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? EVIDENCE

LINKING STRATEGY TO PERFORMANCE IN SMALL
FIRMS
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 strategies
or flexibility strategies outperform those that attempt to pursue both. Additionally, size is used
as a configurational attribute to develop competing hypotheses on whether efficiency strategies
or 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 significantly
underperformed. No significant performance differences were found between firms utilizing only
efficiency strategies and those utilizing only flexibility strategies. Copyright  2005 John Wiley
& Sons, Ltd.

Advancing knowledge on strategy in small firms
is an essential task because these firms play a vital
role in world economies (e.g., Sherman, 1999),
yet face significant disadvantages in the market-
place in terms of managerial expertise, access to
capital, bargaining power with suppliers and buy-
ers, and experience curve effects (e.g., Forbes and
Milliken, 1999; Pissarides, 1999; Dean, Brown,
and Bamford, 1998; Rajan and Zingales, 1995;
Holmes and Dunstan, 1994). Progress in this area
of the entrepreneurship literature has been made
in recent years with studies on topics such as
product-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 in
large ones (e.g., Fiegenbaum and Karnani, 1991;
Jarillo, 1989).
One aspect of small firm strategy that has not
received much attention is how product offering
relates to operational strategy and firm perfor-
mance. This paper examines this concept with
regard to three choices firms can make: to offer
only standard products, to offer only made-to-order
products, 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 offer
only standard products must compete on organi-
zational efficiency, firms that offer only made-to-
order products must compete on their flexibility
to meet individual customer needs, and firms that
offer both must attempt to be both efficient and
flexible (e.g., Filley and Aldag, 1980). It has also
been proposed that the technology, labor, control
system, and organizational structure requirements
to achieve efficiency conflict with those required

Copyright  2005 John Wiley & Sons, Ltd. Received 8 October 2003
Final revision received 6 June 2005
1250 J. J. Ebben and A. C. Johnson
to achieve flexibility, and it is therefore difficult
for firms to achieve both efficiency and flexibility
(e.g., Fiegenbaum and Karnani, 1991; Filley and
Aldag, 1980).
While these strategies and their implications
have been discussed in the organizational theory
and operations management literature, little has
been done empirically to investigate how these
concepts apply to the management of small firms.
This study advances the literature by develop-
ing these concepts using organization theory and
by testing hypotheses regarding the relationship
between these strategies and firm performance in a
large sample of small, privately-held manufactur-
ing firms. The results suggest that small firms that
pursue either efficiency or flexibility strategies are
able to achieve optimal performance, while firms
that attempt to mix efficiency and flexibility strate-
gies significantly underperform. The implications
for small firm management and future research are
discussed.
LITERATURE REVIEW
Early literature on organizations proposed that
there is a trade-off firms can make between effi-
ciency and flexibility due to competing organi-
zational and operational requirements in terms
of technology, organizational structure, operating
processes, and labor. Stigler (1939) introduced this
trade-off, arguing that the technology needed to
operate with low costs is entirely different from
that required to meet changing demand. Thomp-
son and Bates (1957) followed this, proposing that
firms with flexibility goals do not invest in heavy,
specialized capital equipment because it inhibits
the ability to shift from one goal to the next. These
authors also noted that flexibility goals require
skilled direct labor, stating that ‘front-line flexibil-
ity requires the exercise of judgment, and hence
experience is a major basis for functional and
hierarchical differentiation’ (Thompson and Bates,
1957: 331). Woodward (1965) classified manufac-
turing production technologies as unit/small batch
and large batch/mass production, finding that large
batch/mass production firms focused on efficien-
cies, while unit/small batch firms were flexible in
meeting customer needs.
Filley and Aldag built on this previous work
along with their own observations to assert that
a clear distinction exists, in that ‘the survival of
Copyright  2005 John Wiley & Sons, Ltd.
organizations seems to depend, on the one hand,
upon creating efficiency of operations, or on the
other 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 different
types 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 flexibility
in output volume, finding an interaction effect
between variation in output volume and firm size
on performance. This paper integrates Filley and
Aldag’s (1980) and Fiegenbaum and Karnani’s
(1991) work to propose that the key to efficiency
and flexibility strategies does not only come from
the ability to meet variation in quantity of product
provided, but also from the variation in types of
products that are offered. In this regard, flexibility
refers to a firm’s ability to provide made-to-order
products that are unique to individual customers or
groups of customers.
These efficiency and flexibility classifications of
small firms are different from some of the more
popular typologies that have been established in
the literature. For instance, it is different from
Porter’s (1980) low cost and differentiation, in
which firms execute a differentiation strategy via
marketing or innovation rather than customization.
Products that are differentiated still may be stan-
dardized and conducive to mass production and
distribution (White, 1986), which are in essence
efficiency strategies. Differentiation via marketing
might also be less relevant to small firms, as they
may not have the marketing dollars necessary to
pursue this strategy. This is not meant to imply
that other typologies are not useful in small-firm
strategy research, but the efficiency and flexibil-
ity classifications may provide an alternative per-
spective that reveals new insights into small firm
behavior and performance.
THEORY DEVELOPMENT
Configuration theory and small-firm
performance
In small firms, where selection of strategy is criti-
cal for survival given the disadvantages they face,
an investigation of these operational strategies
Strat. Mgmt. J., 26: 1249–1259 (2005)
 Efficiency and Flexibility Strategies of Small Firms 1251

