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Small Business Evolution: Insights on Employment Trends

Understanding the impact of small firms on job creation, GDP, and economic growth. Explore the evolving landscape of entrepreneurship and the shifting roles of small and large firms in the market.

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Small Business Evolution: Insights on Employment Trends

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  1. Session 1 ENTREPRENEURS

  2. 1. Small firms provide an important source of employment and GDP. 2. Job creation only occurs in growth-orientated small firms. • Some variations in definition of what is a small firm. • Entrepreneurs exhibit an innovative orientation by identifying unconventional solutions. • Entrepreneurs are proactive, innovative and take calculated risks. • Entrepreneurs succeed by focusing upon high growth markets ahead of competition. Session 1

  3. Small Business • After Second World War, focus was on building strong economies based around large firms. • By 1970s Western firms were performing poorly in world markets. • Causes include: • Inflexible labour practices • Myopic management • Rising costs due to inflation Session 1

  4. Declining productivity and rising costs caused market share loss to Pacific Rim competitors. • By 1980s SME sector became more important in Western economies. • In UK 55% of all employment in SME sector. • In EU over 65% of jobs in SME sector and also in former Eastern Bloc countries. Session 1

  5. Job Creation • Western governments began to see small firms as key source of new jobs. • Expanded provision of grants, training and advisory services. • Emerging data suggests support has minimal impact on creating new permanent jobs. • In UK, after support grants cease, many new one-person businesses cease trading. Session 1

  6. In contrast, in UK support for existing growing small firms did generate new jobs. • Similar view elsewhere in world that support is better directed at supporting existing smalls firms, not trying to stimulate more start-ups. • In USA analysis of 245,000 firms found 75% of employment gains from firms with 100+ employees. Session 1

  7. In UK only 10% of firms with less than 20 employees showed evidence of new job creation. • Less than 1% of small firms with less than 20 employees grew into 100+ employee operations. • Global Entrepreneurship Monitor (GEM) showed only firms fitting high growth potential group had any significant impact on job creation in 37 countries. • Link between small firms and job creation remains ambiguous. Session 1

  8. Probable conclusion is situation is too complex for generalisation. • Probable job creation varies by industrial sector, stage of firm in business cycle and pace of technological change. • In new industries small firms will be job generators whereas in mature industries large firms will probably be dominant employment source. • Another issue is the quality of small firm jobs and GNP contribution. Session 1

  9. Large firms offer higher quality jobs in terms of wages, fringe benefits, skills development and job security. • Smaller firms tend to pay lower wages and provide lower job security. • In part because large firms often achieve high productivity/employee training. • Also the case that in UK unemployed who start new small business often find income lower than remaining on state benefits. Session 1

  10. Small Firm Definitions • Research complicated by variations in definitions. • Problem of variations in sales, size and profitability across industrial sectors. • Also problem that sole traders and partnership data not in public domain. • Outcome has been a reliance on number of employees as definition of what is a small firm. Session 1

  11. Further, countries and agencies differ in the number of employees used define a small firm. • USA federal definition is 1-500 employees. • US grant and may extend definition to up to 1,500 employees, sales not exceeding $23M. • In certain states in USA, small business definition is sales less than $500,000 with no employee count requirement. Session 1

  12. EU definition is 1-249 with breakdown of: • Micro enterprise 1-9 individuals • Small business 10-49 individuals • Medium size business 50-249 individuals • Even EU will modify definition when announcing new grant schemes. • Examples include: • Maximum sales 40M Euros • Maximum 27M Euro on balance sheet • Minimum 75% of business run by owner and/or family Session 1

  13. Small Firm Growth • When researching growth, owner/manager motivation seems more important than number of employees. • Zero/minimal growth potential: • ‘Lifestyle’ firms where owner has income goal to support lifestyle • ‘Operationally constrained’ firms where limited demand, low sector profitability or intense competition Session 1

  14. Growth firms of 2 types: • ‘Sectoral specialists’ whose ability and flexibility create defendable niche positions • ‘Giant killers’ that eventually emerge as global players, or even founders of new industrial sectors • Not always the case that small firm with giant-killer potential may lack leadership capability to manage growth plan. • Other giant killers sell out to existing large players (e.g. YouTube bought by Google™). Session 1

  15. Large Firm Retaliation • Once a small firm grows to a certain scale, incumbent large firms may recognise the need to retaliate. • In 1970s, Freddy Laker saw an opportunity to create a low-cost airline by limiting operations to the UK to New York route. • Further savings made by restricting tickets sales to ‘First Come First Served’ day of departure. Session 1

  16. He had to fight large airlines in court to get approval to fly the proposed route. • First flight in 1977 - its huge success caused routes to be added. • Major airlines recognised Laker’s expansion would create cash flow problems for his company. • Agreed to reduce their prices even below cost until Skytrain forced to cease trading. Session 1

  17. Entrepreneurs • In 19th century, French economist J.B. Say defined entrepreneurship as process of shifting resources from areas of low productivity to areas of high productivity. • UK economist J.S. Mill perceived entrepreneurs as giving direction, supervising, controlling and risk taking. • Mill perceived that, compared to managers, entrepreneurs are prepared to take greater risks. • Austrian economist Joseph Schumpeter examined role of entrepreneurs. Session 1

