Effect of Business Planning and Effectuation on the Success of a Business By Levon Boghosian Rijksuniversiteit Groningen March 2013

Effect of Business Planning and Effectuation on the Success of a Business

By

Levon Boghosian Rijksuniversiteit Groningen

Chapter 1: Introduction………...………1

Chapter 2: Literature review……….………5

2.1 Business planning ……….………..……….5

2.2 Effectuation and differences with business planning ………..……..13

2.3 Definition of success………20

2.4 Effect business planning on success ……….………..22

2.5 Effect Effectuation on success ……….………23

2.6 Conceptual model ………..……….……….………. 25

Chapter 3: Methodology ……….……….……….27

Chapter 4: Results ……….……….32

Chapter 5: Conclusion and Further Research ……….………….37

References……….40

Appendix 1……….45

Appendix 2……….47

ABSTRACT

This paper attempts to discover the effects of business planning and effectuation on business success. Through literature research, the following variables are described narrowly: business planning, effectuation and success. The variables are analyzed by interviewing entrepreneurs in order to discover the effect of business planning and effectuation on business success. According to this research, both of the variables have a positive influence on business success.

ACKNOWLEDGEMENTS

During the development of this paper many individuals gave their support. I would like to thank those individuals for their time and help. In addition, I would like to thank Professor Lutz, who helped me selecting my thesis subject and helped me outlining the study. Also I would like to thank Professor Zwart who was my supervisor during the development of my paper. His instructions and suggestions were very helpful during the writing of this paper and he was a good motivator. Finally I would like to thank the entrepreneurs who took part in this

CHAPTER 1: INTRODUCTION

This chapter introduces my thesis subject and provides a brief background of the study along with the significant research aims, objectives and questions. Moreover, to highlight the importance of the study the researcher has also illustrated the methodology that will be used as well as the overall structure of the thesis.

1.1. Background of the Research Study

In today’s competitive business environment, a business usually starts with promising aims, objectives and targets. At the start-up, the business lacks deep experience, ample resources, novel ideas and high credentials. The companies eventually build resources and credentials through experience and ultimately grow. New businesses depend upon the capabilities of leading entrepreneurs along with extensive prior research and planning (Davidsson, 2008). The entrepreneurial phenomena of business constitutes of diverse

classification methods e.g. family business vs. non-family business and high tech vs. low tech business. No doubt opportunities exist, but along with opportunities the framework of

of planning in the business performance is in fierce argue since 1960s. Entrepreneurship debate was principally highlighted in the last decade. The debate lies in the difference of opinion regarding entrepreneurship. Some believe that the phenomena of entrepreneurship are a planned process of opportunity exploitation and exploration (Shane & Venkataraman, 2000). While other believes that the phenomena are an emergent learning process involving effectuation (Sarasvathy, 2001) and improvisation (Kamoche, Cunha, & Cunha, 2003). In the business not everything can be anticipated or planned.

Some believe that business planning is a top-down logic, while others suggest that effectuation is a bottom-up approach and is more relevant. Wiltbank and Sarasvathy (2002) further illustrated that venture capitalists and business angels are more effectual than causal and therefore, less attention should be paid to business planning. They believe that the success factors of a business lie in the proper understanding and learning of effectuations. Planning is no doubt important in a business, but at the same time effectuation should also be employed accurately to ensure positive outcomes.

1.2. Research Questions

The research questions reflect the aims and objectives of the study and are considered as a guideline to be followed in reviewing the relevant literature from the previous studies. The study will answer the following research question:

1.2.1. Main Research Question

1.2.1.1. Sub- Questions

To enhance the understanding and justify the research, sub questions are established to acquire accurate findings of the research question. The sub-questions for this research study are as following;

 What is business planning?  What is effectuation?

 How do we define business success?

 What is the effect of business planning on success?  What is the effect of effectuation on success?

 What is more important for the success of a business: business planning or effectuation?

1.3. Methodology

1.4. Structure of the Thesis

This thesis has been developed following the standard framework. It comprises the following five chapters;

Chapter I Introduction: The introduction chapter of the dissertation provides a brief

background about the research topic in order to explain the concept behind the research study. Additionally, the aims, the objectives and the research questions will also be highlighted in this chapter.

Chapter II Literature Review: A detailed literature of the previously conducted

research will be elucidated in this chapter. The nature of the literature review may be critical, theoretical, empirical or analytic. The main purpose of a detailed literature is to describe, clarify, integrate, evaluate and summarize the content in a conceptual model.

Chapter III Methodology: This chapter will highlight the research method that will be

employed to conduct the research study. For primary data, interviews will be conducted. Interviews for this research study will be conducted with different entrepreneurs to access accurate information that helps in establishing appropriate findings and conclusion for this study.

Chapter IV Discussion and Analysis: Outcomes derived from the interpretation of

interview information will be analysed and discussed in this chapter. The conclusion of the thesis will be based on the findings acquired in this chapter.

Chapter V Conclusion: The concluding remarks will be presented in this chapter.