seems especially relevant. Configuration theorists therefore an inability to establish a competitive

have long held that operational strategy is cen-
tral to organizational outcomes (Chandler, 1962)
and that congruence among strategy, technology,
organizational structure, and operating processes
are key in the overall effectiveness of a firm (Fry
and Smith, 1987; White 1986). Different strate-
gies are expected to require different structures
(Miller, Droge, and Toulouse, 1988; Filley and
Aldag, 1980), which must ‘respond to the partic-
ular control and coordinative problems created by
the strategies that are ultimately selected’ (Miller
et al., 1988: 545). Empirical studies regarding con-
figuration have consistently found evidence that fit
among organizational characteristics is an impor-
tant predictor of firm performance (e.g., Slater and
Olson, 2000; Ketchen et al., 1997; Priem, 1994;
White, 1986).
Because each operational strategy calls for a
particular configuration of organizational aspects
(see Table 1), efficiency and flexibility can be
viewed as pure or ideal configurations, while a
combination of efficiency and flexibility would
require a hybrid configuration (Doty, Glick, and
Huber, 1993). Since the configurational dimen-
sions for efficiency and flexibility conflict, firms
that operate with this hybrid configuration will not
have consistent organizational attributes and will
experience difficulty achieving either efficiency
or flexibility in their operations. This will likely
result in an inability to effectively maintain low
costs or effectively meet end-customer needs, and
advantage.
Following this logic, Tushman and O’Reilly
(1999) suggested that a firm can only provide
both standard and made-to-order outputs effec-
tively if they are pursued in physically separate
entities, with different organization structures, sys-
tems, rewards, and competencies; in other words,
two divisions with ‘pure’ configurations. While
this may be feasible for large firms, small firms
generally 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 strategies
may be more demanding and complex than most
small firms can handle. Therefore, small firms that
attempt to mix efficiency and flexibility strategies
will 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 firms
that mix these strategies.
Performance of flexibility vs. efficiency
strategies in small firms
Firm size is an important contextual variable in
configuration, 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 firms

Operational aspect Efficiency firms Flexibility firms Cite

Technology Specialized General-purpose Lowson (2001),

equipment, heavy equipment Thompson (1967),
fixed assets Thompson and
Bates (1957)
Production Long product runs Unit or small batch Zipkin (2001), Filley
processes production and Aldag (1980),
Woodward (1965)
Organization Mechanistic Organic Filley and Aldag
design (1980), Thompson
and Bates (1957)
Direct labor Unskilled Skilled Lowson (2001),
decision-makers Filley and Aldag
(1980), Thompson
and Bates (1957)
Control systems Feedforward Feedback Morgan (1992), Filley
and Aldag (1980),
Thompson (1967)

