enterprenurship.pdf

Contents

Case Insights and Quotes: the Businesses xii

Case Insights and Quotes: the Entrepreneurs xiv

Cases with Questions xvi

List of Figures xvii

List of Tables xix

Preface xx

Guided Tour of the Book and Website xxviii

PART 1 ENTREPRENEURSHIP AND INNOVATION

1 David and Goliath 3The stuff of dreams 4The entrepreneurial revolution 7Entrepreneurs and owner managers 9Defining small firms 13Why small firms are different 14Lifestyle and growth firms 16The UK small firms sector 17Global Entrepreneurship Monitor (GEM) 21The economics of entrepreneurship 22Summary 24

2 Heroes and Super-heroes 29Born and made 30Character traits 31Character traits of owner-managers 32Character traits of entrepreneurs 35Antecedent influences 39Entrepreneurial culture 45Summary 51

3 Opportunity, Innovation and Entrepreneurship 55Tools of entrepreneurship 56Innovation and invention 56Innovation and entrepreneurship 61Creativity and entrepreneurship 63Sources of opportunity 64Innovation and size 69Innovation and location 71Summary 73

vii

4 Developing Creativity 77Understanding creativity 78The creative process 80Barriers to creativity 83Techniques for generating new ideas 83Encouraging creativity 88Summary 91

PART 2 START-UP

5 The Decision 97The start-up decision 98The idea 101Personal attributes 105Customers 106Competitors 106Generic marketing strategies 109Resources 116Planning 118Summary 121

6 Making the Start-up Happen 125Marketing strategies 126Pricing 130Differentiation 136Developing customer focus 139Entrepreneurial marketing 142Undertaking market research 146Developing selling skills 150Using the internet 153Legal forms of business 156Summary 159

7 Control and Decision-making 166Cash flow and Death Valley 167The profit statement 168The balance sheet 174Financial drivers 176Break-even 179Decision-making 182Summary 188Appendix: Information for control 194

PART 3 GROWTH AND DECLINE

8 From Entrepreneur to Leader 209Change or die 210Entrepreneurial organisations 212

viii Contents

Changing skills 215Coping with crises 220The role of leader 221Vision and mission 223Values 226Creating culture 228Leadership style 231Building the management team 235The board of directors 238Entrepreneurial leadership skills 240Summary 242

9 Strategies for Success 248Ingredients of success 249Barriers to growth 251Developing strategy 252The SWOT analysis 254Financial performance analysis 259Value chains 263SLEPT analysis 264Strategy misfit 266Securing competitive advantage 266Successful entrepreneurial strategies 268Summary 272

10 Life Cycles and Portfolios 276Life cycles 277Product portfolios 281Portfolio strategies 283Managing the product life cycle 286Financial implications of the product portfolio 288Implications for the entrepreneur 290Summary 291

11 Making Growth Happen 293Growth options 294Market penetration 295Product/service development 296Market development 300Diversification 301Risk 304Mergers and acquisitions 307Strategy development 309Planning and control 311Summary 312Appendix: Forecasts and budgets – a comprehensive example 315

Contents ix

12 The Exit 325Stagnate and die 326Failure 327The ingredients of failure 329Predicting failure 333Harvest 334Company valuation 337The never-ending cycle 339Summary 340

PART 4 FINANCE AND PLANNING

13 Financing Small Firms 347Money 348Bank finance 351The banker’s perspective 357Banking relationships 358Venture capital institutions and business angels 360The venture capitalist’s perspective 362Stock market floatation 363Is there a financing gap? 366Summary 368

14 Developing a Business Plan 372Why you need a business plan 373The planning process 373What a business plan looks like 377Using the plan to obtain finance 379The banker’s view 380The equity investor’s view 381Presenting a case for finance 383Pro forma business plan 384Summary 389Appendix 1: Business plan for Sport Retail 390Appendix 2: Business plan for Jean Young (Consultancy) 396Appendix 3: Business plan for Dewhurst Engineering Ltd 402

PART 5 TOPICS IN ENTREPRENEURSHIP

15 The Family Firm 411The advantages of family 412Family business is big business 413A conflict of cultures 416Succession 418Points of conflict 419The introvert firm 423Resolving conflict 424Managing succession 426Summary 429

x Contents

16 International Entrepreneurship 433Globalisation and international entrepreneurship 434The international start-up 436The stage model of internationalisation 437The influence of network and learning theory 440Export strategies 442The agency dilemma 444Summary 448