CHAPTER 2: LITERATURE REVIEW

The first section of the literature review, describes the planning of business through the utilization of the business model. The second section explains the effectuation approach, and describes the criteria of decisions in rational planning and effectuation. Moreover, the third section defines success, and the fourth section explains the effect of business planning on success. The fifth section of literature review, describes the effect of effectuation on success of a business. And the last section presents a conceptual model of the study

2.1.1 Strategic Planning For Business Survival and Growth

There is one common saying regarding planning: ‘failing to plan is planning to fail’. To an organization, strategic planning plays a vital role regardless of its nature: large or small, profit or non- profit. Strategic planning is an effective tool used widely across many organizations, to provide a road map that identifies and highlights business strengths and weaknesses (Gruber, 2007). For every business evolution, strategic planning plays a vital role in the overall processing. Honig and Karlsson (2004) reflected that ‘the importance of

strategic business planning is that it gives the overall strategic direction to the organization and provides a specific direction to the business’ major areas, such as: a marketing strategy, a financial strategy, a human resource strategy and an organization development strategy to acquire business aims and achieves ultimate success’. So, for a developing and growing business, planning is essential. No doubt a difference in the business success and failure is reflected in the establishment of a sound business plan. A business plan helps the

actions. Hence, a business plan is a detailed road map which is essential for the start up process and initial operational requirements.

According to Hoagland and Williamson (2000), everything is present in a business plan, from operational and resource schedules, to budget forecasting. Additionally, it is a plan to carry out certain functions of the business essentials to acquire business success and

quality performance. Often, the business plan is communicated and at times documented to evaluate whether the set goals and objectives are met. An effective business plan is one which communicates the business concept and reaches the business objectives.

2.1.2. Importance of Strategic Business Planning

At the business inception, the resources of the business are limited, and the plan of the business growth and development is quite ambiguous. At such instances, execution of a business plan guides the business entrepreneurs on the potential growth, resources and business potential. There are several advantages of planning in a business which can play a vital role in the success of a business (Hoogendam, 2011). Some of the most significant are the following: saves time and money, framework of future, a guideline for definite success, and a great communication tool.

2.1.2. 1. Saves Time and Money

Business planning can help in a better way to make a business successful, because careful planning in a business helps the organization save a lot of time and money. This is a decisive factor to acknowledge whether or not a business is successful. The accurate

Appropriate allocation and significant budget help minimize the problems, threats and obstacles and facilitate in maximizing the opportunities.

2.1.2. 2. Framework of Future

A good planning of the future can also help in making the business successful. Significant usage of effective business planning enables the organization develop the future of it wants. Business planning enables the organization understand what the future will most likely be like and identify the key areas that need to be addressed to acquire ultimate success (Haber and Reichel, 2007). No doubt the market changes are quite speedy nowadays, and it is quite impossible for businesses to predict their future perfectly. But the process model of planning at least helps in handling the unpredicted changes in an orderly manner.

2.1.2. 3. Planning - A Guideline for Definite Success

The appropriate planning of a business helps the organization with guidelines such as starting, building, expanding, managing and acquiring guidelines (Haber and Reichel, 2007). Following these guidelines step by step enables the entrepreneurs to deal with the

complexities and intricacies of a profitable business.

2.1.2. 4. Planning- a Great Communication Tool

communicate their business plan utilize the process of business planning as an effective way to establish strong communication ties with the organization variables and systems.

2.1.3 Business Planning through Business Models

Traditionally people thought that it was important to write a business plan to create a successful business. The overall operations and functions of the businesses were executed upon these plans. The process of a business in the past consists of four significant steps that the business required to execute in order to grow and develop. The four significant steps of a business success are planning, running or execution, evaluation and ultimately improvement (figure 1). Traditionally, the businesses run their operations and functions depending upon these four essential steps. No doubt in the past some of the businesses grow immensely using these models and significant steps (Kirsh, Goldfarb and Gera, 2009). However, with time many changes have occurred in the global business environment, which required the

entrepreneurs and the management of various businesses to change as well. Due to increased globalization and intense competition, organizations and various businesses are competing against each other on the global scale. This expansion has subsequently increased the chances for risks and challenges. The rapidly changing environment now demands for businesses to develop in a way that it anticipates and handles all the risks and challenges appropriately. In order to do so, the process of effectuation was introduced which indicated the use of logical thinking based on previous experience and learning, that helps the entrepreneurs and

Figure 1- Business Planning Model

2.1.4. Parts of a Business Plan

A Business Plan is a detailed summary of the main strategic direction and development of the organization, containing specific information about its business description, operation plan, marketing, competitive analysis, and aims. The business plan reflects the methods of balancing between their own interests and the interests of partners, competitors, investors and consumers (Sarasvathy, 2001a). The purpose of a business plan is the deployment strategy to action, but this requires a definition of the planned use of methods and technologies to start a new production cycle based on the parameters presented in the business plan (Kirsh, Goldfarb and Gera, 2009).

2.1.4. 1. Business description

This part of the business plan contains the nature, its history, legal structure, location, objectives, strategies and mission (Kirsh, Goldfarb and Gera, 2009). This also includes the description of the company’s products and services, their characteristics, how to use, specifications, and stage of evolution.

2.1.4. 2. Aims

This part of the business plan is quite important as this defines the aims and objectives of the business (Kirsh, Goldfarb and Gera, 2009). This helps in achieving the desired goals and objectives of the business. These could be increased returns, increased market share and productivity maximalization.

