how innovation and entrepreneurship can conquer uncertainty and complexity: learning about the...

Int. J. Complexity in Leadership and Management, Vol. 1, No. 1, 2010 55

Copyright © 2010 Inderscience Enterprises Ltd.

How innovation and entrepreneurship can conquer uncertainty and complexity: learning about the unexpected

Carl Henning Reschke* Institute for Management Research Cologne, Mainzer Str. 80, 50678 Cologne, Germany E-mail: [email protected] *Corresponding author

Dieter Bögenhold Free University of Bozen/Bolzana, School of Economics and Management, Via Sernesi 1, 39100 Bolzano, Italy E-mail: [email protected]

Sascha Kraus University of Liechtenstein, Fürst-Franz-Josef-Strasse, LI-9490 Vaduz, Liechtenstein E-mail: [email protected]

Abstract: In recent times, it has become obvious that linear models of the world in general and management in particular do not carry as far as we expected them to. However, the question of how we can find a clue how to deal with a world that is a complex aggregation of evolving interactions is still unanswered. Much of what was seen as real, machine-like, determined and objective seems to be unpredictable, indefinable and subjective since the middle of the last century. The knowledge required for identifying the best alternative is beyond the possibilities of actors. Thus dealing with uncertainty, complexity and the search for novelty are becoming increasingly important. Strategic management science provides a suitable tool for constructing aisles of knowledge into the forest of uncertainty: strategic planning. We argue that one possible key to make the future manageable despite its overwhelming complexity might be to typify future developments based on experiences form past and present. In this way, economic actors may drive corridors of future development into the unknown dark of the future.

Keywords: learning; complexity; uncertainty; strategic entrepreneurship; strategic planning; small business; SME; new ventures.

Reference to this paper should be made as follows: Henning Reschke, C., Bögenhold, D. and Kraus, S. (2010) ‘How innovation and entrepreneurship can conquer uncertainty and complexity: learning about the unexpected’, Int. J. Complexity in Leadership and Management, Vol. 1, No. 1, pp.55–71.

56 C. Henning Reschke et al.

Biographical notes: Carl Henning Reschke is a Co-Founder of the Institute for Management Research Cologne. He holds a Doctorate in Economics and Business Administration from the University of Witten/Herdecke, Germany. His dissertation analyses evolutionary processes in the biopharmaceutical industry. He was a Researcher at MERIT, Maastricht, participated in two startup projects. He has studied business and international economics at the Universities of Passau, Maastricht, Strasbourg and Santa Cruz, and took courses in sociology at the University of Cologne. His research interests focus on strategy, innovation and entrepreneurship as evolutionary learning processes.

Dieter Bögenhold is a Contract Professor at the Free University of Bozen/Bolzano, Italy. Besides, he is a Visiting Professor at the Department of Sociology of the University of Vienna and at the Department of Entrepreneurship of the Vienna University of Economics & Business Administration, both in Austria, as well as External Examiner for Business Entrepreneurship at the National University of Ireland. He holds almost 300 academic publications, amongst others in journals such as Small Business Economics, The International Journal of Entrepreneurship and Innovation or The American Journal of Economics and Sociology.

Sascha Kraus is an Asst. Professor (Research) for Entrepreneurship at the University of Liechtenstein. He is also an Extraordinary Professor for Entrepreneurship at Utrecht University, The Netherlands, and Asc. Senior Researcher at the Vienna University of Economics and Business Administration, Austria and Asc. He is a member at the Newcastle University’s Centre for Knowledge, Innovation, Technology and Enterprise, UK. Before his current positions, he was an Evald and Hilda Nissi Foundation International Fellow at the University of Vaasa, Finland and Substitute Professor at the Salzburg University of Applied Sciences, Austria.

1 Introduction

During the last decades, it has become obvious that linear models of the world in general and management in particular do not carry as far as we expected them to. What was seen as real, machine-like, determined and objective in science seems to be unpredictable, indefinable and subjective since the middle of the last century (Arthur, 1999). In business practice we observe an increase in variance of products, processes, organisational structures, technical systems and locations, which all lead to increasing ‘complexification’ caused by an increasing number of interactions, differing boundary conditions and options (Mariotti, 2008). There have been many attempts at dealing with the nature and implications of complexity - often based on approaches from the natural sciences (see e.g., Auyang, 1998; Bar-Yam, 1997; Garud et al., 2003; Gharajedaghi, 1999; Reschke and Kraus, 2009; Stacey, 2007). Nevertheless, the question how to deal with a world that is an accelerating, complex aggregation of evolving interactions is still difficult to answer. Even if we believe that ‘plus ça change, plus c’est la même chose’ there are still changes that need to be placed in the proper context of current dynamic developments. And if history tends to repeat itself – first as tragedy, then as farce, as Marx (1852) stated – we can learn from the past, but we need to be aware of the changes from our models of the past at the same time.

