This summary of Enterprise and small business: principles, practice and policy by Carter & Jones-Evans is written in 2015
First definition of Small business by Bolton: a small enterprise is so, if it met the following three criteria:
1. Independent (not part of a larger enterprise),
2. managed in a personalised manner (simple management structure),
3. Relatively small share of the market (the enterprise is a price taker rather than a price maker).
This definition was criticised because also a large company can run in a highly personalised manner and independent is a relative concept (legally independent, but reliant on other large companies for their economic activity) and the small business may operate in a niche and therefore have a large share of that market.
Bolton came up with a second definition:
The concern was to capture the heterogeneity of smaller enterprises, by adjusting measures of assets, turnover, profitability and employment for the sector the business is in.
There were also problems with this definition. The measures eroded over time by inflation or productivity and the absence of a uniform definition makes it difficult.
The EU has a more uniform definition but it is only binding for institutions seeking EU funding.
| Enterprise category | Head count | Turnover or | Balance sheet |
| Micro | <10 | €2m | €2m |
| Small | <50 | €10m | €10m |
| Medium-sized | <250 | €50m | €43m |
Labour Force Surveys (LFS) data is used for to estimate the number of self-employed individuals and unincorporated businesses. The problem is that individuals may choose, for whatever reason, tot misrepresent their economic status. It may underestimate young individuals since they are more mobile than older individuals. And another problem is that the data is coming from a survey.
Another form is through Value Added Tax (VAT) registration. Only companies shift over and under the threshold for VAT and therefore it is not a reliable measure.
The best estimate of the enterprise population is often derived from a mix of survey information and registration information.
1. A fast increase of small businesses in the 1980s and a gentle increase since 1995 (with an exception in the early 1990s recessionary period)
2. A U-shaped pattern to ownership rates.
The rest of the countries may be notable exceptions, in the way that they are ‘increasers’ or ‘decreasers’.
1. Cost disadvantages
Before the 1980s smaller enterprises had a cost disadvantage. Larger enterprises would be able to produce goods much more cheaply (economies of scale). Bigger enterprises were also able to reduce uncertainty by vertically integrating their business with others in the supply chain. MES (minimum efficient scale) became important and drove small businesses away.
2. Technological changes
In the 1980s business ownership rates generally began to increase. One reason is that technological change reduced the importance of economies of scale in production, greater flexibility and increased efficiency. De-scaling offered lower optimal sizes and smaller enterprises could enter sectors previously closed to them.
3. Innovation
In parallel with the technological change arguments, some researchers have also argued that the re-emergence of enterprises had much to do with the innovatory capacity of smaller enterprises. In part, smaller enterprises are said to have a competitive advantage because they are less bureaucratic and, therefore, more flexible to changing market conditions.
4. Large firm fragmentation
Since the 1980s, there has been a radical shift in the business practices of larger enterprises. In response to challenges (for example riskier innovative products, difficulties to control large labour forces etc) larger enterprises sought to vertically disintegrate by hiving off enterprise activities into subsidiaries or franchised operations.
5. Development of the service sector
The nature of consumer demand has changed. Not only standardised mass produced goods, consumers have increasingly sought tailor-made goods and, in particular, individual services. Particularly smaller-sized businesses may have been able to exploit to these sectors because there exist few opportunities for the development of economies of scale given that consumption is often at the point of purchase.
6. Changes in the labour market
Population change, increased wealth, immigration and, above all, unemployment may be explanations for the growth in business ownership rates.
7. Public policy
The role played by the public policy changed. Faced with high unemployment, governments may choose to implement other public policy schemes that shift the risk preferences from individuals towards setting up their own businesses.
One explanation for this puzzle may be the use of the COMPENDIA dataset, this measure may be thought poorly to reflect the actual nature of entrepreneurship in de US. This measure looks at the rate of business-ownership rather than the contribution of particular businesses. Because there are much large enterprises in the US, the implication is that the economic growth of the US is due to the economic activities of larger enterprises.
Another reason may have to do with the argument of Carree et al. He argues that there is an equilibrium rate between economic development and business-ownership. Countries that deviate from that equilibrium suffer, by and large; a five percent point deviation implies a growth loss of three percent over a period of four years. This means that the n-shape may be due to the economic performance of the US (i.e. the US is better able to balance its business ownership rates with economic development).
The above two explanations are rather static: they point to what is happening, not why it is happening.
A dynamic explanation may be: the rate of entry and exit. This is called the enterprise churn. Because there are fewer burdens to start a business, entry barriers are lower, there may be greater numbers of new enterprises. Stimulating efficiency and therefore inefficient enterprises will exit the sector. The overall effect is to drive up efficiency and innovation. This explanation is not supported by evidence tough.
Another dynamic explanation may be that in the US there are high rates of growth among its enterprise population. Entrepreneurs may, due to lower regulation and stricter employment legislation, find it easier to expand when their ideas turn out to be novel of efficient.
1. Government as regulator: determine how trade rules operate
2. Government as economic agent: taxes, charges fees, raises debts and spends. This has effect on business finance and risk taking
3. Government as strategic planner and promoter: government finance can be used to offer grants, subsidies, loans, or information and advisory support to SME, and can seek to improve the infrastructure of business factor inputs.
Large firm dominance of the economy has long been encouraged by government in several ways:
Planning of supply during the wars led to considerable consolidations
Government policy encouraged price cartels and collusion between firms
The growth of socialism led to nationalisation and big subsidies
From the late 1960s a significant and rapid change began to occur. Small firm growth rises as cartels and price fixing is prevented and privatisation takes place.
The perceived European problem is that people prefer employee over self-employed status with a resulting lower business birth rate, a less dynamic business sector and higher unemployment levels. Policies to solve this are reduction of entry barriers to starting a business, trying to reduce risk and increase reward levels, fostering capacity and skills and broadening the accountability of business across society.
It is difficult to find evidence that there is a general phenomenon of market failure or need for major government actions for small firms. SMEs are a successful sector in the economy so do not seem to need much help. Survey has shown that government help would be appreciated in stabilising the economic environment or improving the regulatory environment. Furthermore, in training the government is seen as a major source of support and then preferably as an enabler rather than a provider.
Implications of these results are:
SMEs want to maintain and develop their products markets and internal processes themselves
SMEs want government to maintain strong and stable economic environment and a transparent and stable regulatory environment
There is no overwhelming demand for government do to things for specific firms or specific sectors
There is no general evidence of a market failure where business needs are not being met by the private sector
SMEs are concerned with the quality of factor inputs
In cases where individual firms can benefit from specific support, this is usually related to specific business needs which government is unlikely to be able itself to meet
The existence of a market failure or a need in itself does not justify government action. The constraints of government action are:
Peacock (1989) goes on to identify four specific weaknesses.
The usual means of targeting policy it to target those businesses which either:
Benefits of targeting of policy:
Dangers of targeting:
Aims of government support:
Cost reduction: use of grants, subsidies or reduced-rate loans to reduce the cost of inputs into the business.
Risk reduction: the use of macro-economic policies to stabilise the economy and reduce oscillations and uncertainties.
Increase the flow of information: to make information more readily available
Methods of government support:
Targeting can focus on:
Particularly written for the UK, but central policies are aimed on:
The greatest source generating new economic knowledge is generally considered to be R&D. Measures of technological change have typically involved on of the three major aspects of the innovative process:
1. A measure of the inputs into innovative process, such as R&D expenditures, or else the share of the labour force accounted for by employees involved in R&D activities.
2. An intermediate output, such as the number of inventions which have been patented
3. A direct measure of innovative output.
Schumpeter argued that the monopolist firm will generate a larger supply of innovations because there are advantages which, though not strictly unattainable on the competitive level of enterprise, are as a matter of fact secured only on the monopoly level. He states that large enterprises are uniquely endowed to exploit innovative opportunities.
Five factors favouring the innovative advantage of large enterprises have been identified in the literature:
Innovative activity requires a high fixed cost
Only firms that are large enough to attain at least temporary market power will choose innovation as a means for maximalization.
R&D is a risky investment; small firms engaging in R&D make themselves vulnerable by investing a large proportion of their resources in a single project
Scale economies in promotion and in distribution facilitate the penetration of new products, thus enabling larger firms to enjoy a greater profit potential from innovation.
An innovation yielding cost reductions of a given percentage results in higher profit margins for larger firms than for smaller firms.
Also explanations why smaller enterprises may tend to have an innovative advantage:
The bureaucratic organisation of large firms in not conducive to undertaking risky R&D.
They can benefit from researcher who felt thwarted by the managerial restraints in a larger firm.
While larger firms reward the best researchers by promoting them out of research to management positions, the smaller firms place innovative activity at the centre of their competitive strategy.
While it has been hypothesised that firms in concentrated industries are better able to capture the rents accruing from an innovation, and therefore have a greater incentive to undertake innovative activity, there are other market structure variables that also influence the ease with which economic rents can be appropriated.
Small firms are better able to protect their property rights, which means that there is more incentive to work hard. Corporate culture also affects motivation and incentives for hard work. Knowledge is localised for both start-ups and other firms, but start-ups are more closely tied into regional networks because they depend on networks for critical knowledge inputs.
Where do new and small firms get the innovation producing inputs, that is the knowledge?
Small firms can work together with larger firms (incubators) By serving as agents of change, entrepreneurial firms provide an essential source of new ideas and experimentation that otherwise would remain untapped in the economy.
