Understanding Small Business

Rolffe Peacock, Understanding Small Business:  Practice, Theory and Research

(Adelaide:  Scarman Publishing 2004)

Today, small businesses and the concept of ‘smallness’ are very much in the public eye. There have been major reductions in the workforces of large companies and the public sector in many economies, accompanied by a significant increase in work outside the large employers. More and more people have their own small business, are self employed, independent contractors, home-based business owners, or franchisees.

In increasingly volatile and unpredictable economies there is a greater proportion of part-time and casual jobs, and people in traditional jobs are being required to become enterprising – to take personal initiatives and responsibility, to work independently and in teams, and to network. In other words, there is an increasing demand in occupations for the type of enterprise that is always needed by the small business owner-manager. Young people are being encouraged to view their futures as if they were self employed persons. They need to become ‘portfolio people’ with specific skills to sell, to be involved in a number of occupations in their work life, and not to be confined to one job or business in their own State or within Australia; ‘they ought to develop a product, skill, or service, assemble a portfolio that illustrates these assets, and then go out and find customers for them’ (Handy 1996).

The relevance of ‘smallness’ was not always so. From the World Wars until the 1980’s in Australia as in other Western countries, big businesses and big government predominated. The model of industrialisation prevailed. Large enterprises achieved economies of scale from mining, production and market expansion. Within big firms, work was organised along hierarchical lines. Top and middle management planned the work which was carried out by the workers often requiring little training and skill, and the roles of managers and workers were quite separate. Governments intervened to ensure that purchasing was maintained by consumers and the financial system acted in support of big business. High economic growth was the norm and close to full employment was available to wage and salary earners. Although small businesses were known to exist they were very much in the background. They were not studied, no statistics were compiled of their operations, and their role in the economy was not seriously considered.

Starting in the early 1970s economic trouble was brewing for many countries. Prosperity due to the post-war build up of investments petered out. World oil prices quadrupled and persistent inflation caused concern for governments. Large enterprises and some financial institutions ran into economic difficulties and retrenched their workers. No longer could countries depend upon mass production and market expansion to increase the GNP year after year. Government bodies had to downsize and shed workers; however, many sections of the small business sector carried on quite successfully during this period.

In the late 1970s, a researcher for the first time seriously studied the job generation role of small business. David Birch (1979) showed that small businesses created the majority of new jobs in the United States. A shift of employment to small units was confirmed in other Western countries, ‘small business’ was in the news, and governments started to actively encourage and target sections of the small business sector. Australia tended to lag somewhat behind other countries but certainly by the early 1980s interest in small business had increased.   Perhaps the greatest contribution of small business in the last twenty years has been in the creation of employment.

Can we say that our community is knowledgeable with regard to the small business sector and sympathetic towards small business operators ? Despite the fact that private sector small businesses account for 96% of all businesses, and 42% of employment, the answer has to be no.

Three Australian research projects have indicated a poor small business image and a ‘depending’ rather than an ‘enterprising’ outlook in the economy.

In 1993 Mozell and Midgley surveyed 1,200 respondents nationally and they gained an over riding impression of a negative community  attitude about small business.   Although retail operations predominated in the minds of people, these and all types of business were similarly ‘tainted in the minds of the public.’   In 1997 Goddard and Ferguson sought the views of high school students and their parents and teachers.   Although there was a reasonably positive attitude to small business in general and an appealing avenue for youth employment, small business ownership was not attractive.   Many parents believed that employment in a big firm or a profession should be the basis for the careers of their children.

In 2000 Hindle and Rushworth, as part of the GEM (Global Entrepreneurship Monitor) project, surveyed at least 2,000 adults and 36 experts.   Despite an apparent respect for business starters, there was a lack of status for starting a business -  ‘Many people do not see starting a business as a respectable career path.’

The vast majority of our children and young people have not been taught at primary or high school, or in vocational and higher education, about small businesses and the possibilities of self employment. Only now are some primary and high schools starting to include a small business emphasis in their classes. Recent research shows that small business and entrepreneurial studies are a missing element in most Australian universities (Breen and Bergin 1999).   By 1998 there were only 16 ‘key player’ universities teaching these areas and there were only six under-graduate courses, with an average enrolment of only 19 students.   All enrolments in these areas represented less than 1% of all business and management students.

