Summary Small Business And Entrepreneurship Complete - Course Lead: Tom Coogan PDF

Preview

Summary

Course lead: Tom Coogan ...

Description

Chapter 1: Small Business: the big picture.

● The uncertainty facing entrepreneurs is much greater than large business. ● Large business more likely to suffer from internal risk- those at the top need to make sure the strategic decisions are implemented by those lower down. ● In small firms the manager can walk around and so avoid employee conflict by talking to people. ● The person at the top of a large corporation doesn’t really know what is going on. ● However, these behavioural advantages do not protect SB from external uncertainties. External uncertainty: market, customer, aspirational Market: ● Access to market power: large businesses are price makers; small businesses price takers. So SB lack competitive strength. ● Small businesses often only have one customer and so are dependant on them. Kitson and Wilkinson (2000) – smaller the business, the more likely it is to be heavily dependant on one customer. ● Small businesses tend to be in markets that have low barriers to entry. ● They tend to be in markets in which being big has few advantages: the scale economies are limited. ● Where entry is easy, competition is fierce and uncertainty high. ● Possibility to compete on price, however large companies are more likely to be able to achieve economies of scale. Better competing on customer service or innovation. ● Could also try to find a niche (Small, restricted marketplace in which higher than average profits can be made by offering some sort of specialist service). Small business niches tend to be temporary, with low barriers to entry and high profits the competitors soon arrive. Customer: ● Entrepreneurs cannot be certain of a wage. They have certain costs but they don’t know for sure how much they are going to sell. So their income is their uncertain revenue - their certain costs. (Knight 1921). ● Small business may seek to reduce customer uncertainty by becoming a subcontractor to a larger business. Loss of power in this relationship – LB may place demands on the SB, which may lead to lower profit margins for the SB. Play off between uncertainty and profitability. ● Not clear whether businesses dependent on one customer or a diverse customer base will grow more quickly. What is clear is that that there is more risk for a dependant company.

Aspirational: ● The bulk of large businesses seek to enhance shareholder value or profit maximise in the medium term. ● More typically small businesses provide interesting employment for their owners even if they could obtain a much higher income as an employee. Or they may think they are going to strike rich. ● Small business owners are likely to have a wide range of motivations and aspirations and it is unwise to assume that these are exclusively or even primarily monetary. ● Individual business owners are likely to respond very differently to external conditions and market conditions. ● Hakim (1989) - evidence shows that the smaller the operational size of the business the less likely it is to seek to increase its scale! So the desire to grow the business is the exception more than the rule. ● Range of aspirations depends on the number of owners and number of companies (Portfolio entrepreneurship – owning more than one business). More people more aspirations, more uncertainty. ● Link between the aspirations of a small business owner and their personal characteristics- entrepreneurs are more likely to be optimistic about their prospects and abilities. Cooper et al (1988) – 68% of entrepreneurs believed that the odd of their businesses succeeding were better than those in the same sector, whilst only 5% though it was worse. So entrepreneurs are super optimists. ● Small business owners are likely to have a combination of objectives for operating their business - business survival, provides for family etc. Cant apply the idea of profit maximisation to SB. Limiting uncertainty ● Can't assume that people prefer certainty than uncertainty. May not apply when the pay off under uncertainty is higher. ● Small businesses may seek to increase the positive payoff, reduce the negative and improve the odds facing them. 4 ways to achieve this: 1. Register as a limited liability company. Not personally liable for the debts of the company if it is liquidated. Legal form may also help with credibility and taxation. 2. Focus on short term rather than long term profitability. Decisions made in shorter time horizons. 3. Invest less heavily in fixed plant and equipment. 4. Establish a portfolio of businesses rather than a single enterprise. Spread the risk ● Westhead and Wright found that 12% of new businesses were founded by an individual who currently owned another business (portfolio entrepreneur), 25% by serial entrepreneurs.

See table in text book for differences in small and large businesses. Summary: ● External environment very important for smaller firms. ● Small business needs to be flexible - be agile in the short to medium term. ● Less internal uncertainty for a smaller firm. The owner has much more direct contact with the workers. ● The above are all generalisations- small business exhibit huge diversity.

Chapter 2: understanding entrepreneurship ● Are we sure that entrepreneurs play a valuable role in society? ● Both economist and organisational theorists agree that entrepreneurship occurs when information about opportunities is imperfectly known. Entrepreneurs exploit the price differences between two areas. Entrepreneurs good or bad? Not enough or just not the right sort? -

Baumol 1990 in a classic research article analysed the historical perception of entrepreneurs. He distinguished between productive, unproductive and destructive entrepreneurs. Unproductive: e.g. certain lawyers, preys on the misfortunes of others. Destructive: somali pirates. Destructive types of behaviour have negative impacts on wider society. Baumol argues that an individual with exactly the same entrepreneurial ability can be one for the above 3.

