Uncertainty and Planning in Small and Entrepreneurial Firms: An Empirical Assessment

Abstract

Numerous organizational researchers have recognized environmental scanning and management's perception of the environment as central to the strategy-making process (for example, Aguilar 1967; Andrews 1971; Bourgeois 1980, 1985; Hambrick 1982; Miles, Snow, and Pfeffer 1974; Sormunen, Daft, and Parks 1985). While the relative importance of the objective versus the subjective environment to firm performance remains in dispute, it is well accepted that perceived environmental uncertainty mediates between the objective environment and a firm's strategic response (Jauch and Kraft 1986). Research on how perceived environmental uncertainty impacts decision making and planning has been developed extensively in large firms (Aldrich 1979; Boulton et al. 1982; Duncan 1972; Hambrick 1983; Jauch and Kraft 1986; Pfeffer and Salancik 1978) while this phenomenon has been largely ignored in small and entrepreneurial firms (Bruno and Tyebjee 1982; Cooper 1979). While large firms have been reported to increase planning in the face of turbulent environments (Lindsay and Rue 1980), small firms, constrained by their resources and their range of strategic options (Dandridge 1979; Robinson and Pearce 1984), may be less likely to do so. This study examines the relationship between perceived environmental uncertainty and strategic and operational planning in a sample of small and entrepreneurial firms. ENVIRONMENTAL UNCERTAINTY Significant theorizing and research have focused on the nature of the relationship between an organization and its environment, and the construct of environmental uncertainty has been central to most of this inquiry (Aldrich 1979; Boulton et al. 1982; Downey and Slocum 1975; Duncan, 1972, 1973; Emery and Trist 1965; Hambrick 1983; Jauch and Kraft 1986; Pfeffer and Salancik 1978; Smircich and Stubbard 1985; Thompson 1967). In a review of the environmental uncertainty literature, Jauch and Kraft (1986) suggested that approaches to the study of uncertainty have evolved through three stages: (1) the classical view (for example, Cyert and March 1963; Emery and Trist 1965; March and Simon 1958); (2) the transition view (for example, Galbraith 1973; Perrow 1970; Thompson 1967); and (3) the process view (for example, Downey, Hellriegel, and Slocum 1975; Duncan 1972, 1973; Lawrence and Lorsch 1967). However, differing perspectives on environmental uncertainty remain common in the literature today (Milliken 1987). Hence, in the following sections, we briefly review definitions of environmental uncertainty and specify the definition used in this study. Definitions of Environmental Uncertainty Multiple definitions of uncertainty have been offered in the literature, including lack of knowledge for decision-making (Duncan 1972; Lawrence and Lorsch 1967; Thompson 1967); choice (Child 1972); complexity (Galbraith 1973); unpredictability (Cyert and March 1963); and turbulence (Emery and Trist 1965). Further, some authors conceive of uncertainty as an objective dimension of the external environment while others view uncertainty as interpretive or as the end result of the perceptual process through which decision-makers assign meaning to their situation (Milliken 1987). In this study, we decided to investigate the consequences of perceived environmental uncertainty on small firm planning. Conditions in the objective environment undoubtedly influence the performance of the firm whether they are perceived by managers or not (Osborn, Hunt, and Jauch 1980). However, it is generally accepted that perception mediates between objective situations and behavioral responses (for a fuller discussion see Terborg 1981). Similarly, we would expect perception to mediate between the objective environment and managerial response to it (Jauch and Kraft 1986). Thus, it is the perceived environment which elicits strategic action by managers. Types of Perceived Environmental Uncertainty Milliken (1987) proposed that three types of uncertainty exist -- state, effect, and response uncertainty -- and she posited that the effects of the three types on managerial response would differ. …