The federal government has played an active role in financing new high-technology firms since the 1950s. The efforts have been predicated on two shared assumptions:
1. that the private sector provides insufficient capital to NTBFs
2. that the government can identify firms where investments will ultimately yield high social and/or private returns.
Since 1980, the federal government has instituted active policies in support of these companies.
The US Small Business Administration (SBA) has several loan programmes that assist small businesses whose primary activity is in the high-technology industry. The program is conceived to help direct the SBA’s limited loan resources to businesses that may have a greater impact on the nation’s overall economic well-being.
Informal private equity is called angel capital. This capital is both informal and private and is potential to meet the needs of rapidly growing small businesses.
The Small Business Innovation Research (SBIR) helps ensure that innovative ideas developed by small businesses are becoming commercial. They are designed to meet the R&D needs of the federal government.
Small Business Technology Transfer (SBTT) is a programme to tap research institutions for the enormous reservoir of ideas that have not yet been deployed effectively for the nation’s economic benefit.
The Advanced Technology Program (ATP) enables companies to pursue challenging research projects that otherwise would have been delayed, scaled down or not done at all.
The Manufacturing Extension Partnership (MEP) is a growing nationwide system that gives smaller manufactures unprecedented access to new technologies, resources and expertise.
4.1 Growth and development in the small firm
One of the issues that needs to be recognized in any discussion of small business growth is that not all owners see growth as an important business objective. One of the reasons is that there are a variety of factors that contribute to individuals starting and running businesses, which means that lifestyle and non-business objectives may result in a lack of growth orientation.
The importance of business growth in relation to other goals is that individual entrepreneurs may aspire to can change over time. The growth orientation of an individual small firm can also vary at different stages of business development, as well as in response to changes in external factors. Therefore, the extent to which the owner of a small firm is seeking to grow can vary over time as well as between firms.
To start of although a great deal has been written about the growth of small enterprises, there is no single theory which can adequately explain growth patterns in small businesses nor is there much likelihood of such a theory being developed in the future. However, there is a broad agreement about what the main influences on small business growth are identified by Storey namely: characteristics of the entrepreneur, characteristics of the firm and management strategies.
1. Characteristics of the entrepreneurs
One of the approaches to understanding small business growth was the so-called ‘personality-dominated approach’ by Gibb and Davies: the entrepreneur is seen as the key to the development of the business.
Three different identities of small business owners are distinguished, thus emphasizing the variety of goals that are apparent in relation to why individuals start and run businesses.
An artisan identity, where the owner’s role centres on the intrinsic satisfaction associated with the personal autonomy that running one’s own business can entail.
The classical entrepreneurial identity, where the owner’s role emphasizes earnings and the generation of profits.
The managerial identity, where it is suggested that the owner’s priorities are focused on looking for the recognition of others.
Researchers who have focused on the role of the entrepreneur’s personality on the firm’s growth performance, have highlighted its influence on attitudes to risk, the emphasis placed on personal autonomy and managerial competencies, particularly in relation to strategic management skills.
Storey identifies multiple personal characteristics which influences access to resources: educational background and qualifications; the motivation of the entrepreneur of running the business; previous management and/or entrepreneurial experience; functional skills and previous training; previous knowledge and/ or experience of the sector in which the business has been established.
2. Characteristics of the firm
One of the approaches used to explain small business growth identified by Gibb and Davies was the so-called ‘organizational ‘ approach, which emphasizes the development sequences of a firm as it passes through a series of stages at different points in its life-cycle. The life-cycle model made by Churchill and Lewis propounded a five stage development model:
Start-up
Survival/development
Growth
Maturity
Decline
The model focuses attention on the ways in which enterprise and management factors will need to be adapted through the various development stages of the firm. However, the model is not there to explain what is actually happening, but more to create guidance for entrepreneurs who face organizational problems in their effort to grow. ‘Creating time to manage is one of the key internal factors influencing the process of change in small firms’. And a key discriminating feature between firms which were able to achieve high growth over 11 years and those that were simply able to survive.
3. Management strategy
Storey identified four key strategy factors which are evident in growing firms:
A willingness to share equity with external individuals or organizations was frequently identified in small firms that actually achieved high rates of growth.
The ability of rapidly growing firms to identify market segments or niches where they can build customer base founded on their distinct advantaged and selling points.
exploitation of this type of non-price competitive advantage will often relate to the utilization of relevant technologies
A willingness to introduce new products.
Finally, an owner-manager’s willingness to delegate and devolve decision making.
Davies and Gibb use the ‘business management’ approach, which focuses on the importance of business skills and the role of functional management, planning, control and formal strategic orientations.
External environmental influences
Small businesses can face major problems in identifying and dealing with environmental change because of a lack of understanding, management expertise and time. In relation to external environmental influences, sectoral variations on the growth rates of small firms are to be expected. Moreover, a firm’s location can affect its growth prospects, since it reflects spatial variations in local environmental conditions.
A rapidly changing environment
Change situations may be conceptualized in terms of closed-, contained- and open-ended change.
Closed change, a firm can predict events and actions with regard to timing and consequences.
Contained-change relates to events occurring that involve repetition of past events. In the case of both closed- and contained change situations, the small business manager can undertake rational; short-interval planning activity in order to strengthen organizational control.
Open-ended change: most change is unknowable and unpredictable in terms of its timing and its consequences. Here it is often unclear what is changing or why it is changing, making it virtually impossible to predict the consequences for the operating environment of individual businesses.
Industry structure, competition and market limitations
Porter identifies 5 basic competitive forces which determine the profit potential of an industry.
These forces are:
the threat of new entrants
bargaining power of suppliers
bargaining power of buyers
the threat of substitute products or services
the intensity of rivalry among existing firms
In order to effect sustainable development within a given industry, a small firm would need to build up an understanding of the underlying structural features that underpin the basic competitive forces described above.
Owner-manager and size related constraints
Relevant owner-manager and size-related characteristics include the following.
Organizational culture;
This reflects the personality traits and aspirations of the owner-manager which, in turn, shapes the enabling and constraining forces affecting the firm. A potential constraint on future development can be the extent to which the small business culture/structure remains embedded in the owner-manager.
Finance;
An ignorance of formal and informal sources of risk capital may be a constraint on the growth of many potentially successful small businesses.
Attracting and retaining quality people;
Many small businesses face a marginal labour market whereby they cannot offer the same wage and salary levels or career path opportunities as large companies. The solution must be to encourage more owners to adopt a greater staff-focuses approach to human resource management, recognizing that potentially the workforce can be one of the firm’s most important assets.
Marketing problem;
Small businesses have the tendency to rely on informal marketing methods. This is not appropriate when growing overseas and can become mayor constraint if not recognized and adjusted.
Inadequacy of existing assets for underpinning growth
The pace of growth can exert pressure on financial resources, on the firm’s human resource base and on physical resources. Putting pressure on financial resources can lead to over-trading, which can result from failure to plan carefully the underlying financial requirements of a development project, or from an attempt to expand too rapidly. Pressure on the firm’s human resource base can be lifted by given the staff more responsibilities, involving them more substantially in management decision-making processes. Pressure on physical resources comes from a reluctance to invest in additional or new machinery.
Difficulties associated with team building and team management
The owner-manager has to ensure that all tasks are appropriately allocated on an individual and or small group basis. At an early stage in a firm’s development, those ‘sub-units’ of individuals organized to work together may appear to be working as a ‘team’, although in practice may be no more than a ‘group’ lacking a collective rationale. For a small firm to sustain ongoing development there is a need for its management to recognize that the concept of a ‘team’ is preferable to simply that of a ‘group’.
A rational, systematic step approach to managing the dynamic, volatile and fast-changing operating environment in which the modern-day small business finds itself is the most effective way to underpin sustainable long-term development. Furthermore, strategic planning helps the small business concentrate on its competitive nature by encouraging an external focus on key environmental factors to determine where the firm fits, as well as internally focusing on the firm’s strengths and weaknesses.
An organizational learning prospective
If owners are confronted by unknowable, unfolding change forces, success in coping with such a challenge in a manner that can lead to sustainable business development will depend to a considerable extent on their ability and willingness to ‘extend’ personal constructs systems. This can be done by engaging in complex learning (a process that entails the questioning of the underlying assumptions upon which the existing constructs are based).
The role of dialogue both between internal organizational members and with key external informants on the boundaries of the small firm’s operating environment, is a crucial learning activity
Managing finance to facilitate expansion
As the business grows, it is necessary to enhance finance skills and formalize the approach to financial management, but also to recognize the interdependencies between finance and other areas of functional activity within the firm.
With regard to the financing of growth, two crucial areas are the management of fixed and working capital. A crucial ability in this regard related to the need to consider the appropriate balance of external and internal funds. Furthermore, the firm will also have to make sufficient provision for working capital in order to facilitate growth. Inevitably, over time, growth will require additional fixed and working capital and the ability to ensure that adequate and appropriate funding underpins that growth clearly points to the need for an ongoing enhancement of financial capabilities.
Developing the marketing function
In the early stages of small business development the nature and form of marketing are often embedded in the owner-manager. In many instances it is the owner-manager’s close interface and relationship with his customers that allows for the ‘matching process’ between the small firm capability and the wants of customers to be effectively achieved. The crucial issue here is that within in the firm key individuals understand how to allocate resources during the growth of the company, as to keep on meeting the needs of the target customers.