2.1.4. 3. Operation plan

The operation plan is that part of the business plan which contains the description of the operational flow, supply chain, quality control, associated services, productive capacity, logistics and management systems (Kirsh, Goldfarb and Gera, 2009).

2.1.4. 4. Financial Plan

The financial plan demonstrates how the company operates financially. This part of the business plan provides descriptions of internal and external scenarios, critical

assumptions, historical situation, cash flow, investment analysis, income statement, balance sheet projections and other indicators (Gruber, 2007).

This part of the business plan described the marketing strategy of the business. In the sector, market, trends, fashion marketing, distribution and dissemination of products, prices, competitors and competitive advantages are defined (Gruber, 2007).

2.1.4. 6. Competitive Analysis

This part of the business plan is a declaration of the business strategy and its relation to the competition. The competitive analysis is done to find out the strengths and weaknesses of the market competitors, plans that will give a distinct improvement, the barriers which can be developed to stop competition from entering the market, and a few weaknesses which can be subjugated within the cycle of product development (Gruber, 2007).

2.1.4.7 Human plan

This part of the business plan is about the human resources a business has. It’s about managing the people/employees behind the venture, the personal skills and experience that they have developed during their career. Including their personal profiles and achievements like certificates (Gruber, 2007)

2.1.5. Traditional Business Planning and Effectuation

you still need to be aware of other threats that you can’t plan like: new business

opportunities, market competition, and natural disasters etc. (Brinckmann, Dietmar and Kapsa, 2010). The increased exposure of businesses to threats and competition compel entrepreneurs to consider planning as a first step. This simply means that the traditional perception of planning is a road of the business that has been recently challenged against the unprecedented speedy changes at macro and micro industry levels. The concept of

effectuation is gaining much popularity and has narrowed the influence of planning in business success and growth (Brinckmann, Dietmar and Kapsa, 2010). The new concept compels organizations to grow and develop through constant learning and development acquired through experience and not on the planning of the business.

2.1.6 Conclusion

In conclusion, we can say that this paragraph has defined the significance of business planning and it showed that a business plan helps entrepreneurs to define and realize the business idea. The business plan also reflects both the strengths and the weaknesses of the project which can be used in a constructive way to improve the business activity in order to make businesses successful. Moreover, this section has also clarified that the absence of a business plan often becomes a cause of business failure.

2.2 Effectuation

In the past decades, entrepreneurship has been a topic of great interest for many researchers, scholars and theorist. The past studies and findings have been focused to elucidate the entrepreneurial behaviour significant for successful entrepreneurs(Sarasvathy, 2010).Studies have shown that entrepreneurs in various industries have significant

similarities in the way they handle and think in specific situations (Shane & Venkataraman, 2000). Two common approaches of thinking are widely used among various entrepreneurs such as causal reasoning and effectual reasoning. On the basis of these approaches an entrepreneur makes and takes certain decisions. However, effectual reasoning is a different way of thinking in comparison to causal reasoning.

2.2.1. Definition of Effectuation

In the mind of an individual, effectual logic establishes when non-predictive control is required to make decisions. The thinking process is represented in the effectual cycle in a form used in creating markets, ventures and products. The idea of effectuation illustrates that in a business it is quite difficult to plan everything beforehand. (Shane & Venkataraman, 2000). In order to keep surviving in this ever evolving world there are certain elements which every business should remain open. In today’s competitive global business environment if a business sets a path and sticks to this path in a changing market situation then the survival of this business becomes redundant and the businesses eventually disappears (Sarasvathy, 2001).

Effectuation can be described as: ‘an entrepreneur who behaves effectually fabricates her own environments (locally) and futures ( short term) trough self-selected stakeholder commitments that are embodied in new organizational goals and new market segments’( Dijk,2012).

2.2.2. Difference between Causal and Effectuation

Sarasvathy (2010) further illustrated that effectuation is neither a random process nor an irrational approach. The concept of effectuation is distinct from the traditional process of planning in three meaningful ways. In the traditional planning process, the goal is pre-determined while in effectuation, the entrepreneurs do not have any specific pre-pre-determined goal. The goal of effectuation is developed through entrepreneur learning and continual development. Moreover, in effectuation the business of the entrepreneurs does not start with any defined set of means and through experience possibilities are transformed into

opportunities. At last, in traditional planning process the organization is aware of its market and targets however, in effectuation the market is unknown and often at such instance the entrepreneurs need to execute in a completely new market. The figure illustrated below defines the difference of thinking and reasoning between entrepreneurial and managerial approaches. Usually, the entrepreneurs adopt the entrepreneurial thinking and reasoning approach to take their decisions required on daily basis.

Figure 2- Effectual vs. Causal reasoning Derived from Sarasvathy, 2001

2.2.2.1 Sarasvathy view

opposed to affordable loss, competitive analysis opposed to partnerships, avoiding contingencies opposed to leveraging.

Predictive Control Opposed To Non-Predictive Control

Sarasvathy and Dew (2005) illustrated that ‘the entrepreneurs of causation are focused on the future and make appropriate predictions regarding their future’. On the other hand, successful entrepreneurs are principally engaged in non-predictive control because they do not have accurate data for analysis and what they can control is just the on-going processing.

