Small Business: Journey to Success

SMALL BUSINESS JOURNEY TO SUCCESS

M. GORDON HUNTER & DAN KAZAKOFF

Small Business: Journey to Success First edition 2012

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Contents Dedication and Acknowledgements ......................................................... iv Preface ....................................................................................................... v Chapter 1 Overview ................................................................................ 1 1.1 Introduction ............................................................................... 1 1.2 Small Business Defined .............................................................. 2 1.3 Projects ...................................................................................... 7 1.4 Research Approach .................................................................... 9 1.5 Overview of Theoretical Perspective ....................................... 11 1.6 Format of the Book .................................................................. 13 1.7 Conclusion ................................................................................ 17 Chapter 2 Perspectives of Small Business ............................................ 19 2.1 Introduction ............................................................................. 19 2.2 Entrepreneurial Process and Small Business ........................... 19 2.3 Classification of Small Business ................................................ 24 2.4 Three‐Circle Model ................................................................... 26 2.5 Three Dimensional Development Model ................................. 28 2.6 Performance of Small Business ................................................ 32 2.7 Growth of Small Business ......................................................... 35 2.8 Succession ................................................................................ 38 2.9 Conclusion ................................................................................ 39 Chapter 3 Perspectives of Entrepreneurs ............................................ 41 3.1 Introduction ............................................................................. 41 3.2 Types of Entrepreneurs ............................................................ 42 3.3 Characteristics of Entrepreneurs ............................................. 45 3.4 Project A: (Preliminary Investigation into Variety in Canadian Small Business) ......................................................................... 52 3.5 Project B: (Multi‐Generation Small Business) .......................... 59 3.6 Conclusion ................................................................................ 63 Appendix A .......................................................................................... 64 i

Chapter 4 Entrepreneurship Theory .................................................... 65 4.1 Introduction ............................................................................. 65 4.2 Entrepreneurship Theory and Research .................................. 66 4.3 Entrepreneurship Theory and Small Business ......................... 74 4.4 Conclusion ................................................................................ 80 Chapter 5 Agency Theory ..................................................................... 81 5.1 Introduction ............................................................................. 81 5.2 A Context for Agency Theory ................................................... 81 5.3 Agency Theory .......................................................................... 83 5.4 Conclusion ................................................................................ 91 Chapter 6 Stewardship Theory ............................................................. 93 6.1 Introduction ............................................................................. 93 6.2 Stewardship Theory ................................................................. 93 6.3 Stewardship Theory and Small Business .................................. 99 6.4 Conclusion .............................................................................. 105 Chapter 7 Long‐Lived Companies ....................................................... 107 7.1 Introduction ........................................................................... 107 7.2 Common Factors for Success ................................................. 108 7.3 Learning .................................................................................. 110 7.4 Longevity ................................................................................ 112 7.5 Analogies ................................................................................ 114 7.6 Conclusion .............................................................................. 117 Chapter 8 Multi‐Generation Small Business ...................................... 119 8.1 Introduction ........................................................................... 119 8.2 Literature Review ................................................................... 120 8.3 Project (Little Empires: Multi‐Generation Small Business in Southern Alberta: Canada) ..................................................... 126 8.4 Findings .................................................................................. 128 8.5 Conclusion .............................................................................. 132

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Chapter 9 Small Business Response to the Financial Crisis ................ 135 9.1 Introduction ........................................................................... 135 9.2 Literature Review ................................................................... 136 9.3 Project .................................................................................... 138 9.4 Discussion ............................................................................... 139 9.5 Conclusion .............................................................................. 144 9.6 Addendum .............................................................................. 145 Appendix A ........................................................................................ 147 Chapter 10 Small Business Failures .................................................. 149 10.1 Introduction ........................................................................... 149 10.2 Literature Review ................................................................... 150 10.3 Method ................................................................................... 153 10.4 Results and Discussion ........................................................... 155 10.5 Controllable ............................................................................ 155 10.6 Uncontrollable ....................................................................... 161 10.7 Conclusion .............................................................................. 165 10.8 Addendum .............................................................................. 166 Appendix A ........................................................................................ 169 Chapter 11 Journey to Success ......................................................... 171 11.1 Introduction ........................................................................... 171 11.2 Review of the Theories .......................................................... 171 11.3 The Three Dimensional Developmental Model and the Theories ................................................................................................ 174 11.4 The Entrepreneur Continuum ................................................ 176 11.5 Small Business Framework and Continuum ........................... 177 11.6 Evolution of Emphasis ............................................................ 180 11.7 Conclusion .............................................................................. 182 Reading List ............................................................................................ 183 Index ...................................................................................................... 188

iii

Dedication

M. Gordon Hunter To my wife Shirley We are eternal partners in our journey of life And our children Jeffrey (Brandi) Callum and Robb (Cheryl)

Dan Kazakoff To my wife Kathy and children, Thomas and Kirstin, For their constant support and encouragement

Acknowledgements Many people are involved either directly or indirectly in the writing of a book. Some of the chapters are related to specific projects about small business. We are indebted to those very busy small business owners and managers for participating in our interviews and for their forthright comments.

