analyses: whether or not the entrepreneur is living witha spouse or partner, and if they have children living in their home. An additional personalnetwork variable controlled for if and when the nascent entrepreneurs indicated they werea member of a start-up team. We asked respondents if they had received very strong orstrong encouragement from family or friends to start a business, and an additional variablecoded those with many close friends or neighbors who owned their own businesses. We alsomeasured the extended social capital of individuals in the business community by asking ifthey had gotten involved in any business networks, such as trade associations, chambers ofcommerce, or service clubs such as the Lions or Rotary. Affirmative responses were codedin a dummy variable. Note that there may be some level of institutional forces manifestingthemselves in our measures of social capital. Thus, threat of social censure (coercion) hasbeen cited as one factor that enhances the role of trust exhibited in environments of highsocial capital (Coleman, 1990). However, because our unit of analysis is the individualentrepreneur, and not one specific group or community of associated entrepreneurs, webelieve the role of community coercion is a limited factor in our population.

In many countries, gender has been found to be a significant factor in the probabilityof establishing a business (Bates, 1995; Brush & Hisrich, 1991). Age has also been anassociated factoras individuals approach retirement age, they are less likely to invest inthe activities necessary to start a new enterprise (Bates, 1995; Evans & Leighton, 1989).Other studies have shown age to be positively related to success and start-up rate, although ina non-linear way (Preisendorfer & Voss, 1990). Human capital consists not only of formaleducation, but tacit experience accumulated as life-experience. Older entrepreneurs, byvirtue of their age, will have a higher probability of exposure to institutional phenomenonthan younger entrepreneurs. Thus, demographic variables such as age and gender, as wellas initial educational attainment, are important factors when considering lifelong learning(Tuijnman & Bostrom, 2002). We thus included gender and age as controls.

We used hierarchical multiple logistic regressions to determine the influence of predic-tor and control variables on the dichotomous outcomes specified by our hypotheses. Thisgave two equations testing the first three hypotheses (Equations 1 and 2 inTable 2), andan additional two to test the remaining two hypothesis (Equations 3 and 4 inTable 3). Wefollowed the method developed byHosmer and Lemeshow (1989)using maximum likeli-hood estimators to give logistic probabilities, where the computed matrix of covariates anddependent variables are assigned logistic probabilities.

Results

Table 1provides descriptive statistics for all variables. The correlation between thosenascents who took a business class and those who wrote a formal plan was .16, not as strong



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Table 1Means, standard deviations, and correlations of all variables

Mean S.D. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

1. Years education 12.640 2.6342. Years

managementexperience

5.412 6.988 .010

3. Years workexperience

14.261 10.178 .138 .655

4. Previousstart-upexperience

.412 .982 .077 .254 .105

5. Parent inbusiness

.485 .500 .020 .085 .008 .152

6. Encouragement .760 .428 .030 .007 .007 .027 .0067. Friends in

business.324 .468 .095 .074 .083 .094 .115 .131

8. Team start-up .574 .495 .020 .020 .075 .311 .024 .037 .0359. Business

network.275 .447 .040 .071 .026 .005 .051.066 .068 .091

10. Knowncustomer

.400 .490 .037 .020 .017 .001 .029 .010 .088 .086 .171

11. Age 37.897 9.839 .107 .621 .841 .130 .026 .072 .074 .089 .019 .05012. Gender .289 .454 .048 .082 .110 .157 .003 .021 .014 .084 .080 .035 .03013. Married .748 .435 .033 .106 .123 .013 .016 .011 .003 .094 .063 .056 .112 .05914. Children .567 .496 .137 .007 .091 .036 .006 .019 .072 .056 .079 .023 .033 .078 .31815. Contact with

agency.404 .491 .078 .031 .021 .071 .021 .042 .007 .077 .120 .050 .087 .102 .002 .017

