Optimal Time Allocation for Process Improvement and Growth for Entrepreneurs

Abstract

For many growth-oriented entrepreneurial firms, the entrepreneur's time is one of the more salient resource constraint. Classifying the entrepreneurs' activities into four categories based on their revenue-related or process-related impact and short-term or long-term effects, we present a dynamic time allocation model for process improvement in growth-oriented entrepreneurial firms, and characterize the optimal time allocation policy and its impact on firm growth. We find that the optimal time allocation path consists of three phases, focusing first on long-term process improvement activities with temporal returns, and then on those with financial returns, before finally harvesting profit. In particular, entrepreneurs with lower initial revenue rate should invest more time upfront on long-term process improvement activities, which enable them to ultimately grow faster. We adapt these insights to the cases with uncertainty in growth and with limited financial resources. We benchmark the optimal policy to two commonly practiced time allocation heuristics.

Keywords: Entrepreneurship, Process Improvement, Time Allocation, Dynamic Programming

JEL Classification: M11, M13