Goal Driven Actions Opposed To Means Driven Actions

According to Sarasvathy and Dew (2005),’ the approach used in causation is goal oriented’. This simply means that the actions taken in this approach are determined after identifying the goals. Upon these actions means of the organization are gathered. They further stated that ‘in an effectual approach employing the means of the organization appropriate actions are taken to achieve their goals’.

Expected Return Opposed To Affordable Loss

The entrepreneurs employing the causation approach generally employ the opportunity that renders the highest expected return. While the approach of effectuation employed by the entrepreneurs is focused on how a business can invest in a venture

Competitive Analysis Opposed To Partnerships

Sarasvathy and Dew (2005) said ‘entrepreneurs using the casual approach are always engaging in competitive analyses’. These analyses are made to identify the market where the competition is not that intense and penetration is easy. Once fair competition market is identified by the entrepreneurs using the casual approach, potential stakeholders and partners are attracted to incorporate the business. While in the effectuation approach before the identification of the potential market, the partnership and stakeholders of the business are identified and classified.

Avoiding Contingencies Opposed To Leveraging

The work done by the entrepreneurs is often focusing on one specific goal avoiding all the unexpected surprises. In a causal approach anything which is not anticipated is considered as a threat to the business (Sarasvathy and Dew, 2005). The opposite is done in the effectual approach. Anything anticipated is considered an opportunity and the best of everything is attempted to transform negative and positive contingencies into potential opportunities for the venture.

2.2.2.2 Perry, Chandler & Markova view

According To Perry, Chandler & Markova (2012), the process of rational planning and effectuation are somewhat similar. In both cases an individual makes and takes decisions and actions upon certain logical reasons. These logical reasons are mostly the past business trends, experiences and learning. The decisions made through logical reasoning are

traditionally planning processes are failing to meet changing business environment (Perry, Chandler & Markova, 2012).

Criteria of Decisions in Business Planning

The process of causal logic begins with identification, recognition, discovery of potential opportunity followed with several criteria’s (Chandler et al. 2011):

 Effect-driven decision making logic or goal driven logic  Expected return emphasizing

 Detailed competitive analysis  Existing knowledge

 Prediction of the future on logic

 Other causal driven processes such as business plan

Hence, the idea of rational planning also known as causation reflects that as the chances, of risks and uncertainty increase the emphasis on comprehensive planning also increase consequently. The early processes of rational planning are prediction, competitive analysis, forecast and analysis on the basis of which decision for growth and development is made (Brinckmann, Dietmar and Kapsa, 2010).

Criteria of Decisions in Effectuation

The criteria on which the opportunities are identified and created are as following (Chandler et al. 2011):

 Decision making logic –mean driven

 Contingency exploration

 The control based on logic if non- predictive  Opposing marketing research or distrusting  Other effectual driven processes e.g. creativity

Hence, effectuation is about the capability of creating an opportunity instead of only the identification of it. Self-creation protects the business better against risks and uncertainty. This is because a business is then well aware of his resources, capabilities and economic actors (Goel and Karri, 2006). All these aspects play a vital role in business success and growth. Thus, the decision making process is the most significant process of the business which includes the elements of human thinking. The process of human thinking is between the interaction of the problem and environment opportunities.

When we compare the criteria of Sarasvathy (2001) and Perry, Chandler& Markova (2012) we can see that there are similarities but also some differences. The similarities are as follows:

- Both articles oppose goal driven logic against mean driven logic - Both articles oppose expected returns against affordable loss - Both articles oppose competitive analysis against partnerships

- Both articles oppose predictive control (future on logic) against non-predictive control.

- Both articles oppose existing knowledge against contingencies

This research has chosen for the criteria of Sarasvathy (2001) because these criteria are also represented in the criteria of Perry, Chandler& Markova (2012) which means that these criteria are the most common to use.

2.3. How do we define success?

Business success is often defined as the achievement of the objectives. In businesses, success is achieved in terms of financial gains and rewards on goal attainment (Trkman, 2010). The financial returns that arrive from a successful business are very important to entrepreneurs, because they act as key factors in motivating them to take tremendous risks and work hard.

The realization of an aim you have set is also called success. This implies that one becomes successful every time when he/she approaches to a next level towards

accomplishing an objective, aim or target (Brouthers et al. 2009). For our

research we will use some indicators which will measure the degree of success in a business. We will use financial indicators like: increased market share, increased revenue, increased workforce and increased profit. These are called the objective criteria (Reijonen, 2008). And we will use non-financial indicators like: personal satisfaction, autonomy and balance work/family. These are called subjective criteria. (Greenbank, 2001) The subjective criteria could also be goals for entrepreneurs to accomplish. And if these goals are met then they will feel more successful. (Rijonen, 2008). Below the indicators are described:

Increased profit

Increased Return

Assuming that the earnings of a business have been tirelessly increasing, it indicates that a business is productive (Brouthers et al. 2009). A business whose volume of operations is expanding is liable to have its returns likewise expanding.

Increased market share

A business which is successful will have an increase in his market share during time. (Trkman, 2010). The increase in market share means an expansion of the business operations. To achieve an increase in market share you need to be successful in fulfilling the

requirements of the customers, this will eventually increase the production and success of the company.

