Is Small Beautiful The Management Styles of Small Firms - Essay Example

? Is Small Beautiful? The Management Styles of Small Firms BUS320: Employment Relations Word Count: 2,494 Contents Introduction 3 Not just size alone3 Relationships in small firms 5 Type of ownership 6 Management styles 7 Harmony and dictatorship 7 Informality 7 Variable styles 8 Theories of management 9 Responses to regulations 9 Future perspectives 11 Conclusion 12 References 13 Introduction Small businesses are generally taken to be those that have less than 50 employees, however, other definitions consider that a small firm can hire up to 100 employees, or that other factors need to be taken into account, such as the type of ownership (Atkinson, 2008). Since the mid-1970s, small firms have been experiencing a re-emergence and an increase in prevalence and popularity. Some authors argue that this interest in small business has arisen from a desire for differentiation in products (Barrett and Rainnie, 2002). Whatever the reason, small businesses have become a prevalent part of the United Kingdom economy, and consequently, it is important to understand their nature and the way in which they operate. Small firms are more than simply scaled down versions of their larger counterparts, they operate differently, make different decisions and are driven by many factors that do not affect larger firms (Atkinson, 2008). It is often perceived that small businesses have an ideal management structure, which is harmonious, where management and employees work together towards a similar goal. This essay examines what type of management styles are present in small businesses, whether this perception of ‘small is beautiful’ is real, and what influences management of small firms. Not just size alone Many theories and approaches to examining management of small firms assume that there is harmony across the industry. However, small firms are not homogenous with one another; instead they are subject to a range of different factors that influence the way that they operate, their management styles and their success. For example, ownership structures differ between small firms, with the owner being either, self-employed, owner-director, owner controller or a small employer. Because of these variations between small businesses, any consideration of the management styles and methods of control must also consider other factors about the firm, such as structure and agency (Barrett and Rainnie, 2002). Even when sections of the industry are taken into account there is still substantial variation in the way that businesses operate and what factors drive them (Ram and Edwards, 2003). For example, some firms focus primarily on profit, while others desire a family business and are not willing to put this in jeopardy even if this would mean increased profits. Likewise, some small firms compete directly with larger ones by producing similar products, while others produce a unique and distinct products do not directly compete with larger firms. Therefore, it is not possible to provide an overall model of the small business industry, or to predict what management styles will be present under different sets of circumstances. A more effective approach is to examine the different management styles that are present in small firms and how these differ from those common in larger firms. It has been argued that the definition of a small firm needs significant work, as the current perception focuses mainly on number of employees and the precise number differs between publications. The problem with this method of defining small firms is that it does not take into account the complexities and variation that is present within the small industry sector. Some authors or publications make use of key business characteristics to determine whether the company is a small business, or a combination of industry and size. An example of this is the suggestion that in the manufacturing industry, a small business is one that has less than 200 employees. One suggestion has been to modify the definition of a small company so that it uses a qualitative assessment (Marlow, 2002). For example, if a firm is in X industry, has Y employees and has Z locations then it is an A type business, subtype B. Relationships in small firms To understand what drives management styles in small firms it is important to examine the types of relationships that are present in small firms, especially between the business owner or manager and their employees. Relationships are a crucial component of the functioning of businesses (Atkinson, 2008), and this effect may be greater in small firms, as the number of people is much less, so the effects of relationships are stronger and more noticeable. Many small businesses are run as family firms, where a family culture is cultivated by management, and negotiated paternalism is the predominant style of management. This concept is used to promote loyalty and trust between employees and managers (Barrett and Rainnie, 2002). Family has a significant effect on the way that social interactions occur within small firms, and the familial networks and relations that are formed are important for the function of the firm (Ram and Edwards, 2003). Recruiting employees can often be difficult for owners or managers of small businesses. The employer often finds it difficult to create working relationships and understanding between themselves, their current staff members and newly employed staff. There are also additional complications associated with hiring family members (Ram and Edwards, 2003), and it can be difficult to determine how to treat family compared to other members of the staff, and how to