How innovation and entrepreneurship can conquer uncertainty and complexity 57

Change opens opportunities for exploitation through entrepreneurship and innovation. It also correlates with a decrease in certainty about the direction of change and the right choices to make, which is usually reduced through negation of uncertainty and counter-arguments by specific schools of thought or practices (Lefebvre and Letiche, 1999), thus leading to a proliferation of ‘competing’ alternative options and perspectives. This is usually perceived as uncertainty and risk from the outside – particularly so for young and not-yet-established players. The entrepreneurial ‘change agents’ in the process of ‘creative destruction’ (Schumpeter, 1934) contribute themselves to increasing change and complexity: ‘(t)he entrepreneur always searches for change, responds to it and exploits it as an opportunity’ (Drucker, 1986). However, these insiders are pursuing specific beliefs – hypotheses – about markets and products in their entrepreneurial ventures, which may be proven right or wrong by directed action and chance. How to deal with this paradoxical situation? Drucker (1986) argues that entrepreneurship and innovation should not be based in intuition (as is often assumed) but in the organised and systematic search for opportunities. ‘Entrepreneurship is ‘risky’ mainly because so few of the so-called entrepreneurs know what they are doing. They lack the methodology’ (Drucker, 1986). However, as entrepreneurs shift resources from areas of low productivity and yield to areas of higher productivity and yield it should actually be less risky than optimising existing products, services and processes. To be less risky in practice, entrepreneurship needs to be ‘systematic,… managed (and) above all it needs to be based on purposeful innovation’ (Drucker, 1986). Drucker (1986) further argues that innovation stems from the unexpected, where assumptions about developments and their causes deviate from reality – which entails the major risk for management of established and entrepreneurial ventures.

In order to be able to recognise the unexpected and its significance one needs to know what to expect. In the face of uncertainty, change and complexity, systematising innovation and strategic entrepreneurship, i.e., entrepreneurship with a clear focus on strategy and strategic planning (Kraus, 2009), could be one of the factors contributing to survival, growth, learning, and success of entrepreneurial young ventures as much as of established companies. Strategic entrepreneurship provides a tool for constructing aisles of knowledge into the forest of uncertainty: strategic planning. Strategic planning might help enterprises to consider the contingencies of alternative future developments, thereby reducing uncertainty (Honig and Karlsson, 2001). However, since planning is only one of various managerial tasks, it is sometimes difficult to measure or quantify. Nevertheless, it can be considered as one of the key issue for small (Rue and Ibrahim, 1998) as well as large enterprise success (Ansoff et al., 1970; Miller and Cardinal, 1994) – although it is likely to be impacted by external developments, giving rise to emergent strategies (Mintzberg, 1994), which reflect the impact of unexpected developments.

Hayek (1945) argued against the perils of centralised planning: The knowledge required for identifying the best alternative is beyond the possibilities of actors, particularly in large institutions. Thus (smaller, less central) actors nearer to developments may be better at identifying and pursuing opportunities (Langlois and Everett, 1992). However, seen on an aggregate level these pursuits may be instances of economic experiments based on entrepreneurs’ beliefs involving a large amount of chance, where those are successful that happen to be ex post ‘on the right path’ (Alchian, 1950). The more beliefs matter, the more entrepreneurial efforts should be based upon sound foundations of systematic action. Thus dealing explicitly with uncertainty, complexity and the search for novelty are becoming increasingly important in order to


recognise when developments diverge from expectations. The question is how well this tool performs for small entrepreneurial ventures in the face of complexity.

How we proceed: At first we discuss certainty and uncertainty based on Knight and Blau followed by complexity and creative destruction based on Schumpeter, then research into strategic planning in entrepreneurial ventures, followed by implications to be drawn.

2 Certainty and uncertainty

2.1 Risk and uncertainty

In order to be able to deal with strategic planning in young entrepreneurial ventures, we discuss historical perspectives on dealing with risk and uncertainty as well as the emergence planning in large companies. Much of what we observe as new firm strategies to increase flexibility is nothing else than an attempt to minimise uncertainties. Thompson (1967) regards uncertainty appears as the fundamental problem for complex organisations, and coping with uncertainty as the essence of the administrative process.

