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Strategic Management Journal
Strat. Mgmt. J.
,
26
: 1249–1259 (2005)Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.503
EFFICIENCY, FLEXIBILITY, OR BOTH? EVIDENCELINKING STRATEGY TO PERFORMANCE IN SMALLFIRMS
JAY J. EBBEN* and ALEC C. JOHNSON
Department of Entrepreneurship, University of St. Thomas, St. Paul, Minnesota,U.S.A.
This paper analyzes small firm performance in relation to efficiency and flexibility strategies.Using configuration theory, the authors propose that small firms that pursue efficiency strategiesor flexibility strategies outperform those that attempt to pursue both. Additionally, size is used as a configurational attribute to develop competing hypotheses on whether efficiency strategiesor flexibility strategies are better suited for small firm performance. In two samples of 200 and 144 privately-held small firms, firms that mixed efficiency and flexibility strategies significantlyunderperformed. No significant performance differences were found between firms utilizing onlyefficiency strategies and those utilizing only flexibility strategies.
Copyright
2005 John Wiley& Sons, Ltd.
Advancing knowledge on strategy in small firmsis an essential task because these firms play a vitalrole in world economies (e.g., Sherman, 1999),yet face significant disadvantages in the market-place in terms of managerial expertise, access tocapital, bargaining power with suppliers and buy-ers, and experience curve effects (e.g., Forbes andMilliken, 1999; Pissarides, 1999; Dean, Brown,and Bamford, 1998; Rajan and Zingales, 1995;Holmes and Dunstan, 1994). Progress in this areaof the entrepreneurship literature has been madein recent years with studies on topics such asproduct-market strategies, outsourcing strategies,and market entry strategies to name a few (e.g.,Carter
et al
., 1994; Tsai, MacMillan, and Low,1991; Jarillo, 1989; Sandberg and Hofer, 1987).Conclusions have generally been made that strat-egy does indeed impact firm performance and that
Keywords: entrepreneurship; small business; strategy;performance; efficiency; flexibility
*Correspondence to: Jay J. Ebben, Department of Entrepreneur-ship, University of St. Thomas, St. Paul, MN 55105, U.S.A.E-mail: jjebben@stthomas.edu
strategy functions differently in small firms than inlarge ones (e.g., Fiegenbaum and Karnani, 1991;Jarillo, 1989).One aspect of small firm strategy that has notreceived much attention is how product offeringrelates to operational strategy and firm perfor-mance. This paper examines this concept withregard to three choices firms can make: to offeronly standard products, to offer only made-to-orderproducts, or to offer both standard and made-to-order products. Previous literature has pro-posed that these choices dictate operational strat-egy (Chrisman, Bauerschmidt, and Hofer, 1998;Randolph and Dess, 1984), as firms that offeronly standard products must compete on organi-zational efficiency, firms that offer only made-to-order products must compete on their flexibilityto meet individual customer needs, and firms thatoffer both must attempt to be both efficient andflexible (e.g., Filley and Aldag, 1980). It has alsobeen proposed that the technology, labor, controlsystem, and organizational structure requirementsto achieve efficiency conflict with those required
Copyright
2005 John Wiley & Sons, Ltd.
Received 8 October 2003Final revision received 6 June 2005
 
1250
J. J. Ebben and A. C. Johnson
to achieve flexibility, and it is therefore difficultfor firms to achieve both efficiency and flexibility(e.g., Fiegenbaum and Karnani, 1991; Filley andAldag, 1980).While these strategies and their implicationshave been discussed in the organizational theoryand operations management literature, little hasbeen done empirically to investigate how theseconcepts apply to the management of small firms.This study advances the literature by develop-ing these concepts using organization theory andby testing hypotheses regarding the relationshipbetween these strategies and firm performance in alarge sample of small, privately-held manufactur-ing firms. The results suggest that small firms thatpursue either efficiency or flexibility strategies areable to achieve optimal performance, while firmsthat attempt to mix efficiency and flexibility strate-gies significantly underperform. The implicationsfor small firm management and future research arediscussed.
