Small Business Evolution: Insights on Employment Trends

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