A study which addressed the phenomenon systematically and early was the book by Knight (1921). Knight discussed strategies of business organisations in relation to issues of planning certainties. While competition between enterprises is modulated under the premise of perfect competition where all participants share all the same relevant information, Knight (1921) argues that modern dynamic economic societies do not meet this premise: ‘With uncertainty absent, man's energies are devoted altogether to doing things; it is doubtful whether intelligence itself would exist in such a situation; in a world so built that perfect knowledge was theoretically possible, it seems likely that all organic readjustments would become mechanical, all organisms automata. With uncertainty present, doing things, the actual execution of activity, becomes in a real sense a secondary part of life; the primary problem or function is deciding what to do and how to do it’ (p.268). Knight’s (1921) premise is that we are in a world of dynamics and related uncertainties. If we want to understand the economic system adequately, we have to arrive at a better understanding of uncertainties and corresponding zones of complexities. Expectations and certainties are separated by the issue of uncertainty. In economic life nearly all future prospects and activities are based upon specific assumptions. These assumptions are concerning data of competitors, the business cycle, labour markets, innovation and technology standards and institutional settings.

Langlois and Everett (1992) are convinced: ‘by contrast, genuine uncertainty may be best dealt with by a large number of small organisations who can try out different paths. This genuine uncertainty calls for system-wide trial-and-error learning. To put it another way, genuine uncertainty is best dealt with by entrepreneurs capable of imaginative leaps when the structure of the problem is unknown. Variation among entrepreneurs will be greatest in an environment in which many courses are explored and alternatives tried. The larger the number of potential entrepreneurs, the greater the likelihood of creating niches’ [Langlois and Everett, (1992), p.71].

The problem for corporations is how to act despite uncertainties. ‘The significance of change is that it gives rise to the problem of the control of action, and in this respect the difference between predictable and unpredictable change is conspicuous’ (Knight 1921, p.315). Risks are distinguished as static or dynamic risks. Static risks are managed by


routines while dynamic risks are related to challenges provoking new types of answers: ‘Problems of action arise out of departures from routine in changes of all sorts’ [Knight, (1921), p.315].

The corporation does not only deal with uncertainties, which are located outside of the corporation but also within the own organisation. Organisational theory had started to discuss ‘human factors’ inside of the organisational boarders which were treated in different ways through theorems of ‘bounded rationality’ (Simon, 1955) or as ‘moral hazards’ (Alchian and Demsetz, 1972). Although literature discussed the issues not always systematically one crucial point was often the question how a corporation is changing over time. Does the administration change if companies are successfully growing, what’s about the emergence of organisational buffers and lacks of control?

Blau (1974, p.302, 314) saw contradictory developments of ‘diseconomies of scale’:

1 ‘increasing size generates structural differentiation in organisations along various dimensions at decelerating rates’

2 ‘structural differentiation in organisations enlarges the administrative component’.

According to Blau (1974, p.320), two contradictory tendencies are coming up:

“The large homogeneous personnel components in large organisations simplify supervision and administration, which is reflected in a wider span of control of supervisors … and a lower administrative ratio … in large than in small organisations. Consequently, organisations exhibit an economy of scale in administrative manpower … .At the same time, however, the heterogeneity among organisational components produced by differentiation creates problems of coordination and pressures to expand the administrative personal to meet these problems ….”

What Blau explained principally differs very much in relation to different economic sectors and to different organisational environments. Different transaction costs are responsible that companies come up with organisational answers this or that way but transaction costs are very difficult to get estimated practically. Specific organisational structures are often the result of search strategies to minimise transaction costs. In wide parts, these search routines reflect trial-and-error-strategies1, which gives an idea of what Chandler (1962) meant by his famous credo of ‘structure follows strategy’.

Business historian Chandler (1962, 1977) argued in his first two books ‘Strategy and Structure’ and ‘the visible hand’ that

1 strategies are the result of routines of repetition

2 uncertain situations can sometimes imply contradictory strategies

3 new moments of crisis are potentially new starting points of changing organisational conceptions and interpretations.

In the latter book, Chandler (1977, 1962) made clear that for reasons to reduce transaction costs strategies of vertical integration are favoured. And in ‘Strategy and Structure’, he demonstrated just the opposite explanation, e.g., how the emergence of organisational buffers may initiate company processes of reorganisation. Here, advantages of a multidivisional structure are related to a reduction of transaction costs. Chandler states:


“The basic reason for its success was simply that it clearly removed the executives responsible for the destiny of the entire enterprise from the more routine operational activities, and so gave them the time, information, and even psychological commitment for long-term planning and appraisal …. . (The) new structure left the broad strategic decisions as to the allocation of existing resources and the acquisition of new ones in the hands of a top team of generalists. Relieved of operating duties and tactical decisions, a general executive was less likely to reflect the position of just one part of the whole” (Chandler, 1962).