Increase in workforce

A flourishing business will have an increase of his workforce significantly with the passage of time (Artz, Homburg & Rajab, 2012). The increase in the workforce means that the business operations call for extra employees to handle the expanded volume of

operations.

Personal satisfaction

Autonomy

Autonomy is the ability of an entrepreneur to make his or her own decisions. It gives the entrepreneur control over his work situation (Buttner and Moore, 1997).

Balance work/family

This is the balance between your work environment and your private environment. This could also be very important for the success feeling of an entrepreneur. (Buttner and Moore, 1997)

2.4 What is the effect of business planning on business success?

Business planning is a valuable tool in the hands of the entrepreneur. It reduces the possibilities of making mistakes which increases the chance of business success

(Brinckmann, Grichnik & Kapsa, 2010).

A plan also provides a solid foundation of business concepts. This has a positive effect on the success of a business (Burke, Fraser & Greene, 2010).

The success of your business begins with the right marketing plan, which will result in a profit. This will help business to remain stable, despite any changes, to win consumer preferences, to advance in the market and attract loyal employees.

2.4.1 Conclusion

Business planning reduces the possibility to make mistakes (Brinckmann, Grichnik & Kapsa, 2010), provides a solid foundation of your business concept(Burke, Fraser & Greene, 2010), provides a marketing plan, plans and manages your human resources, financial resources, competencies and opportunities in a business(McGrath, 2010). Al these factors of a business plan have an positive effect on business success.

2.5. What is the effect of effectuation on business success?

The theory of effectuation explains that the entrepreneurs initiate with who they are and what they have. Their personal knowledge and experiences, their connections and links actually help them in taking good decisions. Under the influence of these assets they try to achieve something and then observe the results of it (Read, 2005). This initial step leads to further opportunities.

The theory of effectuation also describes that the entrepreneurs limit their risks by thinking about what they can afford to lose at each step. According to Sarasvathy (2001), effectuated entrepreneurs never take more risks at once. This business approach towards new ventures has positive outcomes because the entrepreneurs don’t take more risks at once so the chances of business success are larger.

Moreover, the theory of effectuation explains that if there is a failure in a new venture then that failure can also increase the chances of the individual success. Therefore, an

entrepreneur that sustains a failure at any stage, the possibility of succeeding of that entrepreneur is higher in the later rounds (Sarasvathy, 2001). Failure educates the

Effectuation is derived from a model of expert entrepreneurial action. The literature suggests that experts-individuals who have acquired unique pattern matching and pattern recognition skills( Chase and Simon, 1973) trough years of deliberate practice outperform the general population. Given that effectuation has a positive influence on business success( Chase and Simon, 1973).

2.5.1 Conclusion

2.6. Conceptual model

Based on the theory a conceptual model is developed... In this study different concepts have been used to illustrate whether planning or effectuation has an influence on business success. The conceptual model for this research study is as following:

Figure 3- Conceptual Model of the Study

In order to understand the conceptual model, the variables will be explained below:

The dependant variable is business success. The indicators of business success are increased

returns, increased market share, increased workforce, increased profit, personal satisfaction, autonomy, balance work/family. With these measures we will measure the business success.

Furthermore we have independent variables. The independent variables have an influence on the dependant variable business success. These are business planning and effectuation both with their own characteristics displayed in the conceptual model.

Business succes Success indicators:  Increased return  Increased market  Increased workforce  Increased profit  Personal satisfaction  Autonomy  Balance work/family Concept of Business Planning

Characteristics of Business Planning

 Predictive control

 Goal Driven Actions

 Expected Return

 Competitive Analysis

 Avoiding Contingencies

Characteristics of Effectuation

 Non-Predictive Control

 Means Driven Actions

 Affordable Loss

 Partnerships

 Leveraging

In this research we are going to test the influence of business planning and effectuation on success. Two propositions are set up:

CHAPTER 3: RESEARCH METHODOLOGY

It is essential to determine the reason due to which entrepreneurs are able to

accomplish their organizational objectives successfully, even in uncertain times, while others struggle. Therefore, the research has been conducted to ascertain factors that will assist managers in successfully achieving their objectives (Hopwood, 2004).

The researcher has gathered information to provide managers with appropriate

guidelines to be successful and gain a competitive advantage. According to the effectuation in the business environment, entrepreneurs are required to follow five principles that vary from those that have been identified by the causal entrepreneurs (Neuman, 2005). Hence, research has been conducted to analyze the beliefs and perceptions of different entrepreneurs towards the importance of effectuation and business planning in a business. The research has carried out both primary and secondary research for collecting data to achieve research objectives (Neuman, 2005).

3.1. Data Collection Method

In this part of the chapter an explanation is given how the data will be collected during the research. Also attention is paid to the kind of information and research form.