We appreciate the assistance and encouragement from Dan Remenyi publisher of Academic Publishing International. We acknowledge the helpful comments we received from the anonymous reviewers. Your input has certainly improved our manuscript. We hasten to add that any errors which remain in the final version of the book are entirely our own.

iv

Preface This book is about small business. The small business sector is an impor‐ tant part of an economy. Small business employs 48% of the total work force in Canada and 50% in the USA. The contribution to GDP by small business is 29% in Canada and 30% in the USA. Unfortunately, many small businesses fail. In Canada, 75% will have failed after 9 years. In the USA, 50% will have failed after 4 years. Given the importance of this group of businesses, the question arises then about what factors con‐ tribute to the success of these businesses. This book addresses this im‐ portant issue from both the perspectives of failure and long term suc‐ cess.

The journey through the book includes stops at many stories providing perspectives on small business. Chapter 1 defines small business and proposes a definition of successful ones. The chapter also includes a description of how small business is differentiated from large compa‐ nies. Chapter 2 provides a perspective of small business through the entrepreneurial process. Dimensions of the small business including Business, Family, and Ownership are employed to depict the small busi‐ ness evolution. Further, the small business is described in relation to aspects of performance, growth, and succession. Chapter 3 presents perspectives of entrepreneurs. Types of entrepreneurs include nascent, novice, and experienced. It is noted that experienced entrepreneurs may be regarded by the terms serial (owning small businesses sequen‐ tially) or portfolio (owning multiple small business concurrently). Chap‐ ter 4 describes Entrepreneurship Theory which explains what entrepre‐ neurs do and why they do it. Chapter 5 describes Agency Theory. As a small business grows and more skills become necessary the entrepre‐ neur requires a way to ensure employee attitudes and work activities are aligned with those of the entrepreneur. Agency Theory provides the context to understand this alignment process. Chapter 6 describes Stewardship Theory which involves a person stepping forward and sub‐ suming individual goals to those of the small business. Stewards feel they have been entrusted with the resources of others and will exhibit behaviours beyond their own self‐serving interests. Chapter 7 provides v

a description of The Living Company: Habits for Survival in a Turbulent Business Environment, by Arie de Geus and relates the many aspects of longevity to small business. Chapter 8 describes a project which investi‐ gated multi‐generation small business. Chapter 9 describes another pro‐ ject which investigated how some of the multi‐generation small busi‐ nesses in Chapter 8 responded to the financial crisis of 2008‐2009.

Chapter 10 provides a different perspective of small business reporting on a project which investigated small business failures. Chapter 11 pre‐ sents the main thesis of the book regarding the evolution of emphasis regarding the small business journey to success.

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Chapter 1 Overview 1.1 Introduction This chapter presents an overview of small business and a description of the material presented in the remainder of the book. A series of investi‐ gations form the basis of this manuscript. The results of these investiga‐ tions, along with relevant literature, provide the background and sup‐ port for the concepts that describe the small business journey to suc‐ cess.

Small Business Journey to Success will be of value to many audiences.

The contents may be employed by small business managers to provide guidance in conducting their daily operations and planning for the fu‐ ture. Students will gain insight into important consideration for the long term survival of small business. Academics will find the book a rich source of further research ideas. Finally, accountants, bankers, and con‐ sultants will be able to identify important areas upon which to focus as they provide advice to small business managers to facilitate their jour‐ ney to success.

Many countries realize the importance of small business to their econo‐ mies. In Canada (Industry Canada, 2010) small business employs 5 mil‐ lion people representing 48% of the total work force in the private sec‐ tor. Further, small business contributes 29% to Canada’s GDP. An earlier report (Industry Canada, 2008) showed that during an exceptionally good economic period from 1997 to 2003, an average of 125,000 small businesses failed annually. From a long term perspective, the same re‐ port determined that only 25% of small businesses remain in operation after 9 years. This finding is similar to that reported by Zontanos and Anderson (2004) who found that over two thirds of small businesses close within the decade they open. From an even longer perspective, very few small businesses continue on to subsequent generations of ownership. Cater et al (2006) determined that 30% of small businesses 1

Small Business: Journey to Success are passed to the second generation; 12% to the third generation; and 4% to the fourth generation.