Copyright  2005 John Wiley & Sons, Ltd. Strat. Mgmt. J., 26: 1249–1259 (2005)
1252 J. J. Ebben and A. C. Johnson
efficiency strategy is more appropriate for small
firms than a flexibility strategy, or vice versa.
Given the differences between large and small
firms, conventional wisdom might predict that flex-
ibility strategies are more appropriate for small
firms, but arguments can be made on both sides.
A flexibility perspective
Much of the early entrepreneurship literature pre-
scribed that small firms should pursue niche strate-
gies. This conventional view contended that small
firms cannot compete directly with larger firms
on economies of scale, so they are better off
serving narrow market segments not reached by
larger competitors (Broom and Longenecker, 1979;
Katz, 1970), and targeting market segments that
demand customized products and high levels of
customer service that might be difficult for larger
firms to provide (Cohn and Lindberg, 1972).
The population ecology literature also points to
smaller-scale niche strategies with the concept of
resource partitioning (Carroll, 1985), which sug-
gests that opportunities exist for small firms to
serve smaller, specialized niches that are not ful-
filled by large generalist firms (Wholey and Brit-
tain, 1986).
Based on certain characteristics of small firms,
flexibility strategies do seem to fit. First, small
firms do not have access to the same financial
resources as larger firms and are many times under-
capitalized (Cooper et al., 1994; Rajan and Zin-
gales, 1995). This results in a lack of financial
resources that hinders large fixed-asset investment
(Jarillo, 1989), which is important for optimal per-
formance in efficiency firms. Past research has also
shown that this lack of financing is a key barrier to
growth (Binks and Ennew, 1996; Stancill, 1986),
so small firms may have difficulty achieving the
economies of scale required to be successful with
efficiency strategies. Second, small firms are gen-
erally less bureaucratic, structured, and diversified
than larger firms (Forbes and Milliken, 1999), so
they can be more responsive to individual cus-
tomer needs in providing made-to-order products
and services, which can be a significant competi-
tive advantage (Cohn and Lindberg, 1972). Finally,
small firms generally have fewer formal systems
and procedures in place and perform fewer plan-
ning activities (Busenitz and Barney, 1997), so
they are ill equipped to plan for and implement
feedforward control systems, which are necessary
Copyright  2005 John Wiley & Sons, Ltd.
in efficiency firms for optimal performance. This
leads to the first of two competing hypotheses:
Hypothesis 2a: Small firms that utilize a flexi-
bility strategy will outperform small firms that
utilize an efficiency strategy.
An efficiency perspective
Contrary to the more conventional perspective,
there is reason to believe that small firms may
be better off with efficiency strategies. The most
compelling reason to believe this is that organizing
to meet individual customer needs and fluctuat-
ing demand is very complex (Swaminathan, 2001;
Filley and Aldag, 1980). Because of the uncer-
tainty of demand and costs for individual projects,
production scheduling and pricing are difficult but
necessary to keep costs from getting out of control
and to maintain adequate margins. Additionally,
with the uncertainty involved in product attributes
and volume demand, flexibility firms operate in a
much more turbulent environment by nature (Vick-
ery, Droge, and Germain, 1999). Since small firms
are generally assumed to have less sophisticated
management expertise (Pissarides, 1999; Forbes
and Milliken, 1999), they may not be able to effec-
tively manage these difficult internal and external
environments.
Efficiency strategies, on the other hand, may be
less complicated to manage. Efficiency firms pro-
vide products of a prescribed quality at predictable
levels of demand (Vickery, Droge, and Markland,
1997). These firms generally provide only a few
products that are the core offerings of the firm,
which combined with predictable demand allows
for simpler production scheduling, inventory lev-
els, and delivery. This results in more accurate cost
estimates, so pricing to maintain profitable margins
is less complicated than in flexibility firms. This
leads to the second competing hypothesis:
Hypothesis 2b: Small firms that utilize an effi-
ciency strategy will outperform small firms that
utilize a flexibility strategy.
METHODS
Sample
The sample of firms was selected from a database
owned by Fintel, LLC, that contains financial data
Strat. Mgmt. J., 26: 1249–1259 (2005)
 Efficiency and Flexibility Strategies of Small Firms 1253
Table 2. Descriptive statistics and correlations

