Traits of Small Businesses visa-a-vis Well Resourced Large Companies - Essay Example

? Characteristics of small businesses visa-a-vis well resourced large companies Unlike the well resourced large businesses, small businesses have distinctive characteristics which present challenges to their operations. This paper is going to focus on the following characteristics of small businesses and how they can sustain growth. Small businesses cannot secure debt financing since most of them are sole-proprietorships, partnerships and limited liability companies. Small businesses are mainly managed by the owners since they cannot afford to employ professional board of directors and expert managers. Small businesses lack well documented business plans, vision and mission statements which hinders the strategic planning process. Small businesses do not understand the unique needs of the customers hence offer standardized products and services to the target market. Small businesses can achieve sustained growth through merging with other businesses which is critical in resource sharing. Small businesses should implement internet technologies in order to overcome their location barrier as well as increase their turnover. The small businesses should also maintain financial statements which are critical in accessing debt financing. Characteristics of small businesses visa-a-vis well resourced large companies Introduction The definition of small business has been controversial if not difficult. Some definitions which have been advanced consider the profitability of the business, the value of assets, the annual turnover, the number of employees and the branch network (Pride, Hughes & Kapoor 2010, pp. 24). Small businesses can be analyzed from their distinctive managerial, marketing, organizational and developmental characteristics. Small businesses have certain characteristics which distinguish them from well resourced large businesses. Numerous scholars have used different methods in determining the size of the business. However, most small businesses have less than ten employees and are either family business. Unlike well resourced large businesses, the small businesses have limited options in raising expansion capital since they are sole-proprietorships, partnerships or limited liability companies (Storey, 2002, pp. 6). Small businesses are managed by the owners unlike well resourced large businesses which are capable of employing professional and expert employees and managers. Unlike the well resourced large firms whose shares are able to be traded in the stock markets, the small businesses are closely held hence lack of inference in the management of the business (Little, 2005, pp. 42). Small businesses lack professional board of directors hence most of the strategic decisions regarding the objectives and goals of the business are taken by the owners who are still the managers of the business. Small businesses do not enjoy expansive branch network and distribution channels hence most of them have limited chances of market share growth. Well resourced large firms are able to enter in to strategic partnerships and alliances with other firms hence they can easily penetrate in to new markets unlike the small businesses (Little 2005) Distinctive managerial characteristics Small businesses management is different from the management of well resourced large businesses. Most of the small businesses are family businesses which are managed by the owners. Small businesses may not have enough funds to employ qualified management hence the owners of the businesses make all the strategic objective decisions regarding the source of funds and the expansion programs (Little 2005). Well resourced large businesses are able to list in the stock exchange markets and secure financing by offering shares to the public unlike the small businesses. Well resourced large businesses can afford to hire expert management hence can compete effectively in the business environment. Small businesses employ few employees who may not be qualified in the services which they offer to the business (Lavoie, et al., 2001, pp. 34). Eighty percent of the small businesses use close family members as the employees since they do not have the financial resources to expand their business and hire qualified employees (Little, 2005, pp. 43). Most of the small businesses fail within a period of three years since their start up due to mismanagement by the owners since they lack the ability to differentiate the personal resources and the resources of the business (Lavoie, et al., 2001, pp. 37). In ability to separate the business capital from the personal money leads to misallocation of the few finances of the business which makes expansion of the business difficult. Small businesses have low annual turnover hence low profitability. Small businesses also do not have the capacity to enter in to strategic alliances in the industry which are critical in cutting the operating costs and the level of competition in the market (Lavoie, et al., 2001, pp. 41). Most of the small businesses do not maintain financial records and statements since their owners who in turn are the managers do not have basic accounting knowledge. Lack of financial performance statements makes it hard for the owner of the business to ascertain the actual performance and profitability of the business. The management of small business ignores the importance of strategic decision making and business planning hence most small business lack clear goals and performance measurement metrics which can be used to ascertain the growth of the business (Little, 2005, pp. 64). Organizational characteristics The legal definitions of small business vary according to the industry and country. In the United States, Small businesses are those which employ less than five hundred employees and have less than $ 7 million annual turnover for the manufacturing industry. However, Fair work act 2009, defines small business are those employing less than 25 people (Little, 2005, pp. 70). Unlike well resourced large businesses which have formal organizational structure, small businesses do not have formal structures. Well resourced large businesses have a well established organizational culture with deep entrenched traditions