towards a new model of success

International Journal of Entrepreneurial Behaviour & ResearchEmerald Article: Towards a new model of success and performance in SMEs Mike Simpson, Joanne Padmore, Nicki Newman

Article information:To cite this document: Mike Simpson, Joanne Padmore, Nicki Newman, (2012),"Towards a new model of success and performance in SMEs", International Journal of Entrepreneurial Behaviour & Research, Vol. 18 Iss: 3 pp. 264 - 285 Permanent link to this document: http://dx.doi.org/10.1108/13552551211227675 Downloaded on: 22-05-2012 References: This document contains references to 111 other documents To copy this document: [email protected]

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Towards a new model of success and performance in SMEsMike Simpson, Joanne Padmore and Nicki NewmanShefeld University Management School, University of Shefeld, Shefeld, UKAbstractPurpose The purpose of this study is to develop an academic theoretical framework relating success and performance in small and medium-sized enterprises (SMEs) so that future research could be carried out to identify the critical success factors (CSFs) for SMEs. Design/methodology/approach The research used a literature review, in-depth interviews with owner-managers of SMEs and a knowledge elicitation exercise was carried out based on the experience of the researchers and on the interviews with owner-managers. Findings A new academic conceptual model was developed linking CSFs, denitions of success and performance to the characteristics of the business environment, the characteristics of the owner-manager and the characteristics of the business. The relatively new idea that feedback on performance in the model could modify the strategic/tactical behaviour of the SME owner-managers was introduced. Research limitations/implications The many research problems posed by performance studies aimed at establishing CSFs in SMEs are still present in the current framework but a longitudinal research methodology could be employed to avoid these problems in future research. Practical implications The theoretical framework offers a different way forward for both practitioners and business advisors in thinking about those factors that may be critical for success in SMEs. Originality/value This is a new framework that can be used to inform thinking and research design in the area of performance measurement and success. Keywords Small to medium-sized enterprises, Success, Performance, New conceptual framework, Modelling, Business performance Paper type Research paper

264Received 6 August 2010 Revised 13 December 2010 2 March 2011 Accepted 8 March 2011

International Journal of Entrepreneurial Behaviour & Research Vol. 18 No. 3, 2012 pp. 264-285 q Emerald Group Publishing Limited 1355-2554 DOI 10.1108/13552551211227675

1. Introduction There is a good deal of academic interest in measuring the performance of small and medium sized enterprises (SMEs) and in attempting to identify the factors critical for their success. However, very little theoretical progress has been made in this area because of the complex relationships between performance, critical success factors (CSFs) and the differing denitions of success used by owner-managers, business support agencies and others (Watson et al., 1998; Gadenne, 1998). Yet, this has not prevented managerial prescriptions being devised of what to do and which CSFs to have present in order to improve the performance of these organisations. These factors are then propagated as if they were agreed and established fact, when in fact, no suchThe authors would like to thank all the owner-managers involved in this research for giving freely of their time and providing personal insights into starting and running a small business. The authors would also like to thank the editor and the two reviewers for their helpful comments on this paper.

agreement exists and these managerial prescriptions may be extremely misleading and possibly harmful (Kieser, 2005). This area of research is further complicated by the diverse nature of SMEs, the very particular business environments in which they operate and the many problems specic to small business research (Curran and Blackburn, 2001; Beaver, 2002). The academic literature on performance measurement is also an extremely complex area and it is not surprising that work drawing on these separate research strands has been unable to progress towards an understanding of performance and success in SMEs. In this work we critically evaluate current methods of research in this area, discuss the knowledge elicitation method used to create a research framework and then discuss the elements of the theoretical framework that could be used to investigate these complex relationships both quantitatively and qualitatively from several different perspectives. This paper draws on a wide range of literature to support our arguments for the proposed conceptual framework but it is not intended to be an exhaustive review of the literature in these areas. Nor is it intended to be a practical approach to measuring and managing performance of businesses but instead a contribution to the academic literature concerned with performance measurement and the determination of CSFs for SMEs. 2. Research aims and objectives The aim of the research was to devise, construct and report on a theoretical framework that could be used to carry out further research into the complex relationships between success and performance in SMEs. Thus, the starting point in this study was an understanding of the relevant literature in these areas and an understanding of our own experience working with many SMEs over the last 12 years. The objectives of this study were to: (1) Critically evaluate current methods of measuring performance and establishing the CSFs for SMEs. (2) Critically evaluate the literature in the areas of small business success, performance measurement, denitions of success and CSFs. (3) Develop and rene a conceptual research framework based on the literature, interviews with owner-managers and our own extensive experience working with SMEs so that further research could be carried out in a systematic manner using the framework. (4) Propose a way forward that would use the framework from this research to establish a more credible set of CSFs than exists at present for SMEs. 3. A critique of current methods The traditional approach to measuring performance and identifying the CSFs in SMEs is outlined in Figure 1. We have called this the experimental black box approach but Short et al. (2002, p. 364) call it the normal science mode. In this approach researchers determine a number of independent variables that are thought to be the CSFs, determine a suitable dependent variable which represents the performance of the rm and then treat the SMEs as black boxes. That is, the SMEs are treated as if they are independent isolated systems in which an input (independent variable) such as a management intervention or activity change in some area of the business can be