Sample Variable Mean S.D. 1 2 3 4 5 6

Survey (144 firms) 1. ROIC 0.133 0.167

2. ROE 0.172 0.224 0.935∗∗
3. ROA 0.086 0.106 0.924∗∗ 0.844∗∗
4. Size 5,312,243 4,872,835 −0.029 −0.009 −0.056
5. Age 41.93 29.29 −0.133 −0.110 −0.122 0.230∗∗
6. Family 0.434 0.497 0.102 0.097 0.076 −0.079 −0.219∗∗
7. CEO 17.75 11.40 0.000 0.002 −0.048 −0.045 0.008 0.033
Website (200 firms) 1. ROIC 0.141 0.162
2. ROE 0.179 0.208 0.957∗∗
3. ROA 0.087 0.101 0.947∗∗ 0.899∗∗
4. Size 5,268,259 4,245,381 −0.018 0.014 −0.047

∗∗
p < 0.01

on privately held firms from over 900 SIC codes.
A random sample of 600 manufacturing firms with
SIC codes between 20 and 39 was selected. All
of these firms had less than $20 million in sales,
which is consistent with other researchers’ defini-
tion of small firms (e.g., Daily and Dalton, 1993;
d’Ambroise and Muldowney, 1988). These 600
firms were contacted by phone and 319 indicated
interest in participating in the study. Of these 319
firms, 200 firms had website information avail-
able on firm products and services and 144 firms
responded to a survey of top managers regard-
ing firm operations and strategy (see Table 2 for
descriptives). Ninety-one firms had website infor-
mation available and responded to the survey.
Measures
The independent construct, firm strategy, was mea-
sured via survey response and website analysis.
The survey was designed to examine expected
product and operational aspects of firms that uti-
lize efficiency and flexibility strategies. Eight ques-
tions were developed regarding these aspects and
answered on a six-point semantic-differential for-
mat. Since the Fintel database included finan-
cial data from year-end 1997, the survey ques-
tions asked about firm operations during that year.
For each question, firms scored on a continuum
from flexibility to efficiency (1 to 6), with ques-
tions one, three, four, and six reverse-scored.
The response rate for the survey was 45.1 per-
cent.
Internal consistency of the eight questions was
examined using a principal components analysis
with Varimax rotation. Seven of the eight questions
Copyright  2005 John Wiley & Sons, Ltd.
loaded on a single factor, and the question that did
not load was discarded from subsequent analysis.
Coefficient alpha was 0.86 on the remaining seven
questions, indicating that they were indeed mea-
suring the same construct. Response scores for the
seven questions were added together to represent
strategy for each firm and adjusted to a range of
0 to 35, with lower scores representing flexibil-
ity and higher scores representing efficiency. Only
two firms left one of the eight questions blank;
rather than deleting these firms, the missing data
were replaced with the mean response by the firm
to the other items in the survey.
For the website measure of strategy, a search
was made for websites of the 319 firms and 200
were found that had enough information available
to evaluate the strategy of the firm. Three raters
examined these websites and provided their opin-
ions on whether each firm was using an efficiency
strategy, using a flexibility strategy, or mixing
strategies. One of the three raters was deemed
the ‘blind’ rater and was not familiar with the
hypotheses of the paper. The criteria for strat-
egy classification were specified in advance, based
on the principle that efficiency firms only pro-
vide standard products, flexibility firms only pro-
vide made-to-order products, and mix firms pro-
vide both standard and made-to-order products.
Every available page on each firm’s website (Com-
pany History, Products and Services, etc.) had to
be examined. Coefficient alpha between the three
raters’ strategy classifications was 0.85, signaling
high interrater reliability, and there did not appear
to be systematic differences between the ‘blind’
rater’s and ‘non-blind’ raters’ responses. Based on
rater classifications, the 200 firms were coded as
Strat. Mgmt. J., 26: 1249–1259 (2005)
1254 J. J. Ebben and A. C. Johnson

