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SMALL BUSINESS AND ENTREPRENEURSHIP

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Cees A.M. den Teuling MBA

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Transcript of SMALL BUSINESS AND ENTREPRENEURSHIP

Cees A.M. den Teuling
Small Business and
Entrepreneurship

An Alliance of independent international Consultants with local networks around CIS Countries and Central Europe. OBI offers a quality in various consulting services based on our 25 years of experience and a knowledge of cultural diversity of Eastern European and C.I.S.countries.
Orange Business Improvement
Strategic Development of organizations
Business planning/Investment application
Business partner search and – matchmaking
Market-/ Marketing research
Trade- / Distribution management
Export / Import management
Offices in:
Amsterdam
Kazan
Yerevan
Warsaw
Moscow
www.orange-business-improvement.com
Cees A.M. den Teuling MBA
30 years of extensive experience in consulting medium-sized companies
General management, finance, HR, Turnaround and start-up management, distribution- and export management, market research, operations and purchasing.
Twenty Years of Involvement in business Projects in Central- and Eastern Europe.
Orange Business Improvement
Orange Business Improvement
SMALL BUSINESSES: THE BIG PICTURE
Key objectives
Uncertainty
Risk
Risk & uncertainty
What is the difference between risk & uncertainty? – the two closed pots
?
Understand the concepts of risk and uncertainty
Appreciate the importance of market, customer and aspirational uncertainty
Be able to identify key differences between large and small businesses
Managers of large businesses more likely to face the difficulty of translating their ‘vision’ of the business to their employees (internal uncertainty)
Owners of small businesses can limit such uncertainty by ‘managing by walking about’ but more likely to face a challenging environment (external uncertainty)
Internal and external uncertainty
Key difference between large and small businesses is market power: the small businesses more likely to be a price taker than a price maker
Limited number of customers
Tend to be concentrated in particular (easy to get into) sectors
Focused on ‘niche’ advantages (e.g. specialist, timely or geographical advantages)
Dimensions of external uncertainty: market uncertainty
Employees tend to be fairly certain of their wages. Entrepreneurs are more uncertain of their revenue
Can limit this by having a subcontracting relationship with the customer
Dimensions of external uncertainty: customer uncertainty
Huge diversity of motivations for setting up and running a business (e.g. to grow the business, to earn an income, to provide for a family)
Differences in aspirations greater if we include those with more than one business (portfolio entrepreneurs) or business run by a team
Mostly very small business has no intention of growing
Entrepreneurs tend to be ‘super optimists’
Dimensions of external uncertainty: aspirational uncertainty
Register as a limited company – this may protect the personal assets of the entrepreneur
Focus on short-term survival
Invest less heavily in equipment (e.g. machinery)
Establish a portfolio of businesses – this spreads the risks faced by the entrepreneur
Four ways a small business can limit uncertainty
Key differences between small and large businesses
LB have more political power
High
Low
Political influence
LB have greater access to finance
Wider choice
Limited choice
Finance
LB focus on investment
High
Low
Investment
SB seen as ‘backward’
High
Low
Formal training
SB job satisfaction higher but LB have better pay
Attracts educated workers seeking a career
Diverse (e.g. satisfied/exploited) practices
Human resources
Hire different types of workers
High
Low
Employee wages
Consequence
Large Business (LB)
Small Business (SB)
Aspect
Key differences between small and large businesses (Continued)
How do small and large businesses see themselves?
Small businesses – customer focussed
Large – reliable
How is it seen by the other?
Small (by large) – lacks credibility, unreliable
Large – bureaucratic, price taker
What are the key words?
Small – uncertainty, diversity, flexibility, failure
Large – reliability, brand, market power, influence
Word associations
Explored the concepts of risk and uncertainty in relation to small businesses
Examined three dimensions of uncertainty: market, customer and aspirational uncertainty
Identified key differences between large and small businesses
Conclusions
UNDERSTANDING ENTREPRENEURSHIP
Be able to identify key differences between productive, unproductive and destructive entrepreneurship
Understand the key features of economic and organisational theory interpretations of entrepreneurship
Evaluate the major areas of debate between these two approaches
Key objectives
Productive entrepreneurship (maximises individual (private) and social benefits)
Unproductive entrepreneurship (maximises individual (private) but not necessarily social benefits)
Destructive entrepreneurship (maximises individual but not social benefits)
Baumol’s Typology
What is important is the ‘rules of the game’ (e.g. tax incentives, ease of setting up a business) rather than supply of entrepreneurs
The entrepreneurs are always with us: it is just that people shift between productive, unproductive or destructive entrepreneurship depending on the nature of incentives they face
Soviet Russia and Peru (de Soto, 1990)
Implications of Baumol’s typology
No agreed definition of the entrepreneur
Casson (1982) defines an entrepreneur as ‘someone who specialises in making judgemental decisions about the co-ordination of scarce resources’ (p. 23).