LITERATURE REVIEW
Early literature on organizations proposed thatthere is a trade-off firms can make between effi-ciency and flexibility due to competing organi-zational and operational requirements in termsof technology, organizational structure, operatingprocesses, and labor. Stigler (1939) introduced thistrade-off, arguing that the technology needed tooperate with low costs is entirely different fromthat required to meet changing demand. Thomp-son and Bates (1957) followed this, proposing thatfirms with flexibility goals do not invest in heavy,specialized capital equipment because it inhibitsthe ability to shift from one goal to the next. Theseauthors also noted that flexibility goals requireskilled direct labor, stating that ‘front-line flexibil-ity requires the exercise of judgment, and henceexperience is a major basis for functional andhierarchical differentiation’ (Thompson and Bates,1957: 331). Woodward (1965) classified manufac-turing production technologies as unit/small batchand large batch/mass production, finding that largebatch/mass production firms focused on efficien-cies, while unit/small batch firms were flexible inmeeting customer needs.Filley and Aldag built on this previous work along with their own observations to assert thata clear distinction exists, in that ‘the survival of organizations seems to depend, on the one hand,upon creating efficiency of operations, or on theother hand, producing an outcome which is rel-atively made-to-order’ (Filley and Aldag, 1980:305). These researchers concluded that firms oper-ating with an efficiency strategy produce differenttypes of products and utilize different technolo-gies, organizational structures, control systems,and employees than those that operate with a‘made-to-order’ strategy.More recently, Fiegenbaum and Karnani (1991)examined these concepts in terms of flexibilityin output volume, finding an interaction effectbetween variation in output volume and firm sizeon performance. This paper integrates Filley andAldag’s (1980) and Fiegenbaum and Karnani’s(1991) work to propose that the key to efficiencyand flexibility strategies does not only come fromthe ability to meet variation in quantity of productprovided, but also from the variation in types of products that are offered. In this regard, flexibilityrefers to a firm’s ability to provide made-to-orderproducts that are unique to individual customers orgroups of customers.These efficiency and flexibility classifications of small firms are different from some of the morepopular typologies that have been established inthe literature. For instance, it is different fromPorter’s (1980) low cost and differentiation, inwhich firms execute a differentiation strategy viamarketing or innovation rather than customization.Products that are differentiated still may be stan-dardized and conducive to mass production anddistribution (White, 1986), which are in essenceefficiency strategies. Differentiation via marketingmight also be less relevant to small firms, as theymay not have the marketing dollars necessary topursue this strategy. This is not meant to implythat other typologies are not useful in small-firmstrategy research, but the efficiency and flexibil-ity classifications may provide an alternative per-spective that reveals new insights into small firmbehavior and performance.
THEORY DEVELOPMENT
Configuration theory and small-firmperformance
In small firms, where selection of strategy is criti-cal for survival given the disadvantages they face,an investigation of these operational strategies
Copyright
2005 John Wiley & Sons, Ltd.
Strat. Mgmt. J.
,
26
: 1249–1259 (2005)
 
 Efficiency and Flexibility Strategies of Small Firms
1251
seems especially relevant. Configuration theoristshave long held that operational strategy is cen-tral to organizational outcomes (Chandler, 1962)and that congruence among strategy, technology,organizational structure, and operating processesare key in the overall effectiveness of a firm (Fryand Smith, 1987; White 1986). Different strate-gies are expected to require different structures(Miller, Droge, and Toulouse, 1988; Filley andAldag, 1980), which must ‘respond to the partic-ular control and coordinative problems created bythe strategies that are ultimately selected’ (Miller
et al
., 1988: 545). Empirical studies regarding con-figuration have consistently found evidence that fitamong organizational characteristics is an impor-tant predictor of firm performance (e.g., Slater andOlson, 2000; Ketchen
et al
., 1997; Priem, 1994;White, 1986).Because each operational strategy calls for aparticular configuration of organizational aspects(see Table 1), efficiency and flexibility can beviewed as pure or ideal configurations, while acombination of efficiency and flexibility wouldrequire a hybrid configuration (Doty, Glick, andHuber, 1993). Since the configurational dimen-sions for efficiency and flexibility conflict, firmsthat operate with this hybrid configuration will nothave consistent organizational attributes and willexperience difficulty achieving either efficiencyor flexibility in their operations. This will likelyresult in an inability to effectively maintain lowcosts or effectively meet end-customer needs, andtherefore an inability to establish a competitiveadvantage.Following this logic, Tushman and O’Reilly(1999) suggested that a firm can only provideboth standard and made-to-order outputs effec-tively if they are pursued in physically separateentities, with different organization structures, sys-tems, rewards, and competencies; in other words,two divisions with ‘pure’ configurations. Whilethis may be feasible for large firms, small firmsgenerally have more limited resources (Cooper,Gimeno-Gascon, and Woo, 1994) and expertise(Forbes and Milliken, 1999). Because of this,the task of separating the organization into divi-sions that effectively follow different strategiesmay be more demanding and complex than mostsmall firms can handle. Therefore, small firms thatattempt to mix efficiency and flexibility strategieswill likely be at a disadvantage to other firms,which should result in lower performance.
 Hypothesis 1: Small firms that follow an effi-ciency strategy and small firms that follow a flexibility strategy will outperform small firmsthat mix these strategies.
Performance of flexibility vs. efficiencystrategies in small firms
Firm size is an important contextual variable inconfiguration, so congruence between strategy,configuration, and size may influence firm perfor-mance. It is therefore important to ask whether an
Table 1. Characteristics of efficiency and flexibility firmsOperational aspect Efficiency firms Flexibility firms CiteTechnology Specializedequipment, heavyfixed assetsGeneral-purposeequipmentLowson (2001),Thompson (1967),Thompson andBates (1957)ProductionprocessesLong product runs Unit or small batchproductionZipkin (2001), Filleyand Aldag (1980),Woodward (1965)OrganizationdesignMechanistic Organic Filley and Aldag(1980), Thompsonand Bates (1957)Direct labor Unskilled Skilleddecision-makersLowson (2001),Filley and Aldag(1980), Thompsonand Bates (1957)Control systems Feedforward Feedback Morgan (1992), Filleyand Aldag (1980),Thompson (1967)
Copyright
2005 John Wiley & Sons, Ltd.
Strat. Mgmt. J.
,
26
: 1249–1259 (2005)
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