17 Social and Civic Entrepreneurship 452The rise of social entrepreneurship 453Social enterprise and the social economy 455The social entrepreneur 457The growth and development of the social enterprise 460The civic entrepreneur 462The dangers of social entrepreneurship 465Summary 466

18 Corporate Entrepreneurship 470Defining corporate entrepreneurship 471Building an entrepreneurial architecture 474The learning organisation 476Shaping the architecture 480The role of entrepreneurial leadership 482Constructing an entrepreneurial culture 484The role of size and structure 488Management and structure 490Freedom and control 492Summary 497

Checklist of Regulations to be met in Setting up a Business in the UK 502

Sources of Information, Help and Advice in the UK 506

Entrepreneurship Exercises 508Are you really entrepreneurial? 508Generating the idea 509Evaluating the opportunity 510Growth audit of an existing business 516

Learning Resources 522Selected case studies 522Selected further reading 525Selected journals 526Selected websites 527

Author Index 531

Subject Index 534

Contents xi

1

David and Goliath

Contents

. The stuff of dreams

. The entrepreneurial revolution

. Entrepreneurs and owner-managers

. Defining small firms

. Why small firms are different

. Lifestyle and growth firms

. The UK small firms sector

. Global Entrepreneurship Monitor (GEM)

. The economics of entrepreneurship

. Summary

LEARNING OUTCOMES

By the end of this chapter you should be able to:

. Explain why small firms andentrepreneurs are so important tothe economies of modern countries;

. Describe the influences that havecontributed to their increasingimportance;

. Explain the meaning of the termsentrepreneur and owner-managerand how they are different;

. Explain the differing statisticaldefinitions of small firms;

. Describe the relationship betweensmall firms and entrepreneurship;

. Describe the size and othercharacteristics of the UK small firmssector compared to other countriesand the significant contribution itmakes to the economy;

. Explain what data is gathered by theannual GEM surveys;

. Explain some of the economicunderpinning for entrepreneurship.

3

The stuff of dreams

Over the last twenty years the business world has fallen in love with the idea ofentrepreneurship. Entrepreneurs have evolved to become super-heroes who valiantlyand single-handedly battle to make the most of business opportunities, pullingtogether resources they do not own, finding willing suppliers and eager customersand, just sometimes, against all the odds, winning out to become millionaires. Theentrepreneur has emerged as a new ‘cultural hero’ (Cannon, 1991; Carr and Beaver,2002). It is the stuff of dreams. Entrepreneurs are held up as role models. They are saidto embody ephemeral qualities that we ought to emulate – freedom of spirit,creativity, vision, zeal. Above all, they have the courage and self-belief to turn theirdreams into reality. Is it any wonder that we envy them?

Yet take time to get a perspective on this. Just a century ago, as we entered thetwentieth century, the focus was on big. Big was beautiful and size really mattered.Big was respectable, it was political-establishment. Big was the future. It offeredeconomies of scale; mass production that brought well-being, if not wealth, to themasses. It was how the Western democracies would keep the common man, not onlyin food, shelter and life’s necessities, but also in his place. It even spawned its ownprofessional elite – managers. Whilst this has been a fundamental activity throughouthistory, the recognition and study of it as a discipline and profession is a thoroughlymodern, twentieth century phenomenon. Harvard Business School awarded its firstMasters degree in the discipline in 1910. And all of this was based upon the bestpractices in large corporations. Business Schools have reflected the widerestablishment view and traditionally eschewed the arts of running a small businessand largely ignored the skills of entrepreneurialism (Crainer and Dearlove, 1998).

But have small firms, like David, suddenly triumphed over the Goliath of largefirms? In fact small firms, new firms and entrepreneurs never went away. And in thelater part of the last century reality began to dawn. In 1974 E. F. Schumacher, in hissomewhat romantic book Small is Beautiful asserted that giant organisations andincreased specialisation resulted in economic inefficiency, environmental pollutionand inhumane working conditions and proposed a system of intermediatetechnology based on smaller working units. Others began to doubt even the hard-nosed economic orthodoxy. In 1983 Jim Dewhurst wrote:

In all the short history of modern business there is nothing so strange as this. Onthe one hand we have the traditional belief in the rightness and power of size.Rationalisation, standardisation and concentration are the watchwords.Economies of scale rule the industrial world. And in the UK we have gone furtheralong this road of concentration than any other country in the world. Yet thispredilection for economic orthodoxy has not brought us economic success.(Dewhurst and Burns, 1983)

The reality is that large firms were not so much the future of business but the naturalconsequence of businesses being set up by entrepreneurs and then growing.Unfortunately, like many things in life, they have a natural life expectancy andprolonging this is not always beneficial – to the firm or to society. According to Ariede Geus (1997) large organisations have proved amazingly inept at survival. Hequoted a Dutch survey showing the average corporate life expectancy in Japan and

4 Entrepreneurship and Innovation

Europe was 12.5 years. ‘The average life expectancy of a multinational corporation –the Fortune 500 or equivalent – is between 40 and 50 years.’ The reality is that largecompanies die young, or at least their ownership changes fairly quickly.