16. Manufacturing .120 .325 .019 .048 .013 .096 .058 .021 .024 .113 .027 .020 .006 .074 .025 .013 .06617. Business class .446 .498 .032.063 .013 .166 .013 .031 .043 .173 .199 .083 .045 .134 .019 .075 .366 .10218. Profit .571 .496 .062 .041 .056 .096 .079 .000 .155 .004 .278 .575 .084 .072 .094 .042 .028 .049 .100

19. Survival .375 .485 .048 .077 .077 .052 .104 .033 .081 .018 .272 .270 .118 .008 .091 .034 .063 .162 .084 .41320. Formal plan .225 .418 .043 .128 .137 .043 .075 .097 .010 .038 .141 .039 .195 .008 .078 .060 .237 .145 .165 .112 .139

Correlation is significant at the .05 level (2-tailed). Correlation is significant at the .01 level (2-tailed).

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Table 2Hierarchical logistic regression, nascent entrepreneurs: most likely to plan

Dependent variable Equation 1 Equation 2

Written formal businessplan (controls only)

Written formalbusiness plan

Years education .002 (.05) .002 (.05)Years experience as manager .001 (.02) .007 (.02)Years work experience .02 (.02) .01 (.02)Previous start-up experience .01 (.14) .01 (.15)Parents in business .34 (.26) .36 (.27)Encouraged by friends or family 1.07 (.36) 1.06 (.37)Close friends or neighbors in business .33 (.28) .40 (.29)Member of a start-up team .32 (.28) .39 (.29)Member of a business network .79 (.28) .60 (.29)Knew customer before starting .05 (.26) .16 (.27)Age .07 (.02) .06 (.02)Gender (f = 1) .20 (.30) .25 (.31)Married .34 (.34) .33 (.36)Children .27 (.28) .37 (.29)Contact with assistance agency .99 (.29)Manufacturing .82 (.38)Business classes taken .43 (.30)

2 log likelihood 380.1 354.4Model X2 36.8 62.5df 14 17Overall hit rate (%) 79.3 80.1CoxR2 .08 .14N 396 396

Standard errors are in parentheses. p < .05. p < .01. p < .001.

as we anticipated. We also found those individuals who had contact with an assistanceagency were more likely to have completed a business class, with a correlation of .36.

Table 2shows a hierarchical logistic regression, examining who wrote a formal plan asthe dependent variable.

Equation 1 examines control variables predicting the probability of a nascent entrepreneurwriting a formal written business plan. The goodness of fit chi-square of 36.8 tests the nullhypothesis that the coefficients for all of the terms in this model, except the constant, arezero (like an f test in regression).

Encouragement by friends and family produced the strongest statistically significant co-efficient, 1.07. The logistic regression uses maximum likelihood estimators to calculate thelogit, or log odds of an event occurring. For example, the logit probability (log odds) ofpeople who have encouragement from friends and family writing a formal business plan is1.07, and is statistically significant, indicating that generally, individuals with encourage-ment are more likely to produce plans than those who are not, controlling for the remaining




variables in the equation. Computing from log odds to probability, more commonly referredto as odds, is simply a matter of taking the coefficient to the ex , and these probabilitiesare calculated and discussed for the readers benefit when relevant, in this section (Hosmer& Lemeshow, 1989). For the encouragement variable, this means that those individualswith encouragement were almost three times more likely to have produced a business plan,than those who did not (1.07ex = 2.91). Our supplemental analysis showed that the Waldstatistic (coefficient/standard error, squared) was quite strong (Hosmer & Lemeshow, 1989).Those nascents that were members of a business network had increased odds of complet-ing a business plan by twice. Each additional year of the entrepreneurs age increased theprobability of writing a business plan very slightly (1.07).