In the United States small business employs 50% of the work force and contributes 50% to private non‐farm sector GDP (Michma and Bednarz, 2006). Further, small family run businesses in the United States contrib‐ ute approximately 30% to overall GDP employing 27% of the national workforce (Astrachan and Shanker, 2003). On an annual basis in the United States, there are an equal number (about 50,000) start‐ups and closures. By the end of the second year one third of start‐ups have not survived; and one half have failed after four years (Small Business Ad‐ ministration, 2010).

These small business statistics raise questions about the factors that contribute to small business success and small business failure. Given that there may be a different set of factors that contribute to success versus failure, both sides of this issue are addressed in this book. The emphasis here is on successful businesses. The term “successful” is de‐ fined in a following sub‐section of this chapter.

This chapter includes the following subsections. First, issues surrounding the definition of small business are presented. Second, the idea of de‐ termining a successful small business is presented. Third, small business is differentiated from large business. Fourth, an overview of four small business research projects is presented. The projects are reviewed in more detail in subsequent chapters. Fifth, a brief overview of small busi‐ ness theoretical perspectives is included. Each of the theories is dis‐ cussed in more detail in subsequent chapters. The combination of theo‐ ries forms the basis for the proposed small business journey to success.

This chapter concludes with a brief description of all of the chapters in‐ cluded in the book.

1.2 Small Business Defined Some time ago, an interesting definition of a small business was devel‐ oped by the Wiltshire Committee. A small business is, “…a business in which one or two persons are required to make all the critical management decisions.”

(Wiltshire Committee, 1971:7).

2

Overview There currently exist many different definitions of “small business”.

While some measures such as total assets or annual sales or revenue may be considered they tend not to be employed because they are diffi‐ cult or impossible to determine. Many small businesses are privately held and are not required to report such statistics. Indeed, research shows that small business managers tend not to rely upon these statis‐ tics even when they are available (Halabi et al, 2010). Therefore, most research investigations and many government agencies employ the number of employees as a way to define small business (Longnecker et al, 1997). This statistic is readily available because of the income tax re‐ mittance requirement of most payroll systems.

There are, however, inconsistencies in how this statistic is employed to define small business. In Canada the number is 100 employees for goods producing firms and 50 employees for service firms (Industry Canada 2010). Firms employing between 101 and 499 persons are considered medium. In the United States a small independent business is defined as having fewer than 500 employees (Michma and Bednarz, 2006). There does not seem to be a differentiation made based upon sector. Perhaps the most specific definition of small business is provided by the Euro‐ pean Parliament (2002). They define micro businesses as having 0 – 10 employees. Small businesses include up to 50 employees, and medium sized businesses have up to 250 employees. Because of these inconsis‐ tencies researchers tend to take a contingency approach to defining small business based upon size (number of employees) for each research project. While these definitions vary investigators tend to follow rela‐ tively closely a version of the above categories.

1.2.1 “Successful” Small Business There is also an issue regarding the decision of how to define a “success‐ ful” small business. Naturally, a small business must make a profit in or‐ der to survive. But beyond survival, how could the concept of “success” be incorporated? Some authors (Smallbone and Wyer, 2000; and Dobbs and Hamilton, 2007) propose growth as a measure of success. However, more recent research (Tan et al, 2009) has shown that the small busi‐ ness growth path may diverge. Hunter and Kazakoff (2008) found sup‐ port for small business divergence. See the discussion in Chapter 2. As discussed in Chapter 3, there are many different types of entrepreneurs (Westhead et al, 2005a, 2005b). Westhead and Wright (1999) deter‐ 3

Small Business: Journey to Success mined there are differences in motivations of entrepreneurs. Some indi‐ viduals at certain stages of the small business life are less growth ori‐ ented.

Beyond making a profit and creating growth, the following idea is pro‐ posed regarding defining a successful small business. De Geus (2002) investigated the common aspects of long‐lived large companies. While he focused on large companies the general concept seems to apply to small business. He made the following comment: Companies die because their managers focus on the economic activity of producing goods and services, and they forget that their organizations’ true nature is that of a community of humans. (De Geus, 2002:3) Thus, a community of humans contributes to longevity and, as con‐ tended here, the success of the small business. The factors which help to establish and maintain the community of humans are discussed throughout this book. These factors are exemplified by those small busi‐ nesses which exist for more than one generation. As they proceed be‐ yond the first generation the small business will experience the crisis of succession and will indeed change. To be clear, a successful small busi‐ ness is considered to be a multi‐generation small business. In all likeli‐ hood the small business will remain within the family. But this is not necessary for the determination of success.

1.2.2 Small Business Vs Large Company It is important to note that, “... a small business is not a little big busi‐ ness ...” (Welsh and White, 1981). Managers of small business adopt a perspective and make decisions which are different from those made by administrators of big business. These differences have been docu‐ mented by many researchers and the following examples are included here.

