Difference between a Small Business Owner and an Entrepreneur - Literature review Example

Difference between a small Business Owner and an Entrepreneur Twentieth century is believed to be known as the age of entrepreneurs. During 1990s, there was approximately 1,400 percent increase in the start-up entrepreneurial business as compared to last forty years (Dyer, 1992). In another research study, Burns (2011) identifies that nearly 95 percent of U.S. wealth during twentieth century has been created by new businesses since 1980.Due to opposing views of management theorists, the association and differences between entrepreneurship and creation of new business is far from clear. This essay will discuss what differentiates entrepreneur from the small business owner by critically reviewing the theorists that have studied this area before drawing a conclusion. Small business sector is characterized by a range of activities undertaken by the managers of small firms. A small business owner refers to “an individual who establishes and manages a business for the principal purpose of furthering personal goals” (Carland et al., 1984, 358). The major conditions include: business has to be the primary source of income; takes majority of owner’s time and resources. Moreover, owner considers business as an extension of his or her personality and ties family needs and desires in an intricate manner (Carland et al., 1984, 358). On the other hand, an entrepreneur is “an individual who establishes and manages a business for the principal purposes of profit and growth” (Carland et al., 1984, 358).Entrepreneurship is distinguished by innovative behaviour and application of strategic management practices in the business (Carland et al., 1984, 358). Despite the fact that there is a plethora of definition of entrepreneurship, there is general consensus that it involves a transformational process of market change conducted by specific kind of managers (Stokes and Nicolas, 2006, 29). Despite considerable overlap between small business and entrepreneurship, both concepts are distinguishable. All new business ventures cannot be categorized as entrepreneurial in nature. Entrepreneurship is not a new phenomenon as people have been referring to entrepreneurs for hundreds of years. The word entrepreneur originates from the French that refers to someone who takes between or goes between. In early days, the term represented a middleman who used to direct the resources that are provided by others. During middle ages, entrepreneurs managed huge projects on the behalf of landowners or church, for instance, building a castle or cathedral. The concept became more complex with addition of some elements of risk and profit. Entrepreneur referred to those who signed a contract with state to perform particular tasks, such as, revenue collection, banking operation, and trading services. Due to the fixed price agreed upon in the contract, entrepreneur’s loss or profit depended on the performance of the contract (Stokes and Nicolas, 2006, 29). In 1734, Richard Cantillon(cited in Stokes and Nicolas, 2006, 30) used it in economic literature while defining three types of agents in the economy as: The landowner: provider of primary resource, proprietor of land Entrepreneur: Resource organizer who accepted the risk by purchasing ‘at a certain price and selling at an uncertain price’ included farmers, merchants and hirelings who provided their services for money Jean Baptise (circa 1800) furthered the concept and defined entrepreneur as someone who brings people together as productive team (Corcoran, 2009). In 1800s, J.B. Say defined entrepreneur as “someone who consciously moves economic resources from an area of lower, and into an area of higher, productivity and greater yield” (qtd. in (Stokes and Nicolas, 2006, 31). This definition implies that entrepreneur is an instrument of change, he does not strive to perfect, correct, or optimize the traditional practice, but rather he is someone who identifies new systems and markets. During mid-twentieth century, Joseph Schumpeter adapted this dimension of entrepreneurship as a critical destabilizing force. Focusing on the idea of ‘creative destruction’, Schumpeter suggested that a dynamic economy needs disequilibrium created by constant change of innovation and entrepreneurship (qtd. in Stokes and Nicolas, 2006, 31). Schumpeter (1934) referred it as a creative activity that combines enterprise and business. In addition, Burns (2011) also agree with Schumpeter as he describes that entrepreneurs use innovation to identify and create change and opportunity. In most cases, they manage to do this by moving economic resources in highly risky and uncertain conditions. Peter Drucker defined entrepreneur as someone who “always searches for change, responds to it, and exploits it as an opportunity” (qtd. in Stokes and Nicolas, 2006, 31). Like Schumpeter, Drucker also identified innovation as an integral part of entrepreneurship. He focused on management processes of the entrepreneurial duties while others described entrepreneurship as a process, an action-oriented management style that behaves and thinks in terms of innovation and change (Stokes and Nicolas, 2006, 31). Drucker’s believes that innovation, resources, and an entrepreneurial behaviour are main attributes of an entrepreneur. He asserts that entrepreneurial venture must increase value or enhance customer satisfaction from the resources, new value creation, and new