Fundamental to the entrepreneur is the presence of uncertainty: if everything is known there is no need for the entrepreneur
Theorists generally agree that arbitrage (differences in prices) is important:
Temporal arbitrage (differences in prices between two time periods)
Spatial arbitrage (differences in prices between two locations)
Defining the entrepreneur
Uncertainty
Adopt a choice framework – people make choices and work within a ‘utility’ framework
Focus on outcomes of economic activity
No common approach adopted by economists:
Risk bearers?
Special people?
Risk ‘lovers’?
Innovators?
Market adjusters?
Economist’s approach
The individual exercises a choice between becoming an entrepreneur or an employee and is able to switch between them.
The choice to switch between the two depends on the utility of each state.
The recognition that the income from being an entrepreneur is more risky than that from being an employee.
The choice is also influenced by differences between individuals in terms of their entrepreneurial talent and attitudes to risk.
Four common economic themes
Shared concern with uncertainty and outcomes
Tend to be relatively more interested in entrepreneurial processes (e.g. entrepreneurial decision making)
No common approach adopted by organisational theorists (e.g. focus on different units of analysis (e.g. individual, business)) and different stages of entrepreneurial activity (e.g. start up, growth)
Shane and Venkataraman (2002) suggest it should be about:
Why, when and how opportunities for the creation of goods and service come into existence
Why, when and how some people and not others discover and exploit these opportunities
Why, when and how different modes of action are used to exploit entrepreneurial opportunities
Organisational theorist’s approach
Entrepreneurial opportunities exist – but are not known to everyone
People have different perceptions on the value (financial or non-financial) of an opportunity
Some people will choose to pursue these opportunities
Acting on these opportunities will result in differing outcomes, both profitable and unprofitable
Shane and Venkataraman’s (2002) assumptions
Entrepreneurs are special people and have particular traits (e.g. need for achievement
locus of control, risk taking propensity)
Gartner’s (1988) finds no evidence to support claims
Nicolaou (2008) work on twins research reopens this debate
Entrepreneurial traits
Representative heuristic (‘like for like’ information)
Availability heuristic (easily recalled information)
Anchoring and adjustment heuristic (adjustments based on prior information)
Three main cognitive biases
Over-optimism
Self-efficacy
Intrinsic motivation
Intentionality
Planning fallacy
These approaches appear to provide a more fruitful understanding of entrepreneurs than trait-based theory
Examples of cognitive biases relating to the entrepreneur
Baumol’s typology suggests type of entrepreneur is dependent on rules of the game
Implication is that incentives are more important than the supply of entrepreneurs
Economists and organisational theorists agree on the importance of uncertainty, arbitrage and outcomes
Economists, like organisational theorists, disagree amongst themselves
Economists tend to emphasise outcomes whilst organisational theorists emphasise processes
Conclusions
DEFINING THE SMALL BUSINESS
Understand the issues involved in defining smaller-sized businesses
Grasp the importance of small businesses to developed and developing economies
Account for the changes in business populations over time
Key objectives
Small businesses are the most common size of businesses wherever you are in the world: in all countries large businesses represent less than 5 per cent of the enterprise population
Contribute a great deal to employment and income of any economy: in the EU, two-thirds of employment is provided by SMEs
Want to assess how ‘enterprising’ or ‘entrepreneurial’ an economy is relative to other regions or countries
Why focus on small business?
Difficult because there are different ways of classifying small business activity
Self-employment – no agreed definition but does often involve four elements:
Control
Integration
Economic reality
Mutuality of obligation
Defining the small business
Owned and managed by the same individual(s) – focus on alignment of aspirations
Legally independent – focus on enterprises rather than establishments
Have a small share of the marketplace – price takers
Bolton’s (1971) conceptual definition of a small business
Problems with Bolton’s qualitative approach
Small businesses are heterogeneous
Small in one sector may be large in another
How do you measure small businesses?
Prefer ‘grounded approach’ (asking small businesses to self-define ‘smallness’)
How do you get harmonised data? – want to know if government support is working
Small businesses need clear eligibility criteria to work with government agencies
Curran and Blackburn’s (2001) approach
Table 3.1 EU SME definitions
But still international differences – for example, US and Canada define small businesses as less than 500 employees
European Union’s definition
Figure 3.1 Number of enterprises by employee size class
SMEs are numerically dominant globally
Figure 3.2 Employment by employee size class
SMEs are the dominant providers of employment
Figure 3.3 Business density in EU-27 countries, 2005
Business density varies markedly
Figures tend to only count ‘formal’ businesses
Micro-sized businesses less likely to be registered
May operate in the informal economy
Registration thresholds likely to be set higher than lower
No standard measure of what is an ‘SME’
Yet despite these issues, SMEs are most common type of enterprise in the world
International problems with measuring SMEs
Is the UK an example of the increased importance of smaller businesses?
Although there is no comprehensive or continuous data available, what evidence can we use to chart changes in the UK enterprise population?