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monitored by an output (dependent variable) regardless of the business environments in which these rms operate. Hypotheses are then devised and tested and, by using statistical methods on a large sample of SMEs, it is thought that it is possible to establish cause and effect relationships between the independent variable and the dependent variable. This view assumes that a scientic experimental approach is possible and that other variables can be ignored or isolated and/or controlled (Sekaran, 2000). Unfortunately, the research is not so simple and there are a wide range of moderating, intervening and contaminating variables that must be identied and controlled or held constant. Few researchers acknowledge these problems or if they do it is usually in the latter part of their papers where they defend their methodology and claim the results are a genuine reection of reality. However, these difculties have not prevented researchers from publishing the results of such studies (Widener, 2006; Wiklund and Shepherd, 2003; Tan and Peng, 2003; Li et al., 2008) despite overwhelming criticism from the research community (March and Sutton, 1997). We argue that these studies are essentially awed, at best virtually useless and at worst simply cloud the area of research and provide false leads on the relationship between CSFs and performance in organisations including SMEs. Other researchers have also expressed misgivings about the current state of research in this area (Kieser, 2005; March and Sutton, 1997; Short et al., 2002). Our criticisms of this approach are outlined as follows: (1) Data collection. The data for such studies often relies on the use of a single questionnaire survey using Likert scales and are cross-sectional rather than longitudinal (Widener, 2006; Wiklund and Shepherd, 2003; Tan and Peng, 2003). Managers opinions are obtained on the performance of the company, the performance of the company against its direct competitors, against other companies in the same industry and the presence or absence of certain business activities (Wiklund and Shepherd, 2003; Tan and Peng, 2003; Naman and Slevin, 1993). Often managers are asked to estimate performance over the last two or three years, again often using a Likert scale. March and Sutton (1997) refer to these studies as retrospective recall and point out that performance information colours subjective memories, perceptions and weightings of possible causes of performance (March and Sutton, 1997, p. 701). A single

questionnaire issued at one point in time does not allow for the time delay between a management intervention or change in a business activity to be manifested in a change in the dependent variable, i.e. the temporal precedence required as a pre-condition for inferring cause is not established (Short et al., 2002). Estimates of past performance, especially when compared against competitors and other companies in the industry, are obviously open to interpretation and, in the absence of objective data, are therefore awed. It is well known that SMEs do not systematically collect, retain or analyse competitor information and therefore any information obtained from managers is likely to be unreliable (Wang and Ang, 2004; Gibson and Cassar, 2005; Rogoff et al., 2004). Managers opinions may vary widely from those of experts (Rogoff et al., 2004) and self-report questionnaires are known to be unreliable data collection instruments (Andersen, 2010; Gibson and Cassar, 2005). Researchers using statistical methods often attempt to control for factors such as age of the rm, industry sector, size, and so on. However, it is hard to control for all of these variables without a very large sample size and we conclude that many of the control variables used are not sufcient to eliminate sample bias from the analysis. (2) The dependent variable. Usually a single convenient often one-dimensional measure such as growth (e.g. in employee numbers), prot, turnover, protability or return on capital employed (ROCE) or return on investment (ROI) are used as the dependent variable; ignoring the multi-dimensional nature of performance. Wiklund (1999, p. 40) takes the view that taken together, growth and nancial performance give a richer description of the actual performance of the rm than each does separately and advocates the use of a performance index, combining several dimensions of performance. This approach assumes that there is a correlation between those dimensions and this may not be the case (Andersen, 2010; Murphy et al., 1996). Few studies obtain objective performance measures either from accounts or from operational performance indicators. Where accounting information is used, especially for ROCE/ROI, often no denitions of these measures are given and it is unclear if the gures are calculated in the same way from accounts or simply obtained from the self-report questionnaire. ROCE is a particularly poor measure to use (Frecknall Hughes et al., 2007). Some studies (e.g. Tan and Peng, 2003) do belatedly recognise the subjective nature of the performance indicators used but still contend that they have signicant ndings. (3) The business environment of SMEs. It is generally accepted that the business environment of SMEs is extremely difcult, dynamic and diverse and that even within the same industry different SMEs experience different trading conditions. These features make it very difcult to draw conclusions about the CSFs and performance of SMEs in general. Where the search for CSFs is concerned the industry structure (Porter, 1980), the effect of government policy, supporting agencies, funding regimes, attitudes of banks and other nancial bodies and the general infrastructure supporting an industry create a set of factors which will be needed for success. Although, in some industries, clusters of SMEs can inuence the business environment to a good degree in their own favour (Dimitriadis et al., 2005; Sweeney, 1996) most of the factors involved lay


