Leadership in Small Business - Research Paper Example

Leadership in Small Business There has been much written about the small business environment; based on the reasons of its importance and contribution to any economy, the small business sector is a focus area for the economic policy as it provides solutions to key issues like employment, investment, economic growth and . There has been a surge in entrepreneurial activities across the globe in recent times; studies find that there is a relatively higher likelihood of small business start-up activity in some countries compared to others and one main reason behind this is the higher level of confidence – sometimes even overconfidence – of the people in their own abilities and skills (Koellingera, Minnitic & Schade 2007) in some countries over others. These countries have a culture of encouraging young men and women to speak up and define their goals in life. However, this (over)confidence in one’s own self does not guarantee the success of the small business that is created. Once started, the business needs a lot of input, hard-work and dedication to survive and to thrive. Research suggests that there are a number of factors that come into play in determining the success or failure of an organization. While leadership plays an unmatched role in steering the small company into becoming a sustainable, ongoing concern, some other factors are also found to affect the success or failure of firms, which might or might not be in the control of the owner. What is important, however, is that the owner understands and identifies these factors and works upon them to ensure smooth operations of the business. This does not negate or undermine the importance of a good leader with entrepreneurial skill and vision. Leadership plays a very important role in the thriving of a business. In a good economy, many shaky businesses surprisingly make it and are able to get enough customers to sustain existence. They do not follow what an ideal business model dictates but with the help of a glowing economy, these businesses are able to pull through. This research, however, addresses the success and failure of small businesses, irrespective of the economic situation, and the impact leadership will have on the business. It is through persistence, sound decision making, cash flow management and risk taking that effective leaders are able to make their businesses succeed despite unfavorable circumstances. 1. Economic climate Since December 2007 or about the time when the U.S. economic recession began, small businesses like all other players in the economy have been negatively hit. This recession has shown that there are some factors affecting businesses that are simply out of the control of the business owner, the business model and the hardworking staff. This time, the growth rate across various sectors suffered and many small businesses had to shut down. Numerous business incentives were launched in the beginning of 2008 to curtail the impact of the recession: for small businesses the Bush government launched incentives such as increases in the expensing of capital purchases and bonus depreciation allowance (The Small Business economy 2009). This trend was continued by the Obama government in 2009 where funding for SBA increased and focus was shifted to allowing better loan access to small businesses, necessitating government intervention. Thus the economic climate represents the macro-environment which is mostly out of the reach and control of the small business firm. Even in a small business context, the dynamics of working in a group are quite different from working solely. While it is more likely that a small business firm will have a limited number of people – especially in the initial stages of business – thus making the occurrence of people working in groups mostly unnecessary, the staff is still highly interdependent and thus takes on the form of a group. Recent research has revealed that people tend to attribute the success or failure of these groups in the business context to the dominant personality in the group, most often the leader, rather than any situational or external factors – unless the situational or external factors are too severe to discount (Quaquebeke, Eckloff, Zenker & Giessner 2009). This displays the heavy dependence of employees in small businesses on the owner or entrepreneur for even the smallest of tasks because they do not want to take responsibility for something tough for which they will be held accountable for later. 2. Knowledge Management & Culture Followers have in their own minds an idea of what leadership is and what makes a good, effective leader. The person who is chosen to lead the team will be successful only when he or she is able to understand this crucial point: leaders must ‘match their subordinates’ leader prototype’ (Quaquebeke, Eckloff, Zenker & Giessner 2009). Good leaders and entrepreneurs identify that running a successful small business is all about exploring and identifying a sellable opportunity then grabbing it and making it into a business. In this sense, the small business leader can only survive by being a ‘strategic opportunist’ (Joachim & Wilcox 2000) which means that he or she must combine that business opportunity with a good sound strategy and make the most of it. The world today is extremely fast-moving, with work dynamics changing all the time. Whereas before a small business could survive by being a small, independent concern with unthreatening competition, today there are cut-throat competitors all over the world. The implication of this for the small business is that the owner must continuously create knowledge for the company, for himself and his team. This knowledge has to be managed and transferred to all