Will examine evidence for and against profound changes in the UK’s enterprise population
Part 2: Accounting for changes over time: the case of the UK
Figure 3.4 UK total manufacturing employment in small establishments, 1924 – 88
What was the situation before the 1980s?
Large manufacturers’ employment share increased because they were better able to take advantage of cost advantages (economies of scale)
But some large UK manufacturers became increasingly uncompetitive leading to bankruptcy. So, did the employment share of small businesses increase because of the failings of large businesses?
What does the ‘U’-shaped pattern imply?
Figure 3.5 Percentage of UK labour force in self-employment, 1959 – 2007
Still a step change in self-employment during the 1980s…
Figure 3.6 Number of UK businesses and VAT stocks, 1980 – 2006
…and a doubling of the enterprise population
EU governments ideologically committed to the development of the ‘enterprise culture’
Continued restructuring of the labour market: self-employment seen as a route out of unemployment
There was an expansion of the service economy: firm’s competitive advantage increasingly based on behavioural advantages (e.g. flexibility, speed) rather than cost (price)
Macro-economic stability for much of the 1990s-2000s
Why these changes?
Figure 3.7 Employment shares of small and medium-sized UK enterprises,
1980 – 2006
Evidence against: the decline of medium-sized businesses
Figure 3.8 Percentage of the female population with a main activity classified as self-employed by age group
Older women are more likely to be self-employed…
Figure 3.9 Percentage of the male population with a main activity classified as self-employed by age group
…as are older men
Changes since the 1970s due to the importance of the service sector, changes in business practice, competitive advantage and political support
Other evidence suggests more modest changes
Medium sized businesses share of employment has fallen
Younger people not more likely to be self-employed despite the development of an ‘enterprise culture’
Summary
Figure 3.10 Self-employment in six developed countries, 1956 – 2004
Part 3: Accounting for changes over time: International evidence
Figure 3.11 Business ownership rates in selected EU countries, 1972 – 2004
International rates of business ownership
Changes in self-employment rates show little change but over time a broad ‘U’-shaped pattern evident
Could be expected that there would be more profound change because:
Three world recessions, increased importance of the service sector, growth of ITC, tertiary education and huge political support
Summary
Despite the difficulties of defining and measuring SME activity, it is the pre-eminent enterprise type everywhere in the world
Have been dramatic changes in the EU enterprise population but also strong evidence of stability
International evidence supports the stability argument despite the profound economic and social changes that have occurred over the last 50 years
Conclusions
WORKING IN SMALL BUSINESSES
Understand the issues associated with estimating the extent to which job creation takes place in businesses of different sizes
Be able to compare and contrast small and large business workplaces
Critically evaluate if small businesses are ‘better’ places to work
Key objectives
Large businesses pay more because they:
Have more market power (higher profits)
Better qualified workforce
Have higher performance standards
Can’t distinguish between good and bad workers
Small businesses
Employ lower pay groups (e.g. women, young people, ‘low’ skilled)
Younger businesses
Still ‘size-wage premium’ persists after controlling for such factors
Who pays better?
Figure 4.1 Establishments offering retirement and healthcare benefits
Large businesses provide greater fringe benefits
Training your workers leads to both firm and individual worker benefits
So why are small businesses less likely to formally train their workers?

Explanation 1: there are ‘barriers’:
Entrepreneurs are unaware of the benefits of training
The ‘right’ training (e.g. cost and appropriateness) is not offered
Entrepreneurs have ‘negative’ attitudes towards training
Approach assumes that small businesses training practices should resemble that of larger businesses
Why don’t small firms provide as much formal training as large businesses?
Assumes that entrepreneurs are ‘informed’ rather than ‘ignorant’ consumers of training
Limited ‘slack’ resources to support training
Training increases likelihood of poaching
Gaining qualifications increases poaching
Entrepreneurs favour short term horizon
Diversity of training needs
Entrepreneurial resistance (e.g. what is the value of training?)
Explanation 2: Market-based explanation of take up of formal training
Both ‘barriers’ and ‘market based’ explanations share features (e.g. lack of ‘slack’ resources) but evidence tends to support market-based rather than barrier-based explanation for formal training
What is less clear is the importance of informal training in both large and small businesses
Evidence on training
Figure 4.2 Fatality rate per 100,000 workers (manufacturing), 1992 – 2001
Less safe working conditions in smaller businesses
Figure 4.3 Lack of information on workplace risks, by business size (%)
A lack of awareness of Health and Safety issues
Figure 4.4 Violence and harassment, by business size, EU-27 (%)
Greater levels of job satisfaction in smaller businesses
Large business workplaces have greater levels of formality (rules and procedures)
Smaller business workplaces marked by greater levels of informality (e.g. owner-managers more likely to know their staff)
Why are small business workers more satisfied?