A major reason for the poor  small business image and for the neglect in education is the lack of a strong enterprise culture in the Australian community at large.  A purpose of this book is therefore to provide an understanding of the world of small business - of the owners and their businesses and the environments they face. Small businesses are not mini versions of large enterprises or institutions and need to be studied separately.

Although there are numerous books that concentrate upon the practicalities of the starting up and management of small business there is a gap in providing an awareness of the theory and research studies of small business. The second reason for this text is therefore to assist readers to understand the young and emerging discipline of small business. 30 years ago small business was barely considered an academic discipline, and those teaching it (mainly in the US) were not in the mainstream which focussed on larger firms (Scherr January 1997). There were few small business research journals, and how-to and descriptive work dominated the available publications, mainly in US settings. Globally that has changed.   Numerous new academic journals have emerged, particularly since 1986, research has become more sophisticated and broad-based, research centres, conferences and professorial chairs have been established.   An increasing number of business schools around the world now offer small business and entrepreneurship as legitimate studies.   Whilst common in the USA, there has been more reluctance in Europe and Australia for these.

There is no comprehensive theory of small business, but the body of literature and research that is being accumulated will be examined, especially within Australia; this includes an understanding of a number of recent conceptual frameworks and models. The aim is to bridge the gap between ‘hands-on’ guides to small business management, and the small business literature and research which have developed in the last 25 years. This understanding is relevant for not only the teachers of specialist small business subjects (such as small business management), instructors in starting and managing small businesses, providers of advice/consulting and mentoring, but also for the many students formally undertaking specific small business subjects in Australia. A knowledge of the broad horizon of small business will enhance the efforts of this wide audience. There is no agreement as to which areas could fall within a small business discipline, but in fourteen chapters we will touch upon most that bear consideration, or that impinge upon the emerging discipline.

The book is not a ‘how-to-do-it’ exposition and does not seek to specialise in informing potential or actual small business proprietors how to start or manage a business. However, should the busy proprietor have time to read the book it will provide a wider picture of the small business world than they may be aware of.

The book begins in Chapter 1 with the challenge of defining the term ‘small business’ and then outlines recent data regarding the nature and size of the small business sector in Australia. Against a background of the economic and social contributions of small business, the question is asked whether the expression ‘small is beautiful’ is a valid and useful one.

The entrepreneur is the elusive individual who is a high achiever and growth maker, but the traditional small business owner-manager may be more satisfied in being enterprising and developing a satisfactory business. There is a debate as to whether we can differentiate between persons who are entrepreneurs and those who are traditional small business operators purely from their personal characteristics. These issues are examined in Chapter 2. The small business sector is a very diverse collection of businesses operated by a mix of entrepreneurs and traditional small firm operators. We therefore need some frameworks to assist us to understand both firms and owners, and four frameworks are highlighted in Chapter 3.

The learning curve of small business proprietors begins when their first business is started. Subsequent success or otherwise often depends upon the initial planning of the starter and the physical and human resources used by them. The process of starting a business is the focus of Chapter 4. The scene is set for Chapter 5 by the following comment:

... the small firm sector is extremely large and remarkably heterogenous ... Were it not for one characteristic of prime importance, it would be difficult to point to any similarity between them. The all-important characteristic which is shared by these highly disparate enterprises ... is that they are managed by the people who own them (Bolton Inquiry 1972).

Unlike the large company, the ‘manager is the business’ in the small firm; both general and functional management are the responsibility of one person or a small team and there is often limited internal advice and assistance. Chapter 5 examines how a small business is managed and the challenges that arise as the firm grows and makes the transition to a large company. Because planning should be part of good management, Chapter 6 follows and the apparently ad hoc and informal planning of many small firms is compared to the formal planning of large companies. There is evidence that strategically aware small business proprietors can be successful with flexible planning, but that as their firm grows the need arises for a more formal budgeting system and more formal strategic planning.

Since David Birch (1979), the government and the community have become aware of the importance of small business in generating employment.   The extent of job creation by small business in Australia is explored in Chapter 7. Although the quality of small business jobs has received less publicity and analysis and there is minimal information regarding workplace relation in small business, what we do know is also discussed in Chapter 7. Two critical resources for the small firm are employees and finances and the latter is the major topic for the next two chapters.