2.2 Creative destruction and complexities

Empirically, company strategies dealing with the issue of uncertainties are different. In some way strategic planning is the mirror side of industrial dynamics. In case of certainty no scenario of planning is needed since all parameters are known2. An economy, which is in a permanent storm of ‘creative destruction’ (Schumpeter, 1947) is always in a flux of making new things. Creative destruction is a contradictory expression, which seeks to highlight the fact that competition and inherent processes towards monopolistic and oligopolistic competition are only one part of the overall economic game. Too often neglected are simultaneous processes of the creation of new firms, new ideas and even new business leaders elsewhere in an economy. Deaths and births – both of business enterprises and individual – are two sides of the same coin, and Schumpeter dubbed creative destruction as an essential fact about capitalism. Innovation is the steady new ‘fresh blood’ through new ideas and people who keep the ‘capitalist machine’ going. However, creativity is always combined with destruction elsewhere. When new products appear, consumer demands change, and existing production and related markets are rendered obsolete.3

Innovation is the steady new ‘fresh blood’ through new ideas and people who keep the ‘capitalist machine’ going. Innovation and technical progress are due to the Schumpeterian framework of thought not external factors but they belong to the economic system as internal factors. The crucial question is not what capitalism does with economic structures but how capitalism creates and destroys the own structures. Basic assumption of its dynamics is the existence of competition for innovation: Companies compete always for new ways of innovation. Innovation is regarded as introducing a new combination of things which did not exist before or which were not done in that way before. Implementation of a new combination is the successful test on the market (Schumpeter, 1963).

Entrepreneurs are treated as agents to introduce new inputs into the economy. Schumpeter defined an entrepreneur as a person who comes up with ‘new combinations’ (new goods, new methods of production, new markets, new sources of supply, new organisations of any industry or combinations between these items), which are commonly called innovation. The activity of entrepreneurs is fundamental for economic development.

Entrepreneurship is regarded as an institution, which has to carry out the function to provide innovations. According to Schumpeter, the economic function of entrepreneurship is to initiate and to continue the process of creative destruction as the ‘permanent storm of capitalist development’. In this view, entrepreneurs act as personifications of economically necessary functions of economic change. Schumpeter’s definition is remarkable since he considers only those economic actors as entrepreneurs


who create ‘new combinations’ and this almost risk taking with credited capital. In this sense, entrepreneurial being is ‘not a profession and as a rule not a lasting condition’ (Schumpeter, 1963).

Here, Schumpeter introduces entrepreneurial activities linked to sources of uncertainties. Only those people who deal with uncertainties are regarded as – innovative – entrepreneurs. The link between Knight (1921), Schumpeter, Hayek and further ideas of evolutionary economics (Nelson and Winter, 1982) or evolutionary entrepreneurship (Kirzner, 1973, 1985) is the management of uncertainties under conditions of asymmetric information and perception at the level of companies and their effects at the macroeconomic level. Management processes are always practiced in and against dynamic environments under uncertainties, they are realised under generalised hypotheses and normative assumptions in order to reduce complexities. The recognition of reality starting to deviate from beliefs about reality opens opportunities for innovation – and entails risk:

“If forms of practice are only possible by ignoring other forms of practice (…) then alternative forms of action can be revealed and developed by making the hidden manifest. (…) .Certainty is achieved by repressing uncertainty, knowledge by ignoring counter-argumentation, and skills by refusing to question aspect(s) of practice.” (Lefebvre and Letiche, 1999)

2.3 The complexity of the future as a managerial challenge

Change opens opportunities for exploitation through entrepreneurship and innovation4. It also correlates with a decrease in certainty about the direction of change and the right choices to make, which is usually reduced through negation of uncertainty and counter-arguments by specific schools of thought or practice (Lefebvre and Letiche, 1999), thus leading to a proliferation of ‘competing’ alternative options and perspectives. This is usually perceived as uncertainty and risk from the outside – particularly so for young and not-yet-established players. The entrepreneurial ‘change agents’ in the process of ‘creative destruction’ (Schumpeter, 1934) contribute themselves to increasing change and complexity: “(t)he entrepreneur always searches for change, responds to it and exploits it as an opportunity” (Drucker, 1986). However, these insiders are pursuing specific beliefs – hypotheses – about markets and products in their entrepreneurial ventures, which may be proven right or wrong by directed action and chance.