Figure 4.6 Formality and satisfaction (Storey et al. 2010)
Formality and business size
Table 4.4 Small and large workplaces: a review
Review of small and large workplaces
Large workplaces pay better, provide better fringe benefits, provide more formal training and are safer places in which to work
Small workplaces have a workforce that is more likely to trust its managers. Despite being paid less, they also appear ‘happier’
Review of small and large workplaces
small is beautiful?
small business workplaces are bleak houses?
suggest a more nuanced opinion based on:
How social and economic structures impact on employment relationships in small businesses
How owner-managers and employees respond and make choices in particular social and economic contexts
‘Small is beautiful’ or a ‘bleak house’?
Small businesses are job generators but are also more likely to lose jobs
Large workplaces pay better, provide better fringe benefits, provide more formal training and are safer places in which to work
Small workplaces have a workforce that is more likely to trust its managers. Despite being paid less, they also appear ‘happier’
Need a contextualised understanding of small business employment relations
Conclusions
NEW ENTREPRENEURSHIP AND SOCIAL NETWORKS
Understand the importance of new entrepreneurship and the contribution of social networks to the business start-up process
Be able to critically evaluate just started entrepreneurship and social networks
Key objectives
Defined as ‘…individuals involved in an attempt to start up a business’

Typically measured by asking the following question: ‘Are you, alone or with others, currently trying to start a new business?’
What is just born entrepreneurship?
There are three main questions:
How do individuals go about creating a business?
What actually triggers them to go about starting a business?
How many individuals are actively involved?
New entrepreneurship processes and implications
Katz and Gartner (1988) suggest a theory of four ‘properties’ of emerging organisations:
Intentionality – those seeking to set up a new business have to form some intentions towards setting up their business
Resources –(e.g. workers, finance) have to be identified, collected, assembled and put to use
Boundary – the creation of deliberate psychological (e.g. telling family or friends) or official (e.g. registering a business) boundaries
Exchange – transactions (e.g. sales) have to occur
1. How do individuals go about creating a business?
Table 7.1 Proxies for Katz and Gartner’s four properties of emerging organisations
Start-up activities
Causal - some chefs follow a recipe (means) to cook a meal (ends)
Effectuation - Others go into their cupboard and investigate what ingredients (means) they have. They then imagine what the meal should look like (effects) before cooking the meal (ends).
Brush et al. (2008) specifically test for organisational emergence using Katz and Gartner’s (1988) model. They find that ‘…organising a new venture is not a patterned or linear process but rather is simultaneous, messy and iterative’ (p.548).
Causal or effectuation process?
Aim is to distinguish start-ups from general population and why some make the transition into business

Criticisms
Don’t look that much different from general population or actual entrepreneurs
Small businesses often short lived experiments – better to support growth businesses?
Only actual start ups are of economic significance
Why people do it is easily explained: it is in their interest
2. What actually triggers them to go about starting a business?
Important human activity
New businesses are central to economic development
Criticisms
How actually do you define the seriousness of any intention (e.g. dreamers)?
Can you set up a business without forming any intention to become a nascent entrepreneur?
Do entrepreneurs recognise the label?
More socially acceptable to say you are nascents – differences in TEA rates more about attitudes than actions
3. How many individuals are
actively involved?
‘…the sum of the actual and potential resources embedded within, available through, and derived from the network of relationships possessed by an individual or social unit. Social capital thus comprises both the network and the assets that may be mobilised through that network’
Social capital
Figure 7.1 Birley’s credibility carousel
The credibility carousel
Network content – use and access of resources (e.g. financial, emotional support)
Network governance – the ‘glue’ that binds people together is trust. This makes it ‘cheaper’ to do business
Network structure – the types of ties (weak and strong). Focus then is on, for example, the size of the network, its density, its diversity and where the individual sits in a network
Network use
‘…social networks are defined by a set of actors (individuals or organisations) and a set of linkages between the actors’ (Hoang and Antoncic, 2003: 168)
‘A network consists of single nodes (actors) and connections between these nodes (dyads), which as a whole form the structure of a network’ (Witt, 2004: 392)
Definitional issues
‘…a firm’s set of relationships with other organisations’
‘networking does not have an objective existence independent of the person who is networking. It is a social construction that exists only so far as the individual understands and uses it’
Definitional issues
Compensation thesis – people only network because they lack other resources?
Ambiguous empirical evidence – problem with defining the network?
Costs of networking – get what you put in?
Oversocialised view of economic behaviour? People motivated by economic return rather than trust?
Networking a ‘two way street’?