the employees – however many or few they might be. Proper knowledge management is deemed one of the biggest issues that companies are faced with today. Knowledge should be treated as a value added product or service (Frey p29). Failure to do so will result in lost revenues and value. In the small business environment, the focus is on learning through experience or ‘learn through doing’; this type of learning is focused on ‘current or real issues contextually embedded in their environment’ (Dawe & Nguyen 2007) meaning these are typically those issues which the company is currently facing or is likely to come across imminently. This is in contrast with larger organizations where formal training and orientation programs are part of the ongoing work processes and each employee is required to go through an extensive program. The small business culture needs to be more learning oriented for employees: when employees are well trained and know more, they are able to flourish and take on more responsibility. This is in the best interest of the company as well as the business owner because it leaves him or her time to focus on business expansion, other entrepreneurial activities or focusing on more pressing issues for the company. A knowledge-based culture allows growth. 3. Collaboration International competition and globalization are touted by many experts as being the biggest challenge that local firms are faced with. In order to successfully manage this challenge, the best solution is collaboration. Collaborating among smaller firms (Levicki 1984) allows them to have more strength and bargaining power, and also access to a broader base of resources. Collaborating does not mean that the firms have to share all resources and trade secrets. In fact, there are many varieties of collaboration: for example, an exporting firm has networks and market access in many countries and regions. A local firm which produces a similar type of marketable product can collaborate with the first firm and use their knowledge base to sell their products abroad. In return, the two firms can share a percentage in profits. This works pretty much like a partnership with less strings attached. This is especially helpful when both firms have a set of exclusive strengths that they can use for mutual advantage and profitability. 4. Social and Human capital Small businesses depend greatly on having the support of a sound social network. This comprises of associates, suppliers, customers and even competition. As the small business normally has fewer people, the social network is very effective in getting things done smoothly and with minimal hassle. Social capital for a firm includes all the contacts, business and personal (of the owner or employees’) associations, networks, market access and relationships. As small businesses do not have the structured infrastructure to form formal alliances with other companies and people, these social networks prove very handy in getting things done. Any business which has a strong social capital base is likely to evade drastic times with the aid and assistance of a bankable network of friends and associates. One study found that people whose family members were self-employed, particularly their parents, were more likely to end up being self-employed themselves (Fairlie & Robb 2007). This could be due to the fact that these people have the exposure to the small business ownership environment and are relatively well versed with the pros and cons of being self employed. However, the success or failure of their new venture of being a small business owner was very weakly linked to their having a relationship with another owner; contrarily, the success depended largely on their having some prior work experience in the business venture which, say Fairlie and Robb, is ‘one method of acquiring general and specific business human capital’ (2007). 5. Innovation Many people erroneously assume that innovation and small firms do not have much to do with each other (Waldeck and Callahan, 2009). With a smaller customer base and presumably an uncomplicated, less high-tech product offering, small firms are thought to do well without innovation. This is indeed untrue. There is great need for innovation in small sized enterprises in all their processes so as to reduce costs, minimize waste and manage customer demand appropriately; small firms do not have the cash flows or capital backing of large firms therefore they need to be highly creative in their use of limited resources. Innovation is at the heart of successful, ongoing business. One small company of services for the elderly in Texas was rapidly losing clients because of the dramatic downward shift of the economy; this caused most of the company employees to be out of work for whole days in a row (Flandez 2009). Rather than laying off these people, the business owner encouraged them to start volunteer work at the local hospitals. As the doctors and other medical staff were already aware of the good reputation and services of the company, they made a point to refer potentials clients to the firm. In just a few weeks, the company started having new clients (Flandez 2009). This is a simple example of a small company that is using the resources available to it and innovates in such a way so as to procure and grow business. Without such strategies, many such smaller companies would be doomed for failure. Despite it being one of the most basic steps of managerial decision making, planning is very often ignored in small business environments in the U.S. (Perry). This is perhaps because formal planning is not presumed to be as important in a small business and issues are dealt with as they occur. Unfortunately, this shows a lack of understanding of managers of the importance