Managing Small &

Medium Sized
Enterprises
Session 3 - The Nature, Characteristics and Variety of
Small Business
Key learning objectives

• Understand the concepts of risk and uncertainty

• Appreciate the importance of market, customer and
aspirational uncertainty
• Be able to identify key differences between large and
small businesses in more detail than lecture 1; this
should provide additional content to support your
thinking as you undertake your assessment
• To appreciate the character characteristics of
entrepreneurs; again in more detail as you may well
be meeting these type of people
Risk & uncertainty

• Activity in pairs: What is the difference between risk

& uncertainty?

?
Risk Uncertainty
Risk and uncertainty are different

• A risk is an unplanned event

• Contingency plans can mitigate known risks
• Firms can predict the possibility of a future outcome
• Unknown risks are unidentified but information is
available
• Uncertainty
• The outcome of any event is entirely unknown
• Information is not available to measure or predict
Internal uncertainty

• Managers of large businesses more likely to face the

difficulty of translating their ‘vision’ of the business to
their employees (internal uncertainty)
• How can this be avoided in larger and medium sized
businesses?
• Owners of small businesses can limit such uncertainty
by ‘managing by walking about’ but more likely to face
a challenging environment (external uncertainty)
Dimensions of external uncertainty:
market uncertainty
• Key difference between large and small businesses is
market power: the small businesses is more likely to
be a price taker than a price maker
• Limited number of customers
• Tend to be concentrated in particular (easy to get into)
sectors
• Focused on ‘niche’ advantages (e.g. specialist, timely
or geographical advantages)
• Niche by it nature attracts competitors (high profit,
low entry barrier)
Dimensions of external uncertainty:
customer uncertainty
• Employees wish to be (fairly) certain of their wages.
Entrepreneurs are more uncertain of their revenue
• Costs are certain but prices are uncertain
• Can limit this by having a subcontracting relationship
with the customer
• Closer relationship with customer means more
restrictions and possibly lower margins

? For your assignment consider the extent to which

there is uncertainty regarding customers/order
Dimensions of external uncertainty: aspirational
uncertainty; think about these for your assignment

• Huge diversity of motivations for setting up and

running a business (e.g. to grow the business, to earn
an income, to provide for a family, pass to family)
• Differences in aspirations greater if we include those
with more than one business (portfolio entrepreneurs)
or business run by a team
• Mostly very small business has no intention of growing
• Entrepreneurs tend to be ‘super optimists’
Four ways a small business can limit
uncertainty
1. Register as a limited company – this may protect the
personal assets of the entrepreneur also adds to
credibility and effect on taxation
2. Focus on short-term survival rather than long term
profitability – e.g. training, automation
3. Invest less heavily in equipment (e.g. machinery)
4. Establish a portfolio of businesses – this spreads the
risks faced by the entrepreneur
Now expanding our understanding of
small v large businesses
Assessing our criteria; Word associations

By looking in more detail at the differences between small

and large business we can expand the criteria you can use
in your assessment

Activity in pairs:

• How would describe small firms?

• Small – uncertainty, diversity, flexibility, failure
• How would describe large firms?
• Large – reliability, brand, market power, influence
As you assess your business it will be
useful to use a set of criteria

By looking in more detail at the differences between

small and large business we can expand the criteria you
can use in your assessment

Exercise in Groups: Consider the following comparisons

between small and large businesses and determine as a
group what the differences and consequences might be
 As you read this – think about the business you are going to
assess; key differences between small and large businesses

Aspect Small Business Large Business Consequence

(SB) (LB)
Risk of failure High Low SB focus on
survival/growth
Market power Price taker Price maker SB focus on niche
Management Owner–manager Employee– SB incentives
manager more aligned
Owner’s motivation Diverse Shareholder value Diverse business
performance
Brand No brand value Brand important LB focus on brand
Price Strategy Flexibility Price critical to SB more likely to
competitiveness pioneer innovation
Internal Informal Formal LB seeks to
organisation reduce ‘internal’
uncertainty
 As you read this – think about the business you are going to
assess; key differences between small and large businesses