Other criticisms of social networks
Saw that start-up entrepreneurship is an important but messy process
Networks are pivotal to creating a new business
Approaches attract criticism because they do not fully explain the (importance of) start-up activity or how or why people use networks to create a business
Conclusions
INNOVATION
Understand the key terms and measures in innovation
Be able to evaluate key explanations for how innovation occurs
Be able to discuss how business size impacts on innovation
Key objectives
Invention is ‘the first occurrence of an idea for a new product or process’
Innovation is ‘…the first commercialisation of the idea’
Mousetrap inventions and innovations
suggests that the returns from invention are often likely to be minimal
Invention and innovation critical to economic development
Invention and Innovation
Introduction of a new method of production
Opening up of new market
The conquest of a new source of supply of raw materials or half manufactured goods
The creation of a new type of industrial organisation
Introduction of a new good or significant improvement
Schumpeter’s five types of radical innovation
Incremental innovation
Product innovation (quality advantages)
Process innovation (cost advantages)
Other key terms
R&D expenditure or the number of R&D ‘workers’ employed
Not necessarily correlated with innovation output
Biased towards the large business
Small business innovation spread throughout business rather than restricted to the R&D department
Limited measure of innovation
Measuring innovation: input measures
Measures can be patents applied for, granted or number of new product announcements
Patents are a negative right which ‘shelter’ the innovator
Governments agree to patent protection to foster innovative activity (otherwise entrepreneurs may not innovate) and to promote ‘spillover’ benefits
Advantages:
Better measure because patents are costly so minimises ‘trivial’ patents
Better measure of innovation output than R&D expenditure/workers
Measuring innovation: intermediate output measures
Not the only type of IPR:
Design rights
Copyright
Trademarks
Cost of patenting
Difficulties in enforcing IPR rights
Use of alternative strategies (e.g. trade secrets, reverse engineering)
Problems with patents
Table 5.2 Enterprises rating different methods for protecting innovation as of ‘high’ importance
Large businesses make more use of IPR
Large businesses more likely to use IPR
New product announcements are not always a reliable measure of product innovation
Patents/product announcements more a measure of technological activity than innovation
Problems with intermediate measures
Involves asking businesses about their innovation
Advantage is that an innovation fertility measure (innovation/employment) can be constructed
But problems of subjective opinions and hindsight bias
No measure is perfect
Direct measures of innovation
Not just about inputs (exogenous) but also being ‘smart’ (endogenous)
Spillover effects
Path dependent and context specific
How does innovation occur?
Table 5.3 Successive waves of technological change
Kondratieff waves
Figure 5.1 Innovation over the technology life cycle
Technological paradigm approach
Table 5.4 Advantages and disadvantages of three ways of powering the early automotive engines
Steam, electricity and petrol
Figure 5.2 Technology S curve
Technology ‘S’ curve
Descriptive rather than prescriptive
Potentially downplays roles of entrepreneurs and businesses
Not so applicable to smaller niches or innovations that fail to be commercial successes
Problems with such approaches
Table 5.5 Stylised’ innovation advantages and disadvantages of small and large businesses
Stylised differences between large and small businesses
Mark I sees entrepreneur as dynamic agent of change (behaviour)
Mark II sees resources as being key (large business)
Superficially, evidence tends to support Mark II
Large businesses much more innovative than smaller businesses
Schumpeter Mark I and II
Evidence on Mark I and II
Evidence now suggests that innovation is dependent on
Sector (concentration)
Life cycle stage of sector (new vs mature)
Mark II perspective ignores innovation rate (innovation/employment) of small businesses
Spillover effects (Cambridge)
Measuring innovation is difficult
Can delineate broad patterns of innovative activity but still cannot ‘pick winners’
Innovation amongst small and large businesses is context (sector) specific and assessments need to account for dynamic (spillover) activities
Conclusions
DEFINING BUSINESS GROWTH
Understand six different approaches to business growth
Be able to identify the difficulties in defining and measuring fast-growth businesses
Critically evaluate four ‘stylised facts’ of business growth
Key objectives
Rapid growth businesses like Microsoft, Google and Facebook all made major contributions to US economy
Nokia for Finland
Importance of fast-growth businesses to regional economies
Schreyer (2000) showed that fast-growth businesses represented fewer than 10 per cent of businesses but contributed disproportionately towards employment growth
Importance of fast-growth business
Sales
Profits
Financial ratios
Employment
Market share
Income of entrepreneur
Subjective measures
Multiple measures
Measures of growth
Annualised
Absolute
Relative
Log transformed
Measuring rapidity of growth
No ideal measure of growth: often data dependent
Over what time period should growth be measured?
Hard to tell ‘plums’ from ‘lemons’: need for longitudinal studies?
Usual assumption is organic growth but growth may be by acquisition
‘Plums’ and ‘lemons’
OECD (2008) define gazelles as:
‘…measured in terms of employment (or of turnover) gazelles are enterprises which have been employers for a period of up to five years, with average annualised growth in employees (or in turnover) greater than 20 per cent a year over a three-year period and with ten or more employees at the beginning of the observation period.’ (p. 20).
Gazelles much more important than ‘trundlers’
Gazelles
Figure 11.2 Changing patterns of business size in New Zealand, 2000 – 5
Prior growth increases chances of survival
Fast growth is highly unusual
Four stylised facts about business growth
Growth is spotty: growth is not usually followed by more growth (serially correlated)
Younger and smaller businesses grow faster:
growth is independent of size
Evidence suggests that the ‘Law’ does not hold for the very young or small business
More evidence that it holds for larger and older businesses: points to chance being important in growth
Understanding fast-growth businesses is perhaps the most important aspect of the study of small business and entrepreneurship
Difficult to measure fast growth: who are the ‘plums’ and the ‘lemons’?