3.1.1 Primary Research

3.1.2 Field Instruments: Interview Protocol

The instrument used for interviewing the successful entrepreneurs is a semi-structured questionnaire that will enable the researcher to gather the data needed to proceed with the research (Pickard, 2007). The researcher selected the one-on-one semi-structured interview as an appropriate way of developing a better understanding on the experience of entrepreneurs (Hopwood, 2004). The structure of the interview will be as follows: first general questions, followed by questions about business success, business planning and effectuation (see

appendix 1). The variables will be measured with a five-point likert scale. These questions of the interview are partially based on the questions of Bosma (2012) which also wrote about the effectuation theory. The interview candidates exist less than two years which is good for the consistency of the research. All the interviews with selected candidate are based on face-to-face conversations. And four different business are chosen (see paragraph 3.1.4 Sample size)

3.1.3. Secondary Research

3.1.4. Sample Size

A sample can be defined as the group of people that represents the population. It is important for the researcher to determine the sample size that will be chosen for the research. Determining the sample size is an essential part of the research process; therefore, it is important for the researcher to ensure that the sample has been chosen efficiently (Pickard, 2007).

It is crucial for the researcher to determine the accurate and appropriate sample size, larger sample sizes are likely to lead to increased precision while estimating unknown parameters. On the other hand a small sample size may not truly represent the belief and perceptions of the population (Pickard, 2007).

The sample size that is used for this research, to analyze the importance of

effectuation and business planning for achieving business success is 4 entrepreneurs. In order to measure the business success of these 4 entrepreneurs we first did secondary research in order to discover the criteria of business success. A list of these criteria will be made and showed to the entrepreneur. The entrepreneurs will then be asked which of these criteria they use to measure their success. After knowing their criteria for success, the changes in these criteria during the past two years will be measured in order to see their success rate. We will interview 4 types of businesses: car seller /cleaner, post transportation business, restaurant and a design and printing company. These businesses are achieved by personal networks. These businesses are SMB’s and are chosen because they all exist less than two years which is good for the consistency of the test and besides that in the first two years a lot of changes occur what can deliver a lot of interesting information about business planning and

3.1.5 Data analysis

After interviewing the entrepreneurs the propositions will be tested. The answers of the entrepreneurs on the questions about the different variables will be analyzed and compared to each other. This will lead to an answer on the propositions set.

3.2. Reliability and Validity

The researcher has ensured that the data that is collected is valid and reliable. One of the greatest concerns of the researcher was that participants needed to respond to the

questions openly and truthfully.

The interview supports the use of open-ended questions, exploration of responses, and sensitivity to the researcher’s own role in the negotiation of meaning. In order to achieve valid and reliable data, it is essential for participants to feel safe in sharing information that is personal and confidential in nature (Hopwood, 2004).

3.3. Feasibility

Feasibility requires that you conduct a project with the financial resources available and that you have sufficient time and energy to complete the work (Hopwood, 2004).

The researcher believes that high level of participant interest, as well as numerous assurances to them of confidentiality, will assist in creating a study in which all participants complete their interviews in a spirit of openness and transparency (Verschuren, 2003).

ethical principles in their interactions with research participants (Smith, 2010). The following issues that should be taken into consideration in the process of ensuring the protection of human subjects:

 Receiving permission of persons in authority to provide access to participants and research sites

 Minimal disruption of the physical settings in which interviews take place  Equal treatment of all participants

 Reciprocal relationship between researcher and participants  Protection of participants’ privacy

To that end, the researcher will offer participants the option of terminating their involvement in the study if, during the course of the inquiry, the participant experienced psychological distress or expressed concerns that indicated sufficient reason to discontinue participation (Kumar, 2007). The researcher endeavored to maintain an interview

CHAPTER 4: RESULTS

In this section we will discuss the results of the research. We started the interview with some general questions about the firm’s success and the opinions of the entrepreneurs about their success. This is done in order to know how their perspective is about success. All of the four entrepreneurs stated that their business is profitable and that they have a good living out of it. The entrepreneurs explanation of their success were each different. The answers which were given were adoptions to the local market, qualitative employee’s, personal connections, qualitative products, marketing investments, price-cutting, clear objectives and

communication. In terms of success 3 of the entrepreneurs stated that they are very successful and that they forecast a good future with growth of the business and 1 of the entrepreneurs stated that their business was successful but there was room for improvement to realize a higher success rate. Furthermore the entrepreneurs were asked if they felt successful. All of the entrepreneurs felt themselves successful and they gave subjective and objective measures as explanation (turnover, profit, amount of employees, flexibility, personal satisfaction). After measuring the perspective of the entrepreneurs about success with some general questions, more specific questions were asked beginning with questions about the success criteria.

Table 1 Success criteria used by entrepreneurs

Entrepreneur/success criteria

Profit Workforce Return Market share Autonomy Personal satisfaction Balance family/ work

Entrepreneur 1 Yes No Yes No Yes Yes No

Entrepreneur 2 Yes Yes Yes No Yes Yes No

Entrepreneur 3 Yes No Yes No Yes Yes No

Entrepreneur 4 Yes No Yes Yes Yes Yes Yes

As you can see in table one the objective criteria ‘profit’ and ‘’return’ and the subjective criteria ‘personal satisfaction’ and ‘autonomy’ are used by all of the 4 entrepreneurs. The objective criteria ‘market share’ is used by one of the entrepreneurs and this is also the case for ‘workforce’. The subjective criteria balance ‘family/work’ is also used by one of the entrepreneurs. So this means that the success criteria that are used most by the entrepreneurs are profit, return, personal satisfaction and autonomy.