1 = flexibility, 2 = mix, or 3 = efficiency, result- 31 were classified as flexibility by website, 25

ing in 66 flexibility, 50 mix, and 84 efficiency
firms.
Convergent validity was demonstrated between
the survey responses and website classifications
using several methods. Correlation between the
measures was 0.612 and significant at a 0.01 level,
and the two measures loaded on a single fac-
tor that explained 81 percent of the variance in
cases using a rotated principal components analy-
sis. Also, when cut-off points were established so
that firms scoring below 11 on the survey were
classified as flexibility, firms scoring between 11
and 16 on the survey were classified as mix, and
firms scoring above 16 were classified as effi-
ciency, coefficient alpha between survey and web-
site classifications was 0.80.
As additional evidence of convergence, the
groups of firms as classified by website responded
to the survey significantly differently. For the
91 firms with both website and survey data,
were classified as mix, and 35 were classified as
efficiency. The mean overall survey score for the
31 firms classified as flexibility was 7.58, for the
25 mix firms was 12.36, and for the 35 efficiency
firms was 20.89 (all three mean differences were
significant at a 0.01 level). On individual survey
questions, firms classified as flexibility scored sig-
nificantly lower than those classified as efficiency
on all seven questions used in the analysis, while
mix firms scored in between on six of them (see
Table 3). Mix firms scored significantly lower than
efficiency firms at a 0.05 or 0.01 level on all seven
questions and significantly higher than flexibility
firms at a 0.05 or 0.01 level on four of the seven
questions.
The dependent construct, firm performance, was
captured using three measures: return on invested
capital (ROIC), return on equity (ROE), and return
on assets (ROA). These measures were taken from
year-end 1997 data in the Fintel database and

Table 3. Survey responses by website classification of strategy

Question (scores range from 1 to 6) Mean Response t-valuea,b

Eff. Mix Flex. (E vs. F)

1 = Our company provided only made-to-order products and services to 4.11 2.28 1.61 6.100∗∗
customer groups or individual customers.
6 = Our company provided standard products to all of our customers.
1 = Our products were priced based on the modifications that were 4.77 3.20 1.90 7.335∗∗
required by customers.
6 = We invoiced our customers using a set price list.
1 = We utilized short products runs in manufacturing or produced in 3.03 2.00 2.39 1.623+
single unit batches.
6 = We utilized long product runs in manufacturing.
1 = Our manufacturing line employees were frequently required to 3.98 2.92 2.65 2.977∗∗
perform unique tasks or alter products.
6 = Our manufacturing line employees performed standard tasks in
completing the production/assembly of products.
1 = Our manufacturing materials inputs varied greatly with production 4.54 3.44 2.97 3.994∗∗
runs or were specially ordered for particular production runs.
6 = Our manufacturing materials inputs did not vary greatly with
production runs.
1 = Customers often asked for modification in products when ordering 4.06 2.56 1.65 6.453∗∗
or they ordered products specifically modified for their market
segment.
6 = Customers ordered our products from established descriptions or
catalogs without product modification.
1 = We manufactured products after they were ordered. 3.49 2.68 1.42 5.580∗∗
6 = We manufactured products and placed them in inventory for later
sale.

a
d.f. = 6 3
b
One-tail tests
+
p < 0.10; ∗∗ p < 0.01

Copyright  2005 John Wiley & Sons, Ltd. Strat. Mgmt. J., 26: 1249–1259 (2005)
 Efficiency and Flexibility Strategies of Small Firms 1255