Stevenson (1999) presented a perspective on approaches to business practice, included here in Table 1.1. A continuum of business practice includes major aspects related to strategic orientation and decision mak‐ ing. Small business managers and large company administrators are placed at each end of the continuum. Strategically, small business man‐ agers will tend to focus externally and attempt to capitalize on emerging opportunities (Stevenson, 1999). At the other end of the continuum, 4

Overview large company administrators will place their attention internally and focus on the efficient use of current resources.

Table 1.1: Approaches to Business Practices. Adapted from Stevenson, 1999.

PROMOTER

TRUSTEE

Aspects of Business Practice

Strategic orientation

Resource commitment and control decisions

Small Business

Large Company

Capitalize on an opportunity

Focus on efficient use of current resources to determine the greatest return

Act in a very short time frame

Long time frame, considering long term implications

Multi-staged

One-time up-front commitment

Minimum commitment of resources at each stage

Large scale commitment of resources at one stage

Respond quickly to changes in competition, market, and technology

Formal procedures of analysis such as capital allocation systems

The decision making process also varies between small business manag‐ ers and large company administrators. Indeed, Stevenson’s (1999) terms of “promoter” (small business manager) and “trustee” (large company administrator) seem very appropriate in this context. The promoter’s decision making time frame is very short. Decisions are made in multiple stages with a minimum commitment of resources. This allows the pro‐ moter to react quickly to changes in the environment. The trustee’s de‐ cision making time frame is based upon a long term perspective. After thorough analysis, one time commitments are made regarding the allo‐ cation of large scale resources. This approach is supported by formalized internal and repeatable systems for allocation of resources including financial and human capital.

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Small Business: Journey to Success Another example of small business managers’ perspective relates to the concept of “resource poverty” (Thong et al, 1994). This term suggests that small business managers lack important resources associated with skills, time, and finances. These three aspects of resource poverty con‐ tribute to the perspective on business practice (Stevenson, 1999) out‐ lined above. First, businesses that are small employ few people. This small number of employees may not possess the appropriate skills to support the entire business operation. This point leads to the second aspect of resource poverty. With fewer people and available skills the small business manager will be limited in the time available to devote to decision making activities. Third, as most small businesses are privately held, they tend to be similarly financed resulting in a limited supply of money. In general, small business has difficulty obtaining financing. In‐ deed, small business has more difficulty than large companies in access‐ ing financial resources (Ang, 1991). Small business managers may take an informal approach generally described as the “3Fs” – Family, Friends, or Fools. This approach may prove difficult. Initially, the amount of fi‐ nances available may be limited. Further, if repayment is delayed for some reason personal relationships may be negatively affected. A more formal approach would be to establish a business relationship with a lending institution (Cole and Wolken, 1996; Ang, 1992). However, be‐ cause of the centralized nature of credit granting policies unique re‐ gional or industry sector aspects of small business operations may not be considered (Hunter, 2011a; Boot, 2000; and Degryse and Van Cay‐ seele, 2000).

The final example of small business managers’ perspective relates to the approach to marketing. Small business, in addition to their lack of re‐ sources as outlined above, will rely upon a relatively small customer base (Zontanos and Anderson, 2004) in a concentrated local area (Wein‐ rauch et al, 1991). Thus, it is paramount that small business managers establish and maintain a long term and close relationship with their cus‐ tomers (Berry, 1983; McKenna, 1991; and Cardwell, 1994). There is, however, concern that with a downturn in the economy a focused cus‐ tomer approach may create more of a negative performance affect than a slightly more diversified approach to marketing and customer rela‐ tions.

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Overview

1.3 Projects There has been in general a call for more research into small business (Zachary and Mishra, 2010). Mullen et al (2009) call for more rigour in small business research through the application of state‐of‐the‐art quan‐ titative techniques. Their comments are supported by their review of a large number of publications in highly regarded small business research journals. Conversely, Tan et al (2009) suggest that qualitative research is appropriate because it “...takes full account of the small entrepreneurial firm context.” (Tan et al 2009:245). While each chapter in this book will present a review of the appropriate research, there are specific projects which have been employed in the development of this manuscript.

These projects have taken a qualitative perspective to the investigation of small business. This qualitative approach facilitates an in‐depth inves‐ tigation into relevant issues involved in small business operations. Each project is presented in more detail in subsequent chapters. An overview is included below.

1.3.1 Variety in Small Business This project is presented as part of Chapter 3 and discusses various per‐ spectives of small business entrepreneurs. The research project (Hunter, 2011b) examined variety in small business entrepreneurs. Research par‐ ticipants with high level overview experience provided comments about their interpretations of variety in small business. The research partici‐ pants represented a variety of geographic areas. They were involved in oversight organizations such as local Chambers of Commerce or Eco‐ nomic Development Associations. The consensus was that variety was based upon the specifics of the small business’ location. Personality types of the small business managers affected their approach to con‐ ducting business. Entrepreneurs might be aggressive or conservative.