The first three hypotheses were tested in Equation 2, where contact with agencies, man-ufacturing firms, and business classes were added to the model.Hypothesis 1indicated thatnascents having contact with a public assistance agency would be more likely to write a busi-ness plan.Hypothesis 2maintained that manufacturing firms would have a greater propensityto produce a written formal plan than the referent groups, andHypothesis 3predicted that abusiness education would exert normative pressure on writing a business plan. The resultsshow thatHypotheses 1 and 2were upheld, while 3 was rejected. The model chi-squaredwas statistically significant, and the percentage explained (80.1%) slightly greater than theformer model. Because of the additional degree of freedom, the CoxR2 has increased, sug-gesting that this model is improved. Agency contact was even more influential in producinga written formal business plan than encouragement from family and friends, increasing theodds of doing a plan by a factor of 2.69. Thus,Hypothesis 1was strongly upheld. Manu-facturing firms were more likely to produce a written formal business plan than the referentgroups (service, trading, and not stated). The coefficient was significant at the .05 level, in-creasing the probability of completing a formal written plan by 2.2, upholdingHypothesis2. Nascents who had a business class did not appear to statistically influence the probabilityof writing a formal business plan, although the coefficients are in the anticipated directions.Hypothesis 3was thus rejected.

Table 3shows two logistic regressions for each of the two dependent variablesi.e.,survival andprofitable, respectively.

Equation 3 testedHypothesis 4, stating that firms with business plans would have a higherprobability of survival, by examining those firms that survived during the 24-month periodof study, as well as those that wrote a formal plan. The model chi-square is statisticallysignificant, and the CoxR2 shows .19 of explained variance. Writing a formal businessplan had a moderate coefficient increasingsurvival by 1.8, but failed to pass thep < .05significance level. Thus,Hypothesis 4was not supported. Being a member of a businessnetwork was shown to be the strongest control variable in predictingsurvival, increasing theprobability by a factor of 4.4 (1.50 ex ). Knowing the customer before starting the businesswas also a good indicator ofsurvival, increasing the probability by 2.7. Manufacturing firmsincreasedsurvival by a factor of 4.0, but this may be on account of the longer developmentcycles necessary for manufacturing firms.

Equation 4 testedHypothesis 5, stating those firms writing business plans would be morelikely to reach profitability, by examining firms reporting profits at any time during the24-month period of study. The model chi-square is statistically significant, and the variableshave an important influence on profitability, with a CoxR2 explaining .37 of the variance.




Table 3Hierarchical logistic regression, nascent entrepreneurs: planning and performance

Dependent variable Equation 3 Equation 4

Survival Profitable

Years education .01 (.05) .01 (.05)Years experience as manager .02 (.02) .02 (.02)Years work experience .01 (.02) .02 (.02)Previous start-up experience .007 (.13) .28 (.16)Parents in business .34 (.23) .29 (.27)Encouraged by friends or family .11 (.28) .008 (.32)Close friends or neighbors in business .25 (.26) .64 (.29)Member of a start-up team .18 (.25) .26 (.30)Member of a business network 1.50 (.32) 1.16 (.33)Knew customer before starting 1.0 (.25) 3.24 (.34)Age .04 (.02) .008 (.02)Gender (f = 1) .09 (.26) .64 (.30)Married .38 (.28) .35 (.33)

Children .49 (.26) .05 (.29)Contact with assistance agency .69 (.27) .17 (.30)Manufacturing 1.41 (.50) .24 (.45)Business classes taken .19 (.26) .06 (.31)

Formal Business Plan .59 (.32) .19 (.35)

2 log likelihood 436.15 352.1Model X2 86.2 88df 18 18Overall hit rate (%) 71.5 80.6CoxR2 .19 .37N 396 396

Standard errors are in parentheses.p < .10. p < .05. p < .01. p < .001.

Writing a formal business plan has no statistically significant effects in the equation. Thus,Hypothesis 5is rejected. Knowing the customer before starting the business provided thestrongest coefficient in the model, increasing the probability ofprofitable by 25 (3.24 ex ).This was followed by being in a business network increasing the probability by 3.1, closefriends or neighbors increasing by 1.8.

Discussion

In this research we examined the commonly accepted practice of writing business plansfrom an institutional perspective. Our study shows that new organizations are subject to in-stitutional isomorphic pressures to produce written business plans. We empirically verifiedthat they conformed to coercive and mimetic isomorphic pressures. Contact with assistanceagencies, where plans were a conditional factor in obtaining governmental monetary assis-




tance, was used to demonstrate coercive pressures. To demonstrate mimetic processes, weadopted measures examining specific practices embedded in a particular industry, followinga tradition used in other empirical studies (Burdos, 2001; Mezias, 1990).