and values which help the business in customer service delivery. Small businesses do not consider the business traditions and values, the colors, the logos of business and the language of operations which denies the business recognition among the customers (Little, 2005, pp. 77). Well resourced large businesses usually have a large number of human resources hence the need of a clear chain of command. Though many of the small business have few employees, there is no clear chain of command in the business. Unlike well resourced large businesses which have written vision, mission and business philosophy, the small business have no clearly stated mission hence this creates problems in allocation of the resources and management of the business operations (Little, 2005, pp. 84). Small businesses do not have formal channels of internal communications as well as external communications which makes customer relationship management task difficult in the business. Authority and responsibility in a small business is not well delegated to the employees since the business owner tries to retain all the power and control of the business which interferes with employee decision making and work performance in the business. Well resourced large businesses have well delegated authority and responsibility hence employees feel valued in the business hence they are able to work harder as well as make decisions regarding their work fast (Lavoie, et al., 2001, pp. 52). The organizational structure of small businesses does not encourage innovation and flexibility which makes it difficult for the business to learn new creative ideas regarding the business processes. The organization structure of small business reduces employee motivation while at the same time increasing the administrative costs required to supervise the workers. The organizational structure of the small businesses discourages innovation and flexibility which leads to poor customer service and slow decision making (Little, 2005, pp. 67). Generally, the organizational characteristics of well resourced large businesses has several advantages like increased flexibility, superior customer service, improved management, increased performance accountability, and problem solving (Little, 2005, pp. 79). Developmental characteristics of small businesses Most of the small businesses do not reach their maturity stage partly because they lack sufficient finances for research and development of new products. Well resourced businesses understand that customer needs keep on changing hence they invest heavily in new product development and branding. On the other hand, small businesses do not understand the changing trends in customer needs and preferences hence they offer products and services which the customers may not demand. Small businesses do not survey the customer needs and the level of customer satisfaction hence their market share keep on declining since the customer tastes change over time (Hatten, 2011, pp. 68). The small businesses have limited access to superior technology hence depend on the traditional selling methods in reaching their clients. Well resourced large businesses can afford modern communication and information technology which is useful in managing the customer queries and complains. Lack of modern technology leads to wastage of vital time along the supply chain processes like increased material procurement time. Small businesses have limited access to external financing like bank loans since most of them do not have any assets to pledge as security for the loans and also no financial statements which are prepared which can be used by the lender to estimate the growth prospects of the business and the security of the funds borrowed (Little, 2005, pp. 6). Small business unlike the well resourced large businesses lack modern manufacturing technology and processes which leads to poor quality products and decreased demand in the market. Small businesses use outdated technology which leads to wastage of materials in the production processes thus increasing the manufacturing costs leading to higher prices for their goods and services. Small businesses have poor product design thus their customers can hardly recognize the product in the shelves (Storey, 2002, pp. 8). Well resourced large businesses can establish extensive distribution channels that cover the entire market unless the small businesses which mostly have a single branch. Small businesses experience high transportation costs in the market since they are not able negotiate for cheaper transport costs due to their size (Hatten, 2011, pp. 91). Small businesses unlike the well resourced large businesses are not able to implement effective marketing strategies which can increase the market share and profitability of the business. Most of the small business cannot afford to advertise their products through effective medium like the radio or television. Well resourced large businesses can stage publicity and awareness programs in their marketing communications which are useful in persuading the customers to try their products as well as creating customer loyalty to their products (Hatten, 2011, pp. 103). Small businesses cannot afford to compete on pricing due to their high costs of production. Small business do not enjoy high economies of scale in their manufacturing since they procure raw materials and other inputs at higher prices than the well resourced large businesses which are able to negotiate for discounts and extended credit period. Small businesses cannot afford to offer prices discounts and free samples in order to increase their customer base since they produce at high costs due to low volumes of output. Well resourced large businesses can afford to sell on credit which enables the business to increase the annual turnover and also the customer base (Pride, Hughes & Kapoor, 2010, pp. 76). Implications for small businesses attempting to achieved sustained growth Small businesses face numerous challenges due to inadequate resources but can still sustain growth in their operating markets. The businesses should first scan their operating environment and conduct analysis of their strengths and weaknesses together with those of the competitors. Small businesses should ensure strategic