The experience of the entrepreneurs regarding their type suggested va‐ riety in their approach to acquiring information.

1.3.2 Multi­Generation Small Business Chapter 8 presents an overview of a book titled Little Empires (Hunter and Kazakoff, 2008). This project investigated multi‐generation small business in Lethbridge, Alberta, Canada. The individuals who partici‐ pated in the project generously allowed their names and the name of 7

Small Business: Journey to Success their small business to be used. Indeed, in most cases the names of the family and the business are the same. This is to be expected in relatively small businesses – even more so in businesses that have existed for some time. The participants are rightfully proud of their name, family and business, and the success they have achieved throughout multiple generations of existence. Twenty individuals from eleven different busi‐ nesses were interviewed. Their comments form the basis for their re‐ spective chapters and the subsequent analysis chapters.

The goal of writing the Little Empires (Hunter and Kazakoff, 2008) book was to identify those characteristics which not only contribute to the current success of the small business, but also to the survival of the small business beyond the tenure of the founding entrepreneur. The emerging themes that are identified serve to show the unique approach taken by small businesses that continue past the early generations. Little Empires (Hunter and Kazakoff, 2008) provides valuable insights into the strategies utilized by small business regarding their continued ap‐ proaches to ensuring the viability of a business initiated by a previous generation.

1.3.3 Small Business Response to the Financial Crisis Chapter 9 represents a follow‐up to the book discussed in Chapter 8.

This exploratory investigation (Hunter and Kazakoff, 2012) documents the comments of participating family members of multi‐generation small businesses regarding their experiences in responding to the recent (2008 – 2009) financial crisis. Themes were identified relating to previous crisis experience, external factors imposed upon the small business, and in‐ ternal factors which could be managed. While those individuals who were interviewed had no direct experience with previous financial crises, they felt they were significantly influenced by those with experience to take a conservative approach to finances. External factors related to the down‐turn in the specific market, the banks’ approach to financing, and the overall business environment. Internal factors that could be man‐ aged included revising their business model, investigations into diversifi‐ cation, and decisions about employee lay‐offs. Throughout the inter‐ views the participants demonstrated a clear consideration of the oppor‐ tunities arising from the financial crisis.

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Overview

1.3.4 Small Business Failures As a counter‐point to the Chapter 8 presentation of successful multi‐ generation small business, Chapter 10 reports on an investigation into small business failures. This research project (Hunter, 2011a) documents the comments of bankruptcy professionals in the assessment of the op‐ eration of small business. Interviews were conducted with three re‐ search participants regarding their experience with a total of twelve small business failure instances. The results suggest that it is incumbent upon the small business owner to proactively adopt processes to deal with issues that are controllable and to respond to the non‐controllable issues. The small business owner must continue to focus on the business and retain a passion to see the business succeed.

1.4 Research Approach Each of the above projects employed a similar approach to gathering the data, via one‐on‐one interviews and analyzing the data contained in the resulting transcripts. A qualitative perspective was taken for each pro‐ ject. Qualitative researchers interact closely with research participants gathering interpretations of their personal experiences relating to a spe‐ cific subject. Within this perspective resides Ground Theory which is, “...the discovery of theory from data systematically obtained from social research.” (Glaser and Strauss, 1967:2). In general, qualitative data are gathered relative to a specific research question and without the a priori adoption of a research framework. Emerging themes are identified via a continual comparison of the data from an interview transcript and pre‐ viously identified themes. This method of analysis is known as the Grounded Theory Method. It is common practice in qualitative research to identify emerging themes. Eventually, these themes may be em‐ ployed to develop a response to the initial research question. “By com‐ paring where the facts are similar or different, we can generate proper‐ ties of categories that increase the categories’ generality and explana‐ tory power”. (Glaser and Strauss, 1967:24). The data gathering interview process is considered complete when new themes cannot be identified in subsequent interviews. This situation is referred to as “theoretical saturation (Glaser and Strauss, 1967).

A Narrative Inquiry (Scholes, 1981) approach was taken for qualitative data gathering. This approach incorporates the concepts of contextually 9

Small Business: Journey to Success rich and temporally bounded. The term contextually rich refers to first‐ hand experience. It is recognized that personal experiences are more vividly remembered (Swap et al, 2001; and Tulving, 1972). The term temporally bounded relates to the sequentially oriented personal recol‐ lections. Thus, discussions should be organized with a beginning, a se‐ quence of events, and an end with regards to the area of investigation.

This sequential approach also promotes more thorough and accurate recollections of experiences (Bruner, 1990; Czarniawska‐Joerges, 1995; and Vendelo, 1998).