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outside the control or inuence of individual SMEs owner-managers. While it may be possible for owner-managers to choose a sub-optimal set of parameters (a strategy) which they can manipulate to sustain and grow the business, there is no generic set of CSFs applicable to all SMEs and current research is again found to be inadequate. This may account for many of the conicting results (Short et al., 2002). (4) The SMEs themselves. According to Hudson et al. (2001) and our own experience the typical SME has limited resources, limited cash ows, few customers, is often engaged in management re-ghting, concentrates on current performance (however that is dened but usually concentrates on turnover) rather than taking a strategic focus, often has a at organisational structure and possibly high staff turnover. These characteristics mean that many SMEs do not have the capabilities or resources to create a suitable optimal strategy based on a rational assessment of the external business environment in which they operate. Many SMEs owner-managers do not run their businesses to maximise nancial performance but instead run their businesses for other reasons such as lifestyle ( Jarvis et al., 2000; Jennings and Beaver, 1997; Walker et al., 1999; Walker and Brown, 2004) and satiscing behaviour is often encountered in SMEs owner-managers (Greenbank, 2001). The role played by the family of the owner-manager may have an effect too (Aldrich and Cliff, 2003). Therefore, CSFs and performance may be dened according to the needs and wants of the owner-managers rather than in terms of maximising nancial performance of the business. To conclude, the vast majority of quantitative studies of SMEs using the experimental black box or normal science mode approach outlined above (see Figure 1) do not produce generally applicable results and do not correctly identify the CSFs for optimal performance. 4. Research methodology Dening SMEs is difcult, denitions vary from country to country and in some countries denitions vary by industry sector. In this research an SME was dened as a rm with less than 250 employees (European Commission, 2005) and all the rms included in our empirical work satised this criterion. However, for the literature review we have taken a wider view (Parker et al., 2009) and where an SME is described as such by the denition used in a particular country then the companies studied were deemed to fall within the category of an SME and the paper included in the literature review if relevant. Our attempt to develop a new model was stimulated by research conducted over the past 12 years in this area. This encompassed qualitative work, including detailed interviews with 20 SMEs owner managers, aimed at exploring their views on success, CSFs and performance (Simpson et al., 2004b; Sykes et al., 1997), and quantitative work, including several large scale surveys (Pavic et al., 2007; Ojeda-Gomez et al., 2007; Koh and Simpson, 2005, 2007; Koh et al., 2006; Dimitriadis et al., 2005; Simpson et al., 2001a, b, 2004a, b, 2006; Simpson and Docherty, 2004; Taylor et al., 2003). This, combined with the literature described in section 5, led us to conclude that there is no satisfactory conceptual research framework that encapsulates the fundamental issues

of dening success, CSFs, performance measurement and the effect of feedback in modifying the behaviour of the owner-manager and the business within the overall business environment, necessary for this type of research. These data sets and experiences were used as a basis for a reective knowledge elicitation exercise. In order to facilitate the creative process in the knowledge elicitation exercise a number of diagramming techniques were applied to assist in the development of a conceptual framework. Tacit knowledge, intuition, experiences and insights were used to create a number of diagrams from which concepts, relationships and constructs were created. These diagramming techniques have been variously called mind maps (Buzan, 1993), conceptual maps or conceptual models (Checkland, 1999; Checkland and Scholes, 1990), cognitive maps (Hussey and Hussey, 1997; Kitchen and Freundschuh, 2000; Pidd, 2003), multiple cause diagrams, rich pictures, relationship diagrams and organic diagrams (Cameron, 1991, 2005). Such an approach has its roots in the soft systems methodology devised by Peter Checkland and co-workers (Checkland, 1999) and was used to aid conceptual thinking, develop theoretical constructs and test ideas. The knowledge elicitation exercise required several non-linear or cyclic stages (Pidd, 2003) whereby past experiences were reviewed in the light of issues raised from the literature review and from interviews and daily contacts and discussions with SMEs owner-managers. The resulting diagrams were rened and reduced to the simplest set of constructs that could be devised to explain the situation in SMEs with regard to success and performance. This formed the search for a generic model or framework applicable to all SMEs as we understood them (see Figure 2). It was also necessary to be able to explain the framework and indicate supporting literature for each issue or construct in the framework. Such an approach is common in research but is not always made explicit in the reported literature where often post-rationalisations are used as if the research proceeded in an uninterrupted and linear fashion from research design, data collection and analysis and through to results and conclusions. It is worth remembering that:Theories are construed as speculative and tentative conjectures or guesses freely created by the human intellect in an attempt to overcome problems encountered by previous theories and to give an adequate account of the behaviour of some aspects of the world or universe (Chalmers, 1982, p. 38).


