Characteristics of Small Business vis-a-vis Large Companies - Essay Example

CHARACTERISTICS OF SMALL BUSINESS VIS--VIS LARGE COMPANIES. Initially scholars believed that the path to economic development is via large firms and small firms, which were only viewed as a source of alternative employment, will eventually fade away. (Zoltan, 1999) This view has changed and scholars and policy makers have now realized that small businesses have transformed to sustainable profitability ventures. "Small businesses are the life blood of our economy". These are the words of Britain's' Prime Minister Gordon brown while serving as the Chancellor of the Exchequer. This was after the government accepted Teresa Graham's recommendation on small firm loans guarantee. Small businesses have distinct features in terms of management organization and development structures. According to Wood (1981), Business objectives are negotiated outcome of the inter play of power and influence between owners of property (capital) and those who do not own properties in the industrial field. (Monsted, 2005) In management, small scale businesses are usually owner-managed while in large scale businesses management has a formal structures with well articulated portfolios that are occupied by professionalism their field of business. Management has been charged with the responsibility of formalizing a coherent long-term industrial relations strategy. Successful small-scale firms engage in strategic management either knowingly and with a set vision or even unknowingly without any set vision. Success is related to sound management while failure shows management is somehow wanting. In the management of small firms owner-managers pursue personal goals which are geared by personal visions; this to some extent hinders achievement of success in the business relative to their large counterparts. This is different from the management in large firms because managers are directly answerable to the stakeholders. (Burns, 2007) In small firms' owner-managers, being the principal stakeholder, in most cases play a multiplicity of roles in management, thus the probability of poor decision-making is higher compared to large firms resulting to inappropriate actions due to lack of efficient management attention to issues that are strategic. (Nooteboom, 1994) Analysis of labor management in small firms commanded little attention during the 80's. Human resource management is a new type of management that is widely used in large companies to quite a great success and has since been introduced in the small firms as well. Previously, it was argued that industrial relations and personnel management in small firms was inexistent thus leading to exploitation of employees. Whereas as large companies dictate supplier relationship, the owners of small businesses are denied options regarding the way they manage labor as considering cost constraints and meeting targets for quality takes away the liberty of independent decision making. Research conducted in the personal field tends to focus on the large firms employing more that 100 employees on a full time basis at the expense of small firms. Small firms put more emphasis on the fields of accounting over personnel management (Nooteboom, 1994). The characteristics of personal ownership, independence and lack of marketing power are unique to the small businesses. These characteristics produce the constraints on management produce the constraints on management and financial resources that are an inevitable consequence of small scale, independence plays to the advantage of the small businesses is that decision making is fast and does not have to undergo all kind of bureaucratic stages as witnessed in large businesses. (Nooteboom, 1994) This saves time and if they make the right decision, they reap the whole of the returns. In small business, there is always room for innovation. This makes the small business to be able to come up with new products and services for the various markets. However, ideas developed in small-scale businesses are not likely to prosper because of lack of financial avenues such as those available to large firms. (Monsted, 2005) In small businesses, the need for rational decision-making, objectivity in weighing the pro's and cones of alternative course of action is fuelled by vulnerability and subjectivity which lead to biased decisions made. Mistakes lead to misappropriation of the already limited meager resources and could even lead to running down the firm. Small firms are usually informal and thus are opposed to external training; professional consultancy and they are run without a business plan thus lack a vision and general directions. (Odaka & Sawaii 1999) Organizational structures within the S.M.E's are also distinct. Majority as mentioned are owned by individuals and family members. However, this varies with the size of the firm; the larger it is the more likely it is to have a large ownership structure. The decision to work alone is mainly motivated by the need to earn living .these entrepreneurs face several problems such as lack of skilled labor, lack of access to finances and administrative regulations marketing and effective managerial skills among other constraints. Resource constraints which accounts as one of the major problems provoke entrepreneurial behavior, entrepreneurs are ready to follow opportunities before they control the resources they require (Burns, 2007). Entrepreneurs' wish to be self-governing agents despite their lack of resources. They aim to avoid dependence by setting up mutual arrangements with partners who get a share in eventual returns. In