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The value of business planning before start-up — A decision-theoretical perspective

Author

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  • Chwolka, Anne
  • Raith, Matthias G.

Abstract

In this paper we analyze business planning from the perspective of the nascent entrepreneur. We measure its value for the entrepreneur at the point where he must decide whether or not to plan, and we contrast our results with empirical studies that compare firms' performance after market entry. Within a formal decision-theoretical framework we show that the value of planning is driven by the possibility of evaluating alternative actions and being able to improve strategies. Before market entry, the main purpose of evaluation is to pursue good and terminate bad business ideas. We show how the value of planning is determined by the venture under consideration and how it depends on the quality of planning. Our theoretical model yields several behavioral and statistical implications that we compare with empirical observations found in the literature. In particular, we show how our model of rational decision making can be used to explain important hypotheses and contradictory observations that have fueled the debate on business planning.

Suggested Citation

  • Chwolka, Anne & Raith, Matthias G., 2012. "The value of business planning before start-up — A decision-theoretical perspective," Journal of Business Venturing, Elsevier, vol. 27(3), pages 385-399.
  • Handle: RePEc:eee:jbvent:v:27:y:2012:i:3:p:385-399
    DOI: 10.1016/j.jbusvent.2011.01.002
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    References listed on IDEAS

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    1. Mathew L. A. Hayward & Dean A. Shepherd & Dale Griffin, 2006. "A Hubris Theory of Entrepreneurship," Management Science, INFORMS, vol. 52(2), pages 160-172, February.
    2. Brinckmann, Jan & Grichnik, Dietmar & Kapsa, Diana, 2010. "Should entrepreneurs plan or just storm the castle? A meta-analysis on contextual factors impacting the business planning-performance relationship in small firms," Journal of Business Venturing, Elsevier, vol. 25(1), pages 24-40, January.
    3. Marc Gruber & Ian C. MacMillan & James D. Thompson, 2008. "Look Before You Leap: Market Opportunity Identification in Emerging Technology Firms," Management Science, INFORMS, vol. 54(9), pages 1652-1665, September.
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    5. Gruber, Marc, 2007. "Uncovering the value of planning in new venture creation: A process and contingency perspective," Journal of Business Venturing, Elsevier, vol. 22(6), pages 782-807, November.
    6. Harald Strotmann, 2007. "Entrepreneurial Survival," Small Business Economics, Springer, vol. 28(1), pages 87-104, January.
    7. Cooper, Arnold C. & Woo, Carolyn Y. & Dunkelberg, William C., 1988. "Entrepreneurs' perceived chances for success," Journal of Business Venturing, Elsevier, vol. 3(2), pages 97-108.
    8. Armstrong, J. Scott, 1982. "The value of formal planning for strategic decisions: review of empirical research," MPRA Paper 81683, University Library of Munich, Germany.
    9. Ashish Arora & Andrea Fosfuri, 2005. "Pricing Diagnostic Information," Management Science, INFORMS, vol. 51(7), pages 1092-1100, July.
    10. Karlsson, Tomas & Honig, Benson, 2009. "Judging a business by its cover: An institutional perspective on new ventures and the business plan," Journal of Business Venturing, Elsevier, vol. 24(1), pages 27-45, January.
    11. Shane, Scott & Delmar, Frederic, 2004. "Planning for the market: business planning before marketing and the continuation of organizing efforts," Journal of Business Venturing, Elsevier, vol. 19(6), pages 767-785, November.
    12. Dan Lovallo & Colin Camerer, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March.
    13. Jianwen Liao & William Gartner, 2006. "The Effects of Pre-venture Plan Timing and Perceived Environmental Uncertainty on the Persistence of Emerging Firms," Small Business Economics, Springer, vol. 27(1), pages 23-40, August.
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    Cited by:

    1. Eric Shaunn Mattingly & Trayan N. Kushev & Manju K. Ahuja & Dalong Ma, 2016. "Switch or persevere? The effects of experience and metacognition on persistence decisions," International Entrepreneurship and Management Journal, Springer, vol. 12(4), pages 1233-1263, December.
    2. Parida, Vinit & George, Nerine Mary & Lahti, Tom & Wincent, Joakim, 2016. "Influence of subjective interpretation, causation, and effectuation on initial venture sale," Journal of Business Research, Elsevier, vol. 69(11), pages 4815-4819.
    3. repec:eee:jbrese:v:83:y:2018:i:c:p:173-185 is not listed on IDEAS
    4. repec:gam:jagris:v:6:y:2016:i:1:p:5:d:62486 is not listed on IDEAS
    5. repec:kap:jtecht:v:42:y:2017:i:6:d:10.1007_s10961-016-9518-z is not listed on IDEAS
    6. Annalisa Ferrari & Piergiuseppe Morone & Valentina E. Tartiu, 2016. "Tackling Uncertainty through Business Plan Analysis—A Case Study on Citrus Waste Valorisation in the South of Italy," Agriculture, MDPI, Open Access Journal, vol. 6(1), pages 1-12, January.

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