Broadening the customer base while coping with existing customers
A major challenge facing the growth-oriented small business is to sustain the level of service provision to an existing clientele, which may itself be increasing demands on the firm, both quantitative and qualitative, while at the same time seeking to broaden its customer base. The broadening of the firm’s product-market definition will require an expansion physical, financial and human resources at a time when the existing customer base may be demanding ongoing management attention and additional resource allocations. Therefore, any move to broaden the existing product-market definition within the small business must be accompanied by a careful evaluation of the adequacy of existing resources and abilities, as a basis for sustainable development of the firm in its totality.
Deciding when to introduce new managers and modify organizational structure
In small businesses it is common to find a ‘power’ culture. Its structure is depicted by a web; that is the culture depends on a central power source, with rays of power and influence spreading from that central figure. In small businesses this central power is the small business owner-manager.
A typical evolving response by the owner-manager might be to gradually formalize structure. However, the timing and form of adjustment to organisational structure in a small firm context is a complex issue, with its rigidity and inward focusing tendency, may reduce the ability of the firm to relate and adapt to its fast-changing environment.
Klofsten argues that there are 8 cornerstones of business development:
1. The business idea: a clear idea should be developed concerning what the firm will offer the market.
2. The product: a functional product or service has to be developed.
3. The market: the target market must be defined in geographical and/or demographic terms.
4. The organisation: an organisation must be created, which coordinates the purchasing, production, marketing, financing, controlling and distribution activities that are needed in order to serve the market in a legal and profitable manner.
5. Core group expertise: the competencies must crucial for the business’s success must be hired into or developed in the management team.
6. Core group commitment: the key individuals must have sufficient commitment to the start-up.
7. Customer relations: in order to achieve first sales, trustful relationships with prospective customers have to be developed.
8. Other relations: other key relations must also be developed, for example with suppliers, investors or government agencies.
At least a minimum acceptable level on all cornerstones must be reached.
Delmar and Shane suggest the following sequence of start-up behaviours:
Write a business plan
Gather information about customers
Talk to customers
Make financial projections
Establish a legal entity
Obtain permits and licences
Secure intellectual property
Seek financing
Initiate marketing
Acquire inputs
Roles of the business plan:
1. As analysis tool: used internally to go through the strengths and weaknesses of the venture as well as the threats and opportunities.
2. As communication tool: explains the logic and goals of the business to other parties.
3. Increases the entrepreneurs’ commitment to the realisation of the project.
4. As a blueprint: a detailed guide to action.
Discovery is used for the ideas side of business development, as opposed to the realisation side: exploitation.
Discovery is about developing business ideas and business ideas are the creations of individuals’ minds. You start with a rough idea. Before the idea is converted into an up-and-running business it is likely to have been changed, refined and elaborated.
Business ideas are the result of three different search processes:
Proactive search: actively looking for new opportunities because you want to
Reactive search: ditto, but because you have to in order to make up for, for example lost market share for existing products, or unemployment in the case of independent start-ups.
Fortuitous discovery: stumbling over an unsought-for opportunity.
Also exploitation is a process, it evolves over time. It is the attempted realisation of the value creation and appropriation potentials of the business idea.
See table 1, appendix
see figure 1, appendix
The discovery and exploitation processes are separable. Existence of opportunity is a precondition for discovery, which is a precondition for exploitation. The perils of lack of balance can be described as follows:
Where there is too much emphasis on discovery no value will ever be created or appropriated.
Where there is too much emphasis on exploitation there is the risk that not enough value is being created because the founders have not tuned in carefully enough to the customers’ real needs and preferences.
When the founders try to appropriate all the value created by their product or service, rather than sharing the benefits with the customers.
When entrepreneurs try to appropriate value without creating value on the societal level their activities are socially destructive rather than constructive.
Sarasvathy suggested an alternative entrepreneurial logic: effectuation. Which was based on conceptual forerunners as well as empirical observation of highly successful entrepreneurs.
Causation processes take a particular effect as given and focus on selecting between means to create that effect. Effectuation processes take a set of means as given and focus on selecting between possible effects that can be created with that set of means. The process is characterised by the following principles:
1. Affordable loss rather than expected return.
By taking incremental steps and avoiding financial commitments whenever possible, the entrepreneur make sure the worst-case scenario does not lead to disastrous consequences.
2. Strategic alliances rather than competitive analysis.
3. Exploitation of contingencies rather than exploitation of pre-existing knowledge.
4. Controlling an unpredictable future rather than predicting an uncertain one.
Which is preferable? The planned and systematic or the experimental and flexible?
Advantages of effectuation:
see figure 2, appendix
Quadrant I: situation where is it costly to produce short series and when each unit has high value for the buyer. Requires more of a causation process, no incremental process governed by concerns for affordable loss would lead to this result.
Quadrant II: most difficult to exploit with small funds and incremental strategy. Costs are substantial before a single unit has been delivered and yet the value per customer is low. They therefore require pre-launch investments of a size that only large organisations or venture capital consortia can come up with.
Quadrant III: short series are economical and the value per unit is also low, it is perhaps the best option for independent start-ups using an incremental strategy.
Quadrant IV: low cost for short series, which makes room for incremental strategies. The high value to the customer will make it difficult for new and small actors to enter the market if there are other alternatives.
Degree of uncertainty:
Opportunity recognition: low uncertainty because the sources of both supply and demand exist rather obviously.
Opportunity discovery: medium uncertainty because only one side of demand or supply obviously exists.
Opportunity creation: highest in uncertainty because neither demand nor supply exists in an obvious manner.
Fundamental attribution error: There is a general tendency to explain the behaviour of others as a consequence of their personalities rather than as consequences of what the situation has to offer.
It is often believed that a successful entrepreneur is the result of a special set of personal abilities and characteristics, rather than the results of either being in a favourable situation or through pure chance.
Figure 3 (see appendix) illustrates the complexity and the inherent problems associated with the psychological perspective. The numbers represent the approximate historical evolution of the field.
3. There is supposed to be a set of characteristics or traits that are stable across situations and time.
Problems:
Inconsistency: Researchers have not reached consensus on the relevance of these individual characteristics, their importance and how they vary in situations.
The external validity of the psychological trait approach can be questioned
The theory and methods in use are obsolete.
Research is mainly based on US samples; many of these characteristics are culturally dependent.
4. There is no general agreement of what is and what is not entrepreneurship. It is not a homogenous group. Smith examined the two different entrepreneurs:
Craftsman-entrepreneur: lower education, preferred manual work and wanted a stable income to support the family.
Opportunistic-entrepreneur: higher education, more prone to be a leader and expand the business.
It is more accurate to assume heterogeneity and focus on differences between different types of entrepreneurs.
5. three different measures are most often associated with the concept of performance:
Survival of the firm – what factor influence the long-term survival of the firm?
Firm growth – what factors affect the expansion of the firm?
Firm profitability – what factors influence the firm’s ability to generate profits?
When modelling behaviour and subsequent performance, psychologists tend to make a difference between distal and proximal factors:
Distal factors: may explain general behaviours but which have little ability to explain how individuals act in a specific situation.
Proximal factors: factors defining the situation in which individuals find themselves when they have to choose. (task characteristics).
A successful entrepreneur will have to:
posses the requisite knowledge
master the requisite skills
actually choose to work on the job tasks for some period of time at some level of effort.
6. Cognitive theories: trying to explain behaviour by individuals perceiving and interpreting the information around them.
What is seen as business opportunity for one person is seen as an enormous problem impossible to solve by another. Individuals are actively involved in the construction of their own realities.
Individual characteristics that are supposedly related to entrepreneurs:
Risk-taking propensity
The role of economic risk taker or risk bearer of the economic system. The person’s willingness to take risks is dependent on the perception of the situation.
Need for achievement
Entrepreneurs have a high need for achievement and that makes them especially suitable to create ventures.
Locus of control
How individuals’ perception of control affects their behaviour.
Internal control: a person believing that the achievement of a goal is dependent on his own behaviour or individual characteristics
External control: a person believes that an achievement is the result of luck and external factors.
Over-optimism
Entrepreneurs are positive about the chances of success.
Desire for autonomy
Entrepreneurs have been found to have a high need for autonomy.
The dark side of entrepreneurship: there are also negative characteristics of entrepreneurs. Entrepreneurial behaviour is the result of negative characteristics and drives. Entrepreneurial behaviour and its resulting financial benefits do not always lead to satisfaction and happiness. The author suggests that financial success is often followed by personal crises and even poverty.
Attitude-based models: interested in how attitudes to entrepreneurship shape our behaviour.
Attitude: valuation of an object or a concept.
Theory of planned behaviour tries to explain behaviour when actions are not under complete behavioural control. Behaviour is determined by one’s intention to act, and intention in turn is influenced by attitudes.
Perceived self-efficacy is about a person’s belief in their capabilities to mobilise the motivation, cognitive resources and courses of actions needed to control events in their life.
It is a part of the social cognitive theory of self-regulation. The aim is to explain goal-directed behaviour and it assumes that most behaviours have a purpose regulated by forethought.
Intrinsic motivated behaviours are ones for which there is no apparent reward except for the activity itself.