Aspect Small Business Large Business Consequence

(SB) (LB)
Risk of failure High Low SB focus on
survival/growth
Market power Price taker Price maker SB focus on niche
Management Owner–manager Employee– SB incentives
manager more aligned
Owner’s motivation Diverse Shareholder value Diverse business
performance
Brand No brand value Brand important LB focus on brand
Price Strategy Flexibility Price critical to SB more likely to
competitiveness pioneer innovation
Internal Informal Formal LB seeks to
organisation reduce ‘internal’
uncertainty
Key differences between small and large businesses
(Continued)
Aspect Small Business Large Business Consequence
(SB) (LB)
Employee wages Low High Hire different
types of workers
Human resources Diverse (e.g. Attracts educated SB job
satisfied/exploited) workers seeking a satisfaction higher
practices career but LB have
better pay
Formal training Low High SB seen as
‘backward’
Investment Low High LB focus on
investment
Finance Limited choice Wider choice LB have greater
access to finance
Political influence Low High LB have more
political power
Key differences between small and large businesses
(Continued)
Aspect Small Business Large Business Consequence
(SB) (LB)
Employee wages Low High Hire different
types of workers
Human resources Diverse (e.g. Attracts educated SB job
satisfied/exploited) workers seeking a satisfaction higher
practices career but LB have
better pay
Formal training Low High SB seen as
‘backward’
Investment Low High LB focus on
investment
Finance Limited choice Wider choice LB have greater
access to finance
Political influence Low High LB have more
political power
How do others view business size

• How do small businesses see themselves?

• Customer focussed
• How do large businesses see themselves?
• Reliable
• How do large firms see small firms?
• Lacks credibility, unreliable
• How do small firms see large firms?
• Bureaucratic, price taker
Conclusions

• Explored the concepts of risk and uncertainty in

relation to small businesses
• Examined three dimensions of uncertainty: market,
customer and aspirational uncertainty
• Identified key differences between large and small
businesses in more detail in order to set a range of
criteria for you to use for your assignment
 Small Businesses: Their
Characteristics and Variety

• Why small businesses are of interest, including

their economic and social benefits.
• The distinctive characteristics of small businesses,
the implications of being small and the key areas of
difference between small and big business.
• The main definitions of a small business.
• The variety of small businesses, including family
firms, women-owned firms, ethnic firms and other
categorizations.
Bolton Report 1969
• Industrial revolution in Britain led to trend in
business towards bigger units with economies of
scale.
• 20th century Integrated operation of Fordism and
inevitable decline of small business
• Worries about survival of small businesses led to
government in Britain to commission Bolton: to
investigate the role and special function of small
businesses
• Bolton concentrated on small business rather than
entrepreneurs
Bolton’s Economic Functions of the Small Business;
again as you read this think about the business you
will assess – does it fit with some of these?
1. The small firm provides a productive outlet for the energies of that large
group of enterprising and independent people
2. In [some] industries ... often the most efficient form of business
organisation is a small firm
3. Many small firms act as specialist lower-cost suppliers to large
companies of parts, sub-assemblies or components
4. Small firms add greatly to the variety of products and services offered to
the consumer
5. In an economy in which ever larger multi-product firms are emerging,
small firms provide competition, both actual and potential
6. Small firms are an important source of innovation
7. The small firm sector is the traditional breeding ground for new
industries
8. Perhaps most important, small firms provide the means of entry into
business for new entrepreneurial talent
 Subsequent research highlights more
Benefits of Small Businesses
• Competition (anti monopoly)
• Consumer choice (niche)
• Developers of local economies (rural)
• Individual outlet (entrepreneurs)
• Personal services (essential services)
• Seedbed for new industries (growth)
• Source of innovation (distributed R&D)
• Source of stability (social community cohesion)
• Specialist supplier (value chain)

Does the business you are looking at provide any of these Economic benefits?
David Birch 1979
• Birch showed that taken together small firms
accounted for 82% of job creation while larger firms
lost 13.5% of jobs net
• Birch found that all areas of the US economy were
losing jobs, but some areas were growing because
they were creating jobs more quickly than they
were losing them
Job creation requires innovation which is risky and
therefore there are failures

23
The job generation debate
• Birch (1979) was a seminal piece of research because
he showed that small businesses were an important
source of net jobs
• Birch found that new jobs were the prime source of
employment growth
• Small businesses are job generators but also likely to
lose jobs
Differences between small and large firms

• ‘The differences in the administrative structure of

the very small and the very large firms are so great
that in many ways it is hard to see that the two
species are of the same genus. .... We cannot
define a caterpillar and then use the same
definition for a butterfly.’
Dame Edith Penrose

25
 The Distinctive Characteristics
of Small Businesses (1)
We have covered some general principles previously in Lecture 1 but it will
be useful to do a deeper dive as you begin to consider your assignment

Organisation structure and management

Top down
Organisational structure
Informal systems and procedures
Control
Strategy and decision- making
Ambition
A lack of objectivity
Decision-making
Lack of planning
Limited knowledge of the business environment
 The Distinctive Characteristics
of Small Businesses (2)