Four ‘stylised facts’ on business growth point to the challenges of actually predicting fast growth
Conclusions
ANALYSING AND MEASURING BUSINESS GROWTH
Understand six different approaches to business growth
Be able to compare and contrast these different approaches to business growth
Begin to develop your own opinions on fast-growth businesses
Key objectives
Evolutionary approaches to growth
Social network approaches to business growth
Resource-based views and learning approaches
Managerial approaches
Economic approaches
Stochastic approaches
Six approaches to business growth
Figure 12.1 Greiner’s (1972) model
1. Evolutionary approaches: Version 1 – stage theories
Closure rather than growth is the norm
One-size-fits-all approach: heterogeneity in the business population
Growth is unidirectional but reality is much more spotty
Number of stages and crises?
Importance of informal managerial interactions
Intuitively appealing but little conceptual or empirical reliability
Issues with stage theories
Interest is in organic changes in populations (birth, growth and death) not individual businesses
Environmental resources and competition determines outcomes
Specialist and generalist strategies
Criticism is that it gives little weight to the activities of individuals/businesses
Evolutionary approaches: Version 2 – population ecology
Focus on individuals:
‘… a set of actors (individuals or organizations) and a set of linkages between the actors
Environmental resource and competition determines outcomes
Or on businesses:
‘…a firm’s set of relationships with other organisations.
Growth associated with trust and nature of relationships (strong and weak ties)
Social network approaches: Version 1 – networks
Network magnitude (entrepreneur needs to network widely to grow)
Network closure (entrepreneur relies on small number of strong ties)
Network position (entrepreneur acts as a gatekeeper between networks)
Three network approaches
Difficult to measure association between networking and growth.
Trust is a ‘two-way street’: may not be beneficial
Limited evidence to support influence of networking.
Networking is important but showing its influence has proved elusive
Issues with networking
Agglomeration thesis looks at the benefits of being located close to other businesses
Access to specialist pools of labour
Saves on costs (e.g. lower transportation costs)
Potential for knowledge spill-over effects (know how and know who)
Cluster analysis essentially based upon this but emphasises knowledge spill-overs
Basis of cluster approach
Porter (2003) defines it as:
‘…a geographically proximate group of interconnected companies, suppliers, service providers and associated institutions in a particular field, linked by externalities of various types’ (p. 562).
Cluster approach
Figure 12.2 Boston life science cluster
Cluster approach
Not a new approach: just old wine in new bottles
Vague and elastic definition
Difficult to empirically verify
Heterogeneity and idiosyncratic businesses and regions
Hermetically sealed
Economic not spill-over effects are more important
Represent a ‘one-way bet’
Some critique
What a business does is more important to its performance than external conditions
Basis of approach:
Businesses as bundles of resources
Resources are heterogeneous and idiosyncratic
Resources are immobile
Resources are path dependent
3. Resource-based views and learning approaches to growth
Trait-based approach
Management style
Intentions and entrepreneurial orientation
4. Entrepreneurial management approaches
Assumes that entrepreneurs have the ‘right stuff’ in their psychological make up (e.g. locus of control)
Has proved to be a bit of a dead end (Gartner, 1988)
Trait-based approach
Like stage models, appealing but conceptually and empirically weak
Table 12.1 Scott and Bruce’s (1987) managerial stages mode
Management styles
Some evidence that intentions are linked to growth
suggest that the relationship is likely to be indirect
Rely on self-report measures
Sufficient but not necessary condition?
Intentions
Wide variety of approaches from the simple (neo-classical) to evolutionary economics
Shared interest with other approaches (e.g. learning, dynamic capabilities)
Share, therefore, similar frailties
Economic approaches still more likely to emphasise cost
Economic approaches
Don’t know entrepreneurial talent before entry but if have talent more likely to grow afterwards
Random because high (low) talent individuals may get unlucky (lucky) draws
Emphasis is on passive learning by entrepreneur of their talent
May be modified to make them active learners)
Some approaches:
Entrepreneurs are those with the winning ticket
No good asking them – they are faulty guides
Growth isn’t serially correlated
Older and bigger businesses don’t have stronger growth outcomes
Growth studies show that they can explain only 15 per cent: other 85 per cent is random
Some approaches 2: lottery effects
Spectrum of explanations from the more deterministic to the random
Each have advantages and disadvantages
Your task is to critically evaluate each of these approaches
Conclusions
GROWING THE BUSINESS –
PRE START-UP FACTORS
Understand the range of pre start-up factors commonly associated with business growth
Be able to compare and contrast pre start-up factors
Critically evaluate the importance of pre start-up factors
Key objectives
Age & (Age)2
Gender
Ethnicity
Education
Prior sectoral/managerial/business experience
Family & partners
Unemployment
Personality
Identifying
pre start-up factors that lead to growth?
