Decision Making as Mediator between Environmental Uncertainty, Technological Sophistication, and Financial Performance of Entrepreneurial Firms.

Author:Mukherji, Jyotsna
 
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INTRODUCTION

Firms, specifically small entrepreneurial firms, face dynamic and rapidly changing environmental conditions to which they have to respond effectively. This is a well-developed line of study for management researchers, and one of the principal issues firms have to address through appropriate and effective decision making. In our review of the decision making literature, what was apparent was that the complexity of decision making was sometimes overly simplified and only one, at best two aspects of decision making was actually studied. We intend to rectify this lacuna and study decision making's mediating role (Baum & Wally, 2003; Souitaris & Maestro, 2010) in greater complexity and comprehensiveness. In classical microeconomics and the subsequent IO paradigm, economists (Bain, 1959, 1972; Chamberlin, 1933, 1965; Robinson, 1933, 1969) had emphasized the key role of conduct as a mediator between structure (of the environment) and subsequent (firm) performance. Researchers have viewed conduct as a combination of decision making, strategy formulation, and successful implementation. Our focus is to look carefully at one aspect of conduct, specifically decision making. In developing our research, we will first get a better understanding of the dynamic nature of the environment as there is considerable evidence that the environment is changing rapidly in terms of competition, innovation, substitution, obsolescence, market position, and the difficulties of assessing demand (Drechsler & Natter, 2012). There is also the technological pressure faced by firms as technology is constantly changing requiring product and process modifications, the need for trained personnel, greater investment in R&D, and so forth. This requires the firm to create and possess a level of technological sophistication (Covin, Slevin, & Heeley, 2001) in order to survive and thrive.

THEORETICAL OVERVIEW

There are three major areas in the research framework: (1) environmental conditions; (2) decision making processes; and (3) financial performance. We discuss each of these major areas next.

Environmental Conditions

The key external driver of firm activities, we believe, is the environment. This is the one aspect firms have little control over, but the environment does have a significant influence on the firm. We separate the impact of the environment into two parts; one is the external or exogenous influence on the firm in the form of "environmental uncertainty" and two is the kind of internal response a firm may take to address issues of external uncertainty and this is termed as "technological sophistication".

Environmental Uncertainty. Firms are interested in ensuring that they arrive at appropriate strategic decision so that there is a good fit between the demands of the changing environment and the firm's ability to respond effectively. In a trenchant article, Eisenhardt highlighted the volatility of the environment because of globalization where "the play of the field is high-velocity with strikingly nonlinear instability, unpredictability and ambiguity" (2002, 88). The difficulty decision makers face is how to operate effectively in a hostile environment. Indeed, environmental turbulence, hostility, complexity, uncertainty, and heterogeneity are what firms typically face and these aspects of the environment impact strategic processes (Covin, Slevin, & Heeley, 2001). Researchers have also highlighted the issues of high-velocity environments and dynamism. High-velocity environments refer to fast-paced changes in demand, competition, and technologies that create instability, turbulence and unpredictability, and dynamism refers to issues of predictability (Baum & Wally, 2003). Environmental dynamism also refers to the "presence of rapid and continuous change" (Bourgeois & Eisenhardt, 1988, 88). Uncertainty refers to absence of information making situations difficult to analyze, while "ambiguity refers to confusion and lack of understanding (multiple and conflicting interpretations of a situation)" (Souitaris & Maestro, 2010, 653).

Decision makers face the phenomenon of interpretive ambivalence in deciphering the environment (Fong, 2006; Gilbert, 2006; Weick, Sutcliffe, & Obstfed, 1999). The difficulty with regard to analyzing a complex environment is ambivalence which is holding competing evaluations of an issue (Kaplan, 1972), and that the mindfulness and cognitive complexity of ambivalence frequently delays the speed of responses (Levinthal & Rerup, 2006; Porac & Rosa, 1996). Given the complexity and the changing nature of the environment, strategic issues are invariably poorly defined and non-routine (Lyles, 1981), and as a consequence "the complex nature of these issues invites executives to apply different perspectives and arrive at more ambivalent evaluations" (Plambeck & Weber, 2010, p. 692). It is now widely accepted that, except in very few situations, the descriptions we have provided of the environment is what decision makers typically face and the challenge they have is to interpret the complex environment accurately.

Technological Sophistication. The second aspect of the environment we include in our research is to do with the nature of the industry and firm in the face of certain kinds of environmental pressures. Some industries and, therefore, firms, are in businesses that necessitate regular investment in R&D and equipment. This is especially true of high technology businesses where product, process, and skills are constantly changing. By not doing what is absolutely required, firms can fall behind and quickly lose their competitive position. We rely on the work of Covin, Slevin, and Heeley (2001) to focus on technological sophistication because they argue that it has strong theoretical linkages with decision making style and other organizational aspects. The theoretical linkages of technological sophistication with different aspects of an organization have been verified through past research (McCarthy, Spital, & Lauenstein, 1987; Covin, Prescott, & Slevin, 1990; Eisenhardt, 1990). Technological...

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