Extrinsically motivated behaviours refer to behaviours where an external controlling variable can be readily identified by the persons acting.
7.1 Family and enterprise
According to Kanter it was the family system that made possible the transition from pre-industrial to industrial ways of life.
Family refers to a groups of people bound together by blood and marriage ties and can include the traditional nuclear form of family, extended families, kin groups and single-parent families.
Differentiating family from non-family firms is important because:
Important for the understanding what is unique or special about the organizational practice of family firms
Important for drawing policy attention to the specific needs of family firms.
Rational view of business sees two organizations co-existing within the family business.
a family organization characterised by emotions, nepotism and the non-rational dynamics between family members
the business or rational component characterised by efficiency, structure, functions, role clarity and purpose.
The developmental approach of the study of business involving family members provided the basis for a significant shift in our understanding of the relationship between family and business.
Interpretive inquiry has 5 key characteristics.
1. There is a concern for interpretive awareness and thinking or feeling oneself into the situation of the research subject through intuition and empathy.
2. It aims to focus on the sharing, negotiation and interpretation of meaning that are associated with the notion of family.
3. Interpretive inquiry takes account of processes – these are historically, culturally and politically situated.
4. Interpretive inquiry assumes that meaning creation is constructed inter-subjectively through exchange and interaction.
5. Language and discourse lies at the centre of interpretive inquiry because it is through talk, conversation and dialogue that meaning is constructed.
What is significant about interpretive lines of inquiry is that explicit attention is drawn how to the concept of family is interpreted and constructed by those working in family-enterprise situations.
Social entrepreneurship is not a new phenomenon; already for centuries innovative individuals and enterprising groups have been addressing social issues. However, compared to the past, the social activities now are much bigger and widespread. Social entrepreneurs (SE) are even influencing the world on a global scale with their activities. Still, there remains some lack of clarity as to what social entrepreneurship actually means, and perhaps more importantly, what is it capable of achieving.
Chamberlain first coined the term in 1977. He spotted a new breed of socially motivated business executives who would commit themselves and their corporations to constructive attacks on social problems by changing the rules under which they operated.
It is hard to explain what it is, first of all because it is a complex concept, and second because the literature in this area is so new little consensus has emerged on the topic. The concept is analyzed through two dimensions, the entrepreneurial and the social. In essence, social entrepreneurship may be defined as ventures that address social issues as their prime strategic objective and do so in an innovative and creative fashion.
Social entrepreneurs create, besides shifting economic resources, new social values by marshalling resources effectively to address key issues. In addition, they also generate systematic social change in order to ensure the sustainability of their innovative interventions, e.g. micro credit. Dees is one of the most important writers on this issue, and summed up his research in the following way:
Social entrepreneurs play the role of change agents in the social sector by:
adopting a mission to create and sustain social value,
recognizing and relentlessly pursue new opportunities to serve that mission
engaging in a process of continuous innovation, adaptation and learning
acting boldly without being limited by resources currently in hand
by exhibiting a heightened sense of accountability of the outcomes.
Important to realize is that SE have a different view of business growth, since they are more looking for social impact instead of pure profit.
Growth may thus not always been necessary, and alliances with unexpected business partners are more easily formed, as long as it serves its mission. The urge to change the terms of engagement within their own sectors, not for their own benefit, but for the benefit of their stakeholders, marks SE out as quite distinct from their commercials likes. Their perfect situation would be that their mission is achieved, e.g. no more hunger in the world, putting them out of business.
The social element in the concept is analyzed by looking at three operational dimensions within a given venture:
1. Operational context (typically the social or welfare sector)
SE historically has worked in these areas: poverty, healthcare, education, environmental, communities, welfare and advocacy and campaigning.
Typically, SE evolves in the intersections between three estates of modern society – the public sector, the market and civil society. Distinct points of origin can be seen, of which examples are given in the book. (see page 229 table 12.1 and 12.2.)
SE typically addresses serious social needs from an embedded community perspective, and by mapping these two dimensions (level of social need and level of community involvement) SE can be further positioned in relationship to the two estates of society: the private and the public sector. For quadrants emerge, see page 230 for figure 12.2.
2. Process of social venture
SEs are primarily focused on social innovation and the opportunity recognition of new social value creation. Furthermore, SE seek out opportunities to add social impact throughout their entire value chain. The process of SE may typically be characterized by a range of social missions that are addressed at different points in the value chain.
Interesting is that SE are good at identifying under-utilized resources, like people, places, buildings, etc and find a new ways of putting them into good use. Thompson gives another definition of SE: People who realize where there is an opportunity to satisfy some unmet need that the state welfare system will not or cannot meet, and who gather the necessary resources, and use these to make a difference.
One thing is clear and that is that SE are creating new paradigms of social venture and development and are creating their own definitions, terms and concepts for their activities. This lack of clear cut concepts etc is one of the reasons that resource allocation and the actual opportunities is not always matched.
3. Outcomes and impacts
For SE the mission is explicit and central. This influences the way they perceive and assess opportunities. Mission related impact becomes the central criterion, not wealth creation.
The commitment is not to the traditional model of profit accumulation and equity growth, but rather to the creation and maintenance of social capital. Networks, trust and cooperation are the key words.
What is problematic is the actual measuring of the outcome, how to measure social impact and social value creation? A number of measurements have been proposed, but none is sufficient.
Strategic focus
SE reclaim the innovation and creativity of the entrepreneurial paradigm for the wider public good. They address social market failures left unaddressed by other institutions and identify opportunities for social value creation that the market ignores. This is their social mission and fulfilling it is the first strategic objective.
A range of diverse drivers can be discerned. On the demand side, a series of global crises like environment, health and poverty. Further compounded by social market failures and the retreat of governments from certain markets in face of the free market. At the same time corporate power has increased. On the supply side, we have the emergence of a bigger middle class, combined with technological innovation. The combination has made that significant new resources are available, or in other words people with the time and money, to address social issues. Also social change, like the rise of educated people plays a role plus cheap technological options for information gathering.
Furthermore, the number of citizens groups working across public-private sectors has duly expanded dramatically. The transportation from wealth from individuals to foundations has also increased the available funding for social ventures. New is that some people see giving back as an actual investment, and also expect to be able to measure the impact or the ‘social profit’ made from these investments.
Institutional developments, like the widespread of neo-liberal democracy have increased social undertakings as well.
The organizational landscape of social entrepreneurship ranges from the one hand voluntary activism to the other hand corporate social innovation (see page 238 figure 12.3).
Because not enough funding is available for all the new social projects and ideas, these companies are looking for new ways of funding, for example by exploiting a profitable part of their company or by partnering with commercial companies. This organizational model is known as a ‘social enterprise’. These enterprises do not like funding, and instead find other ways of creating a sufficient cash flow. Ultimately, the aim is to be more sustainable.
In the words of Alter: the defining characteristic of the social enterprise is that it uses market-based approaches to earn commercial income and accomplish its mission. This provides more independence, flexibility and sustainability. However, there may be a danger that focusing on generating earned income can distract a social venture from its true social mission. Furthermore, commercial funding is not always more sustainable than government grants.
Two social enterprise types exist: the hybrid and the mixed form.
Hybrid integrates social and commercial objectives within its core activities.
The mixed format has its social activity linked to its commercial activity but maintains clear boundaries between each.
Following on this distinction, Dees sees three organizational models for social enterprises:
embedded (mission centric social purpose enterprises)
integrated (mission related enterprises as profit centers for subsidizing social purpose venture)
complementary (unrelated to mission, leveraging tangible/intangible assets for income generation)
Intrapreneurship is the development of entrepreneurship within a corporate environment. It is the attempt to integrate the strengths of small firms with the market power and financial resources of large companies.
Intrapreneur: individuals who operated as entrepreneurs within existing organizations. What makes intrapreneurs different of entrepreneurs?
Both take personal risk to make new ideas and innovation happen. However, intrapreneurship will often take the large organizations into new products and markets, away from their established core business. An intrapreneur is an employee of a large organization who has the entrepreneurial qualities of drive, creativity, vision and ambition, but who prefers to remain within the security of an established company.
There are significant differences between creating a new independent venture and establishing a corporate venture through intrapreneurship:
1. The business environment
There can be considerable differences in the degree of freedom each type of business has to develop its potential. Whilst corporate ventures must subordinate themselves to the parent firm’s goals, new independent ventures are usually free to compete in any market, develop any product and utilize any technology.
2. Establishing a new venture
Whilst the entrepreneur has control of the business, with responsibility for its management and, its eventual success or failure, the intrapreneur must share control with top management. Consequently, the intrapreneur will have to operate under managerial constraints that would not be present in many independent businesses.
3. Sources of patterns and funding
New small ventures tend to be funded on a milestone basis, rather than through traditional budgeting and resource allocation processes, as is found in established corporations.
4. Staff resources
A large organization will recruit people to an internal venture on the basis of parent company personnel in line for transfer or promotion, rather than on the basis of the needs of the venture. In contrast, an independent new venture is usually made up of eager qualified individuals who share the founder’s vision.
Being an intrapreneur is not something that can be assigned to individuals within an organization. Intrapreneurs are self-selected, they come up with an idea that they will develop further, often in their own time.
Intrapreneurship sponsors
A corporate environment favorable to intrapreneurship has sponsors and champions throughout the organization who not only support the creative activity and resulting failures but have the planning flexibility to establish new objectives and directions as needed.