When decisions with long lasting consequences have to be taken, both entrepreneurs and politicians find themselves overwhelmed by uncertainty. This often leads to a focus on idealised versions of past situations, configurations, optima and attractors that seem to have worked in the past. This historic approach will necessarily fail in those cases where the future configuration does not really resemble the past configuration. In the process of social evolution and historic development, new configurations of economic interactions emerge. These may or may not conform to some degree to old ones. However, specific configurations of forces may favour visionary, entrepreneurially minded actors who use feeble developments to establish new businesses, as cases like FedEx using unemployed resources and organisational innovations for offering speedy overnight logistics, South-West Airlines offering low cost air travel based on public transport-like schedules, or Dell offering cheaper built-to order computers suggest. The point of switching to a new paths of adaptation, depends on actors’ ability to change, given the political and economic situation in and outside of an organisation, the forces that are favoured and the


perception of a situation by actors’ and particularly of the ‘resources’ that are available at both alternatives over time. In order be able to spot and capitalise such opportunities by taking the right action/decision, we need to have at least a vague idea about the future – functioning like a map (Weick, 1987). In the context of organisations, these maps are business plans.

Since ‘the future is open’ (Kreuzer, 1985, quoting Popper), this map should not be used as a definitive guide to seeing the future through the past but as a tool to prepare for the future, particularly when developments do not match the map anymore, as – in the words of the famous French scientist Louis Pasteur (1854) – ‘in the fields of observation luck favours the prepared mind’. The identification of potential corridors of development reduces complexity. It increases the manageability of the uncertainty about future developments and supports the entrepreneur in the planning process. In the following we argue that the creation of a business plan is a learning process that requires a planner/strategist to systematically think through the elements of his business concept and alternative developments. In the process he becomes aware of the assumptions on which scenarios rest. However, the actual record of planning seems mixed at best as argued by Mintzberg (1994) for large organisations. The record for more agile and flexible organisations might be better, but a deeper analysis reveals that it is not.

3 A possible key: strategic planning as learning device

Strategic planning can be used as a systematic approach to conquer uncertainty and complexity. Large parts of the academic literature understand planning as a key to business success (Crawford-Lucas, 1992). However, several scientific studies stress the fact that planning is rarely prevalent in SMEs. Smaller businesses often prepare formal plans only on an irregular basis, and behaviour and decisions often are based rather on intuition than thorough planning. Even though the relationship between planning and performance has been in the centre of interest of numerous scientific studies, it has been widely dealt with in a black-box way and no consistent results have been presented up to now: Researching the relationship between planning and business success, some studies present a positive relation [e.g., Schwenk and Shrader (1993), and others find mixed results Shrader et al. (1989)] or even fail to identify any relationship (e.g., Robinson and Pearce, 1983). Thus, the planning-performance relationship in small businesses has stayed inconclusive.

Within the last two decades a large number of empirical studies focused on the relationship between planning and survival (Sexton and Van Auken, 1985; Capon and Farley, 1994; Birley and Niktari, 1995; Perry, 2001; Delmar and Shane, 2003). This would apply to technical ventures in particular. Particularly for small businesses, even a bigger number of empirical studies support the relationship between planning and performance (e.g., Gelderen and Frese, 1998; Smith, 1998; Masurel and Smit, 2000; Sarason and Tegarden, 2003).

Even tough the positive influence of planning on various dimensions of business success seems obvious in the light of these empirical results, it is not as widely accepted as researchers and practitioners expect. Even after decades of research, still no univocal results can be identified. Thus, a more holistic approach that takes the whole configuration, its dimensions and the interdependencies between them into account has to


be used in empirical research (Kraus et al., 2011). This calls also for a deeper analysis of business planning as a systematic tool for management.

In small firms, the existence of a business plan is commonly used as an evaluative factor for the relationship between strategic planning and success. It is assumed that it is possible to draw inferences from a written business plan to good planning (Heriot and Campbell, 2004). Overall, a business plan is the document making the firm’s overall strategic plan explicit. A business plan serves to legitimate of the new venture proposal and helps to communicate the vision to external stakeholders, especially potential investors (Castrogiovanni, 1996). It puts in place tools, methods and processes that identify and achieve the long-term goals of the business. Surprisingly strong efforts have been made by governmental, non-governmental and educational institutions to promote and train (potential) entrepreneurs in strategic planning (Honig and Karlsson, 2001). Whereas considerable research has been devoted to planning in small-and-medium-sized enterprises (SMEs), rather less attention has been paid to the group of small and young businesses, in particular to the business plan (Kraus and Schwarz, 2007). The entrepreneurship literature still leaves a serious research gap as to the reasons and consequences of written business plans in young businesses (Castrogiovanni, 1996).