respond if they are inappropriate. Type of ownership It is often argued that the type of management style is strongly linked to the type of ownership that is present. For example, owner-mangers are viewed to have a high desire for autonomy and independence, and consequently tend to discourage the formation of unions. Another aspect of owner-manager management style is that there is a tendency to be paternalistic, and to promote a family atmosphere (Atkinson, 2008). Management style may differ if the owner works alongside his or her staff, or if the owner of the business employs an independent manager. If the is less connection between the owner and the manager of the business, then it is likely that the management type will be stricter, more formal and decisions will be based less on emotions and more on profit. However, this is a generic approximation, and will not be true in all cases. Management styles Harmony and dictatorship One of the earliest approaches to examining management styles of small firms was the concept of harmony, which was proposed in 1971. This theory suggests that within a small firm there is a significant amount of informality and flexibility, which leads to more beneficial relationships. An alternative perspective that was proposed more than a decade later was that small firms are subject to extreme external pressures, and most be highly competitive in order to maintain their place in the market. This theory predicts that small businesses will meet these requirements by closely supervising staff, with strong measures of control and a dictator-like style of management. However, both of these theories are highly deterministic and each argues that all small firms will act in the way that the theory predicts (Atkinson, 2008). This is not a realistic assessment of small businesses, because as discussed above, the small firm sector is not homogenous, and they differ in many characteristics. These differences mean that all small firms will not respond to pressures in the same way, and they will not all exhibit the same styles of management. In general, theses such as these have been dismissed as being too simplistic and not taking into account the dynamics of small businesses and their environment (Marlow, 2002). Informality Like large firms, small businesses still experience tensions between the labour force and management, however, they differ in that small firms also have elements of cooperation. This occurs because employers need workers in order to produce their products and the workers need the business for income. This reliance is stronger in small firms than in large ones, as the market is very competitive and can be unpredictable. This suggests that in small firms, there is a tendency towards informality, with the relationships between employer and employee as well as their respective rights and obligations, being continually renegotiated (Atkinson, 2008). Small firms are often considered to be informal in nature, and do not have the same rigid structures in place that larger firms require (Ram and Edwards, 2003). Small firms are much less likely to have rigid practices and policies in place than their larger counterparts. Instead, policies tend to be less formal, and are often readily changed based on the circumstances. This is thought that this occurs because small business owners tend to have less expertise or knowledge, than the owners of large businesses have access to (Atkinson, 2008). However, informality is not present in all small businesses, and many do have formal policies. For example, the implementation of human resource management in small firms has been associated with an increased level of formality (Marlow, 2002). Variable styles A case study of an Australian business in the information industry shows that small businesses make use of variable styles of management. In the study, the management made use of responsible autonomy, where employees were given a level of autonomy with the aim allowing individuals to respond to changes and to adapt. This method of management can be effective, as it increases employees’ confidence in themselves and their abilities, as well as encouraging responsibility and open communication. Another management technique that this company used was the presence of employee appraisals every six or twelve months (Barrett, 1999). It is likely that other companies also exhibit variable management styles, and that the way that the company is managed is often strongly related to the environment. Theories of management One theory that is often used to predict the management styles of small firms is labour process theory. Here, the tensions between management and employees are recognised. However, one limitation of this theory is that assumes the small industry sector is homogenous, when research indicates that this is not the case. Another theory that is sometimes used is psychological contract theory, which argues that there are implied obligations in the relationships between the employer and each employee. Furthermore, these obligations tend not to be directly stated and may be perceived differently each party (Atkinson, 2008). Responses to regulations An important aspect of the management styles of small firms is the way that the firm responds to regulations, such as market regulations or regulations in employment. Research indicates that these responses are linked to the dynamics that occur within the firm, as well as the situation in the labour and products markets. Thus, firms that appear similar may respond to an external shock in different ways due to the presence of specific labour and product situations (Ram and Edwards, 2003). The Industrial Relations