of planning. Firms that plan well ahead and know their targets for the year ahead are better positioned to fight off adverse situations compared to those firms that ignore this phase because they have direction and know which hurdles need to be removed to get to their target. For example, a small business has a goal of achieving 20% higher sales for a particular year. This means that the business needs to have more orders from customers to be able to meet this new target – this is the plan for the year. If sudden bank loan issues arise, the firm and the owner will know how much financing will be needed to achieve the target sales. Based on that, they will be able to negotiate better with the bank and stay focused on the final target set for the company. Any other poor planning company would get confused in the banking problem and end up losing on both issues. This is one of the reasons why good planning is important for success or failure. 6. Gender The pioneering study by Kalleberg and Leicht (1991) regarding the differences between the success and failure of small businesses owned by men or women found that gender of the business owner had no real significance on the outcome of the business or predicting how successful it would be. However, the research found that women-owned businesses focused more on quality of product offering and considered that a competitive advantage whereas the businesses owned by men considered variety and width in product and services portfolio to be more useful to business success. 7. Performance metrics A way to assess which factors to focus on in the small business, understanding the life cycle of the business and the stage of growth the business is in is crucial. Churchil and Lewis (Storey 2000) identified eight key success factors that will help determine the success or failure of any small business along this cycle. Four of these pertain to the company itself: financial resources (such as cash, running finance, borrowing capabilities), personnel resources (strength and skill of the human resource), systems resources (degree of availability and implementation of information systems) and business resources (including marketing capabilities, market share, competitive advantage, manufacturing and distribution, reputation and others); the second set of factors relate to the owner and include: owner’s personal and business goals and ambitions, his or her operational abilities which are important in sustaining and developing the business, his or her managerial and leadership abilities and willingness to delegate to and manage others and finally, his or her strategic and visionary abilities in matching the company performance, its strengths and weaknesses to his own vision and goals for the company. (p301) Findings This qualitative, secondary research has revealed some interesting findings about the various factors that play a role in the success or failure of a small business. The main research question being investigated with this report is what contributes to the success or failure of small businesses. Sound leadership is an important component of a successful and sustainable business. It is learnt that it is impossible for a firm to continue strongly year after year in the face of any adversity unless it has a good leader at the helm who has a particular set of skills and knows when to take tough decisions. In conjunction with that, this report has identified various other issues and factors that need to be addressed by small business owners for them to ensure the steady success of the business. A significant finding of this research is that small businesses, like any other large or medium scale business, must have their own knowledge management systems and databases. Like in any ongoing concern, small businesses are also continually creating knowledge that is ‘saved’ in the minds of the small number of employees and the owner. It is fundamental that this knowledge is fostered and shared throughout the company. Some small companies practice Knowledge Management but not in a formal, documented structure. This is needed for the longevity of the company. Collaboration among smaller companies can prove to be very beneficial. The Small Business Administration and local business associations must encourage and foster platforms that allow small business owners to intermingle, share best practices and useful resources. Similarly, these will allow the development of strong social networks which are very important, especially in the small business context. This allows buyers and sellers to get together and know when to contact whom to get important things done. These networks prove to be a very strong support system for small businesses. Smaller companies must also make effort and investment to develop their human capital. Unlike larger companies, smaller companies do not rely on formal training programs for organizational learning and people development. This is not primarily due to a lack of resources of the small company; instead smaller companies do not normally require many highly skilled staff and their responsibilities and work is also closely monitored by the owner or upper management. For this reason, it is not deemed necessary to formally train them, unless it is on the job. However, formally trained employees are better able to counteract any business catastrophes and prove to help in business success in the future. It is in the best interest of the company if effort is made to properly train staff. Furthermore, there is no replacement for work experience and learning. These are some of the most valuable assets that can prove to be the difference between a failing company and one that is succeeding. Irrespective of gender, age and background, leadership needs practice