In view of its important role, it is astonishing how few academic studies have explicitly dealt with the phenomenon ‘business plan’ so far. Most studies have only dealt with it as a small component within the larger focus of planning. Usually, the business plan is interpreted as a rational activity that assists the entrepreneur in maximising larger profit. Delmar and Shane (2003) stress the important role the business plan plays for effective planning. However, Shuman et al. (1985) reported that less than half of all high growth businesses completed business plans. The majority of firms, which drew up business plans, only did for to access external funding. Despite the wide-spread assumption e.g. from banks, business angels or venture capital organisations that business plans would be necessary for success, Unni (1984) discovered that the majority of small businesses do not even possess a business plan at all. Risseeuw and Masurel (1994) identified a decreasing planning intensity over the firs years of young ventures. Orser et al. (2000) found that the existence of a business plan is highly correlated with corporate success and growth of an enterprise. Bhidé (2000) on the other hand could not find any correlation between extensive planning and start-up success. Delmar and Shane (2004) as well as Shane and Delmar (2004) showed that the likelihood to terminate is lower when having prepared a business plan before commencing business. Just as Bhidé (2000), Honig and Karlsson (2004) failed to find any relationship between formal business plans on survival and profitability.

After all, little is known about the importance of business plans for early ventures. Within this field, the pre-start-up planning endeavours of small and young business are particularly interesting but also particularly complex involving the frequent re-adaptation of external and internal factors, elements of the business concept and stakeholders. This issue derives its high relevance from both, the increasing number of business plan competitions and founding promotion initiatives from federal and private sources. Although the results appear to be contradictory in parts, especially concerning the reasons for the development and the users of business plans, there nevertheless seems to exist a positive basic attitude towards the instrument ‘business plan’. Particularly with respect to young businesses, the development of a business plan is widely recommended, for financing purposes, for reasons of internal and external communication, and as a control mechanism for possible course corrections.


Even though a number of studies failed to identify a positive effect of planning for small and young ventures, we highlight the indirect contribution to management, as formal strategic planning enhances management skills through the process of business planning. With an increase in size, strategic planning gets more formal and elaborate in keeping with Blau’s (1974) arguments and Chandler’s observations. A business plan provides information on key questions about the vision a young enterprise strives to realise, and the operational details about how it plans to get there (Honig and Karlsson, 2004). We understand written business plans as a systematic ‘summary’ of all strategic activities and assumption-based plans in a company. In that respect they follow Drucker’s (1986) call for a systematic approach to innovative, entrepreneurial activities. In this vein, we assess business plans as a systematic learning device for dealing with uncertainty and complexity and their catalytic effect on success. Drawing up a business plan promotes critical thinking, group decisions (Baker et al., 1993) and forces the management to actively deal with and explicitly formulate goals, strategies and plans of the enterprise. Thus, the management learns more about possible alternatives, its environment and discovers logic flaws in planning based solely on thinking from step to step. For instance, patterns can be identified in transaction partners’ behaviour, which limits the potential behavioural portfolio, thus reducing behavioural uncertainty. With Herter (1995), we argue that every enterprise, regardless of size, needs an effective, comprehensive business plan, since drawing up a business plan tears the entrepreneurs out of their illusions and makes the decision-makers engage with the reality of business world. In our understanding, the he business plan as a learning device represents the first step toward success. The business plan simultaneously confronts the entrepreneur with the complexity of his venture and makes this complexity workable.

4 Discussion and conclusions

4.1 Discussion

It is possible that the mixed results of research on the impact of business planning, result from a neglect of the match between internal management processes and the complexity and dynamics of the environment, which mitigates the success of planning. If complexity and speed of planning do not match the dynamics and the complexity of the environment, then planning might not have the desired results or even do harm – transferring the requisite variety lesson from systems science (Ashby, 1956). While business plans cannot completely model reality, they certainly need a minimum amount of complexity that reflects the complexity of the environment. Updates of the plan should follow the speed of changes in the environment. On the other hand too much and too fast interventions will lead to a too large focus on action, but not necessarily to positive results – just as too detailed plans will hamper the ability to act and adapt. Therefore the question arises what degree of planning is useful relative to environmental conditions.

Planning marks successful companies as it aids the enterprise to better understand the circumstances of its business and prepare for the future. Accordingly, planning can be helpful for coping with the insecurities of business, and thus brings a beneficial value for the future for young companies above pure capital acquisition. Strategic planning especially helps saving time and enhances management professionalism after a


company’s start-up. Producing a business plan may facilitate entrepreneurs’ recognition of the breadth and complexity of their business.

Perry (2001) concludes from his research that real planning is rarely undertaken in firms with fewer than five employees, and suggests that it could indeed have limited value and utility for micro-enterprises. For the latter, simple and intuitive planning approaches could be more fruitful, especially when the communication of plans does not require written documents as only few people are involved. Therefore the question is whether planning is a success factor per se, or is it only the right kind of planning that benefits financial success.