-

-

The rules of the game are more important and decide which route they take. Society thinks it has too few entrepreneurs and may try to encourage entrepreneurial behaviour when in fact it is better to improve the rules of the game. If a society appears to lack entrepreneurs it is because those people are using their skills in an unproductive/destructive way. In short there is never a shortage of entrepreneurs, simply an imperfection in their distribution between productive, unproductive and destructive activities. Entrepreneurship is therefore about making imperfectly informed choices – choosing which activity to undertake. This means that entrepreneurship can be either good or bad: must be very clear by what we mean when we use try to measure or quantify it. Only by doing so can we see if there is a link between entrepreneurship and economic and social welfare.

Defining entrepreneurs and entrepreneurship -

-

The economist approach vs. the organisational theorist approach. Common to both – entrepreneurship doesn’t exist where there is perfect certainty about the future. Less than perfect certainty. Purest form entrepreneurship exists when an individual judges a price difference between a product or service in one market and its price in another and they exploit this. E.g. buying in bulk and selling for more elsewhere, special arbitrage. Or buying now when cheap and selling when price rises, temporal arbitrage. Entrepreneurship is both about imperfect information and making a judgement. The difference in the two prices (pure arbitrage) is necessary but not sufficient for entrepreneurship for 4 reasons: the entrepreneurs may incur costs which eliminate profit, availability of reasonably priced capital to buy the products in the first place, individuals may not be aware of the price difference, so not all people will exploit it. Even of those that are aware, all may not exploit it (not risk takers, better alternatives etc).

The Economists approach: -

-

Uncertainty: Employees are certain about their wages, whereas entrepreneurs have an uncertain income (profit). Entrepreneurs make choices in order to maximise their utility – they make choices in terms of income. However this is debated- are they all in it for the money? Morton and Podolny (2002) – showed that wine producers in California were in it to escape the rat race. One continuing area of debate for economists is around risk and uncertainty. Risk is measurable, uncertainty isn’t (the situation is unique). Risk is measurable because if an event is repeated continuously then you can assign a probability to it.

-

No common approach amongst economists: But arbitrage underlies all discussions of entrepreneurs. Several topics where there is debate amongst writers: assumer of risk, are entrepreneurs special people? are entrepreneurs simply people with low risk aversion? innovation and its link to entrepreneurship. Assumer of risk

Special People

Risk lovers Innovators Market adjusters

Manager, co-ordinator, employer and organiser

-

YES: Kihlstrom and Laffrot (1979) – the profits are the rewards from accepting risk. NO: Schumpter (1934) – profit from risk bearing reflects ownership of capital not entrep. YES: Branchflower and Oswald (1998) – only a fixed proportion of the population has an entrepreneurial vision. NO: Kihlstrom and Laffort (1979) – everyone has access to the same opportunities, but only those with risk aversion will take them. YES: Kihlstrom and Laffort. NO: Knight (1921) Schumpeter Kirzner – need entreps to bring the market back into equilibrium. But why or how does the process take place? Casson 1982.

4 themes of entrepreneurship amongst economists are now widely accepted: 1. The individual exercises a choice between becoming an entrepreneur or an employee and is able to switch. 2. The choice between the two depends on the utility of each state. 3. The income from being an entrepreneur s more risky than that of an employee. 4. The choice is also influenced by the differences between individuals in terms of their entrepreneurial talent and attitudes to risk.

Have a more quantitative perspective. Inputs and outcomes. The organisational theorist approach -

Areas of different interpretation – lots of definitions.

-

-

-

Timmons (1997) focuses on the individual, Morris (1998) focuses on individuals and teams. Gartner (1998) – the creation of new organisations, the process by which new organisations come into existence. Focusing on the new business and the unit of anlaysis has its own problems – people do business, not businesses. Different types of people involved: nascent entrepreneurs: setting up a business for the first time, serial entrepreneurs: have prior experience, portfolio entrepreneurs: currently running a business. Not all new businesses are the same: corporate ventures, managerial buy-outs, special enterprises, franchised. Given these issues, researchers have wondered if there can be any clearly defined organisational approach to study or understand entrepreneurship. SHANE PAPER.