Operations/production Financial resources

Thresholds/Discontinuities A lack of resources
Economies of scale Personal capital

Human resources Market share

An absence of functional Little influence
managers Small product range and
A lack of training limited customer base
 Defining Small Businesses

The Bolton Report (1971) definition of a small business:

does your business meet these criteria?
✓ ‘First, in economic terms, a small firm is one that
has a relatively small share of its market.
✓ Secondly an essential characteristic of a small firm is
that it is managed by its owners or part-owners in a
personalised way, and not through the medium of a
formalised management structure.
✓ Thirdly, it is also independent in the sense that it
does not form part of a larger enterprise and that
the owner-managers should be free from outside
control in taking their principal decisions.’
EU Commission
Definitions; you have seen before –
so just a reprise

In 2003 the EU Commission adopted the following definitions

for SMEs for implementation from 2005:
Maximum Micro Small Medium-sized

Number of employees <10 <50 >250

Turnover (million Euro) 2 10 50
Balance sheet total (million €) 2 10 43
Independence criterion* N/a 25% 25%
* The maximum percentage that may be owned by one, or jointly owned by
several, enterprises not satisfying the same criteria.
 USA; larger – as one might expect
The US Small Business Administration adopted size standards for
each individual North American Industry Classification System
(NAICS) coded industry. For instance:
• 500 employees for most manufacturing and mining industries
• 100 employees for wholesale trade industries
• $7 million of annual receipts for most retail and service
industries and $33.5 million of annual receipts for most general
& heavy construction industries
• $14 million of receipts for all special trade contractors
• $0.75 million of receipts for most agricultural industries
 Qualitative or
Quantitative?
• Most of the definitions of a small business given are in
effect only attempts to provide a proxy for what is the
essence of ‘smallness’ in business units (Quantitative).
• Many people, however, feel that they know what is meant
by a ‘small business’ (Qualitative).
“It is one that has few employees, a low turnover, little or no formal
structure and is usually managed by one person, who is also the
business owner. It is about being autonomous yet having limited
resources; it is about having to cope with greater uncertainty and risk
while having few opportunities for risk-spreading”.

• It is these characteristics that make a small business behave

in the way it does and which present distinctive challenges
and opportunities
 The Variety of
Small Businesses; spread your net wide!

• One-person businesses and self-employment

• 3.3 Million business in UK have no employees (2010)
• Gig economy
• Family, women-owned and ethnic businesses
• Academic spin-out businesses
• Other categorizations of small business
• High-tech / low-tech
• Urban/rural
• 'Third age'
• Craft
• Social enterprises
 Family Businesses
How many? In 2011 a report indicated that there were 3 million family
businesses in the UK (out of an estimated total of 4.5 million private sector
businesses). Recent research suggests that in the USA one household in ten
has a family business.
A definition: One report proposes that a firm, of any size, is a family business
if it meets the following criteria:
• The majority of decision-making rights are held by the person who
established or acquired the firm, or their spouse, parents, child or child’s
direct heirs.
• At least one representative of the family is involved in the governance of
the firm.
• In the case of a listed company, the person who established or acquired
the firm, or their family or descendents, possesses (at least) 25 per cent of
the right to vote through their share capital.
 Women-owned
Businesses
How many? In the UK, there are approximately 1.1 million self-
employed women (8.1 per cent of women in employment) in
comparison to 2.7 million self-employed men (17.7 per cent of men
in employment).
Some issues: Are some problems experienced uniquely by women
business owners?
• Access to business finance
• Difficulty in obtaining start-up finance.
• Required to provide guarantees when seeking external finance and
sometimes unable to provide the requisite collateral.
• More difficult to obtain ongoing finance.
• Bankers tend to have negative stereotypes of women entrepreneurs
and discriminate against them
• The survival of female-owned businesses
 Ethnic Businesses
Characteristics
• A business which draws heavily on a group 'that is socially
distinguished (by others or itself) by characteristics of cultural or
national origin'.
• Ethnic entrepreneurs in different countries may be from different
backgrounds.
• Educational attainment is a factor in the rate of ethnic enterprise and
in the nature of the businesses operated.
• Two aspects of business in which ethnic businesses rely particularly
heavily on others from the same ethnic group:
• They may understand co-ethnic customers better and the latter
may patronise a firm because of ethnic solidarity.
• Labour comes largely from co-ethnics in the community and
from the extended family.
 Some Key Points as you consider which
business you will choose
• Since the 1970s interest in small businesses has grown because
they have been identified as the main source of new jobs –
although the statistics need to be interpreted with care.
• Small businesses do not behave like small big businesses.
• Despite their many differences, small businesses have key
aspects in common, and which distinguish them from big
businesses.
• There is no single definition of what constitutes a small
business - although most definitions use employee numbers.
• Ownership, location and purpose can also make a difference to
the variety of small businesses.
ENTREPRENEURS:
UNDERSTANDING THEIR NATURE
ENTREPRENEURS:
UNDERSTANDING THEIR NATURE