planning which is critical in attaining their goals and objectives. Such businesses should have well documented mission, vision, policies and business philosophy to guide the resource allocation process (Gilmore et al., 2001). Small businesses should also maintain financial records and statements which can be used in evaluating the growth over a certain period of time. The business should be able to calculate the increase in profitability, the market share as well as the return on investment. Small businesses should establish a sustainable growth rate which they can maintain without increasing financial leverage. In sustaining the growth rate, the business should consider the capital structure of the firm which includes both the equity capital and debt capital. The business should also consider the retained earnings and the interest charges on the debt capital and the possibility of securing additional debt without increase in the cost of capital (Storey, 2002, pp. 11). Achieving a sustainable growth is a major concern for all the small businesses. Achieving the goal is not easy task given the distinctive challenges which face the small businesses unlike the well resourced large businesses. The general business environment which includes the social, political and economic environment may be difficult to accurately predict hence this may hinder the strategic planning process of the small business. Consumer needs and buying behavior keep changing hence small business should have mechanisms of identifying the unique needs of their consumers as well as producing goods which cater for their needs (Geddes, 2005, pp. 41). Small business should employ professional managers who can utilize their skills in increasing the business market share. The business should also ensure qualified personal are recruited in all major functions like financial management and customer relations. Small business managers should be able to differentiate business financial capital from personal finances hence business operating cash should not misallocated to settling of private expenses (Geddes, 2005). In order to secure debt financing, small business should have written business plan which can enable the financiers to estimate the business growth prospects as well as the business risk. Small businesses should also consider mergers in order to increase their competitive strengths. Mergers will allow the different businesses to share resources like technology, distribution channel and research and development activities. Small businesses should implement modern marketing technologies like internet marketing in order to decrease their marketing costs as well as achieve global business presence. Internet marketing and communication technologies will increase the sales volume and also enable the business to respond to customer complains within the stipulated time period. Implementation of internet technology will help the company in negotiating with suppliers hence production stoppages due to delayed raw material procurement will be avoided (Leyshon, 2009, pp. 12). Small business can also ensure sustained growth by ensuring fast decision making and flexibility in the business (Leyshon, 2009, 38). The business manager should delegate authority and responsibility to the lower level employee hence thus increasing flexibility and creativity in the business. Small businesses should also consider bulk procurement of raw materials hence they can benefit from quantity discounts from the suppliers. The business should establish good working relationships with the suppliers in order to reduce chances of delayed suppliers and production stoppage (Arjun, 2009, 17). Since expansion in to new markets may not be possible due to limited resources, small businesses should identify a particular niche market which is concentrated and avoid entering new markets before fully exploiting the market potential of the first market (Storey, 2002, pp. 46). Small businesses can reduce the level of competition by branding their products and diversifying their product offerings. Differentiation of the products and services is a critical competitive strength hence small business can achieve product differentiation by adding new product attributes, enhancing technology and proper packaging of the products (Gilmore et al., 2001, pp. 6). The marketing efforts of small businesses should be geared at enhancing the customer loyalty hence after sale follows should be conducted to determine the level of customer satisfaction. The business should also segment the market depending on the characteristics of the consumers and the buyer purchasing behaviors in order to effective develop products which cater for the needs of the target market (Blewitt, 2008, pp. 38). Conclusion Unlike well resourced large companies, small businesses have certain distinctive characteristics which present challenges in ensuring sustained growth. Most of the small businesses do not employ professional managers nor do they keep any financial records. Small businesses lack organizational structures hence no formal chain of authority and command. Small businesses not have vision, mission statements which make it difficult to achieve strategic growth objectives. Small businesses lack modern technologies, research and development activities and superior manufacturing technology hence cannot compete effectively on quality and price of the products and services. Small businesses should merge and implement modern technologies in order to sustain growth. The businesses should understand customer needs hence market segmentation and product differentiation is essential in sustaining the growth rate. References: Arjun, K. (2009). Small business management concepts & techniques for improving decisions. New Delhi. Global India Publications. Blewitt, J. (2008). Understanding sustainable development. London. Cengage Learning Geddes, M. (2005). Making public private partnerships work: building relationships and understanding cultures. Aldershot, England; Burlington: Gower. Gilmore, A., et al. (2001). SME marketing in practice. Marketing Intelligence & Planning, 19, 1: 6-11. Hatten, T. (2011). Small business management: entrepreneurship and beyond. Mason. 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