constructing a new enterprise, their objective is to make a resource base that can ensure returns, but the difficulties of mobilizing initial capital often make it essential to adjust the initial business vision. Sustaining growth often requires more resources than new enterprises with a young resource base can make; growth creates problems of organization and resource deficiencies make it worse. These call for review of the firm's goals, behavior and resources. Efforts to find an answer open up new chances in firms that overcome early difficulties. Returns are reinvested or spread, in ways that increasingly change the new firm's resource base and business opportunity. The entrepreneurial firm that sustains growth, as Penrose showed, remains repeatedly open to new opportunities and accordingly adapts and enriches its resource base. Research revealed that growth in new firms determined by the problem-solving methods adopted by the entrepreneurs, who develop their firms by reacting to new opportunities and enlisting the support of others. Based on empirical evidence from which the case examples are drawn, it was proposed that, in reaction to difficulties they encounter, entrepreneurial firms, mobilize resources in unusual ways, gain leverage from limited resources, reduce their resource requirements (economize), create new resources - competences, technologies etc, establish strategic relationships based on reciprocity. These not success factors but active procedures merged to promote inventive activities and growth models. Entrepreneurial teams, in search of ways around the obstacles they face induced to form new kinds of coalition and build new capability often in unexpected ways. Many of the innovative efforts result in competitive advantage for new firms, where new business form structures and resources, developed as response to challenges compensate for initial weaknesses. (Burns, 2007). The small businesses have a strong interest in law and order and support competition policy. They do so because those rules have a potential restraining influence on big firms. On the other hand, small businesses are hostile to taxation and all form of regulatory measures and interferences. They are of the notion that the government undermine their value to the economy and society and often discriminate against them. (Zoltan & David, 1990) In terms of growth and development, small businesses have less sophisticated approach to business planning as opposed to large firms. This may be directly linked to their low level of systematic information gathering and statistical analysis. The lack of a business plan has been a contributing factor to high rates of failure in the small businesses. This is highly prevalent in start up businesses (Nooteboom, 1994) Growth of small-scale businesses involves a series of stage-models, which a business goes through as it expands most of the small and medium enterprises are usually in the first or showing features of the second stage. (Zoltan, 1999). According to Greiner, organization grows through five distinct developmental stages each of which ends with a management crisis. This crisis will determine either the demise or success of the organization in that, some organization might be close down due to crisis, however, some organization in trying to solve the crisis will move to successive stage. Stage 1 is referred to as the birth stage. The emphasis in this is stage is creating product and a market among main features include the founder is entrepreneurially introduced and concentrate more in producing and selling the product and not managing, the communication among employees is informal and frequent., long hours and modest pay accompanied with the promise of ownership benefits, control decisions are based on customer feedback. As the organization grows, the management structure fail in terms of coordinating directing and controlling creating a crisis, the move to reorganize to the organization pushes the firm to the next stage referred to as delegation stage. (Churchill, 1983) Stage 2 is the directing stage; the companies that survive the birth stage by installing an efficient business manager usually embark on a period of sustained growth under efficient leadership. This stage is characterized by a functional management structure which separates the production departments, marketing department and accounting and purchase departments which are introduced, incentives, work standards and budget are adopted and communication becomes formal and impersonal as hierarchy of positions are put in place. Management structure guide employee more competently into expansion, they eventually become more unsuitable for controlling a large more diverse and composite organization. Lower level employees find themselves restricted by Bureaucratic hierarchy. Thus the next revolution is about to happen and a crisis builds up from demands for greater independence on the part of lower lever managers. The solution adopted by most firms is to delegation of responsibilities to low-level managers (Churchill, 1983). Stage 3 referred to as the delegation stage evolves from the successful application of delegation of powers thus a decentralized structure emanates. It shows these features; much greater responsibility is given to the managers of plants and market territories. Profit centers and bonuses are introduced to motivate employees. The top management at headquarters restrain themselves to managing by exception, based on periodic reports from the field. Management concentrate in more qualitative decisions e.g. acquisition of new companies. Communication from the top is infrequent, usually