Younger people lack experience but have energy and closeness to particular markets
Older people have experience but lack energy and commitment to growing the business
Prediction is that ‘prime age’ individuals (aged 30–50) more likely to have growing business
Strong evidence that, indeed, prime age individuals are more likely to have growth businesses
Age & (Age)2
Why is that women are less likely to own growing businesses?
Lack of ability?
Discrimination?
Family responsibilities?
Sectoral influences?
Gender
Expectation is that groups with higher rates of self-employment more likely to have growing businesses
Reflects:
Presence of ‘role models’?
Cultural predispositions?
‘Ethnic’ resources?
Evidence from Saxenian (2000) about ethnic Silicon Valley entrepreneurs
Ethnicity
Ethnicity may be confused with immigration
Immigration important because they are likely to be a non-random sample
Ethnic disadvantages:
Constrained by the size of market
Ethnic resources
Discrimination
Sector
Future research needs to better account for differences between ‘immigration’ and ‘ethnicity’ and differences between ethnic groups
Immigrants and ethnic disadvantage
Formal education useless – need ‘university of life’
Positive justifications:
Increases skill levels
Selection mechanism
Sectoral influences
Resources
Need higher income level (choice theory)
Clear evidence that education is positively associated with business growth
Education
Detailed knowledge of sector can identify growth opportunities
Counter argument is that no two opportunities are the same so no guide to success
Evidence is limited and mixed
Sectoral experience
Need managerial experience to run a growing business
Managing your own business is fundamentally different from managing someone else’s business
May have a modest impact
Prior managerial experience
Surely prior business experience (serial or portfolio) is better than no experience (novice)?
Knowledge is cumulative
Arguments against:
Experience is unrelated to entrepreneurial talent (Jovanovic, 1982)
Reflects the optimism of the individual
No clear impact: Ucbasaran et al. (2006) find no significant association
Prior business experience
Family businesses less exposed to ‘principal-agent problems’ and more likely to ‘steward’ the business
Not clear that managers of non-family business might have fewer principal-agent problems or be capable stewards
Family or business?
Family resources?
No evidence of association with growth
Reflects definitional issues with family
Second generation likely to under-perform
Family
Prior evidence that partners (team) were important to growth
Needs a wider/diversified range of skills and have greater resources
Similar rather than diverse skills?
Teams are initially important but less so later on
Problem in definition (similar to family), tendency to assume shared goals and may just mask advantages of incorporation
Research issue of what came first: team or growth?
Partners
Summary of ‘pre’ start up factors
Explored the range of pre start-up factors commonly associated with business growth
Offered arguments for and against why particular factors should be important
Found some factors associated with business growth
Conclusions
GROWING THE BUSINESS – AT START-UP FACTORS
Understand the range of ‘at start-up’ factors (firm level characteristics) commonly associated with business growth
Be able to compare and contrast ‘at start-up’ factors
Critically evaluate the importance of ‘at start-up’ factors
Key objectives
Use pre, at and post start-up growth factors
Health warning: although they are treated separately, they are often linked
Evidence based on large scale multivariate analysis
Recent studies from different countries using a range of performance measures
Reminder of basis of approach
Initial size
Legal form (limited company)
Sector
Location
At start-up factors
Growth independent of size
Smaller businesses have to grow fast to survive
Larger businesses grow because they ‘hit the ground’ running
Two different types of start up
Some evidence of the need to grow, less evidence on whether to start small or large
Initial size
Basic difference between incorporation (limited companies) and unincorporated (sole traders, partnerships) businesses
Advantages of incorporation:
Limited liability to assets in the business
Trade equity
Brand/credibility
Tax advantages
Potentially easier to sell the business
Legal form
Often need a minimum share capital in many countries
Limited liability a fiction, particularly when use is made of external finance – need for collateral (home) on any finance
Comes with regulatory checks and balances
Have to register with regulators.
More visibility so potentially can take less ‘advantage’ of the informal economy
Costs of incorporation
Often need a minimum share capital in many countries
Limited liability a fiction, particularly when use is made of external finance – need for collateral (home) on any finance
Comes with regulatory checks and balances
Have to register with regulators.
More visibility so potentially can take less ‘advantage’ of the informal economy
Costs of incorporation
Clear robust evidence that incorporation is positively associated with growth
Proxy for team entrepreneurship?
Reflection of the growth motivations of the entrepreneur?
Brand (credibility) advantages?