5. The proposed framework Given the critique of the current approach to research on success, CSFs and performance in SMEs we propose that the framework in Figure 2, is a more holistic approach and outline our reasoning below. 5.1 Language and denitions The language used in this area of research is a major obstacle to understanding. In our view, the CSFs are the independent or predictor variables illustrated in Figure 1. These are the factors that are thought to be necessary for an SME to have or activities that must be carried out, in order to sustain and improve a rms performance. Performance is the achievement of an outcome from any activity or the result of action (Slack, 1997, p. 134) and performance measurement is the process of quantifying past action, where measurement is the process of quantication and past action determines current

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Figure 2. Dening success theoretical relationships

performance (Neely, 1998, p. 5). Therefore, the dependent variable in Figure 1 is some measurement or outcome that is the result of past actions. That is, ex ante actions leading to ex post performance. Performance indicators are specic measures of performance and can consist of monetary or non-monetary parameters (Olve et al., 2000, p. 175). 5.2 The business environment It is clear from the conceptual framework in Figure 2, that the business environment will have a major effect on the behaviour of the owner-manager, the enterprise and the factors critical for success (Watson et al., 1998; Porter, 1980; Covin and Slevin, 1989). The CSFs will be determined by the type of industry, the business environment in which the SME operates and the requirements of customers. Using the terminology of

Terry Hill (Hill, 1993; see also Storey, 1994), CSFs will depend on the order qualifying criteria in order to compete in the particular chosen market, order winning criteria and order qualifying criteria which are order losing sensitive and the operational requirements necessary to meet these criteria (e.g. technology, skills and resources). This will then have a clear effect on the denitions of success, some of which will be customer-focused, some of which will be related to the business and some will relate to the personal needs and aspirations of the owner-manager and any moderating role played by the family of the owner-manager (Aldrich and Cliff, 2003). Measurement of performance will therefore consist of a mixture of both nancial and non-nancial measures directly related to the denitions of success and the CSFs as perceived by the owner-manager (HSMO, 1971; Watson et al., 1998). It is also clear that SMEs will have a major inuence on the business environment partly because of the very large number of SMEs in the economy but also because of the development of industrial districts and localised economies of SMEs or clusters of SMEs (Dimitriadis et al., 2005). These clusters can exert considerable market forces and create a strong SMEs sector based on exibility, a capability for continuous innovation and the creation of a higher level of competitiveness (Sweeney, 1996). These regional networks of SMEs have the capability to survive economic crises where normally individual rms might see considerable difculties and fail and so we have added a feedback loop from the business to the business environment. 5.3 The enterprise The enterprise consists of two sections, the owner-manager/entrepreneur and the business and they have considerable interaction and overlap in the framework in Figure 2. Many researchers have attempted to dene the characteristics of the successful entrepreneur (Curran et al., 1986; Cragg and King, 1988; Beaver, 2002; Birley, 1996; Bolton and Thompson, 2000; Harada, 2003; Sadler-Smith et al., 2003; Scarborough and Zimmerer, 2003). Nandram (2002) suggests that in order to be successful the entrepreneur must have a combination of attributes and skills including being goal orientated, decisive, pragmatic, resolute, exible and self-condent, while Hodgetts and Kuratko (1992) mention technical and mental ability, human relations skills, high achievement drive and creativity. Sadler-Smith et al. (2003) found that managing culture and managing vision are related to an entrepreneurial style while managing performance is related to a non-entrepreneurial style. The non-entrepreneurial style seemed to describe the behaviour of owner-managers to some extent and was regarded as managerial to some degree. They went on to identify a positive association between entrepreneurial style and business performance as measured by sales growth. Harada (2003) found that an entrepreneurs previous experience in the industry, previous knowledge of the market and related business experience all have a positive effect on turnover, supporting Aldrich and Martinezs (2001) ndings that a certain amount of prior knowledge is required for success, either through training, experience or formal education (Simpson et al., 2004b). It has been suggested that the motivations for setting up a business have an impact on survival. Business start-up is inuenced by a complex combination of motives, skills and ambitions (Westhead, 1990; Birley and Westhead, 1994). Walker and Brown (2004) and Watson et al. (1998) refer to the notion of being pushed, via external negative reasons (e.g. redundancy), or pulled, via a positive internal desire