Continuous involvement of the original intrapreneur
In many large organizations, it is usually the case that an innovator of a new idea will be forced to hand that idea to another team of individuals for its development. The intrapreneur may also be left behind if the idea reaches a stage of development where the intrapreneur has no direct experience. When they are removed from projects, the very driving force behind the project is lost.
The autonomy of the intrapreneurial team
Intrapreneurs have the desire to have sole control over the destiny of their particular idea.
Crossing boundaries in the organization
Inter-functional boundaries: between R&D and marketing
Divisional boundaries between different business units within a company
Organizational boundaries between different levels of management in the hierarchy.
Managers within large organizations are recognizing that vertically driven, financially oriented, authority-based processes, which for so long dominated company operations, are being overtaken by horizontal processes that cut across organizational boundaries.
Tolerance of risks, failures and mistakes
Risk is a factor that is inexorably linked with entrepreneurship and innovation. However, large companies are risk adverse. In contrast many entrepreneurs in small firms see failure as a learning experience, from which new products, services and ventures can be developed.
Long-term philosophy towards success
A company must be prepared to establish a long term horizon for evaluating the success of individual ventures as well as the overall intrapreneurship program.
Finding sources for ideas
Organizations need to make resources available for intrapreneurs to work on their new ideas in their own time in order that these ideas reach the market-place more quickly.
An effective reward system
The energy and effort expended by the intrapreneurial team in the creation of a new venture needs to be appropriately rewarded.
Short-term variable pay benefits: profit sharing
Long-term variable pay benefits: equity ownership
Education and health benefits: pay for travel, tuition and supplies for job-related education and training
Large companies have a problem in being entrepreneurial for one simple reason: they are too big. The size of such organizations means that managers have to structure the corporation in order to control it, and as the company grows bigger, even more structures of management are added in order to manage the whole operation. Order barriers:
1. Traditional corporate structures
The hierarchical nature of large companies is not conducive to entrepreneurial behaviour, with considerable distance between the top layers of management and the lowest level of the workforce, resulting in an impersonal relationship between management and staff.
2. Corporate culture
The nature of corporate culture itself – where job descriptions are rigidly enforced – may stifle innovation.
3. Large firm performance standards
The performance standards imposed by large businesses may adversely affect the development of intrapreneurial projects.
4. Planning procedure
As companies get bigger the corporate environment will require more control and specific performance standards to exert this control.
5. Ownership
Within large companies, ownership of assets of the intrapreneurial part of the business is rarely possible, except in the case of a management buy-out.
6. Mobility of managers
Mobility of managers within large organizations may lead to a lack of commitment to specific projects, especially if those projects are of a long-term nature, as many intrapreneurial ones are.
7. Inappropriate reward systems
Rewards are normally based on improvements in strict performance measures laid down by management, with very little scope for a reward basis based on creativity and innovation.
Studies have shown that managers and entrepreneurs vary considerably across a range of behavioural patterns. See table 14.1 page 279.
Managerial skills
The managerial skills required by an intrapreneur are as follows:
the ability to adopt a multi-disciplinary role
understanding the environment
encouragement of open discussion
creation of management options
building a coalition of supporters
Entrepreneurial skills
Some of the entrepreneurial skills required by the intrapreneur:
Vision and flexibility: the intrapreneurial leader must have a dream and overcome all obstacles by selling this dream to others within the organization.
Action-oriented
Dedication: intrapreneurs will prefer to get the job done on time
Persistence in overcoming failure: he must persist through the frustration and obstacles that will inevitably occur during the creation of a new venture
Setting self-determined goals
The learning organization is on organization skilled at creating, acquiring and transferring knowledge, and at modifying its behavior to reflect knowledge and insights.
Organizational learning requires a commitment by the organization and whilst learning intent reflects the decision that the organization intends to engage in learning, organizational commitment refers to the implementation of its intent.
Barriers to organizational learning
Avoiding ambiguity is a major organizational barrier to information acquisition. Organizational inertia is one of the greatest barriers to learning. Organizational change is difficult and inertia is resistance to change.
Access to external sources of technology becomes important in ensuring the large firm’s learning and enables it to continue to innovate and remain competitive. A number of key factors – most notably organizational culture and capability – can help to transform externally generated knowledge into a key competitive advantage for the organization. More importantly, the capability to learn internally can enhance the learning from external sources of different organizations and enable a continuous culture of entrepreneurial behavior within the firm.
Perren compares the two terms leadership and entrepreneurship and concludes that both are similar notions and there are conceptual overlaps, but there are clearly still conceptual differences.
Leadership tends to be more associated with the conceptual building blocks that relate to people. Entrepreneurship tends to be more associated with the personal search for independence and identification of market opportunities.
Four broad categories:
1. Theories of leadership traits
It assumes that leader have certain personal characteristics such as sociability, persistence, initiative, know-how, self-confidence, perception/insight, cooperativeness, popularity, adaptability, good communication skills etc.
2. Theories of leadership styles
autocratic – they dictate what they want
persuasive – they sell their ideas
consultative/participative – they discuss with the team members before reaching a decision
democratic – they involve the team members in both the discussion and the decision.
3. Situational theories
These relate to the group environment, its psychical setting, the size of the group, its technical abilities, the authority given to the leader by his superiors etc.
4. Integrative theories
They embrace a wider variety of variables and from them it is possible to ascertain that the successful leader is ware of the great many forces affecting her effectiveness and is able to determine the most important forces operating at any particular time.
The leader gets the task completed by developing good relationships with colleagues and harnessing their combined resources.
Leaders are grown, not made. Forms of leadership development:
1. Formal training: conducted by training professionals.
2. Developmental activities: job assignments and the emphasis is on learning from experience.
3. Self-help activities: reading books, viewing videos, listening to audiotapes and using interactive computer programs.
There are various ways to acquire leadership and management skills. Most prominent is the informal method, which ranged from observation to informal mentoring by business colleagues or a former lecture.
Entrepreneurial leadership can be defined as the ability to anticipate, envision, maintain flexibility, think strategically and work with others to initiate changes that will create a viable future for the organization.
In this definition there lacks something of the emotional nature of leadership.
A network is a social structure, comprised of a set of relationships between a set of individuals, which is viewed as being ‘greater than the sum of its parts’.
Networking can be seen as the activity by which these network relationships are built, nurtured and mobilised, and the ‘flows’ through these relationships, such as information, money, power and friendship.
4 key components that need to be investigated:
Actors – the individuals within the network;
Links – the relationships between the individuals within the network;
Flows – the exchange between the individuals within the network; and
Mechanisms – the models of interaction employed by the network members.
The nature of a link or relationship between network members can also vary along a number of dimensions:
Formality: distinguishes between formal and informal linkages
Intensity: the frequency of interaction and the amount of flow or transactions between 2 actors.
Reciprocity: the balance of flow over time between 2 actors through a given linkage. The link is ‘asymmetric’ of ‘unilateral’ if it largely one-way. And ‘symmetric’ or ‘bilateral’ if it a two-way interaction.
Multiplexity: the degree to which 2 actors are linked by multiple role relations.
Origin: the context in which the relationship originated and the initiator of the relationship.
Tichy distinguishes between 4 types of flow within a network:
Affect: the exchange of friendship between actors;
Power: the exchange of power and influence between actors;
Information: the exchange of ideas, information and know-how between actors;
Goods: the exchange of goods, money, technology or services between actors.
Two types of mechanisms are distinguished namely, ‘active’ mechanisms, where a form of personal interaction takes place, like face-to-face or over the phone and ‘passive’ mechanisms, where there is no direct interaction between ‘sender’ and ‘receiver’ of information.
Dimensions of networks
The most relevant network dimensions are:
Size: this dimension refers to the number of actors participating in the network.
Diversity: refers to the number of different types of actors
Density: refers to the extensiveness of the ties between actors.
Openness: here the distinction is made between strong and weak ties. Strong ties are found in cliques and associated with dense networks. Weak ties connect to individuals outside the clique and thus create ‘openness’ in the network.
Stability: the frequency and magnitude of change of the actors and linkages in a given network.
One of the key problems in undertaking a network study is the determination of the boundary of the network, since this establishes the sample of actors and links under investigation.
Case summary
The creation of Dyson’s various business ventures was heavily dependent upon both family and friends, as well as acquaintances and chance meetings (weak ties). It is stated that perhaps what distinguishes entrepreneurs is their ability to maintain and make use of their strong ties, as well as their effectiveness in initiating, nurturing and mobilising weaker ties.
Network diversity allows small firms to draw upon a range of external resources, such as technological knowledge, to supplement the internal resources of the organisation.
Entrepreneurs, at an early stage of enterprise development, rely heavily on an informal networks. And at a later stage more and more on formal networks. A diversity of flow and transactions through the entrepreneur’s network is important to successful entrepreneurial activity.
The personal or social networks of entrepreneurs can be seen to play a number of important roles:
they generate social support for the actions of the entrepreneur;
they help extend the strategic competence of the entrepreneur in response to opportunities and threats; and
they supplement the often very limited resources of the entrepreneur, allowing the resolution of acute operating problems.
The role that networks play in the building of technological competence within small firms. Three technological competence trajectories were established.