are common measures utilized in the strategy and
entrepreneurship literature (e.g., Robinson, 1999).
Adjustments were made to these data to reduce the
influence of outliers using the Winsor technique at
the 5th and 95th percentiles. This technique has
been recommended for accurate regression model
estimates (Kennedy, Lakonishok, and Shaw, 1992)
and used in empirical analyses in the management
literature (e.g., Miller and Parkhe, 2002; Berger,
1993).
In an additional data adjustment, calculations for
ROIC and ROE were eliminated when invested
capital and/or equity for a firm was negative, as
these negative denominators would result in a
misleading measure of performance. While there
are bias concerns with this method, it resulted
in minimal loss of data. For the 200 firms with
website data, this left 199 firms with an ROIC
measure, 194 firms with an ROE measure, and all
200 firms with an ROA measure. For the 144 firms
with survey data, this left 144 firms with an ROIC
measure, 142 firms with an ROE measure, and all
144 firms with an ROA measure.
Industry was used as a control variable for three
reasons. First, size, growth, and concentration of
a particular industry are likely to affect individ-
ual firm performance within that industry (e.g.,
Schmalensee, 1985). Second, controlling for indus-
try helps to control for environmental effects, such
as hostility, complexity, and dynamism (Naman
and Slevin, 1993). Third, controlling for industry
helps to control for firm goals (Bromiley, 1991;
Fiegenbaum and Thomas, 1988). Industry was con-
trolled using a dummy variable for each 2-digit
SIC code.
Firm size was also used as a control, as sev-
eral studies have linked size to performance (e.g.,
Table 4. Mean performance comparisons
Fiegenbaum and Karnani, 1991), and size has
been argued to be an important control variable
in entrepreneurship research regarding firm perfor-
mance (e.g., Murphy, Trailer, and Hill, 1996). Firm
size was defined as the log of 1997 sales revenues,
which was obtained from the Fintel database. Log
values were used to obtain normal distributions for
this measure, consistent with other empirical stud-
ies (e.g., Garg, Walters, and Priem, 2003).
For the survey sample, firm age, family own-
ership, and the tenure of the current CEO were
obtained in the survey and included in regression
as control variables. All three of these constructs
have been linked to various firm outcomes, includ-
ing performance (e.g., Randøy and Goel, 2003;
Hambrick, 1991; Randolph and Sapienza, 1991).
Firm age was taken as the log of the number of
years since inception, family ownership was coded
as 0 = No and 1 = Yes, and tenure of the current
CEO was measured as the number of years the
current CEO had been in his or her position.
ANALYSIS AND RESULTS
Two sets of analyses provide evidence of support
for Hypothesis 1 but no evidence of support for
Hypothesis 2a or 2b. The first set of analyses com-
pared firm strategy as measured by survey to firm
performance on the sample of 144 (see Tables 4
and 5 for results). ANOVA and t-tests showed sig-
nificant differences in performance between firms
classified as non-mix and those classified as mix at
a 0.10 level. Regression analyses revealed stronger
relationships when controlling for firm size, age,
industry, family ownership, and CEO tenure, with

Measure Mean t-testsa Mean t-testsa

Mix Non-mix d.f. t Eff. Flex. d.f. t

ROICb 0.093 0.143 142 1.467+ 0.153 0.133 112 0.653

ROEb 0.116 0.186 140 1.510+ 0.201 0.172 111 0.699
ROAb 0.060 0.092 142 1.483+ 0.100 0.085 112 0.780
ROICc 0.091 0.158 197 2.579∗∗ 0.152 0.166 147 0.617
ROEc 0.120 0.203 192 2.799∗∗ 0.194 0.215 143 0.583
ROAc 0.056 0.098 198 2.556∗∗ 0.092 0.104 148 0.492

a
One-tail tests
b
144 surveyed firms
c
200 website firms
+
p < 0.10; ∗∗ p < 0.01

Copyright  2005 John Wiley & Sons, Ltd. Strat. Mgmt. J., 26: 1249–1259 (2005)
1256 J. J. Ebben and A. C. Johnson