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(e.g. personal freedom, job satisfaction, nancial rewards) into starting a business. Setting up a business for what might be termed affective reasons such as to be independent, to be creative, to do enjoyable work is associated with survival of the small rm (Hodgetts and Kuratko, 1992), while setting up for more emotionally detached reasons such as to exploit a market opportunity or meet a perceived service need, reduces the probability of survival (Watson et al., 1998). This is somewhat counter-intuitive and yet appears to be substantiated by these studies. The critical period for any small business tends to be following initial start-up and Cunningham (1998) identied cash ow problems as being responsible for the failure of six out of ten SMEs. Although all businesses must pass the long-run test of economic survival (Reid and Smith, 2000, p. 168), there are many other determinants of success, both internal and external, not least of which is the inuence of the owner-manager when dening objectives (Watson et al., 1998). Employees, customers, and the social context of the owner also have an inuence (Greenbank, 2001) and earlier work suggested that outsiders (including supporting agencies) can also have an effect on the attitudes and behaviour of owner-managers (Robinson, 1982). The objectives of small business owners often relate to personal goals and are subconsciously set rather than formalised in business plans, differing from the objectives of entrepreneurs which tend to be growth related (Greenbank, 2001). Previous studies of success criteria from the perspective of managers and business owners identied a sense of achievement, recognition, enjoyment and the feeling of doing the job well, job satisfaction and satisfaction of owning a business as among the most common (Sturges, 1999; Walker et al., 1999; Greenbank, 2001). These non-nancial measurements of success may complement or replace nancial goals (Walker et al., 1999). Many owner-managers identify themselves as the business (Walker et al., 1999) and are reluctant to expand their business if, as a consequence, they would lose their autonomous state (Watson et al., 1998; Greenbank, 2001) although this is less of a concern for those in service industries (Walker et al., 1999). A number of success factors, to do with the organisation as a whole (but inuenced by the owner-manager), are the uniqueness of culture, shared values, a collaborative approach between owner-manager and staff, the use of core competencies and building on strengths, employee relations (found to be a critical factor in service rms), job satisfaction and fullment for owner and staff (Choueke and Armstrong, 2000). Again the issue of complexity in the small rm is raised (Greenbank, 2001). 5.4 Denitions of success Small business success is closely linked to small business performance. Success in business is a matter of opinion and may be related to the degree to which objectives are met or exceeded, some of which may be critical for success. Researchers have found it difcult to separate the concept of success from performance mainly because success can be dened in terms of certain elements of performance. For this reason there are strong links between factors critical for success, denitions of success and measures of performance in the proposed framework in Figure 2. Brush and Vanderwerf (1992) refer to success as a specic aspect of performance and Brooksbank et al. (2003) equate success with high performance. There is, however, much debate on what constitutes success (Rogoff et al., 2004) and how performance should be dened and measured, particularly in the context of small businesses. Some

researchers have dened success as being equivalent to continued trading and failure equivalent to ceased trading (Watson et al., 1998) but this is too simplistic since companies may cease to trade for a variety of reasons other than nancial failure (Headd, 2003; Stokes and Blackburn, 2002). Others view success in terms of growth (Perren, 1999; Perren, 2000; OGorman, 2001) or protability, but this perspective is problematic in the context of a small business where a range of goals may be being pursued ( Jarvis et al., 2000; Jennings and Beaver, 1997). In their critical assessment of performance studies in managerial research March and Sutton (1997) consider the problematic view of the organisation as an instrument of purpose. They point out that an organisation may well have multiple purposes; dependent on the perspective of the stakeholder, and that these purposes may not be consistent. This view is supported by Murphy et al. (1996) who use secondary data to produce and identify relationships between commonly used performance measures which reveal that performance cannot be treated as a one-dimensional construct. They suggest that the multi-dimensional nature of performance might reect the trade-offs facing a rm as actions taken to improve one dimension might depress or have no effect on performance on another. Lumpkin and Dess (1996) give the example of how heavy investment in R&D might enhance sales growth in the long term but the requisite resource commitment may detract from short-term protability. Within the context of small businesses the denition and measurement of success is further complicated by the varied objectives of owner-managers:[. . .] there are very real problems with the term success and its various interpretations and perceptions in the small rm sector (Beaver, 2002, p. 98).


Traditionally the focus has been on nancial measures such as increases in turnover, prot and return on investment (Jennings and Beaver, 1997). These measures are relatively easy to dene and administer but they ignore the possibility of alternative criteria for dening success, based on the personal objectives of the owner-manager:Contrary to popular belief and a great deal of economic theory, money and the pursuit of nancial fortune are not as signicant as the desire for personal involvement, responsibility and the independent quality and style of life which many small business owner-managers strive to achieve. Consequently, the attainment of these objectives becomes one of the principal criteria for success, as dened by the entrepreneur/owner-manager ( Jennings and Beaver, 1997, p. 63).

Jennings and Beaver (1997, p. 68) dene success as the sustained satisfaction of principal stakeholder aspirations and argue that success can no longer [be] regarded as synonymous with optimal performance. From this perspective, a business may be successful while failing to achieve the optimal level of performance in terms of growth and business development. Walker and Brown (2004, p. 588) suggest that given the strong entwined nature of the business and the owner, personal success often equates to business success, and that for some, non-nancial lifestyle criteria are more important. Jarvis et al. (2000) assert that research has consistently indicated that owner-managers pursue a range of goals, focusing on business survival but incorporating a range of alternative aims including altruistic goals, status considerations and professional pride. Their interviews with 20 small business owners indicated the importance of cash and cash ow indicators in addition to the conventional notion of prot maximisation.