1. Competence ‘widening’: a diversification of the technological competence of the firm;
2. Competence ‘deepening’: an improvement of existing technological competencies of the firm;
3. Competence ‘narrowing’: an abandoning of a set of existing projects, processes or products, without the development of new technological competencies.
There has been a tendency among both marketing theorists and small business owners to associate marketing with large, rather than small, organizations. But it is also important for small firms.
Marketing is important in the early, vulnerable years, because it provides a vital interface between the organization and its external environment.
The principal reasons given by business angels for not investing:
lack of relevant experience of entrepreneur and any associates
deficiencies in marketing
flawed, incomplete or unrealistic financial projections
Certain characteristics, which differentiate small from large organizations, lead to marketing issues that are especially challenging for the small business owner-managers:
| Small organization characteristics | Marketing issues |
| Relatively small in given sector | Limited customer base |
| Resource constraints | Limited activity, expertise and impact |
| Uncertainty | Little formalised planning; intuitive, reactive marketing |
| Evolutionary | Variable marketing effort |
| Innovation | Developing and defending niches |
| Personalised management style | Dependent on owners’ marketingcompetency |
Marketing defined
Marketing as an organizational philosophy – this relates to a set of values and beliefs concerning the central importance of the customer to the success of the organization.
Marketing as a strategy – this defines how the organization is to compete and survive in the market-place.
Marketing tactics – these use specific activities and techniques to implement strategy.
Entrepreneurs tend to define marketing in terms of attract new business (marketing tactics).
Customer orientation versus innovation orientation
Marketing as an organizational philosophy indicates that an assessment of market needs comes before the new product development. Entrepreneurial business owners frequently do it the other way around. They start with an idea, and then try to find a market for it.
Top-down versus bottom up strategies
Smaller firms practise a bottom up targeting process in which the organization begins by serving the needs of a few customers and then expands the base gradually as experience and resources allow.
Four P’s versus one-to-one marketing tactics
Entrepreneurial marketing activities do not fit easily into existing marketing models. They involve direct interchanges and the building of personal relationships.
Market research versus networking
Entrepreneurs prefer more informal methods of gathering market information.
How can a typical entrepreneur carry out his marketing process?
innovation
identification of target markets
interactive marketing methods
Entrepreneurial marketing relies heavily on word-of-mouth marketing to develop the customer base through recommendations.
Image building: important for the great majority of small business, which are involved in selling services rather than tangible products.
Incentives: reduced prices and promotional offers
Involvement
informal information gathering
There are distinct differences between the financing of large quoted firms and small firms. The main difference lies in the lack of availability of capital markets where small firms can raise funds compared with their larger counterparts who have established markets.
The research and surveys examining the financing of small firms should be interpreted with caution for two reasons:
1. there is no universal definition of a small business
2. the extent and source of funds will depend upon the size and industry of the business
The finance gap refers to a situation where a firm has profitable opportunities but there are no, or insufficient, funds to exploit the opportunity.
There is a very limited opportunity for small firms to raise funds in the equity markets. Large firms have established markets where they can publicly raise funds but there are no similar markets for the majority of small firms.
Also the information gap is highlighted. It is claimed that the reason why small enterprises have problems raising finance is because owner-managers are insufficiently informed of funding opportunities with regard to both equity and loan capital, the quality and cost of information which can drive and sustain bank lending decisions.
Banks
The importance of bank lending as a primary source of small business finance is widely acknowledged.
Loan Guarantee Scheme
The scheme is aimed at small firms that have a viable business proposal, but have tried and failed to obtain a conventional loan from a bank, because of a lack of security or business track record.
Main criticism is that is costly and banks are reluctant to use the scheme because it is excessively bureaucratic and expensive to administer.
Leasing and hire purchase
This is the second most important source of finance to small firms. The ownership of asset rests with the lessor who allows the lessee the use of the asset for an agreed period.
Operating lease: the asset is leased for a period that is substantially shorter than is useful economic life. The responsibility for servicing and maintenance rests with the lessor.
Finance lease: transfers substantially al the risks and rewards of ownership to the lessee. It is a contractual commitment to make a series of payments for the use of an asset over the majority of the asset’s life.
Equity
The finance contributed by the owner(s) of the enterprise.
The Alternative Investment Market (AIM)
Alternative Investment Market gives early development companies access to new public funding with fewer regulatory requirements, usually resulting in lower legal, accounting, and administrative costs, along with faster capitalization.
Venture capital
This is finance provided to companies by specialist financial institutions.
Informal venture capital (business angels)
Business angels are a source of informal venture capital. They are wealthy individuals, rather than financial institutions, who tend to have considerable business experience and are wiling to invest in start-ups, early-stage or expanding enterprises.
Factoring
This is the purchase by a factor of the trade debts of a business, usually for immediate cash.
The main question when deciding how the firm should be financed is whether there is an optimal capital structure that will maximize the value of the firm and hence shareholders’ wealth. Small firms are subject to very different financial, economic and socio-economic structures compared with large firms. There tends not to be a separation between ownership and control of firms and large firms are listed and quoted on markets. These are two significant characteristics of small firms that are likely to influence the capital structure decision.
Norton concludes that small firms are less likely to have target debt rations and there is a preference to use internal finance to external finance. Michaelas et al (1996) findings show that the life-cycle of a small firm is influential in determining its capital structure. When firms start up and grow they use debt finance. As they mature the reliance on debt declines.
An important link between the sources of finance for a business, particularly for small firms, are the financial reports produced periodically by firms which primarily give an account of the performance for a stated period, normally a year (profit and loss account), and the financial position of the business on a stated date (balance sheet).
Venture capital can be defined as finance that is provided on a medium- to long-term basis in exchange for an equity sake. Investors hope for returns on their investment in the form of a capital gain on the value of their shares. Investors will only invest in firms that are expected to achieve a significant size and market share. Firms that successfully achieve to attract venture capital are likely to have a disproportionate impact on the economic development (patents, etc).
There are different stages a firm grows through:
Personal saving of the entrepreneur or team are important for two reasons; the entrepreneur shows that he himself is financially committed to the business. And because other capital is hard to come by in the seed and start-up stage. Also the entrepreneur is likely to contribute 'sweat capital' by working for no salary or at a level below what he would normally earn.
Family and friends are the biggest source of start-up capital after the founders themselves. They are mostly short-term loans, sometimes converted into equity shares in the company.
Business angels are conventionally defined as high-net-worth individuals who invest their own money directly in unquoted companies in which the have no family connection in the hope of financial gain and typically play a hands-on role in the businesses in which they invest.
Venture capital firms: are financial intermediaries that attract investments from financial institutions (banks, pension funds, insurance companies), large companies, wealthy families and endowments into fixed life investment vehicles with a specific investment focus.
Government-backed investment organizations: In most countries governments have created investment vehicles to fill what are perceived to be gaps in the supply of venture capital that results in funding difficulties for particular types of company.
They fit the following profile:
Mostly males
Successful cashed out entrepreneurs
In the 45-65 year age group
Geographical: Businesses Angels are everywhere, but they do not always match with the local businesses. Businesses Angels tend to invest locally.
The investment process:
1. Deal origination:
This is the stage where entrepreneurs and businesses angels make their first contact. There are two ways in which a contact between them can made. There is a formal way in which a businesses angels is contacted by lawyers and accountants. And the informal way where the entrepreneur approaches the businesses angel or the other way around.
2. Deal evaluation:
This step consist of minimal two distinct stages; initial screening, where the businesses angels decides whether the investment opportunity fits their own personal investment criteria location, the nature of the business, the amount needed and any other personal investment criteria. Upon these criteria he decides whether the proposal is worth the time for the second stage.
In the second stage (detailed investigation) the investor takes a closer look at the businesses (the business plan, the financial information, visit the premises and take a closer look at market potential and a very important factor the people who run the businesses). Whether or not the investor decides to negotiate a deal with the entrepreneur, largely depends on the personal qualities of the entrepreneur.
3. Negotiation and contracting
The businesses angel must negotiate terms and conditions of the investment that are acceptable both to themselves and also to the entrepreneur. There are three main issues – valuation, structuring of the deal (share price, types of shares, size of shareholding, timing of the exit) and the terms and conditions of the investment, including the investor's role.
The valuation of a small company is more difficult than that of a large businesses because they are not valued by the (stock) market. Mostly they are valued through their earnings or cash-flow. However these valuations are very imprecise and are often also based on the gut feeling of the investor.
4. Post-investment involvement
The involvement of the angels is very different for different angels. Some spend one day a week or less with the business, and other angels become very involved up to the point that entrepreneurs see the as a part of entrepreneurial team. Business angels can have different roles in the company but often have an advisory role. There is involvement also depends on the physical distance between the angels and the company.
5. Harvesting
Studies show that some business angels make a loss, break-even or a win. The most successful investors were more likely to be motivated by the fun and interest of making investments, while the least successful investors where motivated by altruism.
1. Source of investment opportunities
Venture capital firms receive investment opportunities from 2 main sources: the first one is unsolicited deal flow, the second source of deal flow comes through the personalized network of venture capitalists from trusted intermediaries. The latter is preferred because the quality is superior after the screening of these intermediaries.
2. Deal evaluation
This stage is quite similar to the approach of business angels, although they are often more thorough. Venture Capital funds invest at a later stage than business angels, when the risks and uncertainties have been reduced, and commit larger amounts. An attractive investment proposal will rate highly on three components:
The concept: has a potential earnings growth, or has already demonstrated a degree of market acceptance.