Not due to compliance costs
Evidence on incorporation
Sector ought to be related to growth
Clear that demand patterns & means of production have changed over time
Population ecology perspective) shows that small businesses dominate in the early stages of the life-cycle of a sector:
new sectors should see greater numbers of small fast-growth businesses
Sector
No strong evidence that ‘new businesses
(hi-tech businesses in new sectors) grow faster although individual businesses may grow quickly
Growth is found in ‘established’ and traditional industries
Evidence is mixed on the influence of sector
Sectoral variation
Again, location ought to be positively associated with growth
Reminder of agglomeration advantages:
Specialist pools of labour
Cost advantages
Knowledge spillovers (know ‘who’ and ‘how’)
Location, location, location
Argument that ‘how’ a business did business more important than ‘where’
Fast-growth businesses exist all across the countries
further “spaces”:
Universities
Science parks
‘Born globals’
Location decisions of individual businesses
Does ‘space matter’?
Science parks usually provide incubator services to high-tech businesses
finding no evidence of science park businesses being more likely to grow.
Others provide more positive evidence
Science Parks
Defined as:
‘…a business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries. The distinguishing feature of these start-ups is that their origins are international, as demonstrated by observable and significant commitments of resources (e.g., material, people, financing, time) in more than one nation
Businesses that ‘escape’ their location
Born globals
Agglomeration advantages still persist – businesses like bees to honey
Definitionally elastic approach
Most likely found in small open economies (e.g. Scandinavia)
Relatively rare
Criticisms of ‘born globals’
Lifestyle choices important when a business is created
Likely to be source of contacts
Home businesses very common but may have limited growth potential (lifestyle choice)
But ‘garages’ do offer cheaper cost basis and more ‘acceptable’ with the internet
Location decisions of entrepreneurs
Arguing that home businesses is a rational economic choice (home markets)
Uncertainty about future profits
Butterflies (fast-growth businesses) likely to be different from caterpillars (start-ups) but home location important because of sunk costs
Evidence on location decisions
Summary of ‘at’ start up factors
Explored the evidence based on four key at start-up factors
Legal form and location are associated with fast-growth businesses
Still, evidence suggests that we don’t really know why legal form is important. Equally, importance of location is uneven
Conclusions
GROWING THE BUSINESS –
POST START-UP FACTORS
Understand the range of post start-up factors commonly associated with business growth
Be able to compare and contrast post start-up factors
Critically evaluate the importance of post start-up factors
Provide a reasoned critique of factors that are associated with growth
Key objectives
Formal planning
Workforce training
Sources of finance
Entrepreneurial skills
Innovation
Post start-up factors
Advantages:
Ansoff (1991) says purposive planning leads to better outcomes
Strategic view of the business.
Mistakes on paper and a ‘reality check’
Planners more likely to win external funding because it legitimises business
To plan or not to plan, that is the question….
Mintzberg (1990) says trial and error is better
Trade off: write plan or pursue opportunity
Uncertainty is high so little point
Normative – where’s the evidence that plans work in university settings?
Mimetic – business plans simply devices for looking like other businesses
Coercive – businesses forced to write plans
Disadvantages of plans
10 million business plans written every year
But not all businesses write plans
Mixed evidence on plans:
arguing that it depends on multiple effects (profile and context of business)
Type of reader
Plan not necessarily the same as planning
Diversity makes it difficult to associate plans easily with growth
Evidence on plans
Training key aspect
Evidence that training helps performance of larger businesses
Difficult to identify performance link in small businesses:
Informal rather than formal training
Training only one of many influences on growth
Chicken and egg
No strong evidence of link
Workforce training
Ought to be a link between finance and growth: businesses need finance to grow
Link usually in terms of provision of external equity (venture capital)
Finance may be an outcome/consequence rather than cause of growth
What is important is how well the small business finance market works (information)
Sources of finance
In general, venture capital funding will supports growth
No appetite for external finance (control aversion)
In principal, a strong case but difficult to work out the additional impact of finance on growth
Evidence on finance
Managing a start up is different from managing a growth business
Research tends to rely on asking entrepreneurs – ‘halo’ effect
Growth is spotty
There is no evidence of continued growth in second period – businesses return to industry average
Entrepreneurial skills
Different types of managers (entrepreneurs) are needed as the business grows
Opposite argument is that it is the entrepreneurs’ ‘baby’, has fewer principal-agent problems and entrepreneur has superior talent
Difficult to identify the role of the entrepreneur because as the business grows it is likely to develop a corporate structure
In order to grow, must the founder go?
Entrepreneurial skills, again, ought to be associated with growth
Difficult to identify link
There is no ‘one-size-fits-all’ strategy
Evidence on entrepreneurial skills
Again, innovation ought to be linked to growth
Reasonably clear evidence for large businesses
Some evidence of link for small businesses but other evidence is ambiguous
Innovation
Uncertainty
Difficulties in commercialising a product/service
Potential of inadequate returns
Costs
Lagged effects
Spotty nature of small business innovation
Difficulties in measuring innovation
Why is innovation not more clearly associated with growth?
Summary of post start up factors
Table 15.2 Summary of pre, at and post start-up factors
Summary of findings
Strong associations (e.g. males, education, incorporation)
Very many factors have either no or an unclear impact on business growth
Overall reflections on business growth
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