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Other factors mentioned included quality (of inputs and outputs) and customer buying indicators such as quantity purchased and speed of settlement along with other, less tangible, measures. The overarching theme for these owners was the survival of the rm. Similarly, the interviewees in Walker et al. (1999) study of micro-businesses in Australia recognised the necessity of making money but did not always consider it to be their primary focus. Their study identied a variety of attitudes towards measuring success ranging from purely nancial aspects to altruistic, community-focused ways. The complexity of dening success is reinforced by Greenbank (2001), again in the context of micro-businesses, who suggests that more exible denitions of success should be applied to small businesses, reecting the combination of nancial and non-nancial objectives being pursued. Greenbank (2001) argues that while the importance of alternatives to growth and prot are recognised within the literature, less attention has been placed on the satiscing behaviour of owner-managers who may be willing to adjust their objectives in order to remain satised with running their business. 5.5 Factors critical for success Watson et al. (1998) reviewed previous research attempting to dene clear characteristics shared by the owners of small businesses which affect their success and conclude that there is no simple pattern (Watson et al., 1998, p. 222). They refer to the absence of a general theoretical framework and develop their own framework based on extant literature. Gadenne (1998) refers to the lack of a comprehensive theoretical framework as limiting the usefulness of much of this research. His analysis of 169 rms in three separate industry groups found success factors unique to each. For example, in retail success is positively related to competitive pricing and quality, in manufacturing to competitive pricing and knowledge of competitors, and in services to employee relations issues such as training (Bellamy et al., 2003; Simpson et al., 2004b), staff involvement in decision-making, and job satisfaction. Recruitment of quality staff is said to be a major challenge and a barrier to success in small rms (Beaver, 2002; Williamson, 2000) and sales and marketing matters were found to be the most dominant problems encountered by small businesses (Huang and Brown, 1999). More recently Pansiri and Temtime (2010) used data collected from a sample of 203 SMEs in the Republic of Botswana to identify ten sets of principal CSFs. On examination of the perceived impact of these CSFs they concluded that this varied from rm to rm depending on size, age, industry, and management prole. A further complication is that much of the quantitative research in this area requires owner managers to identify CSFs themselves and this may lead to biased assessment of their importance. This was examined by Rogoff et al. (2004) who used open-ended questions to elicit a list of factors believed to contribute to business success but did not dene success explicitly. While there was broad agreement on those factors contributing to business success, which included individual characteristics, management issues, nancial issues, marketing activities and human resource issues, the business owners in the sample were more likely than the experts questioned to attribute success to internal factors. Conversely, when asked to identify barriers to success, business owners were far more likely to cite external factors than the sample of experts.

The studies cited indicate the limited success of research attempting to identify success factors in the form of organisational characteristics according to conventional, performance-focused criteria. Such quantitative analyses fail to provide real meaning when dealing with the unique perceptions of individuals, as it could be said that the concept of success factors unique to each industry group could even prove to be unique to each owner and each organisation, to such an extent that the owners perceptions of success would be a relevant starting point. Success for many small rm owner-managers means the ability to sustain an acceptable level of income for themselves and their employees, through maintaining an optimum level of activity with which they can cope (Beaver, 2002). It is possible that self-fullment, job satisfaction and enjoyment at work for both owner and employees may also be important to a small organisations success (Walker et al., 1999). 5.6 Measures of performance A vast literature has developed around the notion of business performance and its measurement. Approaches to and denitions of performance measurement vary according to the objectives pursued, and two distinct strands may be identied within the literature. The rst acknowledges the complexity of business performance, its multi-dimensionality, the importance of taking into account all stakeholders within the organisation, the balance and potential trade-off between short-term and long-term objectives and the importance of future performance in addition to current and historical performance as assessed traditionally by nancial measures. Its focus is on performance measurement systems (PMS): the set of metrics used to quantify the efciency and effectiveness of an action (Tangen, 2004, p. 727). An effective PMS allows a company to measure and monitor its performance, enabling informed decisions to be made and actions to be taken because it quanties the efciency and effectiveness of past actions through the acquisition, collation, sorting, analysis and interpretation of appropriate data (Neely, 1998, pp. 5-6). While the models presented vary in the approach adopted (see Baxter and MacLeod, 2008; Tangen, 2004), they all assess performance from a variety of perspectives. Business performance is viewed as a complex concept, encompassing several dimensions in such a way that some researchers would contend that there is no completely unambiguous way to know when a company is protable, since many business opportunities involve sacricing current and future prots (Tangen, 2003). More recently researchers have recognised that these approaches, developed within large organisations, may not be directly transferable to smaller organisations and models and frameworks specic to SMEs have been developed (e.g. Cocca and Alberti, 2010; Sousa and Aspinwall, 2010; Souza et al., 2006; Garengo et al., 2005; Hudson et al., 2001). The second strand is characterised by researchers [who] try to use statistics to isolate factors that supposedly contribute to organizational success (Kieser, 2005, p. 268) and is often referred to as success factor research. In these studies organisational performance is treated as a dependent variable and attempts are made to identify factors that inuence it (see Figure 1). Implicit within the rst strand is the understanding that no single measure can convey the overall performance of an organisation because of the multiple objectives pursued and the environment in which it operates. By contrast within the second strand, with its focus on testing theoretical models, business performance is typically constrained to one or two dimensions. This