Management
Returns
3. Deal structures
A typical investment agreement for a venture capital fund will involve the following elements:
It will give the investor control over key decisions.
It will give the investor involvement in the company, typically in the form of one or more seats on the board of directors.
It will specify a compensation scheme for the management team to align their interests with that of the investor, typically by means of a combination of low salaries and stock options.
The investor will use investment instruments that give downside protection and a favourable position to make additional investment if the company is successful.
Venture capital investments are likely to be syndicated with other firms, especially in second and subsequent funding rounds. This avoids over committing the fund to a small number of investments and enables diversification. It also provides the investor with a second opinion and helps to establish a fair price for the next round. And it provides complementary sources of value-added.
4. Post-investment involvement
Venture capitalists spend around half their time monitoring and supporting the companies in their portfolio, with the remainder of their time allocated to sourcing and evaluating potential new investments. Venture capitalists use their expertise and networks to make a variety of contributions to their investee companies:
They help recruit and compensate key individuals in the firm.
They work with suppliers and customers.
They help establish tactics and strategy.
They play a major role in raising capital.
They help structure any transactions that the company might make.
5. Harvesting
Venture capital involves investing for capital gain and not for dividend income. There are tree main mechanisms for harvesting:
A public offering in which the shares of the venture capitalist are sold on the stock market.
A trade sale in which the business is sold to another company.
A private placement involving the purchase of the venture capitalist's share by another investor.
Scase states that the knowledge of industrial relations in small firms is highly limited because
1. Small businesses have received little attention in academic social research.
2. Issues of employer-employee relations have been considered to be non problematic.
Results of research:
employment in smaller firms are generally more informal
small firms are less regulated
subject to greater owner idiosyncrasy than those found in larger firms
A combination of free markets, monetarism, entrepreneurialism and individualism address the economic social and industrial challenges of the late twentieth century. The role of the state was to be constrained to facilitate individual freedom and choice.
The government effectively reduced the level of publicly owned stock and introduced price competition into that which remained. Such initiatives coupled with mass unemployment in the 1980s, stimulated the growth in self-employment and to a lesser extent new small firm foundation.
During the 1980s and early 1990s, the employment relationship was deregulated and subject to market discipline; for many employees this has resulted in greater job insecurity, loss of union protection, greater flexibility, a move from larger to smaller employers or venturing into self-employment or small firm ownership.
Assumptions about small firms:
small firms provided a better environment for the employee
the employee in a small firm can more easily see the relation between what he is doing and the objectives and performance of the firm as a whole
working rules can be varied to suit the individual
Different points of view:
Flexibility
The size of a small firm would facilitate a rapid flexible response to changing market demand.
Harmony
Labour management styles of small firm owners are constrained by the demands and competitive position of their later counterparts:
dependent – where survival is totally dependent on a relationship with a larger firm
competitive dependent – competition is directly with larger firms, therefore survival depends on the ability to cut costs and is likely to result in extreme exploitation of labour.
Old independent – niche market firms where growth is constrained due to market demand.
New independent – new or developing markets where larger firms may invade if the opportunities for profit and expansion are attractive
Social negotiation
There is the idea of a father figure making key decisions in the interest of all. There are few personnel policies and no formal method of involving employees other than a familial culture of friendly relations.
Formality and informality
Large firms have a foundation of formal policy and practice that bounds the employment relationship even if issues of custom and practice dominate regarding the daily management of work. Smaller firms, however, are less likely to employ professional HR or personnel managers and so the employment relationship is more likely to reflect the idiosyncrasies of the owner’s priorities and interests.
Since their election in 1997, successive Labour governments have regulated the employment relationship through a series of Acts that have recognised the European social agenda. This has been evident by:
the enactment of two Employment acts
a National Minimum Wage Act
the adoption of a number of EU Directives
New legislation:
Key provisions of the ICE:
the identification of employee representatives for consultation purposes and as conduits for information dissemination
consultation regarding changes to terms and conditions of employment
information regarding terms and conditions of employment, firm performance and prospects
Implement of legislation:
More rules in the larger organizations. Small firms commands lower pay, offer fewer opportunities for training and development, small internal labour markets constrain career progression, and hours worked are either longer to enhance wages or are more likely to be part-time.
Managing labour is a key task for any organization. All firms must address the problem of the effort-wage bargain, how much work will be undertaken for what level of reward.
Key elements of the employment relationship in small firms:
a central role for the firm owner
a close relationship between owner and employee
employees are more visible to employers and vice versa
family involvement within the firm and its employment
informality of management and a lack of procedures
distinctive employment characteristics in terms of gender, education, skills
the sector is heterogeneous and generalisations are thus cautious.
It is about two questions: what business should we be in? And how do we compete in a given business?
The essence of a good strategy is that it is feasible, that it provides a clear competitive advantage; and that there is a ‘fit’ between the business and its external competitive environment. To develop a strategy the business must have a clear understanding of its market and its competitors.
The resource-based perspective argues that the source of a competitive advantage is the resources and capabilities of the business. Resources confer competitive advantage if they are hard to imitate, if they are heterogeneous and if there is uncertainty as to the value of the resource. Of particular advantage to firms are having what are referred to as superior core competences and capabilities.
Mintzberg defined strategy in 5 different ways:
as a plan: the intended actions that management have developed
as a ploy: when these plans refer to a specific decision they can be described as ploys
as a pattern: Strategy can be inferred from a pattern in a stream of decisions that management have made over time
as a position: Strategy can also refer to the position that the business has adopted in the external environment
as a perspective. strategy can be conceptualised in terms of how a business perceives itself and its external environment
Strategy making in new and small firms is characterised by improvisation. Improvisation is a process whereby design and execution of a strategy occur simultaneously. The planning processes observed in most small businesses have been described as ´informal, unstructured and sporadic´ and as ´a passive search for alternatives’.
Arguments in favour of adopting a formal planning system for a small firm:
The essential components of a successful planning process in a small business are that the owner-manager is central to the planning process; the owner-manager must have sufficient time to devote to the planning process; and effective planning will only be possible if sufficient internal information is available.
The benefits of formal planning for small business are:
A statement of goals and objectives: by clearly specifying objectives, promoters and staff should be more focused in their daily work activities.
Efficient use of time: be engaging in a planning process the owner-manager should make better use of their own management time. Planning should result in the identification and monitoring of a small number of key success factors.
Consideration of alternatives: a formal planning system allows the small business to explicitly consider alternatives for its development.
Better internal management and staff development: by focusing on the future development of the business a planning system should highlight the need for internal systems and processes
Better financial management: In order to plan, the small business will need a basic financial system that provides timely information on current performance.
Planning helps focus owner-managers on their resources, their market and their product; it could be argued that the main contribution of planning to a business is an increased level of environmental awareness.
Reasons for absence of formal strategic panning in small businesses
There are several barriers that inhibit the practice of planning in new and small businesses:
Clear sense of strategic direction/position: stick to start up plan
Centrality of the owner-manager: The close proximity of the entrepreneurs to environmental issues often makes objective judgement difficult
Environmental context: in highly turbulent environments, planning may be counter-productive.
Rigidity of formal systems: Leads to a loss of flexibility and speed of response.
Lack of time: the owner-manager may not have time to invest in formal planning.
Lack of experience
Lack of openness: Owner-managers are hesitant to share their plans.
Fear of failure: Stating goals and objectives in a formal plan could end up in a sense of failure when these goals are not met.
Choosing ‘where’ to compete: a broad or narrow focus?
The firm can choose to be a generalist of a specialist. Porter suggests that small businesses should pursue a focus strategy, selecting a segment or group of segments in its industry and by tailoring its strategy to serving these segments to the exclusion of others, so they can compete with the competition. The smaller business should avoid head-to-head competition, combining this with the segmentation strategy they should seek to differentiate their product offering and should offer a high quality product. The disadvantage or danger of pursuing a focus strategy is that the business may incorrectly identity a market niche. Another problem that could arise is that the chosen market niche becomes too small to survive or may force the company to go international.
Choosing ‘how’ to compete: cost or differentiation
Porter distinguishes 3 competitive strategies: cost leadership, differentiation and focus.
Research suggests that a differentiation strategy is the most appropriate strategy for small businesses. The limited resources of small businesses suggest that the owner-manager should focus. To be sustainable a business’s differentiation must perform unique activities that impact on the customer’s purchasing criteria. Porter suggests 4 ways to achieve this.
To enhance its source of uniqueness
To make the cost of differentiation an advantage
To change the rules of competition to create uniqueness
To reconfigure the value chain to be unique in entirely new ways
The strategic weaknesses that characterise most small businesses are the consequence of the managerial deficiencies of the owner-manager and the resource deficiencies of the small business.
Lack of financial resources: most small businesses are undercapitalised or are inappropriately capitalised, high debt-equity ratio and over-reliance on short-term debt.
Marketing problems and customer concentration: Small businesses spent little time either on marketing or selling activities. A distinguishing characteristic of small businesses is their high dependency on a small number of customers. This is a high-risk strategy as the loss of one customer may result in business failure.
Management resources and human resources: Small firms have difficulty attracting good staff, for many potential employees they do not offer the scope for training and development. Furthermore because the owner-manager is not trained in every management field, the small business is often deficient in a number of these functional areas.
