Enterprise and Small Business Principles

Definitions of smaller enterprises

This section begins by looking at two early attempts to provide a definition of smaller enterprises and then considers how authorities in the UK, the EU and elsewhere have defined smaller enterprises.

There is no simple or single definition of what constitutes a small enterprise. One of the earliest attempts to provide a definition was provided by the Bolton Report (1971). Bolton suggested two definitions for the small enterprise. First, he suggested a qualita­tive or economic approach that tried to capture the range and diversity of the smaller enterprise relative to the larger enterprise. This definition suggested that a small enter­prise was so if it met three criteria:

■ independent (not part of a larger enterprise);

■ managed in a personalised manner (simple management structure);

■ relatively small share of the market (the enterprise is a price ‘taker’ rather than price ‘maker’).

Such criteria are useful because they reflect central features of smaller enterprises. Other than size itself, one factor that distinguishes smaller enterprises from their larger counterparts is the nature of the uncertainty they face. As smaller enterprises are often reliant upon a limited number of customers and have a limited product portfolio (Cosh and Hughes, 2000), they tend to be exposed to greater levels of uncertainty in their markets. In contrast, larger enterprises are able to limit the uncertainty in their mar­kets simply because they have diversified product portfolios. The independence and personalised nature of the smaller enterprise further promotes uncertainty. Keasey and Watson (1993) have argued that small enterprise owner-managers often run sole pro­prietorships or partnerships. This means that their fortunes are often tied up directly with the success or otherwise of the enterprise: without the protection of limited liab­ility, owner-managers may end up personally liable for their debts if their enterprise fails. Owner-managers of smaller enterprises also face, relative to larger firms, higher fixed management costs. This, again, may make their situation precarious as they may not have the necessary ‘skill-set’ to attend to the various areas of the business (e. g. financial or human resource management) equally well.

Bolton’s attempt to reflect the uncertainty situation faced by small enterprises does present problems. Storey (1994) has criticised Bolton as it is often unclear when exactly the locus of management control shifts from the owner-manager to a functional or hierarchical management structure in a growing business. Enterprises that run into the thousands of employees may be run in a highly personalised manner. Storey and Johnson (1987) have also argued that ‘independence’ is a relative concept: some enter­prises, whilst legally independent, may be entirely reliant upon one large enterprise for their economic activity. On the other hand, some enterprises with two or more

establishments may expect each of these establishments to function independently. Finally, one or two employee enterprises may have a high degree of market power because they work in a highly specialised market niche.

Bolton also proposed a more quantitative definition of the smaller enterprise. Again, the concern was to capture the heterogeneity of smaller enterprises. This is because no single measure such as assets, turnover, profitability or employment is likely to fully account for the size of an enterprise. For example, an automotive manufacturer may consider itself small if it employs 300 workers. An enterprise of the same size, how­ever, may be considered to be large if it is in motor repairs. Bolton, therefore (Table 2.1), suggested a variety of measures to reflect sectoral heterogeneity. Hence, employment was used for sectors such as manufacturing, turnover for motor trades, assets for trans­portation and ownership for catering.

There are obvious problems with such a definition. For a start, although it appears ‘grounded’ in the differences between sectors, many small enterprise owner-managers may not agree with such definitions either then or now (Woods et al., 1993). Perhaps a more pertinent problem is that measures such as turnover and employment are eroded over time by the influence of inflation and productivity, respectively. Equally, the absence of a uniform definition makes it extremely difficult to chart differences or similarities between countries.

A more uniform definition has been adopted by the EU. This was first introduced in 1996 but was updated in 2004 to account for the impact of inflation and productivity changes. Table 2.2 shows that the EU considers there are three types of smaller enter­prise: micro, small and medium-sized. Each of these have differing employee, turnover

and asset thresholds. These three size groups of non-subsidiary independent businesses make up what are termed small and medium-sized enterprises (SMEs).

Although recommended by the EU, this definition is only binding for institutions or businesses that seek EU funding. Individual countries may adopt their own interpreta­tion of what constitutes an SME. The UK government, for instance, tends to define an SME as:

■ micro firm: 0-9 employees

■ small firm: 0-49 employees (includes micro)

■ medium firm: 50-249 employees.

Internationally, there is a wide variety of definitions. Countries such as the US or Canada define an SME as one that employs fewer than 500 employees. Hong Kong has an alter­native definition: SMEs are manufacturing enterprises with fewer than 100 employees or non-manufacturing with fewer than 50 employees. This obviously makes it difficult to compare SMEs across various countries, particularly with regard to turnover or assets. Transnational studies, therefore, have tended to concentrate upon simple employment thresholds when measuring SMEs.

This section has shown that there is no easy, simple or optimal definition of smaller enterprises. In essence, whatever definition is used involves some form of a trade-off. What definitions such as Bolton’s offer are insights into the managerial and behaviourial characteristics of smaller enterprises. Such definitions, though, cannot be easily gener­alised across industries and regions or countries.