We also examined normative force, as studied byMezias (1990), represented in thisstudy as having a business education. Our normative measure was not found to significantlyinfluence the new organizations propensity to write business plans. Contrary to our ex-pectations, nascent entrepreneurs seem to disregard the normative advice provided themin business classes. Perhaps this is because many business schools are preoccupied withmanagement in large organizations, and that business educated entrepreneurs recognize thatnew organizations require different practices. Alternatively, this may be an artifact of thetype of business education provided in Sweden, or due to the relative newness of Swedishbusiness education compared to the USA. It may also reflect the market conditions and typeof nascent entrepreneurship existing in Sweden. Future research, using business educationas a proxy for normative pressure, may benefit by devoting more attention to the actualcontent of business education.

Surprisingly, our results indicate that performance is not necessarily an outcome of organi-zational isomorphism. We suspect that new organizations conform to institutional pressuresindependently of competitive selection mechanisms. Thus, from an economic efficiency per-spective, the writing of business plans in new organizations can be questioned. Our studyalso examines isomorphism regarding the survival of nascent activity. We found that thosewho wrote business plans were no more likely to persist in nascent activity as compared tonon-planners. This studys failure to find support forHypothesis 4atp < .05 is consistentwith Castrogiovannis (1996)contention that planning does not directly effect survival, butinstead influences survival only indirectly through its (direct) symbolism, learning, and ef-ficiency outcomes. Our study suggests that conformity to the business-planning paradigmis not the result of competitive processes weeding out companies who do not write plans.Rather, survival seems to be unrelated to business planning.

Previous research examining business plans in new organizations has primarily focused onthe empirical relationship between plans and performance (e.g.,Barrow, Barrow & Brown,1998) and has largely avoided proposing theoretical foundations for such a relationship.Perhaps as a result, this stream of research has been largely unsuccessful, unable to findany consistent relationships (Lumpkin, Schrader & Hills, 1998; Rhyne, 1986; Schwenk &Shraeder, 1993). We found that writing a business plan has no statistically significant effecton the profitability of the nascent organization, and rejectedHypothesis 5. Because we uti-lized a theoretical perspective based on institutional theory, we believe we are better able toexplain our findings regarding organizational conformity. It appears that new organizationsdo not write business plans to improve performance, rather, they do so in order to conformto institutionalized rules and to mimic the behavior of others.

In sum, we propose that new organizations plan because they are reacting to how theyare expected to plan, because they imitate other successful organizations in their fieldsthat plan, or because they are told to plan. This research shares conclusions with severalprevious studies examining the spread of management tools and management education,such as the adoption of the multi-divisional form (Fliegstein, 1985), TQM (Westphal, Gulati& Shortell, 1997), financial reporting (Mezias, 1990), high-involvement work practices (Pil& Macduffie, 1996) and entrepreneurship education (Alvarez, 1993).




Of course, this study is not without limitations. Firstly, although we suspect that ourfindings might also hold for other environments, we have no way to ascertain this. Thephenomenon of pre-startup business planning is only about a decade old in Sweden, andmany organizations do not formally write business plans. There are reasons to suspect thatthe business planning phenomena may be more institutionalized elsewhere, for examplein the USA, where business planning as a concept is older (approximately 50 years cf.Drucker, 1959). Secondly, whileHaverman (1993)suggests that mimetic isomorphismoccurs between successful firms in a similar industry or field,Haunschild (1994)pointsout that mimetic isomorphism is moderated by uncertainty. This study was not designedto capture the role of success for the imitated organization, nor to examine the levels ofuncertainty in the firms environment.