McCracken’s (1988) Long Interview technique was employed to gather the research participants’ comments. This technique supports a rela‐ tively free flowing unbiased approach to conducting interviews. The technique involves four stages. In the first stage, the researcher devel‐ ops a thorough understanding of the existing literature. Then, in the second stage, the researcher conducts a self‐assessment regarding his or her knowledge and skills relative to the research question. Interviews are conducted in the third stage. The interview protocol employed for each project is included in an appendix for each respective chapter. Not only did this protocol provide a relatively flexible guide for each inter‐ view, it also provided consistency across a number of interviews. The fourth stage involves a detailed analysis of the interview transcripts to identify emerging themes. This is common practice when qualitative in‐ terviews are used to gather data (Luna‐Reyes and Andersen, 2003; Thompson, 1997; and Miles and Huberman, 1994).

Within the interview, three types of generic questions are posed. First, at the beginning of the interview, “grand tour” (McCracken, 1988) ques‐ tions are posed. General in nature and non‐directive in manner, these questions are meant to set the research participant at ease and to estab‐ lish the context for subsequent more probing questions. Second, subse‐ quent questions are referred to as “planned prompts” (McCracken, 1988). They are directly related to the topic of the investigation. They may result from a prior literature review or appear as open ended ques‐ tions related to the topic in anticipation of determining new previously unidentified issues. Third, “floating prompt” (McCracken, 1988) ques‐ tions may also be posed in order to obtain more detail about a response from the research participant. These questions originate from the re‐ sponse by the research participant to a planned prompt question. Thus, the researcher will decide to probe even further in an attempt to more 10

Overview fully understand the research participant’s comment and perhaps choice of words.

1.5 Overview of Theoretical Perspective From a theoretical perspective, it is proposed here that there is a series of stages of emphasis through which the small business progresses that facilitates its long term survival. There exists a progression from the sole entrepreneur who initiates a small business; through the appropriate growth of the small business; to the recognition of the small business as a valuable asset by subsequent entrepreneurs, some of whom may be family members.

There are many theories which may be employed regarding the analysis of the firm in general and small business in particular. The theories which will be employed in this treatise will be as follows:   

Entrepreneurship Theory Agency Theory Stewardship Theory

While these theories will be discussed in detail in a later series of chap‐ ters, a brief overview is presented here.

1.5.1 Entrepreneurship Theory Many researchers have contributed to the development and evolution of Entrepreneurship Theory (Schumpeter, 1934; Shackle, 1962; Kirzner, 1973 and 1992; Herbert and Link, 1988 and 1989; Baron, 1998; and Shane and Venkataraman, 2000). Perhaps the most well known com‐ ment on entrepreneurship was made by Drucker (1998) who suggested entrepreneurship involves an innovative approach to establishing and maintaining the viability of a business.

Entrepreneurship is a long term creative process beginning with a vision of a business or process and culminating in a living system. This process is known as the entrepreneurial act (Long, 1983; Long and McMullan, 1984; McMullan and Long, 1990). Both small business and large compa‐ nies are merely considered points reached on a continuum that includes a beginning with an abstract business idea that the founding entrepre‐ neur resolves to pursue as a business venture. The business venture is shaped by strategic decisions made by the entrepreneur in response to 11

Small Business: Journey to Success environmental challenges. As an early start‐up these challenges may re‐ late to identifying, evaluating and pursuing a particular business oppor‐ tunity. As these challenges are successfully addressed the business ven‐ ture moves closer to the development of a self‐sustaining living system that is capable of innovating and adapting to an ever changing environ‐ ment.

An entrepreneur will continually seek out new and innovative opportu‐ nities (Pretorius et al, 2006). Someone who adopts this approach is de‐ scribed as an authentic leader (Jensen and Luthans, 2006). The interests of the organization are considered and placed before personal interests.

Employees are treated with respect and mutual trust evolves. The en‐ trepreneur is the focal point for the development of both business val‐ ues and a positive operating culture (Denison et al, 2004).

While the entrepreneur or authentic leader will establish a positive mo‐ dus operandi there will always be a consideration for further innovation and change. As the founding entrepreneur passes the business to a sub‐ sequent entrepreneur subsequent change will result.

1.5.2 Agency Theory The formal relationship between managers and employees may be de‐ scribed by Agency Theory (Ross, 1973; and Jensen and Meckling, 1976).

As a manager hires employees, Agency Theory suggests that in order to align the objectives of the two parties a contract must be established which outlines activities to be performed in order to accomplish the agreed upon objectives. The manager acts as the principal and the em‐ ployee as the agent. The contract represents the control mechanism that attempts to align the agent’s objectives with those of the principal.

As the business grows or new skills become required, it will be necessary to hire employees. Thus, ways must be found to ensure the goals of the employees are aligned with those goals established by the business (McConaughy et al, 2001). So a contract, either written or implied, should be established to create a control mechanism to ensure align‐ ment of the goals of the employees with those of the small business manager. Agency Theory provides a framework to analyze this alignment process.