  18. He defined entrepreneurship as a ‘meta-economic event’ such as the advent of a new technology (e.g. computers). • Schumpeter perceived large firm managers as continuing to use conventional approaches and remaining confident about understanding customers. • Entrepreneurs are most likely to succeed when markets in disequilibrium and customer needs remain unfulfilled. Session 1

  19. The entrepreneur’s distinguishing attribute is not risk taking but a willingness to exploit innovation. • Possible entrepreneurial actions are: • Develop new product • Discovering new supply sources • Creating new organisational forms • Since Second World War new views of entrepreneurs have emerged. • ‘Creating something different and assuming financial, psychological and social risks’ (Hisrich & Peters). Session 1

  20. Miller proposed entrepreneurial orientation of firm demonstrated by top managers: • Taking risks • Favouring change • Exploit innovation to achieve competitive advantage • Hills & Laforge review concluded successful entrepreneurs require certain attributes: • Ability to create new organisation • New organisation which exploits innovation • Ability to create unique operation to support business growth Session 1

  21. Industrial Revolution • Successful new businesses are often created by an individual who identifies unsatisfied customer need or unresolved problem. • The philosophy was apparent in early years of industrial revolution • Abraham Darby – iron smelting • James Hargreaves – Spinning Jenny • Thomas Newcomen – steam engine • It is reflected in today’s entrepreneurs by people such as Trevor Baylis, whose solution to the high cost of batteries was to invent the clockwork radio. Session 1

  22. Entrepreneurial Attributes • Tendency is for terms ‘entrepreneurship’ and ‘small business’ to be used interchangeably. • Added effect from GEM study, which uses ‘number of people considering starting a business’ to measure entrepreneurship across nations. • It is preferable to treat the entrepreneur and the small firm as different entities. • Gartner stresses entrepreneurship is a unique process involving innovation linked to achievement of profitable business growth. Session 1

  23. Several studies have tried to identify common traits among entrepreneurs. • East German study compared entrepreneurs with managers; former’s behaviour included: • Greater level of self efficacy • Higher order achievement need • More readiness to accept change • Greater interest in innovation • High desire to succeed • More competitive • Other studies have concluded most average small firm managers are closer to large firm managers than entrepreneurial owner/managers. Session 1

  24. Features common to a number of studies include: • Work commitment • Desire to succeed • Energy levels • Innovativeness • Willingness to take risks • Ambition to achieve business growth • Covin and Slevin’s definition of entrepreneurial style includes 3 dimensions: • Risk taking dimension • Innovation dimension • Proactive dimension • The evolved the first validated empirical scale for measuring entrepreneurial style which has been used in various studies. Session 1

  25. Although there is general acceptance of the innovation dimension, there is some debate about the risk taking dimension. • Brockhaus and others have found problems validating entrepreneurs as exhibiting higher propensity for taking risks. • It is possible that risk taking is a complex variable, influenced by factors such as: • Prevailing economic conditions • Nature of industry • Age of business • Size of firm • Educational background • Prior business experience Session 1

  26. Errors can happen • The media tend to characterise entrepreneurs as exhibiting an infallible ‘Midas touch’. • Some successful entrepreneurs may embark on their latest venture without determining the true opportunity. • Stelios Haji-Innou founded highly successful UK budget airline EasyJet. • He has used same low price business model in internet cafes (succeeded); car hire (question mark); cinemas (failed) and cruise liner (question mark). Session 1

  27. Importance • Entrepreneurs can have an important role in creating fast-growing firms that generate new jobs. • Data supported by innovation level, innovation per employee and registered patents. • As only a small number of firms are entrepreneurial, only a small number of firms are important as new job creators. • Hamel & Pralahad perceive entrepreneurs as creators of entirely new business concept (e.g. Jeff Bezos with Amazon.com). Session 1

  28. Individuals have impact by meeting new/unsatisfied market need. • They succeed by breaking with convention to deliver a new, more innovative proposition. • Hamel and Pralahad see very successful entrepreneurs as acting to change the rules of the game by: • Changing some fundamental aspect of rules of engagement and/or • Redrawing boundaries between industries and/or • Creating entirely new industries • Chaston definition is ‘behaviour which challenges established market conventions to develop new solutions’. Session 1

  29. Convention Challenging • Bill Gates’ record with Microsoft demonstrates the huge potential rewards of challenging convention. • He believed software, not hardware (or ‘boxes’), was the real future in the IT industry. • He persuaded IBM to accept business model of installing his Microsoft MS-DOS operating system as standard on the IBM PC. • He went on to persuade other key players to accept the same principle, which then extended to Windows/Office software products. Session 1

  30. The Option • People may decide to become self-employed at various stages in their lives. • Certain industries, such as graphic design or limited job opportunities, causes self employment to be standard option. • Professionals, such as accountants, often start their own practice having worked in another practice for some years. • Some people see self-employment as a source of more freedom at work. Session 1