In the last twenty years we have come to realise that new firms have done more tocreate wealth than firms at any time before them – ever! Ninety-five per cent of thewealth of the USA has been created since 1980. When Bill Gates founded Microsoft,IBM dominated the computer market with over 70 per cent of the market and morecash on its balance sheet than the sales of the rest of the industry. Since then its shareprice has plummeted and its workforce was slashed as it struggled to stay alive, whilstDell has prospered to become one of the biggest manufacturers and marketers of PCsin the world. By 1997, one in every three households in the USA – 37 per cent or35 million households – had at least one person who was involved in a primary role ina new or emerging business (Economic News, 1997).

Also over the last twenty years people have begun to appreciate the sheerproportion of firms that can be described as small – by any definition, in any country.Small firms, virtually no matter how they are defined, make up at least 95 per cent ofenterprises in the European Community. At the same time, their contribution to theeconomies of their countries began to be appreciated. It was David Birch (1979) who,arguably, started this process with his seminal research which showed that 81.5 percent of net new jobs in the USA, between 1969–76, were created by small firms (under

David and Goliath 5

Case insight

We start with what is probably the outstanding business success story of a generation. Born in

1955 in Seattle, Bill Gates and his friend Paul Allen, ‘begged, borrowed and bootlegged’ time

on his school’s computer to undertake software commissions. The two went to Harvard

University together, using the University’s computer to start their own business. Bill’s big break

came when he approached Altair, a computer company in Albuquerque, New Mexico, trying to

sell it a customised version of BASIC , the programming language for the PC it produced. The

only problem was that, at the time, he and Paul Allen had not finished writing it. He had a vision

of what it would look like and how it would operate, but no software. That was not finished

until some weeks later and with it Microsoft came about. The package was later licensed to

Apple, Commodore and IBM. IBM then commissioned Microsoft to develop its own operating

system and that was how Microsoft Disk Operating System (MS DOS) was born. Founded in the

late 1970s, by 1980 Microsoft was seen as a successful start-up with turnover of £8 million from

just 38 employees.

Since then Microsoft’s growth has been amazing. Microsoft is now the world’s largest

software company producing a range of products and services, including the Windows

operating system and Office software suite. By 2005 Microsoft employed some 61 000 people

and made profits of over $12 billion on turnover of just under $40 billion – not bad for a

business only 30 years old. And its ambitions are still anything but small. The company has

expanded into markets such as video game consoles, interactive television, and internet access.

With its core markets maturing, it is targeting services for growth, looking to transform its

software applications into web-based services. Microsoft has also reached a settlement to end

an ongoing antitrust investigation, agreeing to uniformly license its operating systems and

allow manufacturers to include competing software with Windows.

500 employees). The general pattern has been repeated since. Small, growing firmshave outstripped large ones in terms of job generation, year after year. At times whenlarger companies retrenched, smaller firms continued to offer job opportunities.There are now about 10 million self-employed people in the USA and it has beenestimated that small firms now generate some 50 per cent of GDP and over 50 percent of exports now come from firms employing less than 20 people.

Europe lags a little behind the USA. Overall in the EU small firms generate 66 percent of employment. In Italy the proportion is 79 per cent, in France it is 63 per centand in Germany it is 60 per cent. In the UK they generate 62 per cent of employmentand over 25 per cent of GDP. With some 4 million small firms, the UK now has one ofthe highest business start-up rates in Europe. By just about any measure thecontribution small firms make to the economy of any country is increasing and theirimportance is now fully recognised.

But the focus is not just on small firms. It is also on high-growth firms. Despitebeing few in number, high-growth businesses are disproportionately important tonational economies. Harrison and Taylor (1996) claim that in the USA it has beenestimated that, whilst 15 000 medium sized businesses represent just 1 per cent of allbusinesses, they generate a quarter of all sales and they employ a fifth of all privatesector labour. In the UK, Storey et al. (1987) asserted that ‘out of every 100 smallfirms, the fastest growing four firms will create half the jobs in the group over adecade’ – an assertion that has stood the test of time.