Have a more qualitative perspective. Interested in processes. So, -

-

In organisational theory the focus was initially on the traits or characteristics of the person, the who and why they became and entrepreneur. This has moved onto examine how individuals cognitively gather, process and evaluate information in an entrepreneurial environment. Economists tend to focus on choices and information processing, rather than why people become entrepreneurs (they think this is because of utility).

Entrepreneurial Traits -

-

Is there a single trait or set of traits that makes people entrepreneurial Chell (2008) argues that there are 3 traits: 1. Need for achievement: achievement motivated, undertake tasks of moderate difficulty, actively seek to take responsibility, welcome feedback. 2. Locus of Control: believe the achievement of a goal is due to their actions, rather than fate etc. 3. Risk taking propensity: better able to evaluate risks. Other possible traits: desire for autonomy, over optimistic, tolerance for ambiguity. Weak evidence for entrepreneurs being special people. Gartner argues trait approaches assume that the entrepreneurs has a fixed and identifiable personality type. Ignores the fact that the enterprise population is very fluid. His research into studies on traits suggested that so many different traits have been assigned to entrepreneurs that if the ideal entrep was constructed they would have so many traits that they would be just some sort of everyman. Jury still out on traits. Nicolaou et al (2008) looked at 870 pairs of identical twins, and 847 pairs of same gender twins. Any differences in entrep activity

-

may be attributable to genetic factors. Found that 48% of the variance in the likelihood of being self-employed was explained by genetic factors. But couldn’t say which genetic factors. Traits theory complicated: how do we identify the elements of an entrepreneurial personality? Hard to accurately identify. Even if we could which elements of this personality cause entrepreneurial behaviour.

Cognitive approaches -

-

-

-

-

Understanding how people think and react in different situations. People do not follow apparently rational choices when making decisions under uncertainty. One explanation is that human rationality is bounded: all of us have limits to how much attention, memory or brainpower we can give to a task. Kahneman et al (1982) argued that people who make decision in uncertain conditions use cognitive heuristics, or shortcuts. Representative heuristics: assumes that an action or event can be categorized and understood based on similarities with other situations. Availability heuristics: relying on information that is available, because it is easily retrieved. Anchoring and adjustment heuristics: comparing to reference points. Entrepreneurs may be prone to other biases such as having illusion of control (overestimate personal control over outcomes), planning fallacy (believing a plan can be put into place quicker than it can) or impression manage (try to pin events). Even though context is important, Shane and Venkataran (2000) argue that cognitive perceptions of how risks and opportunities are constructed are pivotal. Three cognitive concepts to describe how individual evaluate opportunities: 1. Self efficacy: the believe in ones capabilities to organise and execute course of action required to manage prospective situations’. Success breeds success. People can be trained to thin more this way. 2. Intrinsic motivation: individuals who perform task for their own sake are more likely to be motivated than individuals who are motivated by some external features. 3. Intentionality: More likely to set up a business if it their intention. Cognitive approaches remain relatively under research hand their exact application to entrepreneurial action ambiguous.

Overview: - Economists interested in the role of price information and the outcomes of economic activity. Individuals move from one state to the other based on utility. More interested in who moves and when. - OT interested in how outcomes are achieved: cognitive and psychological attributes of the entrepreneur.

Chapter 3: Defining the small business Entrepreneurs and small business share similarities, but are also two different things. An individual can act in an entrepreneurial manner without ever becoming a business. Defining the self-employed “Self- employment jobs are those jobs where the remuneration is directly dependent upon the profits derived from the good and services produced. The incumbents make the operational decisions affecting the enterprise, or delegate the decisions whilst retaining the responsibility for the welfare of the enterprise.’ OECD, 2000 -

In labour market statistics those who own and run their own business are usually regarded as self-employed. However for tax purposes they may be considered employees because they work for their business. Different countries have different ways of counting the self employed – makes cross comparison difficult.

In the UK there are 4 tests applied to difficult cases: 1. Control 2. Integration 3. Economic reality- how are they paid, pay tax, hire others etc 4. Mutuality of obligation – how long dos the contract last, how regular is the work. Defining the small business Bolton report 1971 said that small businesses have to be: - Owned and managed by the same individuals - Be legally independent - Have a small share of the marketplace Curran and Blackburn (2001) emphasise three points of issue with this definition 1. Small businesses are both numerous and varied in the ways they do business 2. A small business in one sector may not be viewed as a small business in another 3. What is an appropriate method of measuring smallness? Number of employees, sales? Necessary to have a definition because the government needs to see who is eligible for help and then be able to measure success of their policies. In the EU:  SME refers to businesses up to 250 employees.

  

Micro businesses – < 10 employees, < €2million Small businesses – 10-49 employees,...