The small business proprietor needs to establish profitability and liquidity objectives for the firm, be aware of the concept of matching the sources and uses of funds and the concept of financial leverage, and follow some sound financing principles. These are all suggested and outlined in Chapter 8. Actual financing requirements of the small firm vary according to its growth cycle, but Chapter 9 indicates that there are gaps in the provision of debt and risk capital in Australia. Recent studies commissioned by the Federal Government, some new policy actions, and the development of an informal venture capital market (‘business angels’) may improve the situation.

Although many new businesses start, a large proportion close and fail. The basic problems of smallness and root causes of small firm closures are examined in Chapter 10. Importantly, we need to understand possible remedies and the provision of assistance to not only reduce discontinuances, but also improve the productivity of continuing firms. It is argued that the public accountant should have a proactive role in providing assistance.

Chapter 11 is a contrast to chapter 10 because it examines high growth small business. Research indicates that no more than about 10% of all small firms have characteristics of fast growth, including high growth in creating new jobs. Labelled the ‘gazelles’ of the small business sector, they have only recently become subject to research studies and theoretical understanding. They are important to government policymakers who need to consider whether they should be targetted for special consideration.

Two of the fastest growing but contrasting types of small business activities are franchising and home businesses. Franchising tends to receive high media coverage as a ‘glamour industry’ with a low failure rate. Home businesses have a low profile and we have limited information regarding their numbers and characteristics. Chapters 12 and 13 respectively aim to improve the reader’s understanding of both empirical findings and theoretical considerations of these activities. As with most aspects of the book overall, limited attention is given to the ‘how-to-do-it’ aspects.

Finally, Chapter 14 is about the relationship between small business and the Federal Government. A model of the policy-setting process is used to help understand how government policy is established for small firms, and key programs and measures are examined. A further model is suggested as a basis for evaluating small business policy.

It is hoped that the book will be used as a stand-alone text for small business programs (under-graduate, post-graduate, MBA, and research based). It is also intended as a supplementary reference for individual small business management subjects in universities and institutes of vocational education, both for students and for teachers, and in the programs of professional bodies such as accountancy, banking and finance, law and management, which provide advisers and consultants to the small business sector. Small business researchers, whether new or experienced, should find the text invaluable as a starting point to undertake research.

It is also anticipated that the book will be used by students of many disciplines who have no immediate interest in small business, but who can learn that small businesses are no longer ‘a largely mute, or marginal, subject in economics and the social sciences’ (Sengenberger et al 1990).

For teachers, instructors and students there are Learning Objectives at the beginning of each chapter to emphasise the important issues in each chapter and to focus on expected learning outcomes. For each chapter there are factual small business cases, and also small business highlights illustrating relevant issues. Discussion questions and web-based assignments on the text’s web site are designed to test the reader’s understanding of material in each chapter and to promote discussion of issues of interest. References (also on the text’s web site) for each chapter include not only those used by the author, but others that are relevant.

A Web Site has been developed as a companion to this book:

Understanding Small Business     www.sbeducation.info/

Its target is a ‘wide market of small business students of all ages - young and old, managers and employees, engaged in large or small firms or in the public sector, unemployed people, potential small business proprietors, retired people, small business advisors and policymakers, small business teachers ... ‘Its objective is to ‘assist in an understanding of the enterprising world of small business.’ It provides for self-study and for formal study, and includes a classified listing of relevant small business web links.

The site contains chapter-by-chapter references for the whole book. There are also chapter-by-chapter discussion questions, and assignments based upon internet material and cases. Updates and amendments to the book will also be made periodically on the site.

The following seven topics also appear on the web site.

·        Small business image in Australia (Appendix A chapter 2).

·        Small business and entrepreneurship studies in Australian universities (Appendix B chapter 2).

·        Starting a business at home (Appendix A chapter 4).

·        Capital budgeting in the SME (Appendix A chapter 8).

·        Informal venture capital in Australia (Appendix A chapter 9).

·        Franchisee and small business operator satisfaction:  literature review (Appendix A chapter 12).

·        Job satisfaction:  a comparative analysis of franchisees and small business owners in Australia and the validation of a model (Appendix B chapter 12).

This site proudly sponsored by ScoDan CONSULTING
Specialist Small Business Consultants 
scodan@ozemail.com.au
Copyright © 2008 Understanding Small Business
Last modified: 03/07/08