After knowing which criteria were used by the entrepreneurs the importance of each criterion was measured. This is done on a scale from 1(low) to 5(high). See the results in table 2, 3, 4 and 5 (APPENDIX 2).

In order to know which success criteria is the most important the scores of each entrepreneur will be summed up and this will lead to a total score which is presented in Table 6.

Table 6 Most important success criteria

Success criteria Total score

As you can see the most important success criteria are profit and autonomy followed by return and personal satisfaction. And the less important criteria are workforce, market share and balance/work family.

According to the results, the entrepreneur’s definition of success is determined. This

definition is mostly the same as which is used in the literature of the research. The difference here is that workforce, market share and balance work/family is not important success criteria according to the most of the entrepreneurs.

After defining the success criteria of the entrepreneurs the change in success during the past 2 years was measured. Each of the criteria was measured. This was also done on a scale from 1(lower) to 5(higher). See Table 7, 8, 9 and 10(APPENDIX 3).

As we can see according the tables all the four important criteria: profit, return, personal satisfaction and autonomy have become higher during the past two years in all of the cases. This means that there is an increase in success for the entrepreneurs.

Table 11 Entrepreneur 1: Decision making

Effectuation Business planning Means driven actions 1 2 3 4 5 Goal driven actions Affordable loss 1 2 3 4 5 Expected return Leveraging 1 2 3 4 5 Avoiding contingencies Partnerships 1 2 3 4 5 Competitive analysis Non-predictive control 1 2 3 4 5 Predictive control

Table 12 Entrepreneur 2: Decision making

Effectuation Business planning Means driven actions 1 2 3 4 5 Goal driven actions Affordable loss 1 2 3 4 5 Expected return Leveraging 1 2 3 4 5 Avoiding contingencies Partnerships 1 2 3 4 5 Competitive analysis Non-predictive control 1 2 3 4 5 Predictive control

Table 13 Entrepreneur 3: Decision making

Effectuation Business planning Means driven actions 1 2 3 4 5 Goal driven actions Affordable loss 1 2 3 4 5 Expected return Leveraging 1 2 3 4 5 Avoiding contingencies Partnerships 1 2 3 4 5 Competitive analysis Non-predictive control 1 2 3 4 5 Predictive control

Table 14 Entrepreneur 4: Decision making

According to the tables 11-14 we can see that the answers of entrepreneurs 1 and 4 on the questions are more near the value 1. This means that those entrepreneurs decision making is based on the effectuation approach. The answers of entrepreneurs 2 and 3 on the questions are more near the value 5. This means that those entrepreneurs decision making is based on business planning. Below you can see their average scores on the five variables:

Table 15 Average score on 5 variables

Entrepreneur Average score

1 1.8

2 4.4

3 4.2

CHAPTER 5: CONCLUSION AND FURTHER RESEARCH

5.1 Conclusions

This research examined if the success of a business depends on effectuation or business planning. In order to measure these relationships a good understanding of the concepts studied needed to be established. Business planning, effectuation and success were defined during the research and after defining these concepts they were measured by interviewing four different entrepreneurs. To measure business success, objective and subjective criteria were used. The findings of the research indicated that the success criteria that are used most by the entrepreneurs are profit, return, personal satisfaction and autonomy. After examining the success criteria that were used the most, the entrepreneurs were asked to rate the

importance of each criteria. According to the findings the most important success criteria were profit and autonomy followed by return and personal satisfaction. The entrepreneur’s definition of success was determined and this definition is mostly the same as which is used in the literature of the research. The difference here is that workforce, market share and balance work/family are not important success criteria according to the most of the

effectuation approach and entrepreneurs 2 and 3 were using business planning. After attaining this information we can give an answer on the propositions set.

The propositions of the research were:

1. Business planning has a positive influence on business success 2. Effectuation has a positive influence on business success.

Both of the propositions are valid because the entrepreneurs using a effectuation approach saw an increase in their business success and the entrepreneurs using business planning saw an increase in their business success .So according this research we can’t say which of the two approaches is better to use because both of the approaches cause a positive effect on business success. This means that the success of a business depends on business planning and effectuation.

5.2 Limitations and Further research

During the research a lot of secondary and primary information is gathered but still there are some limitations to this study that had an influence on the process and interpretation of the results of the study. First of all there is a researcher bias. The data that is collected is

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APPENDIX 1 INTERVIEW

Algemene vragen

1. Is uw bedrijf rendabel en kunt u mij uitleggen waarom? 2. Kunt u er goed van leven?

3. Hoe vindt u dat uw onderneming draait, in termen van succes? 4. Waarom voelt u zich wel of niet succesvol?

Succes vragen

5. Maakt u gebruik van subjectieve criteria om succes te beoordelen? 6. Welke subjectieve criteria gebruikt u om uw succes te beoordelen? 7. Maakt u gebruik van objectieve criteria om succes te beoordelen? 8. Welke objectieve criteria gebruikt u om uw succes te beoordelen?