Act was introduced in 1971, which grants individuals the right not to be unfairly dismissed. This has a significant impact on small businesses, as it makes it difficult for businesses that operate on tight profit margins and forces businesses to use a range of disciplinary procedures before any employee is dismissed. Small businesses often feel that they are being unfairly treated under the legislation, as it assumes that they have the resources available for extensive disciplinary measures (Earnshaw et al., 2000). The response to regulations is important for small firms, because a large proportion do not have any formal procedures for discipline or dismissal of employees. Additionally, small businesses are more highly represented in unfair dismissal claims than large businesses. In a study on unfair dismissals in small businesses, the authors examined what factors made dismissal claims so prevalent in small firms. One difference that was observed between small and large firms was that many small business mangers considered that moving from an informal approach to the first stage of disciplinary proceedings constituted a decision to dismiss the employee, with the remainder of the formal steps being a matter of procedure. Consequently, under the management style of small businesses, the employee had little chance to present their side of the story or to defend themselves, as management had already decided the individual would be dismissed (Earnshaw et al., 2000). This management style is risky, and may open the business up to litigation. Another important aspect of this is that regulation seeks to make many aspects of business more formalised, which is contradictory to the informal nature of many small businesses. Additionally, as discussed above, many small businesses desire to maintain autonomy and to make their own decisions, while laws can go against this autonomy. Some authors argue that in the United Kingdom, changes to legislation and regulation have placed a high burden on small businesses that can make the maintenance of their business difficult (Marlow, 2002). In many cases, the instigation of such policies makes it difficult for business owners or managers to manage the business as they desire to. Future perspectives The field of small firm management is still poorly understood, although recent research has made an attempt to address some of these gaps (Barrett and Rainnie, 2002). The first step to a more detailed analysis of small business management would require a consensus definition of what a small business entails, or the development of a method that could be used to categorise businesses based on a wide range of factors. The papers examined in this discussion show that there has been a significant amount of interest into this field, although opinions of how best to proceed vary between authors. Barrett and Rainnie (2002) argue for an integrated approach that could be used to analyse the relationships within small firms. An integrated approach could also help for the understanding of management processes. However, this also assumes a certain level of homogeneity within the small business sector, which does not appear to be present. In contrast, Ram and Edwards (2003) argue that research has made significant progress in explaining the way that small businesses interact with their employees and with their business environment. Although more research is needed in this area, there has been significant progress made in understanding management in business, and future studies should focus on determining the way that management strategies differ with aspects of the business. This method would allow for the influential factors to be examined, and may result in the production of a predictive model. Conclusion Small businesses are significantly different than their larger counterparts, and they are exposed to a range of influences that are not relevant to large businesses and also have different ownership and management structures. Many small businesses exhibit a higher level of independence and informality than large businesses do, and show a resistance to the incorporation of new regulations, especially those that are counter to the desires of the owner. The small business sector is far from homogenous, and this makes the determination of overall trends difficult. However, the studies examined in this paper suggest that management styles in the small firm sector differ significantly depending on the individual factors that influence the business. Consequently, many small businesses are beautiful, and are good environments for employees and areas were management and staff work together on common goals. However, there are also many businesses where this is not the case and management styles can vary substantially within and between businesses. References Atkinson, C. (2008). An Exploration of Small Firm Psychological Contracts. Work Employment Society, 22, 447-465. Barrett, R. (1999). Industrial Relations in Small Firms: The Case of the Australian Information Industry. Employee Relations, 22. Barrett, R. & Rainnie, A. (2002). What's So Special About Small Firms?: Developing an Intergrated Approach to Analysing Smalll Firm Industrial Relations. Work Employment Society, 16, 415-431. Earnshaw, J., Marchington, M. & Goodman, J. (2000). Unfair to Whom? Discipline and Dismissal in Small Establishments. Industrial Relations Journal, 31, 62-73. Marlow, S. (2002). Regulating Labour Management in Small Firms. Human Resource Management Journal, 12, 25-43. Ram, M. & Edwards, P. (2003). Praising Caesar Not Burying Him: What We Know about Employment Relations in Small Firms. 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