Enterprise and Small Business Principles
Barriers and growth constraints — the internal operating context
This section reviews some of the major internal constraints which affect growth in the small firm. These relate to the influence of the owner-manager and the relative small scale of the enterprise.
6.6.1 Owner-manager and size-related constraints
For many small-medium size enterprises, ‘size-related factors affect their ability to identify and respond to developmental opportunities in their external environment’ (Wyer and Smallbone, 1999). This emphasises how owner-manager and size-related characteristics help to shape the enabling and constraining forces that affect the ability of smaller firms to identify, cope with and positively respond to external environmental changes. Size-related characteristics thus contribute substantially to shaping strategic activity and underlying management actions. Relevant owner-manager and size-related characteristics include the following.
In an owner-managed business, the ‘organisational culture’ typically reflects the personality traits and aspirations of the owner-manager which, in turn, shapes the enabling and constraining forces affecting the firm. The pervading sets of norms and values, ways of doing things and the freedoms afforded to different individuals are often reflected in informal and idiosyncratic structures, systems and processes, which themselves often reflect the personality traits of the main owner (see Chapter 8). Whilst over time a firm’s historical development path and its markets and its technologies will all affect this culture, the owner-manager is likely to have a predominant influence, particularly in the early stages of a business. In this context, a key potential constraint on future development can be the extent to which the small business culture/structure remains embedded in the owner-manager. This is a key management issue which is addressed later.
A well-documented constraint on small business growth is that of an inadequate financial resource base (see Chapter 18), which can be a particular constraint on growing firms, where an ongoing need for development funds creates a strong demand for finance. On the one hand, financial constraints can result from a lack of the required levels of collateral - perhaps because the firm’s assets are already being used to secure existing debt - combined with the absence of a proven track record in the case of new and young firms, which can affect their ability to raise external finance. It also reflects the firm’s financial management skills, which can affect its ability to generate investment funds internally. Whilst Storey (1994 op. cit.) has identified a willingness to share equity as a factor influencing the growth potential of a small firm, the operation of the formal venture capital markets makes it difficult for firms to raise sums of less than approximately £250,000 from this source. The potential importance of equity financing to high-growth small firms is emphasised by the fact that for risky projects and those requiring long-term funding, equity capital is often the only possible source (Ruda, 1999). Whilst informal risk capitalists (or business angels) are a possible source of such finance, as well as publicly funded venture capital funds that, in some cases, may be specifically targeting seed and early stage financing, entrepreneurs must have the knowledge and ability to identify a feasible development project and produce a supporting business plan to realise finance from these sources. As it is, an ignorance of formal and informal sources of risk capital may itself be a constraint on the growth of many potentially successful small businesses.
Attracting and retaining quality people
Many small businesses face a marginal labour market whereby they cannot offer the same wage and salary levels or career path opportunities as large companies. This can affect their ability to attract the most able, committed and/or experienced workers, which can in turn impact on the consistency of product or service quality. The latter is essential in building image and a satisfied customer base, and can be difficult to realise if there are staffing problems (see Chapter 20). The solution must be to encourage more owners to adopt a greater staff-focused approach to human resource management, recognising that potentially the workforce can be one of the firm’s most important assets.
Developing effective marketing and distribution systems can represent a particular challenge for small businesses, especially for those firms attempting to grow through market development activities into overseas markets (see Chapter 24). For example, Smallbone et al. (1999) found that, within a recent seven-country study of internationalisation and SME development, in all countries SMEs faced difficulties in obtaining information about foreign markets, which was, in part at least, due to their tendency to rely on informal marketing methods. It was felt that whilst reliance upon informal methods is often adequate in some domestic markets, such methods may be inadequate abroad. Carson (1991) suggests that our understanding of small business marketing will derive from greater consideration of factors such as the character and personality of the owner-manager and the inherent flexibilities and informalities of small business management. Implicit in this view is the possibility that any small business attempt to draw upon the essentially large-company-oriented formal marketing management literature for guidance, with its emphasis on more formalised marketing methods, could, in some instances, act as a constraint on the firm’s development rather than a facilitator.