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Overview Through the establishment of a contract the principal is able to delegate tasks to be performed by the agent. The contract outlines the level of performance of the tasks assigned to the agent. According to Agency Theory the contract is necessary to ensure the agents will not attempt to maximize their own interests over those of the principal. The pursuit of self‐interests over business interests is referred to as agency cost. The less the two parties are aligned the higher the agency cost. This cost is related to the effort required to attain alignment. The main purpose for Agency Theory is to establish mechanisms to control the alignment of interests between principal and agent; and thus reduce agency costs.

1.5.3 Stewardship Theory This theory (Donaldson and Davis, 1989 and 1991) suggests the emer‐ gence of a “steward” who is motivated by intrinsic rewards (Davis et al, 1997). Stewards realize they are leaders who know they have been en‐ trusted with resources that they must nurture and grow (Smith, 2004).

Further, stewards realize they are responsible for holding an asset in trust for another (Block, 1996). Thus, a steward is motivated by different considerations than those of the principal/agent relationship expounded

by Agency Theory, where a formal mechanism is required for controlling and monitoring the relationship. As a further comparison, Agency The‐ ory focuses on extrinsic rewards; while Stewardship Theory considers intrinsic rewards. The former are tangible and the latter are intangible.

Stewardship Theory outlines the behaviour of a steward who acts in a similar way to the authentic leader described above by Jensen and Lu‐ thans (2006). Thus a steward may act in ways that provide support for the long term goals of the business, but which may not produce imme‐ diate financial results (Mowday et al, 1982, O’Reilly and Chatman, 1986; and Smith et al, 1983). Further, a steward will take action that may be beyond the scope of the business and may provide benefits to those outside of the specific entity (Westhead, 2003).

1.6 Format of the Book The main idea presented in this book relates to the evolution of empha‐ sis in relation to a series of theoretical perspectives along a journey to success. This evolution is outlined in later chapters. Earlier chapters pre‐ sent contextual material in support of the thesis about the evolution.

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Small Business: Journey to Success

Chapter 1: Overview This chapter provides a definition of small business and a discussion of the importance of small business. It also includes a brief overview of a series of projects which led to the development of the thesis presented in a later chapter. The results of these investigations, along with relevant literature, provide the background and support for the concepts that describe the small business journey to success.

Chapter 2: Perspectives of Small Business This chapter focuses on the small business as a unique entity. The en‐ trepreneurial act involves the process of identifying an opportunity and building a structure to pursue the opportunity (McMullan and Long, 1990). Structures of small business involve the depiction of the partici‐ pation of the entrepreneur (Deeks, 1973). Over time the small business will evolve along dimensions related to ownership, business, and family (Gersick et al, 1997). Also presented in this chapter are methods for evaluating performance and growth along with a discussion of succes‐ sion from the perspective of the small business as an entity.

Chapter 3: Perspectives of Entrepreneurs This chapter includes a description of the types of entrepreneurs in‐ volved in small business. The emphasis of this chapter is on the individ‐ ual. The types of entrepreneur include novice, serial, and portfolio. Per‐ sonality types determine the entrepreneur’s approach to conducting business. Some entrepreneurs might be aggressive while pursuing growth and expansion while others might take a more conservative ap‐ proach. The variety of the small business is mainly based upon specific aspects of location.

Chapter 4: Entrepreneurship Theory The Entrepreneurship Theory suggests entrepreneurs take an innovative approach to establishing and maintaining the viability of a business.

(Drucker, 1998). Entrepreneurs continually take an innovative approach to seek new opportunities (Pretorius et al, 2006). The chapter presents an overview of the theory and how it relates to small business.

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Overview

Chapter 5: Agency Theory Agency Theory (Ross, 1973; and Jensen and Meckling, 1976) involves the establishment of a formal contract relationship between the business manager (principal) and the employees (agents) to facilitate the align‐ ment of objectives. The contract represents a formal control mechanism to ensure alignment. (McConaughy et al, 2001). While Agency Theory is not specifically related to small business this chapter presents an over‐ view of the theory and how it may is represented in small business through growth when it becomes necessary to acquire the services of individuals with appropriate skills.

Chapter 6: Stewardship Theory Stewardship Theory (Donaldson and Davis, 1989 and 1991) suggests the emergence of a “steward”, motivated by intrinsic rewards, to manage a valuable resource on behalf of others (Smith, 2004; and Block, 1996).

Decisions made in this context will not focus on immediate financial re‐ wards but will take into consideration the long term survival of the busi‐ ness (Mowday et al, 1982, O’Reilly and Chatman, 1986; and Smith et al, 1983).