We take the position that planning can be a substantial factor for small business success. Even so, the best business plan is only of limited use if it is not implemented afterwards. We therefore want to emphasise the importance of the business plan as a facilitating tool for future entrepreneurs. Additionally, the process of ‘strategic planning’ should not be a one-off activity, but moreover a continuous process including the adaptation of former goals and strategies within a changing environment, which is valid especially for young and small businesses. Therefore, a business plan should not be limited to the start-up of an enterprise, but instead also used as a continuous working document for planning (Hormozi et al., 2002).

4.2 Implications

Accordingly, implications for scientists, educators and consultants include increasing the awareness and sensitivity for engaging in systematically developing the business concept through business plans in young entrepreneurial ventures and SMEs. The staff of governmental, non-governmental and academic institutions should be further encouraged to train entrepreneurs in preparing business plans, e.g., through workshops or business plan competitions. However, the weight of teaching and writing a business plan should be less on the ‘mechanic’ side of business economics concepts, but more on the systematic identification of the rationale, elements and conditions of success of a particular business idea. Experts for business services such as accounting, logistics, production, legal advice, marketing, public relations can often be bought or hired. The innovative combination that captures the needs driving an opportunity is what makes or break the business. The creative, innovative logic of the concept and the systematic development of the dynamics of its elements are what distinguish successful from unsuccessful ventures (Drucker, 1986). The awareness of young entrepreneurs of the value of business planning in order to understand the dynamics and sensitivity of their business concept needs to be increased, even if the process entails writing several versions of the plan. Although a business plan can never guarantee success (Crawford-Lucas, 1992), its preparation, existence and application is an important help in avoiding failure of small businesses, which can in turn be fruitful for the respective economy. The literature reviewed above shows that entrepreneurs should thoroughly write business plans before starting their business, even if they are keen to start as soon as possible. By developing a business plan in advance, the entrepreneur can discover possible risks or deficits of his business and thus reduce the likelihood of failure and increase the likelihood for financial success.

It can be inferred from the above discussion of the literature that planning exercises are positive and lead to success, if and when their implied complexity and dynamics of change match the complexity and dynamics of the environment. There seems to be a gap in the research on this point of a ‘requisite variety between planning and environmental


conditions’. This requires adapting business plans not only to changing conditions but also to conditions of change. How managers decide to interpret signals for and deal with these conditions of change depends on their interpretation of the world – which underlies their planning as well as scientists’ recommendations for how to do that. We will come back to that point at the end of the section, but first let us explore the practical issues in changing plans.

Getting to grips with the dynamics of a business concept in writing and rewriting business plans entails switching paths of thinking and future action. This process is a mentally costly and time-consuming exercise. The literature on successful entrepreneurs often praises their steadfast adherence to a vision or goal (Collins and Porras, 2005) – while at the same time, flexibility in achieving these goals and in realising and grasping opportunities is applauded (Lumpkin and Lichtenstein, 2005). In sum, these requirements are seemingly calling for a schizophrenic personality in entrepreneurs. On a more practical level of organisation and strategy, the issue behind switching plans is switching paths of action, which entails answering the question how to jump from one good, established technology, strategy or organisational form to one that is still inferior, but that promises to be superior in the future, i.e., ambidextrous management (Smith and Tushman, 2005). Systematic investigation and research based planning is the tool to achieve this by learning about the environment and making plans on how the environment and the companies’ (re-)actions in this environment should be aligned. In that respect, the question arises how to manage the transition between two differing paths of adaptation, particularly when there are diverging interests and opinions on the viability of new versus old fields of business. Thus, strategic management requires answers to whether – and if so when and how – to switch strategic paths. It can be assumed that switching – as all change efforts – needs additional resources to bridge the path from one trajectory to another one (which is often enough neglected to make the case for change efforts more easily). Economics would prescribe to estimate cost and gains of switching, relative to the cost and gains of staying on a path. Strategists would implement that analysis possibly under differing scenarios to derive alternative options for alternative futures.

Planning tools should therefore be used to get a grip on future developments. Analysis and planning for future paths should be seen as a sounding and test effort (Hamel and Prahalad, 1994) to investigate which options to take under different scenarios. Long-term planning needs to be differentiated from short-term planning focussed on implementing a path towards a specific future. However, implementing this kind of planning and differentiating between long-term and implementation-oriented planning, requires the dynamic capabilities of an adaptable, flexible organisation that can withstand the threats of traditionalising forces ingrained into routines (Teece, 2007; Nelson and Winter, 1982).