by correspondence, telephone, or brief notes to field locations. The delegation stage proves useful for fast growth through increased incentives at lower levels. Decentralized managers with greater powers and motivation are able to infiltrate larger markets, react faster to customers, and develop new products. However due to the powers given to low-level manager's top management are threatened by the notion that they are loosing control and seeks to reclaim power over the total company. A part of top executive, try a return to centralized management, which usually fails because of vast extent of operations. Those companies that moved ahead find a new solution in the use of special coordination techniques (Churchill, 1983). Stage 4 which are called the coordination stage. During this stage, the developing era features the use of official systems for achieving greater coordination and by top executives taking responsibility for the commencement and management of these new systems. For example: Decentralized units are amalgamated into product groups .Formal-planning measures are established and intensively evaluated. Numerous personnel are hired and located at headquarters to central company. Lack of confidence slowly builds between line and staff, and between headquarters and the field for example, more and more tension heavy staff direction from those who are not familiar with local environment. Thus, the organization has become too big and complex to be managed through official programs and rigid systems. This leads to the demise of stage four (Churchill, 1983). Stage 5 is the collaboration stage where stage 4 revolves more through formal systems and procedures, stage 5 stresses greater spontaneity in management action through teams and the competent argument of interpersonal differences. Social control and self-discipline take over from formal control. This transition is especially difficult for those experts who created the old systems as well as for line manages who relied on former system for answers. Evolution, then, builds around a more elastic and behavioral approach to management. Here are its characteristics: The focal point is on solving problems quickly via composite teams i.e. made up of experts in all fields, head office staff are restructured and others reassigned, and joint in interdisciplinary teams to confer with, and not to direct field units. An element of teamwork and conflict resolution is introduced; Economic rewards are geared more to team performance than to individual achievement (Churchill, 1983). Most of SME, s are in the birth or start up stages and delegation stages are typical of the Greiner model. Empirical studies on small entrepreneurial support systems have dealt fundamentally with the broad population of small and medium enterprises and entrepreneurs use a move to the delegation stage due to external relations. They use of elaborate network of support to set up their business. Professionals such as lawyer's and accountants provide critical assistance and aid to new and growing small firms. Many entrepreneurs also use extensive social networks that include family, friends and relatives and commercial networks, including of business contacts, such as customers and suppliers. Other important sources include public or publicly related services purposely intended to support small business. Still venture capitalists, universities, mentors and counsellors, and industry associations provide other support. The support systems, both formal and informal, represent an important source of outside skill and resources (Burns, 2007). Their role takes on an additional significance for the small firm that are generally faced with limited resources. In addition, the complexity of the emerging economy suggests the role of the support network may be of growing importance to creating and to developing successful businesses in the new global economy, notwithstanding the importance of business development support systems, with the exception of research related to financial support. The specific needs of knowledge-based businesses have received limited attention in the literature. In conclusion, it is indeed true that small businesses have semiformal and informal structure but the innovativeness, networking technique and creativity introduces new management models that can be utilized even in their large companies. It is already clear that SME's offer a lot in the society, they create employment opportunities, offer services to large firms through outsourcing, fill the market niche left by there large counterpart, due to creativity and innovativeness they help in recycling of unused material etc. Due to the dynamic nature of the business world SME's might be the key to accelerated growth and development since it triggers innovativeness and offer effective competition needed for market expansion Work Cited: Burns, P. Entrepreneurship and small business. Palgrave Macmillan Hampshire, England 2007. Churchill, N.C. & Lewis, V.L. The five stages of small business growth': Harvard Business Review. 1983. vol. 61, no. 3, pp. 30-50. Monsted, M. Strategic networking in small high Tech firms. Forlaget Samfundslitteratur. 2005. Nooteboom, B. Innovation and diffusion in small firms: Theory and evidence. Small Business economics. Springer Netherlands. 1994 Odaka Konosuke & Sawai Minoru. Small firms, large concerns: The development of small Business. Oxford university press. 1999. Zoltan, Acs. Are small firms important: Their role and impact. Springer Publisher. 1999. Zoltan, J and & David ACS The Economics of small firms: A European challenge. Springer Publishers.1990. Read More