productive combinations from the existing materials (Drucker, 1985). On the other hand, small business is defined as an independently owned firm that is neither dominated in its field nor engages in cutting edge innovation (Carland et al., 1984). Pretorius (1996) also acknowledged the difference between small business owner and entrepreneur as the later concentrates on the development of new ideas. According to Weber’s sociological theory, social cultures are considered to be the driving force of entrepreneurship. The entrepreneur turns into a role performer in accordance with the role expectation of society. These role expectations are rooted in religious beliefs, customs, and taboos (Weber et al., 1971).Max Weber (1864-1920) believed that religion is the primary driver of the entrepreneurship. Moreover, he stressed on the free spirit of capitalism that generates economic freedom and private enterprise. Capitalism flourishes under the protestant work ethic that consists of these particular values. Therefore, the right combination of discipline and a free spirit that is full of adventure is the real recipe of a successful entrepreneur (Weber et al., 1971). According to Schumpeter’s innovation theory of entrepreneurship (1934), entrepreneur is someone with three major attributes: innovation, foresight, and creativity. According to his theory, entrepreneur works to create a new ways to make a product, identifies a new market for the existing product, discovers the new source of raw material, or identifies new ways to create things and organization. However, Schumpeter’s entrepreneurial theory ignores the importance of risk taking abilities and organizational skills of an entrepreneur. On the other hand some economists have included an aspect of imitating and adapting to innovation. According to them, entrepreneurship necessitates the imitation by adapting a product to a niche in better way as compared to the existing products (Schumpeter, 1934). According to McClelland’s Theory of Achievement Motivation, people accomplish because of three major motives: need for achievement, need for power, and need for affiliation. Entrepreneurship is driven by the need for achievement and power. McClelland believes that entrepreneurs perform in a better way and are able to make decisions in uncertain times. Moreover, their aspiration to achieve big supersedes financial and other external incentives. Contrary to Weber, McClelland revealed that traditional beliefs don’t inhibit entrepreneur, however, the process of internalizing motivation for achievement orientation through training (McClelland, 1967). Timmons Model of Entrepreneurship identifies three critical factors of a successful venture as opportunities, teams, and resources. He argues that an entrepreneur is successful if he balances these three factors. Centre of this model is entrepreneur as he searches for the opportunity and after getting opportunity, he transforms it into a high-potential venture through his team by the resources he has. In the process of starting his business, the entrepreneur takes risks of losing his career, personal cash flow, or his net worth. Timmons based this model on the assumption that entrepreneur earns the rewards in commensuration with the efforts and risk he took at the time of starting or financing the business (Timmons, 1978). However, Timmons failed to recognize the importance of innovation in an entrepreneurial venture. Stanworth and Gray (1991) critically analyse the major research studies that have identified entrepreneurial traits. They effectively summarize the existing literature and present most commonly discussed and highly agreed upon traits of entrepreneurship as (qtd. in Beaver, 2002, 39): Need for achievement (McClelland, 1961); Locus of control (Brockhaus, 1982; Caird, 1990; Chell et al., 1991); Risk-taking propensity (Quinn, 1980; Carland et al., 1984; Chell et al., 1991); Need for independence (Bolton, 1971; Collins and Moore, 1970); Kets de Vries, 1977). Innovative and creative behaviour (Moss Kanter, 1983, 1989, West and Farr, 1990) Despite the fact that numerous theorists and economists focused on the traits of entrepreneurs for distinguishing them, there has been consistent and robust criticism on such attempts. The criticism is based on various issues that include: importance of identifying constellations of personality characteristics over individual traits; methodological issues inherent in the identification of personality traits; and contradictory findings of different studies (Chell and Haworth, 1988; Chell et al., 1991 qtd. in Beaver, 2002, p.39). Stanworth and Gray (1991) argue that the list of issues with trait approach is so long and alarming that it should be enough to abandon it (qtd. in Beaver, 2002, 39). The most critical reason for criticism is the fact that this approach works on the assumption that entrepreneurial behaviour is a function of individual’s personality while completely ignoring the effects of external environment, context, and industry in which the entrepreneur is operating. As a result, we come to the inevitable conclusion that trait approach to small business and entrepreneurship can only present partial analysis of behaviour (Beaver, 2002, 39). Considering the loopholes in psychological or trait base approach to identifying the difference between entrepreneur and small business owner, it seem logical to peep into their role in economy. During 18th century, Cantillon defined