Chapter 7: Long­Lived Companies Examples are included here about large companies that have existed for a long time. Analogies are provided in support of the description of small businesses. The emphasis here is on the business entity. This chapter employs and reviews the book titled, The Living Company, by Arie De Geus (2002) to provide the context for a discussion about long‐lived small business. The author investigated large companies that have ex‐ isted in one form or another for a very long time. It was difficult to find many. For instance, de Geus (2002) determined that the average life span of Fortune 500 companies was only 40 to 50 years. In general De Geus (2002) compares “economic” companies with “long‐lived” compa‐ nies. Economic companies focus on Return on Investment (ROI) ap‐ proaches to making decisions and consequently do not survive for very long. Long‐lived large companies focus on empowering employees and developing a culture that emphasizes learning. This focus results in a company that survives and continues to search for improvement.

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Small Business: Journey to Success

Chapter 8: Multi­Generation Small Business This chapter describes multi‐generation small businesses and proposes that this is a way to define a successful small business. The chapter pre‐ sents an overview of the project that investigated multi‐generation small businesses and the factors that contributed to their success. These small businesses are privately held and do not have publically traded invest‐ ment vehicle. Ownership of the small business is held within the family unit which may be children, or grandchildren of the founding entrepre‐ neur. In some cases individuals may become involved in the small busi‐ ness through marriage. A multi‐generation small business is one that has been passed down from one generation to the next within the family unit. The goal of this project was to identify those characteristics that not only contribute to the current success of the small business, but also those that have contributed to the survival of the small business beyond the tenure of the founding entrepreneur. The majority of investigations into multi‐generation small business have focused upon factors sur‐ rounding succession planning. This is an important aspect to consider for multi‐generation small businesses and, indeed, consideration for succes‐ sion emerged from this investigation. However, succession planning is just one, albeit an important issue, relating to the success of small busi‐ nesses over more than one generation.

Chapter 9: Small Business Response to Financial Crisis The financial crisis of 2008‐2009 had a major affect on all economies and impacted many small businesses. This chapter reviews how multi‐ generation small business reacted to the crisis. This exploratory investi‐ gation documents the comments of participating family members of multi‐generation small businesses regarding their experiences in re‐ sponding to the recent financial crisis. Themes were identified relating to previous crisis experience, external factors imposed upon the small business, and internal factors that could be managed. While those indi‐ viduals who were interviewed had no direct experience with previous financial crises, they felt they were significantly influenced by those with experience to take a conservative approach to finances. External factors related to the downturn in the specific market, the banks’ approach to financing, and the overall business environment. Internal factors which could be managed included revising their business model, investigations into diversification, and decisions about employee lay‐offs. Throughout 16

Overview the interviews the participants demonstrated a clear consideration of the opportunities arising from the financial crisis.

Chapter 10: Small Business Failures This chapter reviews the common causes of small business failures and documents the comments of bankruptcy professionals in the assessment of the operation of small business. The results suggest that it is incum‐ bent upon the small business manager to be able to proactively adopt processes to deal with issues that are controllable and to respond to the non‐controllable issues. The small business manager must continue to focus on the business and retain a passion to see the business succeed.

Chapter 11: Journey to Success The main thesis of the book is presented in this chapter. This idea relates to an evolution of theoretical emphasis. The evolution is not a distinct set of discrete stages but more of a shifting of emphasis. To begin, En‐ trepreneurship Theory applies in the innovative approach to managing the small business. This theory continues to apply throughout the life of the small business as new opportunities are continually investigated. As the small business grows employees are hired to respond to required skills. Agency Theory provides a mechanism to ensure alignment be‐ tween the entrepreneur’s business goals and the employees’ personal goals. This mechanism usually exists in the form of an employment con‐ tract. Eventually, the founding entrepreneur will move on either to other opportunities (business or retirement) or unfortunately, death. If the small business is going to survive beyond the departure of the founding entrepreneur an individual must step forward. Further, if the small busi‐ ness is going to continue beyond this transition the self‐initiated individ‐ ual will take a “stewardship” approach to managing the valuable asset.

Thus, Stewardship Theory then applies. The steward will make decisions that are in the best interest of the long term survival of the small busi‐ ness.

1.7 Conclusion This chapter has set the stage for the remainder of the book. Small busi‐ ness has been defined and the concept of a successful small business has been introduced. Small business was differentiated from large compa‐ nies. An overview of a series of projects that have investigated small 17

Small Business: Journey to Success business was presented in support of an applied context for the journey to success. Then a theoretical context was introduced via an overview of three applicable theories as they relate to small business. Both the rele‐ vant projects and theories have been presented in support of discus‐ sions in subsequent chapters. Finally, the format for the remainder of the book was presented along with an overview description of each chapter. The next chapter presents a description of the entity of the small business including aspects such as evaluation, growth, and succes‐ sion.

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