Table 5. Results of regression analysesa

Ind. variables 144 surveyed firms 200 website firms

Model 1: Model 2: Model 3: Model 1: Model 2: Model 3:
ROIC ROE ROA ROIC ROE ROA

Intercept 0.013 −0.066 0.140 0.021 −0.084 0.104

(0.304) (0.413) (0.195) (0.241) (0.313) (0.150)
Log sales 0.051 0.079 0.010 0.012 0.031 −0.007
(0.047) (0.063) (0.030) (0.037) (0.048) (0.023)
SICb — — — — — —
Firm age −0.151∗ −0.207∗ −0.086∗ n/a n/a n/a
(0.064) (0.087) (0.041)
Family-ownedc −0.003 −0.011 −0.010 n/a n/a n/a
(0.032) (0.043) (0.020)
CEO tenure 0.001 0.001 −0.001 n/a n/a n/a
(0.001) (0.002) (0.001)
Strategyd 0.078∗ 0.114∗ 0.047∗ 0.067∗∗ 0.088∗∗ 0.042∗∗
(0.038) (0.052) (0.024) (0.027) (0.035) (0.017)
F 1.192 1.056 1.058 1.879∗ 1.968∗∗ 1.494∗
R2 0.188 0.173 0.171 0.166 0.177 0.136
Adj. R 2 0.030 0.009 0.009 0.078 0.087 0.045

a
Standard errors are in parentheses
b
SIC 31 significant at 0.05 for surveyed firms, SIC 30 and 31 sig. at 0.05 for website firms
c
0 = no; 1 = yes
d
0 = mix; 1 = non-mix
∗
p < 0.05; ∗∗ p < 0.10