It is important to connect the vision about future developments back to the history of an organisation, as organisations will not sustain large changes from the past without a means to cross the chasms between new and old structures, visions and goals. The knowledge and means required to do so can be supplied by an evolutionary view of organisational development. Historic paths of organisational development, experiences of constraints and possibilities of adaptation will also constrain or enable organisational systems in their future options and development paths. It may provide meta-rules for when to start to change and adapt again.


How to do so? Match complexity and required planning, considering the nature and history of the organisation. Recognise when plans/model of economic realities do not match anymore. Consider limitations of past in changing and adapting.

4.3 Conclusions

Since the situation of SMEs, and here particularly young enterprises, is often less ‘proven’ and their ‘strategies’ are less explored over time, tools useful to them will have to enable young and small organisations to deal with external uncertainty and complexity. Such tools need to enable them to build their vision, find and expand their niche (while larger organisations need strategic tools often to deal with their internal complexity). Therefore, one could argue that there are several counteracting forces at work with respect to the need for strategic (‘vision’) management and (‘bureaucratic’) planning tools in the development from a small to a large enterprise across the relevant configurations: external uncertainty and complexity (usually) decreases, which requires less exploration and planning for alternative courses of action. Internal complexity increases and adaptability decreases, which requires more detailed planning of how to implement strategic actions. At the same time uncertainty about the vision of an enterprise decreases. One could go even one step further in arguing that young enterprises and SMEs practically engage in strategic management, while they lack bureaucratic implementation and control of the required measures, whereas larger, established organisations routinely implement planning and control but lack agility, visionary impetus and flexibility (cp., Drucker, 1986). This is why they need explicit strategic management tools. The differentiated consideration of these factors is even more important, as SMEs, in comparison to big companies, commonly boast a higher level of heterogeneity regarding size and development stage. Furthermore, the role of the entrepreneur and his attitude towards concepts of strategic planning are often critical in SMEs for their implementation. Planning is an activity without direct returns, which is hard to ‘justify’ (psychologically), if either customers are coming in scores or if they are hard to come by and marketing and sales activities seem more important. A possible avenue for future research could thus focus on identifying different configurations of comparable clusters of enterprises with particular strategic needs over the lifetime of industrial and organisational development.

This situation requires tools that focus much more on learning and sense-making (Weick, 1987) for small enterprises than they do for large ones. Particularly, young enterprises need to prove their vision correct or adapt it to changing conditions. It would be desirable, if these tools allowed at the same time easy implementation of the necessary planning activities integrated with ‘vision development and testing’ – which might be alleviated by a computerised tool for analysis.

To conclude: SMEs are challenged particularly by the uncertainty of future developments. Planning can help to make uncertain developments more ‘controllable’. The tool to do so is a business plan, as it requires entrepreneurs/managers to start thinking and learning about potential future conditions and developments. Despite practical shortcomings of this tool, and some gaps in the literature, business plans can serve as a particularly relevant element in entrepreneurial success.


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Notes 1 Starbuck and Hedberg (1977) portrayed the non-scientific background of many company

philosophies as following “An organisation’s top management develops a characteristic world view that is shared by many lower-level personnel: this world view dictates what phenomena the organisation will try to perceive and what phenomena it will ignore; then, when happenings are perceived, the world view determines how they are interpreted”. Nohria and Eccles (1992) argued that management is running own ways of logic which often do not match with conventional management theories: “What we do advocate is that you take an action perspective which recognises that the purpose of management is fostering action and then making that meaningful to people both collectively and individually. As we have argued, this requires not only the skillful use of rhetoric, but, more generally, taking a rhetorical stance vis-à-vis the practise of management. Part of this healthy dose of skepticism about the quick-fix solutions flooding today’s managerial literature” [Nohria and Eccles, (1992), p.211].

2 Strategic planning is not only inherent to capitalist dynamics, but must also be regarded as the strength of capitalism because planning under uncertainties is more efficient than planning in socialist planed economies (Hayek, 2001).

3 As well as Marx, Joseph A. Schumpeter acknowledged the double-face of capitalism with its interplay of destruction and creativity, but Schumpeter stressed the dynamic process of industrial change much more than Marx ever did, and Schumpeter highlighted the principal open nature of the process: “The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process. It may seem strange that anyone can fail so see so obvious a fact which moreover was long ago emphasized by Karl Marx. Yet that fragmentary analysis which yields the bulk of our propositions about the functioning of modern capitalism persistently neglects it. … Capitalism … is by nature a form or method of economic change and not only never is but never can be stationary. And this evolutionary character of the capitalist process is not merely due to the fact that economic life goes on in a social and natural environment which changes and by its change alters the data of economic action. ... This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in” (Schumpeter, 1947).

4 According to Shane (2003), three major sources of opportunities exist which are provided through technological changes, political and regulatory changes and social and demographic changes.

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