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apparent contradiction is recognised by Meyer (2005, p. 285) who contends that the performance of the rm is very difcult/impossible to measure. In his opinion:Performance studies are bereft of application since knowledge of the causes of past performance provides little if any basis for taking action aimed at improving the current performance of the rm (Meyer, 2005, p. 285).

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Despite these concerns, research in this area abounds, the majority being based on measures of nancial performance and business growth, e.g. Robinson (1999), Reid and Smith (2000), Freel and Robson (2004), Johnsen and McMahon (2005), Koch and Strotmann (2006), Poon et al. (2006), and Wood (2006) and, while researchers acknowledge the existence of alternative performance goals (Johnsen and McMahon, 2005; and Poon et al., 2006), empirical work is limited. Lumpkin and Dess (1996) propose that any attempt to measure organisational performance should consider sales growth, market share and protability together with indicators of overall performance, incorporating the rms goals, objectives and aspiration levels. They note the importance of overall satisfaction and non-nancial factors in evaluating the performance of privately held rms, citing the example of a small privately owned rm that might regard its continued existence as a satisfactory indicator of high performance. They suggest that the relative importance of nancial and non-nancial performance indicators may vary according to the stage in the life of the organisation, a point also made by Walker et al. (1999). Even when appropriate measures have been identied, there is still the difculty of collecting the data. Venkatraman and Ramanujam (1986) present a classicatory framework of performance measures, differentiating between primary and secondary sources and nancial and operational measures. They discuss the merits and drawbacks of various combinations, highlighting issues of dimensionality and convergence across multiple methods of data collection and advocate the use of a combination of factors and sources. Chandler and Hanks (1993) and Wang and Ang (2004) discuss the difculties inherent in obtaining measures of performance in the context of small businesses. Traditional measures of performance may not be available or may be inappropriate because of the small starting base; different nancial measures may measure different aspects of performance; nancial measures may be affected by industry-related characteristics making direct comparisons between industries or businesses misleading and many measures require a longitudinal design. In practice cross-sectional self-report surveys tend to be the favoured approach. Chandler and Hanks (1993) evaluate the three most common approaches to measuring performance when only self-reported data are available: assessing rm performance in broadly dened categories; subjective measures of owner satisfaction with rm performance; subjective measures of performance relative to competitors. They recommend the use of two dimensions of venture performance: growth and business volume reported in broad categories which they found to be relevant, available, internally consistent, reliable and externally valid. These measures have been adopted subsequently in SME research (e.g. Wood, 2006; Wang and Ang, 2004; Reid and Smith, 2000). Although both alternative self-report approaches satisfaction with performance and performance relative to competitors were found to be problematic, they continue to be employed by researchers, e.g. Alpkan et al. (2007).