  31. Others are forced into self-employment because no jobs available. • Academics and support services aspire to identify common traits. • In reality, entrepreneurs seem to come in different ‘shapes’ and ‘sizes’. • Some studies have limited applicability, being based on small samples or anecdotal data. • One exception is Professor Schein at MIT in USA who has undertaken large-scale empirical studies. Session 1

  32. He concluded people can be divided into 5 career types ( ‘anchors’): • Technical/functional • Managerial • Security and stability • Autonomy and independence • Entrepreneurial creativity • Schein’s typology has been used to examine career anchors among self employed. • Self-employed show 46% respondents are ‘autonomy and independence’ orientated and 33% respondents exhibit ‘entrepreneurial creativity’ orientation. Session 1

  33. Dominant Career Anchors of Self- Employed Persons Autonomy • The chance to pursue my own lifestyle and not be constrained by rules • A career free from organisational restriction • A career which permits maximum freedom to choose my own work environment • Being able to retain a sense of freedom and autonomy • Not constrained by organisations of the business world in general Entrepreneurial creativity • Able to create or build something that is entirely my idea • Using my skills to build a new business • I am motivated by the number of ideas which are totally mine • To invent or create something of my own is very important • I have always wanted to be my own boss Session 1

  34. Qualitative data associated with such studies indicates importance of • Escaping/avoiding large firm bureaucracy • Greater control over own life • Greater freedom to be creative • Many owner/managers are frustrated to subsequently discover that a small business involves many hours of paperwork, such as managing tax returns, etc. • Many frequently-quoted trait studies exhibit problem that other researchers are unable to duplicate results. • A common research problem is that the original study used a poor and/or non-validated measurement scale. Session 1

  35. Robichaud et al. developed and validated an 18-question research tool and response levels which permitted the use of factor analysis. • Factor analysis loaded on 4 specific factors exhibited by entrepreneurial responders: • Independence/autonomy • Intrinsic reward • Extrinsic reward • Security • Within each factor loading, certain key attributes/behaviour traits the explained majority of the variance. Session 1

  36. Items Measuring Entrepreneurial Motivation Independence/autonomy • Make my own decisions • Maintain my personal freedom • Self-employment • Be my own boss • Personal security Intrinsic reward • Personal growth • Gain public recognition • Prove I can succeed Extrinsic reward • Sales and profits • Achieve a comfortable living • Increase personal income • Achieve business growth Security • Build a business that can be passed on (or sold) • Be closer to my family • Provide security for my family • Build up wealth for retirement Session 1

  37. Success • Attempts to define a formula to guarantee small business or entrepreneurial success have yet to succeed. • It does appear success probability is increased where: • Market is growing • Customers exhibit wide diversity of need • Success is more difficult in mature, non-growth markets where often high level of competition between firms. • Often, the only growth option in mature markets is to undertake the expensive process of stealing customers from the competition. Session 1

  38. Need Change Opportunity • Where customer need is changing, this may permit the launch of new product or service. • Many large firms prefer to operate in large stable markets offering standard products. • This leaves smaller firms free to create a new business based on occupying a market niche. • In some cases what starts as a niche becomes new global business (e.g. Apple computers). Session 1

  39. A current example is of major consumer good firms focusing on the 18-49 age group. • However, an ageing population means the relative importance of this age group is declining in the economies many developed nations. • Many large firms seem to ignore that 70% of consumer net worth is owned by 50+ age group. • In the UK, the highest income group is aged 60-64 and 50+ people account for 80% of all personal assets. Session 1

  40. 50+ age group is becoming even more important in 2008 recession. • Few 50+ have negative equity in their homes, and many have paid off mortgage or only small balance left to pay. • 50+ have borrowed less than 18-49 age group. • At 50+, children usually have left home. • Overall combination means 50+ level of discretionary spending will exceed 18-49 age group. Session 1

  41. Saga • Sydney de Haan founded Saga in UK when he identified major holiday firms were ignoring the older consumer. • First product was coach tours in the UK. • As older consumer incomes rose, he diversified into overseas package holidays. • Saga focuses on relationship marketing to build high customer loyalty and hence high repeat purchase. Session 1

  42. With high loyalty diversified into financial services for older consumers (insurance, savings). • Eventually firm was sold to Venture Capital Group. • This move was followed by acquisition of AA insurance services, providing access to largest UK database of 50+ consumers seeking/buying insurance products. Session 1

  43. Starbucks • US coffee market is dominated by Maxwell House, Nescafé and Folgers. • Focus on competition-based on promotional spending to achieve perceived differentiation. • Howard Shulz was a coffee buyer for Starbucks company, then a Seattle retailer/wholesaler of coffee beans. • He observed the appeal of the diverse range of coffee sold in Italian cafes. Session 1

  44. He proposed that Starbucks open coffee shops focusing on superior quality and product variety. • His idea was rejected, so he left and opened his own small coffee bar operation. • When Starbucks came up for sale, he purchased the company and changed the name of his outlets to Starbucks. • He built his business into a national, then international business. Session 1

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