non-mix strategy having a positive and signifi-
cant impact on performance at a 0.05 level. No
significant differences in the performance of firms
classified as efficiency and those classified as flex-
ibility were found in this sample.
The second set of analyses using the website
measures of strategy on the sample of 200 provided
even stronger support for Hypothesis 1. ANOVA
and t-tests showed that firms classified as non-mix
as well as those classified as efficiency and flexibil-
ity separately performed significantly greater than
firms classified as mix at a 0.01 level. Regression
analyses supported these results when controlling
for size and industry, with non-mix strategy having
a positive and significant impact on all three mea-
sures of performance at a 0.01 level. No significant
differences were found between the performance
of efficiency and flexibility firms.
DISCUSSION
The findings in this study are significant for the
small-firm strategy literature, as they indicate that
efficiency and flexibility may be appropriate clas-
sifications of small-firm strategy and provide a
Copyright  2005 John Wiley & Sons, Ltd.
new area of focus for entrepreneurship strategy
research. The results seem significantly strong
considering the use of two separate measures of
strategy on two overlapping samples. Although the
findings using the website measure of strategy may
be questioned, as this measure was taken in 2002
(5 years after the measure of performance), it is
contended that the 2002 website measure is repre-
sentative of 1997 strategy for three reasons. First,
the convergence with the survey measure of strat-
egy, which asked about firm operations in 1997,
provides validation. Second, based on the mini-
mum age of firms in the sample, 6 years, as well as
the median age, 33 years, it appears that the major-
ity of these firms are well established and therefore
subject to inertial constraints that would prevent
them from changing strategy significantly (Han-
nan and Freeman, 1984). Third, follow-up phone
interviews with a random sample of 10 firms indi-
cated that these firms were operating in 2002 with
the same strategy as in 1997. In fact, all 10 inter-
viewees responded enthusiastically that their firm
had not changed its strategy at all since well before
1997, with some stating that their firm was oper-
ating today exactly the way it has been for the past
40 or 50 years.
Strat. Mgmt. J., 26: 1249–1259 (2005)
 Efficiency and Flexibility Strategies of Small Firms
This validation is important because it provides
evidence that meaningful differences exist between
small firms in terms of standard and made-to-order
product offerings. Most importantly, the strong
support for Hypothesis 1 along with the lack of
support for Hypotheses 2a and 2b suggests that
what matters most in regard to efficiency and flex-
ibility strategies is not which one a small firm
pursues, but that a small firm does not attempt
to pursue both. This does not coincide with the
conventional wisdom that small firms can bet-
ter compete by providing unique or made-to-order
products; instead, it supports configuration theory
in that the strategy chosen is not as important
as whether it allows for consistency in operations
(e.g., Doty et al., 1993). The surveys provide some
evidence of this, as it appears that firms offer-
ing only standard products configure in a manner
related to efficiency, firms offering only made-to-
order products configure in a manner related to
flexibility, and firms offering standard and made-
to-order products are somewhere in between.
In addition to theoretical advancements, there
is also merit to the methods utilized. The authors
are unaware of other studies that have used web-
site analysis to classify firm strategy, and while
this may seem unorthodox to some researchers,
its convergence with a second measure and the
high interrater reliability indicate that this method
is indeed valid. This is a method that could poten-
tially be used to classify firm strategy for a large
sample of firms. This study is also unique in uti-
lizing a database containing financial data for pri-
vately held firms, which may make the results of
this study more generalizable to the population of
small firms than studies that have used secondary
data on public small firms or business units of large
corporations.
In terms of practical application, the findings
of this study have the potential to be signif-
icant for entrepreneurship education. Anecdotal
evidence suggests that small firms mix strategies as
a response to customer demand or in an attempt to
increase sales volume by offering greater variety.
For example, efficiency firms may begin mixing
strategies if sales reps are repeatedly asked whether
‘special’ sizes or versions of products are pos-
sible. While this may seem like a good way to
expand sales and grow, or as a strategic response
to faltering sales, the evidence from this study sug-
gests that this may actually be counterproductive in
terms of the long-term health of the organization. If
Copyright  2005 John Wiley & Sons, Ltd.
1257
entrepreneurs are taught to determine what opera-
tional strategy their firm should rely on (efficiency
or flexibility), they can then organize accordingly
and avoid mixing strategies.
Limitations and future research
The sample used for this study only included
manufacturing firms for comparability within this
study, and generalizability to the entire population
of small firms should therefore be done with cau-
tion. Efficiency and flexibility strategies are fairly
simple to identify in firms that manufacture prod-
ucts (standard vs. made-to-order), but may not be
so simple to identify in retail or other types of
firms. It is also possible that these strategy classifi-
cations are not appropriate for small firms outside
of manufacturing, or that other results would be
obtained for non-manufacturing sectors. However,
there is no immediate reason to assume that either
of these is the case and this should be addressed
in subsequent research.
A second limitation is the model used for this
study. All efficiency and flexibility firms were
lumped together and treated as adopting pure
strategies, while mix firms were coded zero and
treated as directly in between efficiency and flexi-
bility firms. This ignores the true variance in strat-
egy implementation, reducing the model’s predic-
tive power. Future research should specify a more
accurate model that addresses the degree to which
a firm mixes strategies and at what point it begins
to impact performance.
Another topic that should be addressed in future
research is how these strategies develop and change
in small firms. It is likely that product and organi-
zation are intertwined, which conflicts with some
of the traditional thinking that organization fol-
lows product (Randolph and Dess, 1984). What
an entrepreneur sees as a need in the market
may lead him or her toward a standard or made-
to-order product, but the entrepreneur will also
need to consider the organizational requirements
involved when evaluating the overall opportu-
nity. For instance, an entrepreneur may recog-
nize an opportunity within an industry to provide
either standard or made-to-order outputs, but that
entrepreneur may view the capital requirements of
an efficiency strategy as prohibitive and therefore
opt to pursue a flexibility strategy. Likewise, there
may be identifiable factors that influence strategic
change as a firm develops.
Strat. Mgmt. J., 26: 1249–1259 (2005)
1258 J. J. Ebben and A. C. Johnson
All in all, the authors believe that this study pro-
vides a significant step forward in entrepreneurial
strategy research. Although classifying firms as
efficiency, flexibility, and mix is relatively simple,
it appears promising given the performance and
organizational differences found in this study. If
future research confirms and builds on the concepts
and findings of this study, considerable advance-
ments may be made in the field of entrepreneurship
regarding organizational development.
ACKNOWLEDGEMENTS
We would like to give special notice to Gerry
George, Robert Pricer, Nancy Carter, Kenneth
Wathne, Jan Heide, and Boris Neide for their inte-
gral support and insight, and thank the Univer-
sity of Wisconsin—Madison and the University
of St. Thomas for providing us with exceptional
resources for pursuing this study.
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