Another potential problem with self-report surveys is that of same-source bias. Andersen (2010) describes how correlations between performance and entrepreneurial orientation identied through same-source self-report methods might be due to managers with a more positive attitude being more likely to adopt entrepreneur-oriented strategies, and to overestimate the performance of their rm. The collection of objective nancial information using self-report surveys is no more straightforward as nancial denitions are often open to interpretation by respondents and self reported measures may not be directly comparable between companies (Gibson and Cassar, 2005). 5.7 The role of feedback The facts, gures and perceptions emerging from the application of the performance measurement activity (which may be limited to quarterly and annual accounts in some rms) in an SME will offer opportunities for feedback in all dimensions important to the owner-manager and the business. Under normal conditions, it would be expected that the behaviour of the owner-manager and the business would be affected to some degree, perhaps resulting in strategic or operational changes to achieve the desired performance outputs in the future. This use of feedback in the proposed framework suggests a form of continuous strategic and/or operational adjustment (Hudson Smith and Smith, 2007). Factors critical for success may be re-evaluated or changed, denitions of success may be adjusted and perhaps new targets set in accordance with the overall business environment in which the business operates (Hudson et al., 2001; Hudson Smith and Smith, 2007). Much of this type of behaviour will be determined by the perceptions of the owner-manager and the business employees and which may or may not change over time. Thus, businesses may exhibit aspects of organisational learning and this is explored in greater depth by Wyer et al. (2000). Some researchers have used (past) performance as an independent or predictor variable in performance and CSFs research (Reheul and Jorissen, 2007). The argument here is based on the idea that successful companies will have higher perceived performance, better staff morale, lower staff turnover, less absenteeism and staff will perform better thus improving overall company performance. 6. Conclusions and recommendations The aims and objectives of this research have been achieved. We have critically evaluated the current methodology for measuring performance and establishing CSFs in SMEs and found it inadequate. We have reviewed the academic literature in the area of success, denitions of success, CSFs and performance measurement in SMEs. We have developed and rened a conceptual research framework, which encapsulates the fundamental issues raised, and which will allow research to progress in this area and establish a more credible set of CSFs than currently exists for SMEs. We conclude that there is no consensus on how SME business success or performance should be measured or on the CSFs contributing to that performance. This area of research is complex, the denitions of success are either simplistic or fuzzy at best and the number of factors contributing to the survival and performance of an SME is potentially extremely large. The uniqueness of the businesses, their business environments, the aspirations of the owner-managers for their business and the variety of perceptions of success involved make the area very difcult to research. As a result


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theoretical advancement in this area has been slow if not completely stagnant over the last 30 years (Kieser, 2005). In response to this situation a conceptual framework, presented in Figure 2, was developed from a complex knowledge elicitation exercise and builds to some extent on that offered by Watson et al. (1998, p. 219). The conceptual framework we have developed focuses more clearly on the issues of dening success, CSFs, performance measurement and the effect of feedback in modifying the behaviour of the owner-manager and the business within the overall business environment. This framework can be used to investigate these issues either qualitatively or quantitatively in future work but noting the inadequacies of the current methodology employed. While we tried to reduce the highly complex conceptual frameworks we devised to the simplest set of constructs, we are painfully aware that the model will be re-expanded for the detailed follow-on study where the variables will be operationalised and a formal or explicit model developed and tested statistically. A longitudinal approach may have to be adopted to deal with temporal precedence as a pre-condition for inferring cause (Short et al., 2002). An important point to emphasise is that once CSFs are identied for a given denition of success for an SME then performance measurement, feedback on that performance and improvement techniques can be applied which are aligned with the companys strategy to make the company more successful (McAdam, 2000; Hudson Smith and Smith, 2007). Here we take the view that there are many factors that may need to be optimally managed to achieve a given view of success. If this cannot be done in SMEs for some reason then this work, and the work of many other researchers over the last 30 years, has indeed been wasted (Kieser, 2005). In our view the effect of performance feedback on the SME owner-manager and the business is an important area of research that appears to have been neglected to some degree (Wyer et al., 2000), although some authors do use (past) performance as an independent or predictor variable in performance and success factor research (Reheul and Jorissen, 2007). Success and performance of SMEs are multi-dimensional issues (Murphy et al., 1996) with research currently heavily dependent upon the views, opinions and perceptions of owner-managers. It is also recognised that trade-offs do face the owner-managers of SMEs and that these trade-offs may encompass areas such as work/life balance, prot maximisation versus lifestyle, satiscing behaviour (Greenbank, 2001), freedom to do as they wish versus maintaining a nancially viable businesses or risks of potential new opportunities versus commitment to current employees and not jeopardising the business nancially (Lumpkin and Dess, 1996). It is concluded that more exible denitions of success should be adopted and that traditional measures of performance are often inappropriate and misleading and neglect the satiscing behaviour of owner-managers (Greenbank, 2001). Future research is intended to focus on both qualitative and quantitative approaches to dening success and determining the performance of SMEs using the framework in Figure 2, in the hope that a number of CSFs will emerge. Such a research methodology will necessarily involve a longitudinal study rather than the current use of a single questionnaire in a cross-sectional study and also involve the development of some objective measure(s) of performance. Once these CSFs are established opportunities for their management may be afforded. It is also possible that the framework in Figure 2 may prove to be the starting

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Wood, E.H. (2006), The internal predictors of business performance in small rms. A logistic regression analysis, Journal of Small Business and Enterprise Development, Vol. 13 No. 3, pp. 441-53. Wyer, P., Mason, J. and Theodorakopoulos, N. (2000), Small business development and the learning organisation, International Journal of Entrepreneurial Behaviour & Research, Vol. 6 No. 4, pp. 239-59. About the authors Mike Simpson is a Senior Lecturer in Management at Shefeld University Management School and teaches operations management and marketing. Mike Simpson is the corresponding author and can be contacted at: [email protected] Joanne Padmore is a Lecturer in Business Studies at Shefeld University Management School and teaches quantitative methods. Nicki Newman is a Teaching Associate in Marketing at Shefeld University Management School.


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