Formality of Management, Organization Structure, and Firm Performance in Microbusiness Operating in Stable Contexts: An Exploratory Study

Lauren A. Spatig, Fielding's School of Human & Organizational Development

Organizational theory and research characterizes small business as informal in management, intuitive in strategy, and organic in structure. It is generally accepted that small business need not formalize until growth demands it. However, formalization drives performance advantages for larger firms operating in stable environments, begging the question as to whether small firms operating in a stable context might also benefit from formalization. In practice, small business advisors often respond to the inherent informality present in small firms by prescribing formalization and structure more often associated with large organizations, without clear evidence of the performance benefits. Studies aimed at understanding the relationships among formality, structure, and performance in small firms yield conflicting conclusions. The contradictory findings may be explained by a failing of Small and Medium Enterprise (SME) research to recognize the heterogeneity of small business including variability of environment, industry, and firm size. In addition, there remains a gap in organizational and management research for microbusiness, as defined by firms with less than 20 employees.

This study isolates microbusiness in a single industry and stable context to explore whether formalization of strategy, structure, and management practice relate to firm performance. This study employs survey research and quantitative analysis of owner reported organizational and management practices in relationship to firm performance. Responses from 264 microbusiness owners with an average of three employees within the insurance and financial services industry are analyzed and discussed.

This study finds formalization, as defined by written documentation, is higher than anticipated based on small business literature. While the incidence of formalization is high, formalization fails to explain variance in firm performance. However, key management and organization structure variables do explain higher firm performance. Building an organization through staff emerged as critical, with three staffing variables positively related to performance including, (a) owner belief that staff provide a positive return on investment, (b) proactive hiring with the intent to grow, and (c) number of employees. With employees on board, designing an organization utilizing both specialization and delegation bears significant positive relationship to performance. Of the many management variables analyzed only two emerged as related to performance; that is, regular employee reviews, and owner ability to leave the office with confidence that the business will run smoothly. What began as a study of formalization resulted in key findings as to organization building, management and leadership in microbusiness.

Key Words: Microbusiness, small business, SME, organization structure, organization design, management, formality, informality, business planning, strategy, performance, franchisee, franchise