Enterprise and Small Business Principles

Barriers and growth constraints — the external operating context

In this section, we consider the main external barriers that may constrain small busi­ness development and which have to be circumvented, or managed, if effective growth is to be sustained.

6.5.1 A rapidly changing environment

If contemporary business organisations are to survive and prosper, their managers must learn to cope with unprecedented levels of change. The origins of such change are multi-sourced, deriving from factors such as increasing globalisation associated with the emergence of new sources of production; developments in information and com­munications technology; and the emergence of the better educated and more discerning consumers in mature market economies. In combination, such factors have contributed to a more competitive and rapidly changing environment facing business managers.

For the small business, its weakness in being able to control and relate to the envir­onment is a key distinguishing characteristic. Moreover, when one conceptualises ‘change’ at a more specific level, the complexity of the management task in small firms becomes highly apparent. Change situations may be conceptualised in terms of closed-, contained - and open-ended change (Stacey, 1990). Faced with closed change, a firm can predict events and actions with regard to timing and consequences, such as if a major customer increases their order. In such circumstances, the form and timing of its consequences are knowable and allow for prediction in terms of the required resources and cash flows. Contained change relates to events occurring that involve repetition of past events, such as where a seasonal pattern of sales allows for a degree of predict­ability. In the case of both closed - and contained-change situations, the small business manager can undertake rational short-interval planning activity in order to underpin organisational control.

However, as Stacey and others have emphasised, much of the change that faces contemporary business organisations is unknowable and unpredictable in terms of its timing and its consequences. In other words, such change is open-ended, and it is often unclear what is changing or why it is changing, making it virtually impossible to predict the consequences for the operating environment of individual businesses. For example, the unanticipated emergence of cost reductions and quality improving tech­nology from overseas competitors can have an indeterminate impact on a small busi­ness. Under such operating conditions, sustainable business development can only be effected by small business management processes that can facilitate the identification and understanding of open-ended change situations as a basis for determining appro­priate internal adjustment activity within the small firm.

6.5.2 Industry structure, competition and market limitations

Porter (1980) emphasises that the key aspect of a firm’s environment is the industry or industries in which it competes. For Porter, the competitive rules of the game and strategies potentially available to a firm are substantially influenced by industry struc­ture (see Chapter 21). He sees the intensity of competition in an industry transcending the behaviour of current competitors, with its roots in the industry’s underlying eco­nomic structure. For him, it is the collective strength of five basic competitive forces which determine the profit potential in an industry. These forces, which drive industry competition, are: the threat of new entrants; bargaining power of suppliers; bargain­ing power of buyers; the threat of substitute products or services; and the intensity of rivalry among existing firms.

In order to effect sustainable development within a given industry, a small firm would need to build up an understanding of the underlying structural features that underpin the basic competitive forces described above. This is because it is knowledge of the underlying sources of these competitive forces that allows a firm to determine its critical strengths and areas of weakness. For example, the threat of new entrants to an industry (or, put another way, the difficulty of gaining access to an industry) can be understood with reference to the underlying sources of barriers to entry. These might include the existence of economies of scale within the industry; established firms having achieved product differentiation; high-level capital requirements; the presence of switching costs; the need for new entrants to secure access to distribution channels; and the possession by established firms of cost advantages independent of scale (such as product know-how or design characteristics retained through patents or secrecy; access to raw materials; or favourable locations).

For the smaller business, one keystone to growth may be a recognition that ‘mar­kets tend to become more heterogeneous over time, evolving into progressively finer segments as buyer tastes and technological opportunities change’. Such ‘heterogeneity of the market permits market segmentation and the use of product differentiation to create “specialist” or “niche” strategies by firms’ (McGee, 1989). At the same time, significant potential barriers often exist, which may prevent the small firm from effect­ing such development. These barriers include the need to identify and respond to such market segments or niches, requiring both the determination of the form of the ‘dis­tinctiveness’, which will provide the differentiation of product to match the customer needs; and the ability to produce and sustain that distinctiveness. In this context, it has been suggested that those firms achieving growth are those that can identify the key criteria upon which to compete in certain segments (including design, price, quality, delivery) and are then able to develop a competitive advantage around these criteria (O’Farrell and Hitchens (1988)). The barriers also include the difficulty of coping with direct competitors who may ultimately be attracted by the returns associated with the emerging segment or niche, and the broader forces of competition, as discussed above.

Moreover, even where a small business has appropriately identified underlying industry and market structure characteristics in a manner which continues to facilitate ongoing sustainable development, the unfolding of unknowable open-ended change situations can confound that development without warning. For example, the effect of 9/11 on the willingness of many US citizens to travel abroad had sudden and significant effects on firms engaged in tourism in London and other major tourist centres.