and experience to be useful to the small business. Small businesses must concentrate on innovation: this does not mean that the focus should be on product innovation: even if a company offers a very simplistic or traditional product, it can still use innovation for better cost management, turnaround times and many other benefits. Bottom line is that small businesses must continuously think out of the box in all business practices. Discussion The research has shown that there are many factors that affect small businesses and if not managed in a timely and proper manner, can prove to be the failure of the business. It is true that at the heart of it all lies good and sound leadership, and without leadership a small business cannot achieve sustained growth and progress – however, this research has shown that small businesses are afflicted by many problems that might even be out of the control of the leader if not curtailed correctly. An entrepreneur is an opportunist who seeks an opportunity of fulfilling an unmet demand in the marketplace. He needs to truly believe that his product of service offering satisfies that demand and is as per customer expectations. That is the first step in setting up a small business. If this criterion is absent in any business, it will most likely fail; even a very dynamic and visionary leader will not be able to save a company that is not built on this basic premise. Moreover, having leadership skills is an excellent asset to a small business owner but that needs to be combined with passion and drive for doing the business, the ability to fight off obstacles and not be daunted by failure. Joachim and Wilcox (2000) describe the strategic opportunist as: The opportunists exhibit characteristics of a heavyweight champion, always moving, observing and evaluating. They have an uncanny ability to assess gaps in the market, understand customer needs and refine their businesses to stay competitive and customer driven. Successful opportunists often are intuitive about relationships, and they're insatiable networkers. They're masters at finding alliances and partnerships that offset their limited resources for such things as marketing and promotion The leader needs to have an unashamed sense of determination and persistence. He must also have the ability and gumption to make very quick decisions under pressure and react accordingly to outside influences and concerns. Small businesses that want to impede failure must invest in knowledge management. Although it might be impractical and extremely cost inefficient for smaller firms to set up separate departments for knowledge management, they can look at alternate, innovative ways of ensuring knowledge management. For example, the leader can make one company wide Knowledge Management champion or have one per department who ensures things like documentation and dissemination and adherence to knowledge management systems. This will also ensure that every employee is on the same page with regards to company goals and aspirations for the future. Planning is also one of the most important success factors. Planning is involved in various stages throughout the life of the business. In fact initial planning takes place when the business idea is first developed. This is when the business owner decides on the product offering, location, sales and services, distribution, money requirements, customer and market segmentation, pricing, etc. All of these have to be established before the owner decides his place is open for business. Location is very important for the business and as this can only be decided once, a lot of deliberation must go into taking this decision. A lot of small businesses end up failing because they were located in areas where there was limited demand for their product offering or they were too far away from their actual customers. Decisions like pricing and sales are ongoing decisions that require continuous input and decisions from the leadership. A good sense of organization is another trait that is necessary for the business. Even if the owner or leader does not have ‘being organized’ as one of his strengths, he can rely on an efficient assistant who will help keep the books and other important documents in order. Small businesses often have to deal with professionals like bankers, lawyers, government officials, etc. and these people often require business documents before they can help with whatever you need. An efficiently organized business will go a long way in avoiding many unnecessary hassles and delays that can irritate clients or suppliers. The leader cannot work and operate independently. At one point or another, he or she will need the assistance or sage advice of another person. While it would be assumed that this person that is asked to ‘mentor’, so to speak, is an expert it generally turns out to be a friend, relative or an associate. This close relationship with that person makes it likely that the person will support your decisions and will not be naturally as objective and blunt with opinions as another outside person. Therefore, the input and advice that will be received will likely be skewed and biased. While this advice might not become the reason the business fails, it will encourage the leader to be blind to some very obvious flaws with his plan and will backfire in another, more disastrous way. The report has established and acknowledges that a small business goes through a unique life cycle as the years pass. Based on the life-cycle approach, there are a different set of skills and strengths required for each of the different stages of a small business that will ensure that the business succeeds. This means that things like having a marketable idea, high energy and steady cash flow are especially