Over-reliance on the entrepreneur: the high achievement that drives the entrepreneur may result in the centralisation of decision making.
Lack of systems and control: Small businesses are characterized by informality and poor information systems. The lack of information systems results in poor decision making.
Technological skills: Most small businesses lack the capacity to investigate and assess new technical developments that might impact on their competitive position.
A franchise can be defined as comprising a contractual relationship between a franchisee (usually taking the form of a small business) and a franchisor (usually a larger business).
The franchisor provides general advice and support, research and development, and help with marketing and advertising. In return, the franchisee usually pays an initial franchise fee and also an ongoing royalty or management service fee.
Two viewpoints:
1. the franchise is a managed outlet of another truly independent business
2. the franchise is an emerging form of independent small business whose distinguishing characteristic is its overt and close relationship with another, usually larger enterprise.
Three typologies of reliance upon large firms:
Marketeers – those firms that actually compete in the same or similar markets as large firms
Specialists – those firms that carry out functions that large firms do not find it economic to perform at all, though they may include large firms among their customers.
Satellites – where the small firm is highly dependent upon a single larger business for the majority of its trade.
To the franchisor
Advantages :
increases number of distributive outlets with limited capital investment
franchisees are highly motivated to maximize growth and profitability because it is their own business, which is also beneficial to the franchisor
franchise unit often locally owned so readily accepted by the community
franchisor has limited payroll, rent and administrational costs because the franchisee is self-employed and responsible for that.
franchisees often linked to franchisor by obligations to buy from or through the franchisor
Disadvantages:
difficult to exercise control, bad reputation of one outlet can damage image of the franchisor
franchisors cannot always be certain about the declared level of business activity by the franchisee
not much can be done when an outlet seems demotivated as long as they operate within the terms of the contract
management of the franchising company limited in flexibility, changes need to be carefully handled to avoid conflict and perceived loss of independence of individul outlets
problems with information feedback
franchisor faced with paradox, the need for standardized product, uniform presentation clashes with the focus on personal attention and service of the franchisee
hard to find suitable franchisees who: see franchising as attractive, are motivated towards self-employment and have necessary capital available for investments
To the franchisee
Advantages:
running their own business and benefiting from economies of scale, market research, training and centralized buying of the larger company
franchisor often undertake big advertising for the product so the franchisee can focus on other aspects of the business
less capital needed than when setting up an independent business, franchisor can help with bank loans etc
franchisors may agree that they will not set up an other competing outlet within a given geographical radius, but there is no way to stop general competition from doing so
other franchisees in the network with same problems are source of non-threatening advice.
Disadvantages:
the tight control by the franchisor may leave little opportunity for the franchisee to impose their personality on the business
should the trade name of the franchise be tarnished, the franchisee might suffer due to being seen as a representative of the franchise
services provided by the franchisor may be a heavy expense to the franchisee, equipment may be more expansive than from other suppliers
the franchise agreement may not fulfil the franchisee expectations
To consumers and local economy
Advantages:
many franchises operate on the basis of long hours of service for their market,
this offers consumers the convenience of an extended-hours service
Franchisees, as owner-managers, should be able to offer a highly personal service
Consumers can locate all outlets under a single trade name
In the case of franchise failure rates are lower and customers can contact the franchisor if they are dissatisfied
Franchisees receive training from their franchisors, this is expected to add to the stock of the company and knowledge in the local economy
Disadvantages:
franchising may reduce levels of diversity in local economies due to their stress on standardization
Franchising may “export” money out of he local regional economy in terms of payments made to franchisors and may “import” goods and services from the franchisor rather than from small suppliers locally
4. To national economies
Advantages:
franchising can offer an avenue of opportunities for individuals seeking self-employment but miss the experience and know-how
for existing businesses franchising can over the possibility of growth levels unlikely to be achieved otherwise
the high level of publicity, the books and seminars, magazines and manuals reinforce the role of the franchising industry as shop-window of business formats
Three facts about the US:
franchising accounts for approaching 35% of all retail sales in the US.
franchising accounts for 10% of GDP in the US.
franchising expanded by around 300% between 1975 and 1990.
Also there is the assumption that franchising is both a low-risk business option and a largely recession-proof business strategy. But the expansion and contraction of franchising in the US seems to have followed general economic trends. Large companies dominate the market and women and minorities have increased their presents in the franchising business.
Franchise growth factors
growth of the US economy since World War II
‘downsizing’ policies exercised by large corporations that have released
corporate executive with necessary financial resources and experience, seeking self-employment
the post-war ‘baby boom’ increased both consumer spending levels and the numbers of potential franchisees, also the number of women in the workforce increased
technological changes heralded a revolution in electronic data processing
The conventional wisdom in the industry is that completely new small business needs at least 2 years to establish its business formula. Then an identical outlet should be established in another location. This will all lead to a steep learning curve.
Finally, three key documents should be drawn up prior to beginning franchising.
an operating manual committing to paper detailed instructions for guidance of
Franchisees when running an outlet for themselves
a franchise contract, stipulating the legal obligations for both parties
a franchise prospectus as a marketing tool for use in recruiting franchisees
6 main components of a franchise contract (mostly 30-40 pages)
- guarantees granted to franchisees of territorial exclusivity
- franchisor’s rights to unilaterally imposed changes to their operating manuals
- post-termination restrictions in competition
- franchisor’s stakes in franchisees’ businesses via ownership of sites, telephone lines or equipment
- franchisor’s rights to police the quality of the franchisees’ output
- the franchisor’s imposition of output targets
Generic causes of SME failure:
- under-capitalization
- absence of economies of scale
- lack of business acumen
- inability to survive intense competition in sectors where entry barriers are low
‘franchising-related’ failure:
- business fraud, using celebrities to attract franchisees to ill-founded franchise schemes
- intrasystem competition, involving franchise outlets located to close too each other
- insufficient support of franchisees
- poor franchisee screening, resulting in a mismatch of franchisee’s attributes
- persistent franchisor-franchisee conflict
Most franchised businesses tend to involve a limited range of products and services and appear to lend themselves to low-skill/low-pay human resource strategies.
Some time ago internationalization was regarded as the domain of large corporations. Based on their presumed lack of internationalization potential, small firms were largely ignored by most governments, policy makers and researchers, seeking to promote national economic position through greater firm-level internationalization.
Internationalization refers to the process of increasing involvement in international operations.
Theoretical approaches on SME internationalization
1. Incremental internationalization models
“stage” theorists think that SMEs adopt a evolutionary approach to foreign markets, gradually deepening their commitment and investment as they gain international market knowledge and experience, they start in markets similar to their own
4 stages: no export- export via independent representatives- sales subsidiaries- production
2. Network theory
not contrary but complementary to the Uppsala/stage model, a firm begins the export process by forming relationships in the foreign market, which will deliver experiential knowledge about a market, and then commits resources in accordance. Firms progressively gain from these relationships.
3. Resource-based perspective
decisions about the country market choice, the mode of entry and the product strategies are based on a coordinated framework of resources & capabilities & environmental realities of each firm individually
The business strategy perspective proposes a strategically planned, rational approach to internationalization
The contingency approach to internationalization views foreign expansion & export as a situation-dependent, selective and dynamic adaptation to the changing characteristics of the foreign market
Four categories:
- internal-proactive: SME exploits own unique internal competencies
- internal-reactive: responding to pressures from internal environment
- external-proactive: active exploitation by management of market possibilities
- external-reactive: reaction to factors from the external environment
Stimuli alone do not seem to be enough, they also need to be supported by facilitating factors:
1. Decision-maker characteristics: inconsistent but different characteristics researched are: self-confidence, experience, motivation, flexibility, age, work experience, network in foreign countries
2. Firm characteristics and competencies: implementation of a process for systematically exploring, analyzing and planning for export seems to be a powerful discriminator between exporters and non-exporters
3. The environment: this concerns the domestic environment and the foreign markets attractiveness, legal systems, infrastructure, government barriers
Definition: all those, attitudinal, structural, operational and other constraints that hinder the firm’s ability to initiate develop or sustain international operations
Four categories of problems:
1. internal-domestic: lack of experienced personnel
2. internal-foreign: adapting products to foreign market safety standards
3. external-domestic: lack of government support, infrastructural or otherwise
4. external-foreign: foreign government-imposed restrictions
Direct and indirect support includes:
providing access to foreign market info
providing some form of financial assistance (grants, subsidies, export credits)
improving SMEs capability through management advisory services and help with R&D and technology
providing SMEs with a better business environment, by facilitating networking and sub-contracting arrangements and offering simplified, one-stop assistance units, industrial parks and arbitration assistance
Figure 24.1 recommendations to assist internationalization by SME categories
4 categories:
I less entrepreneurial and non-internationalized
- introduce change agents, provide training, support and information, help with networking and foreign market contacts, establish international market brokers
II entrepreneurial and non-internationalized
- assist to redress competency gap, provide consultancy support and training, introduce mentoring scheme, encourage best practice: R&D, IT, innovation
III less entrepreneurial and internationalized
- seek positive reinforcement, deploy liaison officer, encourage networking: export clubs, establish mentoring scheme
IV entrepreneurial and internationalized
- encourage best practice: R&D, IT, innovation, facilitate participation in network structures, mitigate operational problems: assist foreign customers, ease market access
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