entrepreneur as, “someone who confidently pursues profitable exchanges even when faced with uncertain market conditions” (Beaver, 2002, 40). Cantillon also identified entrepreneur as risk taker and innovator for the first time. Like many other modern theorists, Casson(1982) identified innovation, being an agent for change, willingness to take risk, and ability to make confident decisions as entrepreneurial characteristics(qtd. in Beaver, 2002,40). In recent times, there is consensus about the distinct behaviours that are considered entrepreneurial acts and an agreement that these characteristics are not only rare but unusual as well. Contribution of economists contributed to the distinctive set of characteristics that influences entrepreneurial actions. It is clear that most of small business owners are not categorized as entrepreneurs, moreover, psychological analysis of the nature of entrepreneurship is required for a more balanced approach towards such distinction ( Chell et al.,1991 qtd. in Beaver, 2022,40-41). Some studies that adopted a sociological perspective to differentiate between entrepreneur and small business owner constructed typologies that helped in contextualization of the business operating environment and individual behaviour. These studies analysed the relationship between inherent qualities of small firms and allow greater tolerance of diversity in small enterprise. For instance, Chell et al. (1991) proposed the profile of prototypical entrepreneur as: opportunistic, adventurous, ambitious, idea driven, proactive, innovative, high-profile image maker; and broad financial strategy adopter (qtd. in Beaver, 2002, 41). However, critics of sociological school argue that typologies are quite simplistic, tend to produce contradictory results, and are not sound in terms of methodology (Chell et al., 1991 qtd. in Beaver, 2002, 41). Conceptual Distinction Despite considerable overlap between small business and entrepreneurship, both concepts are distinguishable. All new business ventures cannot be categorized as entrepreneurial in nature. The major point of differentiation is the fact that entrepreneurial firms may start small, they keep on growing over time. The major factor that distinguishes entrepreneur from a small business owner is innovation. Entrepreneurial activity is characterized by activity creation that emerges as a result of innovative combination of resources for profit. Other prospective entrepreneurial attributes include: need for achievement or goal oriented nature, internal locus of control, need for freedom, need for power, and need for responsibility. Moreover, risk taking ability is also mentioned quite frequently, however, Schumpeter (n.d) and Brockhaus(1980) observed that it is more of an ownership characteristic than entrepreneurship (qtd. in Carland et al., 1984, 357). Conclusively, Carland et al., (1984) suggest that numerous published studies may mislead in their conclusion. Economic theorist suggest that entrepreneurship is critical for economic development(Schumpeter,1934; Williams,1981), but research on entrepreneurship overlook the need to distinguish between entrepreneurs and small business owners. It is important because erroneous definitions can mislead investigation in different ways. Specially, we cannot analyse entrepreneurial contribution to economic development if case studies are not entrepreneurial in nature. References Burns, P., 2011. Entrepreneurship & Small business. In: Start-up, growth & maturity. Hampshire: Palgrave MacMillan. Beaver, Graham. Small Business, Entrepreneurship And Enterprise Development. Harlow: Financial Times/Prentice Hall, 2002. Print. Carland, James W. et al. Differentiating Entrepreneurs From Small Business Owners: A Conceptualization. The Academy of Management Review 9.2 (1984): 354. Web. 9 Mar. 2015. Carland, J. W., Hoy, F., Boulton, W. R. & Carland, J. A. C., 1984. Differentiating Entrepreneurs from Small Business Owners: A Conceptualization. Academy of Management Review, 9(2), pp. 354-359. Corcoran , T., 2009. Entreprenuers Drive Innovation. Financial Post Magazine, December, p. 11. Cramer, J. J., Hartog, N. & Van Pragg, C., 2002. Low Risk Aversion Encourages the Choice for Entrepreneurchip: An Empircal Test of a Truism. Journal of Economic Behaviour and Organisation, Volume 48, pp. 29-36. Stokes, David, Nicholas Wilson, and David Stokes. Small Business Management And Entrepreneurship. London: Thomson Learning, 2006. Print. Drucker, P. F., 1985. Theory of Entrepreneurship. Oxon: Butterworth-Heinemann. Gibb Dyer , W., 1992. The Entrepreneurial Experience. In: Confronting Career Dilemmmas of the Start Up Executive. San Francisco: Jossey-Bass. Hebert, R. F. & Link, A. N., 1989. In Search of the Meaning of Entrepreneurship. Small Business Economics, 1(1), pp. 39-49. McClelland, D. C., 1967. The achieving society. New York, London: The Free Press. Mohanty, S. K., 2005. Fungamentals of Entreprenuership. In: New Delhi: Prentice-Hall. Pretorius, J. B., 1996. Perceptions and Expectations on Entrepreneurship. Journal of Small Business & Entrepreneurship, 13(1), p. 72. Schumpeter, J. A., 1934. The theory of economic developement. Cambridge: Harvard University. Timmons, J. A., 1978. Characteristics and role demands of entrepreneurship. American Journal of Small Buisness, Volume 3, pp. 5-17. Weber, M., Henderson, A. M. & Talcott, P., 1917. The theory of Social and Economic Organization. New York: New York, Oxford University Press. Read More