This book looks at a range of things that make up this whole romanticised, butblurred, vision – entrepreneurs and small business. It looks at entrepreneurs. Who arethey? Are they born rather than developed? What do they do? What is their link withthe process of innovation, so loved by governments in most countries? Canentrepreneurs manage large firms or do they have to change as the business grows?Are entrepreneurs any different from managers or leaders? Are they any differentfrom owner-managers? Are they any different from managers of small firmsgenerally? And, the important question for this millennium, can entrepreneurship beengendered in larger companies or other sorts of organisations?

The book looks at small firms. Are all small firms the same? Are owner-managedsmall firms really different from any others? What are the skills you need to manage asmall firm and a growing firm? What are the particular problems small firms face andhow can they be overcome? This book is now also about big firms. Can corporateentrepreneurship be made to flourish? How are the entrepreneurial leaders oftomorrow to be crafted?

The book looks at start-ups and growing firms. How does the start-up happen? Aresome people more likely to start up a business than others? What are the qualities andskills required to ensure a successful start-up? How do you pull together the necessaryresources? What sectors do small firms have the best chances in? Should they beencouraged to ‘go international’ at an early age? What marketing strategies shouldthey use? Are growth businesses different in any way from the ‘normal’ small firm?Are the particular problems they face as they grow predictable and how can they beovercome? Are international start-ups any different from the traditional sort? Howshould growth be financed? What skills are needed to grow the firm? Are therebusiness strategies that are more likely to work than others? Can you spot‘winners’?


The book also looks at family firms and the social role they play within the familystructure. Does being a family firm make any difference to how they operate? How dofamilies deal with the succession from one owner-manager to another? Are theparticular problems they face predictable and how can they be overcome?

Finally this book looks at social entrepreneurship. Can the qualities and skills ofthe entrepreneur be transferred to the social, public or civic sectors? What does thismean and how can it be achieved? With over thirty years of research intoentrepreneurship and small business there are answers to many of these questions.This book will take a conceptual perspective to develop a theoretical framework forunderstanding the area and, based on this, move forward to show how many of theseconcepts may be operationalised and developed into practical help in successfullylaunching and growing a business – indeed any organisation.

The entrepreneurial revolution

What we are seeing now is nothing short of an entrepreneurial revolution. The majorfactor causing this is change and the pace of change is accelerating. Change itself haschanged to become discontinuous, abrupt but all pervasive. And small,entrepreneurial firms are better able to cope. Their flexibility and speed of responseto changing market circumstances is well documented. In a turbulent world, fullof uncertainties, they seem better able to survive and prosper. This is the essenceof their success – their ability to spot an opportunity arising out of change or even

David and Goliath 7

Case insight

Michael Dell purchased his first computer – an Apple II – in 1980 and immediately took it apart

to see how it was built. Only three years later he started a lucrative business selling upgraded

PCs and add-on components out of his dormitory room at the University of Texas with capital of

only $1000. Michael registered the name Dell Computer Corporation in 1984 when he

decided to leave college and start selling custom-built computers directly to end-users, ignoring

the more normal channel of selling mass-produced computers through computer resellers. This

not only eliminated the substantial middleman mark-up, but also the costly inventories

required.

‘We built the company around a systematic process: give customers the high-quality

computers they want at a competitive price as quickly as possible, backed by great service.’

(Dell, 1999)

Since then Dell has grown at five times the industry average growth rate to become one of the

biggest manufacturers and marketers of PCs in the world. The company’s share price has

reflected this success, increasing 36 000 per cent in the last decade. Michael is now CEO and

Chairman of a $18 billion company.

Michael Dell started life as an entrepreneur, but to grow a successful international

organisation of this size in such a short time demonstrates that, like Bill Gates, he has become

a truly excellent and exceptional entrepreneurial leader.

create it and then focus resources on delivering what the market wants quickly.In essence they are expert in innovation. And that often means taking risks thatlarger businesses are unwilling or unable to take. This all boils down to oneword – entrepreneurship. It is the entrepreneurial small firms that have beenable to capitalise most on the turbulent world we face today – entrepreneurialfirms led by founders like Bill Gates, Michael Dell, Richard Branson, andAnita Roddick.