important in the first few years of a small business’s life compared to later on in the life cycle when things like people management skills, sound information management systems and budget controls take precedence in order of importance (Storey 306). Being efficient at a set of skills that would be required and useful at another stage of the life cycle is a mix-match and recipe for disaster. It is the leader’s responsibility to congregate skills for the business over the years so that the knowledge is readily available to it whenever the time and need comes. Another reason for business failure that the literature perused was somewhat unable to address is the starting of the small business for the wrong reasons. Starting a small business is not a hobby. It is a full time activity that requires a lot of hard work, investment, time and perseverance. Most businesses fail for one cited reason or another but the key to it that led to the other reasons is that the purpose of starting the business was wrong: it was not started to address a need in the market and to satisfy a big enough customer base with the product or service offered. In fact, it was started because the business owner wanted to be ‘his own boss’, assumed having time off would allow him to have more time for himself and family or was simply bored with the full time day job he already had. All of these factors might prompt a person to consider self-employment but that does not mean he or his idea is the perfect fit for a sellable and profitable business. Therefore, a whole new set of strengths are necessary to be considered and pondered over before the business is started, irrespective of the owner’s leadership skills and practice. A small business also needs that the owner and the employees have an excellent rapport. As has been found in the research, employees look at the leader for continuous guidance and support. In return, the leader must be able to trust his team: he must have a team of people who can run their area of work responsibly. Furthermore, the leader cannot possibly be an expert at all areas – he will need help with finance or accounting, with hiring or marketing, there’s procurement and customer service as well: running a business, even a small one, is an amalgamation of many activities that have to be performed equally well. The leader cannot solely rely on himself. He needs to identify which areas of work he is not very good at and for those he has to hire and depend on outside help. Capital, or rather lack of it, can prove to be the single cause of downfall of a company. As has been displayed by the credit crisis of the past few years, the banking system is not one hundred percent reliable. With mammoth bad loans, the first business parties that banks stop funding are small companies. The changed credit policy becomes so stringent that it becomes impossible for a single business to meet the criteria set by the bank and is rendered ineligible for funding. In such as case, as was observed by the Obama administration’s small business policy, banks are encouraged and sometimes required to make it easier for smaller companies to access loans. However, this is mostly in theory. If a company is not satisfactorily liquid or runs very high debts, it will never be able to come out of this position and will have no choice but to declare bankruptcy. This makes capital adequacy one of the major reasons of small business failure. Small business owners must plan well in advance to deal with this important requirement. Over time, these small businesses gain the market to justify having a bigger workforce, more capital and assets. This makes them ideal to move from small scale to large scale. Although there are many businesses that remain small scale throughout, this opportunity to enlarge the business must be picked up by the leader, so that the business is able to achieve greater levels of success. Not only does this boost economic growth but also increases employment. Kuratko (2007) notes that new entrepreneurial businesses in the U.S. have been jointly responsible for creating 1.4 million new jobs during the past ten years. Small businesses are a crucial part of the economy therefore there is much scope and need for study in the area. Small business are governed by the same basic rules and practices that large firms abide by, however, the smaller scale, limited access to resources and lesser number of people make small and medium sized businesses a different game altogether. This means that small businesses have a different set of factors affecting their operations and everyday activities, and their concerns and issues are also different in nature. Small businesses have their own development and governing authorities that aid in the support and cooperation of these companies. However, it is found that there are times when specific macroeconomic or government policies are needed that target small businesses and aid them, which includes special allowances or incentive packages which encourage small businesses and help curtail the negative effects and consequences of a troubling external environment, global competition and economy. The SBA has data on the businesses that only managed to survive the first two years and some that made it as far as five years but still failed. These facts show that it is not for certain that businesses which flourish in the beginning will continue to survive in the coming years. This report has identified many factors that small business owners must consider to avoid catastrophes as much as possible. However, there is still a lot of room for research to help small businesses in ensuring success and avoiding failure, even in the toughest of economic situations. 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