We have covered this at a high level in Lecture one;

doing a deeper dive should help you determine
whether the business you study is entrepreneurial in
nature
• New Ventures: what is needed
• Entrepreneurial character; can it be assessed? Let’s
have a look at the components of character so we
can break down – this should be helpful when you
are speaking to businesses
 New venture creation

Business
idea

Character Skills &

traits abilities

Start-up
Success
Resources Business
plan
Entrepreneurial character: ‘traits’ - do you see these?

Drive & determination

Need for Need for

achievement independence

Acceptance of Creativity, innovation &

measured risk & opportunism
uncertainty Internal focus of control
Lets go through 1 by 1
 Need for independence

You are likely to be a person who: A

➢dislikes taking orders

➢prefers to work alone & ‘do their own thing’
➢likes to make up their own mind & not bow to
pressure
➢can be seen as stubborn & determined
➢prefers to do ‘unconventional’ things
 Need for achievement

You are likely to be a person who is:A

➢ restless & energetic

➢ task & results orientated
➢ persistent & determined
➢ forward looking & self-sufficient
➢ optimistic rather than pessimistic
 Internal focus of control

You are likely to be a person who:A

➢believes you control your own destiny & discounts

fate
➢believes you create your own luck by hard work
and effort
➢is self-confident & shows considerable
determination
➢is willing to take advantages of opportunities that
present themselves
 Moderate risk-taking

You are likely to be a person who:A

➢makes decisions quickly

➢can act on incomplete information evaluating
likely costs against benefits
➢accurately assesses your capabilities & then sets
challenging but attainable goals
➢is neither over- nor under-ambitious
 Creative & innovative

You are likely to be a person who:A

➢is curious & questioning

➢is intuitive & imaginative
➢is innovative with an abundance of ideas
➢is a bit of a daydreamer
➢enjoys change & the challenges it poses
 Drive & determination
You are likely to be a person who:A

➢is proactive rather than reactive

➢acts decisively & quickly
➢sets achievable goals & then works hard to
achieve them
➢is persistent & determined
➢continues in a task despite set-backs
➢is ‘on the go’ all the time
➢restless & easily bored
 Key Points
• Enterprise activity is dependent on enterprising individuals. Studies
analysing why some individuals more enterprising than others
include:
₋ Economic approaches
₋ Personality theories
₋ Sociological approaches
₋ Cognitive approaches
₋ Behavioural theories
₋ Integrated approaches
• These approaches offer some insight into what makes an individual
act in an enterprising way but no approach has yet proved to be
helpful in predicting future enterprise or entrepreneurial success.
• Some observers have suggested that genetic make-up plays a large
part in determining whether an individual behaves
entrepreneurially. Others have suggested that it is largely due to
nurture and environmental factors. A possible model of
entrepreneurial potential is suggested which combines both these
influences.
Case study 1
• ENTERPRISE & ENTREPRENEURSHIP: UNDERSTANDING THEIR
NATURE
SMALL BUSINESSES: THEIR
CHARACTERISTICS & VARIETY
Case Study 2
• SMALL BUSINESSES: THEIR CHARACTERISTICS & VARIETY
 As you read this – think about the business you are going to
assess; key differences between small and large businesses

Aspect Small Business Large Business Consequence

(SB) (LB)
Risk of failure High Low SB focus on
survival/growth
Market power Price taker Price maker SB focus on niche
Management Owner–manager Employee– SB incentives
manager more aligned
Owner’s motivation Diverse Shareholder value Diverse business
performance
Brand No brand value Brand important LB focus on brand
Price Strategy Flexibility Price critical to SB more likely to
competitiveness pioneer innovation
Internal Informal Formal LB seeks to
organisation reduce ‘internal’
uncertainty
Key differences between small and large businesses
(Continued)
Aspect Small Business Large Business Consequence
(SB) (LB)
Employee wages Low High Hire different
types of workers
Human resources Diverse (e.g. Attracts educated SB job
satisfied/exploited) workers seeking a satisfaction higher
practices career but LB have
better pay
Formal training Low High SB seen as
‘backward’
Investment Low High LB focus on
investment
Finance Limited choice Wider choice LB have greater
access to finance
Political influence Low High LB have more
political power