A number of other influences have accelerated this trend towards smaller firms.Firstly there has been the shift in most economies away from manufacturing towards

the service sectors where small firms oftenflourish because of their ability to deliver apersonalised, flexible, tailor-made service at alocal level. The ‘deconstruction’ of larger firmsinto smaller, more responsive unitsconcentrating on their core activities, oftensub-contracting many of their other activities tosmaller firms, has also contributed to the trend.Large firms and even the public sector becameleaner and fitter in the 1980s in a bid to reducefixed costs and reduce risks. Small firms havebenefited, although they may be seen asdependent on large ones.

Technology has played its part. It hasinfluenced the trend in three ways. Firstly, thenew technologies that swept the late twentiethcentury have been pioneered by new, rapidlygrowing firms. Small firms have pioneeredinnovation in computers and the internet,although only time will tell whether thesemarkets will start to consolidate and

amalgamate into larger units as they mature. Secondly, these technologies haveactually facilitated the growth of self-employment and small business by easingcommunication, encouraging working from home and allowing smaller and smallermarket segments to be serviced. Indeed information has become a product in itsown right and one that can be generated anywhere around the world and transportedat the touch of a button. Finally, many new technologies, for example in printing,have reduced fixed costs so that production can be profitable in smaller, more flexibleunits.

Social and market trends have also accelerated the growth of small firms. Firstly,customers increasingly expect firms to address their particular needs. Market nichesare becoming slimmer and markets more competitive – better served by smaller firms.Secondly, people want to control their own destiny more. After periods of highunemployment, they now see self-employment as more attractive and more securethan employment. Redundancy pushed many people into self-employment at thesame time as the new ‘enterprise culture’ gave it political and social respectability.The growth of ‘new age’ culture and ‘alternative’ lifestyles have also encouraged thegrowth of a whole new range of self-employment opportunities.


‘We now stand on the threshold of

a new age – the age of revolution.

In our minds, we know the new

age has already arrived: in our

bellies, we’re not sure we like it.

For we know it is going to be an

age of upheaval, of tumult, of

fortunes made and unmade at

head-snapping speed. For change

has changed. No longer is it

additive. No longer does it move

in a straight line. In the twenty first

century, change is discontinuous,

abrupt, seditious.’

Gary Hamel, author (2000)

Entrepreneurs and owner-managers

Before we go much further we need to define some terms. There is no universallyaccepted definition of the term entrepreneur. The Oxford English Dictionary defines anentrepreneur as ‘a person who attempts to profit by risk and initiative’. Thisdefinition emphasises that entrepreneurs exercise a high degree of initiative and arewilling to take a high degree of risk. But it covers a wide range of occupations,including that of a paid assassin. No wonder there is an old adage that if you scratchan entrepreneur you will find a ‘spiv’ (somebody who makes a living from unlawfulwork). The difference is more than just one of legality. Therefore a question youmight ask is, how do they do it?

Back in the 1800s, Jean-Baptist Say, the French economist, said: ‘entrepreneurs shifteconomic resources from an area of lower productivity into an area of higherproductivity and greater yield’. In other words entrepreneurs create value by exploitingsome form of change, for example in technology, materials, prices or demographics.We call this process innovation and this is an essential tool for entrepreneurs. We shallexamine it in greater detail in Chapter 3. Entrepreneurs, therefore, create new demandor find new ways of exploiting existing markets. They identify a commercialopportunity and then exploit it.

Central to all of this is change. Change causesdisequilibrium in markets out of which come thecommercial opportunities that entrepreneursthrive upon. To them change createsopportunities that they can exploit. Sometimesthey initiate the change themselves – theyinnovate in some way. At other times they exploitchange created by the external environment.Often in doing so they destroy the establishedorder and complacency of existing social andeconomic systems. How entrepreneurs manageand deal with change is central to their characterand essential if they are to be successful. Most‘ordinary people’ find change threatening.

Entrepreneurs welcome it because it creates opportunities that can be exploited andoften create it through innovation.

Another key feature of entrepreneurs is their willingness to accept risk anduncertainty. In part this is simply the consequence of their eagerness to exploitchange. However, the scale of uncertainty they are willing to accept is altogetherdifferent from that of other managers. This high degree of uncertainty they arewilling to accept reflects itself in the risks they take for the business and forthemselves. And for some this can become so addictive they become ‘serialentrepreneurs’, best suited to continuing to start up businesses and unwilling to facethe tedium of day-to-day management.

It is no wonder that entrepreneurship has been described as ‘a slippery concept noteasy to work into a formal analysis because it is so closely associated with thetemperament or personal qualities of individuals’ (Penrose, 1959). We shall examineit in more detail in the next chapter where we attempt to differentiate entrepreneurs

David and Goliath 9

‘We learned the importance of

ignoring conventional wisdom

and doing things our way . . .