From a cross-cultural perspective, planning may be seen as a way of taming uncertainty,as well as providing meaning (Brunsson & Olsen, 1993). The need to reduce uncertaintyhas been shown to vary culturally (Hofstede, 1980). In terms ofHofstedes (1980)wellknown measures of uncertainty avoidance, both Sweden and the USA rate scores wellbelow the mean (29 in the former, 46 for the latter, mean of 65). Thus, both culturesappear to have a higher tolerance for unplanned behavior. We suspect that similar out-comes regarding pre-startup planning may be found in the USA and other cultures withsimilarly low uncertainty avoidance, despite variations in the diffusion of the paradigm.Cultures high in uncertainty avoidance, however, may demand more attention to detail,less flexibility, and so reward the producers of more exacting plans (Andreas, Frese &Sonnentag, 2000).

This study raises several questions for further study. Future research might devote moreattention to the possible implications of writing a business plan on the actual behavior of thenew organization. For instance, the activity of writing plans may hamper the organizationsability to act on new opportunities, something often seen as crucial for the success of neworganizations. In general, our findings regarding business plans and performance suggestthat if any relationships exist, they are either weak or more complicated than the businessplanning literature implies (e.g.,Boyd, 1991; Robinson, Logan & Salem, 1986). Economicoutcomes may be contingent upon the level of uncertainty the nascent organization expe-riences (McGrath & MacMillan, 1995), or perhaps the complexity involved in the marketor product technology employed. We encourage further study to test other explanationsregarding the relationship between planning and profitability and survivability of nascentorganizations.

Lastly, we remain particularly interested in the role of assistance agencies. In our analyseswe found that contact with assistance agencies was positively correlated with writing formalplans, while unrelated to profitability, suggesting that assistance may be influencing nascentorganizations in non-helpful ways. The relationship between planning and survival may beanother fruitful subject for future research. Note, that survival is not necessarily a sociallypositive outcome. If the idea to start a business does not have sufficient merit, it maybe a more beneficial outcome for the economy, the community, and for the entrepreneur toterminate at an earlier date. While this study examines the antecedents and effects of writinga business plan, we encourage future research that addresses more fine-grained definitionsof plans and planning. Do certain types of planning activities outperform others? What roledo related topics play, such as financial planning, unwritten, or informal plans, in nascent




organizational development and performance? Is there an optimum time in the life-cycle ofa firm to write a business plan? Careful longitudinal research is necessary to answer thesequestions, critical to a range of actors, including scholars, teachers, and agents attemptingto promote entrepreneurship.

Acknowledgments

We are indebted to The Entrepreneurial Research Consortium (ERC), a temporary asso-ciation of 30+ university centers and 100+ scholars who are carrying out the U.S. PanelStudy of Entrepreneurial Dynamics (PSED). This Swedish study has been made possiblethrough financing from the Swedish Foundation for Small Business Research, the Knutand Alice Wallenbergs Foundation, and the Swedish National Board for Industrial andTechnical Development (NUTEK). We also thank our three anonymous reviewers for theextensive and unprecedented assistance in developing this manuscript.

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BensonHonig: Graduate School of Business, University of Haifa. Ph.D. (Stanford Univer-sity). Benson Honig has studied microenterprise and entrepreneurship worldwide. Currentresearch interests include business planning, nascent entrepreneurship, social capital, andentrepreneurship in environments of transition. Previous work appears primarily in leadingjournals in the entrepreneurship field.




TomasKarlsson:Ph.D. candidate, Jnkping International Business School (JIBS). TomasKarlsson finished his masters degree in business and administration 1998. During 1999 hewas involved in the Program on Entrepreneurship and Growth (PEG), mainly responsiblefor qualitative data gathering. Currently a doctoral student at JIBS, his primary interestsinclude research methodology, business planning in new organizations and opportunitydevelopment processes in high growth ventures.



Institutional forces and the written business planTesting the Impact of Institutional SourcesGovernmental AgenciesIndustrial FieldNormative

Outcomes of Institutional ConformitySurvivalProfitability

MethodsSampleVariablesDependent variablesIndependent variables

Control Variables

ResultsDiscussionAcknowledgementsReferences

Chapter 2 - 9 Honig & Karlsson

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Transcript of Chapter 2 - 9 Honig & Karlsson