9. Geef aan de volgende criteria de mate van belangrijkheid bij het beoordelen van succes:

Winst Laag 1 2 3 4 5 Hoog

Werknemers Laag 1 2 3 4 5 Hoog

Omzet Laag 1 2 3 4 5 Hoog

Marktaandeel Laag 1 2 3 4 5 Hoog

Autonomie Laag 1 2 3 4 5 Hoog

Persoonlijke tevredenheid Laag 1 2 3 4 5 Hoog Balans tussen werk en familieLaag 1 2 3 4 5 Hoog 10. Bent u het er mee eens dat de bovenstaande criteria de belangrijkste criteria zijn voor

uw om u succes te beoordelen?

11. Is er bij uw een stijging te zien in de afgelopen 2 jaren bij de bovenstaande criteria voor succes?

Manier van belissen

Bij al de volgende vragen graag een uitleg bij de keuze. Waarom neemt u op deze wijze beslissingen?

12. Neemt u beslissingen op basis van;

A)uw middelen(wat u heeft,wie u bent,wie u kent en wat u weet) of B)de gestelde doelen(middelen worden aangetrokken?

A 1 2 3 4 5 B

13. Neemt u risico’s(investeringen op basis van;

A) het te veroorloven verlies of B) het te verwachten(maximale) rendement?

A 1 2 3 4 5 B

14. Met betrekking tot onvoorziene omstandigheden

A) maakt u hier gebruik van,door flexibel te zijn en ze in uw voordeel om te zetten of B) probeert u ze uit de weg te gaan en houd u vast aan de bestaande doelen ?

A 1 2 3 4 5 B

15. Over uw houding ten opzichte van anderen

A) brengt u liever dingen voort met anderen(samenwerking met klanten

leveranciers, etc.) of B) bent u bezig met de concurrentie,door het uitvoeren van’’ concurrentie analyse’’ en concurrende strategien?

A 1 2 3 4 5 B

16 Richt u zich liever op;

A) de beheersbare aspecten van een onvoorspelbare toekomst( voor zover u de toekomst kunt beheersen,hoeft u hem niet te voorspellen) of

B) de voorspelbare aspecten van een onzekere toekomst(voor zover u de toekomst kunt voorspellen, kan u hem beheersen)

APPENDIX 2 RESULTS: IMPORTANCE SUCCES CRITERIA

Table 2 Entrepreneur 1: Importance success criteria

Profit Low 1 2 3 4 5 High

Workforce Low 1 2 3 4 5 High

Return Low 1 2 3 4 5 High

Market share Low 1 2 3 4 5 High

Autonomy Low 1 2 3 4 5 High

Personal satisfaction Low 1 2 3 4 5 High Balance work/family Low 1 2 3 4 5 High Table 3 Entrepreneur 2: Importance success criteria

Profit Low 1 2 3 4 5 High

Workforce Low 1 2 3 4 5 High

Return Low 1 2 3 4 5 High

Market share Low 1 2 3 4 5 High

Autonomy Low 1 2 3 4 5 High

Personal satisfaction Low 1 2 3 4 5 High Balance work/family Low 1 2 3 4 5 High Table 4 Entrepreneur 3: Importance success criteria

Profit Low 1 2 3 4 5 High

Workforce Low 1 2 3 4 5 High

Return Low 1 2 3 4 5 High

Market share Low 1 2 3 4 5 High

Autonomy Low 1 2 3 4 5 High

Personal satisfaction Low 1 2 3 4 5 High Balance work/family Low 1 2 3 4 5 High Table 5 Entrepreneur 4: Importance success criteria

Profit Low 1 2 3 4 5 High

Workforce Low 1 2 3 4 5 High

Return Low 1 2 3 4 5 High

Market share Low 1 2 3 4 5 High

Autonomy Low 1 2 3 4 5 High

APPENDIX 3 RESULTS: CHANGE IN SUCCES

Table 7 Entrepreneur 1: Change in success

Profit Lower 1 2 3 4 5 Higher

Workforce Lower 1 2 3 4 5 Higher

Return Lower 1 2 3 4 5 Higher

Market share Lower 1 2 3 4 5 Higher

Autonomy Lower 1 2 3 4 5 Higher

Personal satisfaction Lower 1 2 3 4 5 Higher Balance work/family Lower 1 2 3 4 5 Higher

Table 8 Entrepreneur 2: Change in success

Profit Lower 1 2 3 4 5 Higher

Workforce Lower 1 2 3 4 5 Higher

Return Lower 1 2 3 4 5 Higher

Market share Lower 1 2 3 4 5 Higher

Autonomy Lower 1 2 3 4 5 Higher

Personal satisfaction Lower 1 2 3 4 5 Higher Balance work/family Lower 1 2 3 4 5 Higher

Table 9 Entrepreneur 3: Change in success

Profit Lower 1 2 3 4 5 Higher

Workforce Lower 1 2 3 4 5 Higher

Return Lower 1 2 3 4 5 Higher

Market share Lower 1 2 3 4 5 Higher

Autonomy Lower 1 2 3 4 5 Higher

Personal satisfaction Lower 1 2 3 4 5 Higher Balance work/family Lower 1 2 3 4 5 Higher

Table 10 Entrepreneur 4: Change in success

Profit Lower 1 2 3 4 5 Higher

Workforce Lower 1 2 3 4 5 Higher

Return Lower 1 2 3 4 5 Higher

Market share Lower 1 2 3 4 5 Higher

Autonomy Lower 1 2 3 4 5 Higher