We conclude this sub-section by emphasising that the distinctive characteristics of small businesses, described previously, may threaten their potential flexibility and responsiveness, which small firms can potentially exploit in competing with larger firms. If such problems are not circumvented or effectively managed, they are likely to prove a major constraint on the ability of the small business to grow.
6.6.2 Inadequacy of existing assets for underpinning growth
Many of the above size-related constraints can exert pressure on management to attempt to ‘squeeze more’ out of existing assets in order to facilitate the growth path to which they are committing themselves. For example, ‘rapidly growing companies are especially vulnerable to cash difficulties, because the need for working capital increases in a fairly constant ratio to turnover. As a result, there is likely to be an increasing demand for finding working capital as turnover increases’ (Winckles, 1986). This can lead to a phenomenon known as over-trading, which can result from failure to plan carefully the underlying financial requirements of a development project, or from an attempt to expand too rapidly. For instance, taking on additional customer orders on the assumption that existing resources can cope (when in practice they are insufficient) can lead to cash flow problems. This in turn may contribute to relations with the firm’s workforce and suppliers being soured, as the firm finds itself unable to pay staff wages and/or suppliers.
Growth can also lead to pressure on the firm’s human resource base, which is exacerbated if management is either unwilling or unable to recruit externally. Such firms must focus on existing human resources within the firm, placing an emphasis on getting the best out of those workers. Within this context, small businesses have been found to be constrained in several areas. For example, in order to motivate and enthuse management and supervisory level staff, and to fully utilise their expertise and capabilities, it may be necessary to give staff more responsibility, involving them more substantially in management decision-making processes. However, the management style of many owner-managers has tended to be autocratic and underpinned by a reluctance to delegate decision making (Kets de Vries, 1977). A further issue concerns confidence and capability levels of staff (including the owner-manager) to undertake new tasks, which they will inevitably be asked to complete as the firm proceeds along its growth path. This in turn raises the issue of the need for upgrading management skills, although a number of constraining forces have been found to restrict the uptake of management training within the small firm. These include an owner-manager reluctance to utilise outside advice; time constraints; willingness to pay the market price; and the inappropriateness of much of the training provided to the needs of a heterogeneous small business sector. One of the biggest challenges for those providing training is the proposition that the most effective learning mode for small firms may be through experience rather than formal external training (Gibb, 1997).
The pace of growth can also exert pressure on physical resources. For example, a reluctance to invest in additional or new machinery may be the result of a lack of confidence; a lack of ability to assess new available technologies; or it may reflect concern with regard to the integration of new systems and processes into existing activities. In this regard, Ekanem and Smallbone (2004) have demonstrated the key role of experiential learning in relation to investment decision making in small manufacturing firms rather than using appraisal methods based on formalised learning. A further developmental difficulty revolves around premises. Since the pace of growth may result in a small business outgrowing its existing facilities, both availability and cost of alternative premises can result in a firm attempting to utilise existing premises to the limit, which may have severe repercussions in terms of efficiency of operation and ability to meet customer demands with regard to quality and delivery. Moreover, a fear that increased overheads associated with any expansion may not be adequately covered because of the firm’s inability to achieve requisite rates of growth in sales can also result in a reluctance to take up new premises (Wyer and Smallbone, 1999).
6.6.3 Difficulties associated with team building and team management
In order to establish a newly developing firm as an effective organisation capable of sustaining itself in the market-place, the owner manager has to ensure that all tasks are appropriately allocated on an individual and/or small group basis. At an early stage in a firm’s development, those ‘sub-units’ of individuals organised to work together may appear to be working as a ‘team’, although in practice may be no more than a ‘group’, lacking a collective rationale, in which it is clearly understood that individual performance contributes directly to the overall good (Godfrey, 1990; Ensley and Pearce, 2001; Ucbasaran et al., 2003). Arguably, though, for a small organisation to sustain ongoing development, there is a need for its management to recognise that the concept of a ‘team’ is preferable to simply that of a ‘group’, However, whilst recognising that the transition from ‘group’ to ‘team’ working is a pre-condition for effecting sustainable small business development, the problems associated with team building and team management can prove a major constraint on organisational development in practice (see Chapter 20).