It’s fun to do things that people

don’t think are possible or likely.

Its also exciting to achieve the

unexpected.’ (Dell, 1999)

Michael Dell

from others by their character traits. We shall also address the question of whetherentrepreneurs are born or made.

Notice in these definitions that there is no mention of small firms. Indeed, RichardBranson, surely a successful entrepreneur in his own right, said

I am often asked what it is to be an ‘entrepreneur’ and there is no simple answer. Itis clear that successful entrepreneurs are vital for a healthy, vibrant andcompetitive economy. If you look around you, most of the largest companies havetheir foundations in one or two individuals who have the determination to turn avision into reality (Anderson, 1995).

The point is that entrepreneurs are defined by their actions, not by the size oforganisation they happen to work within. Any manager can be entrepreneurial. Themanager of a small firm may not be an entrepreneur – an important distinction that isoften missed in the literature. Equally entrepreneurs can exist within large firms, evenones that they did not set up themselves, and how large firms encourage and dealwith this is an important issue for them.


Case insight

Richard Branson is probably the best known entrepreneur in Britain today and his name is

closely associated with all the many businesses that carry the Virgin brand name. He is

outward-going and an excellent self-publicist. He has been called an ‘adventurer’, taking risks

that few others would contemplate. This shows itself in his personal life with his transatlantic

power boating and round-the-world ballooning exploits as well as in his business life where he

has challenged established firms like British Airways and Coca-Cola.

Now over 50 years old, his business life started as an 18-year-old schoolboy when he

launched Student magazine, selling advertising space from a phone booth. He started selling

mail-order records but soon decided he needed a retail site. He got his first store, above a shoe

shop on London’s Oxford Street, rent free on the grounds that it could not be let and would

generate more customers for the shoe shop. It was a great success and Richard next branched

into the music business with Virgin Records.

Since those early days the Virgin brand has found its way onto aircraft, trains, cola, vodka,

mobile phones, cinemas, a radio station, financial services and most recently the internet. In

1986 Virgin was floated but later reprivatised because Richard did not like to be accountable for

his actions to institutional shareholders. In 1999 a 49 per cent stake in the airline was sold to

Singapore Airlines. Today Virgin describes itself as a ‘branded venture capital company’, having

created over 200 businesses.

‘Despite employing over 20 000 people, Virgin is not a big company – it’s a big brand made

up of lots of small companies. Our priorities are the opposite of our large competitors . . . For

us our employees matter most. It just seems common sense that if you have a happy, well

motivated workforce, you’re much more likely to have happy customers. And in due course

the resulting profits will make your shareholders happy. Convention dictates that big is

beautiful, but every time one of our ventures gets too big we divide it up into smaller units . . .

Each time we do this, the people involved haven’t had much more work to do, but

necessarily they have a greater incentive to perform and a greater zest for their work.’

(Branson, 1998)

The way our notion of entrepreneur has been crafted has a long history, datingback to Cantillon in 1755. These concepts have shifted and developed. Table 1.1 triesto summarise some of the major developments in the concept. Trying to combinethese concepts and definitions together with elements of character, I would proposethe following definition for this elusive term:

Entrepreneurs use innovation to exploit or create change and opportunity for the purpose ofmaking profit. They do this by shifting economic resources from an area of lowerproductivity into an area of higher productivity and greater yield, accepting a high degree ofrisk and uncertainty in doing so.

You do not have to own a firm to manage it. However, some managers do own thefirms they manage and these make up the majority of managers of small firms. Theseare owner-managers. Sole traders are owner-managers. Limited companies, however,have share capital. The term owner-manager, therefore, needs further refinement. Anobvious one would be that to qualify as an owner-manager requires ownership (orbeneficial ownership) of over 50 per cent of the share capital, thereby controlling thebusiness.

These definitions are, however, restrictive. For example, if a company is ownedequally by two managers they would not be called owner-managers. Would this beany different if it were a partnership? Many people would call the managers in bothsituations owner-managers. But where does this dilution begin and end? How manymanagers do you need to own part of the business before they cease being calledowner-managers? Are all the employees of the John Lewis Partnershipowner-managers? The real issue is not ownership, but control. Owner-managerssignificantly control the operations of their firm on a day-to-day basis. Notice,

David and Goliath 11

Case insight

Anita Roddick may have retired as Chairman of what is now an international public company,

but when she opened the first, tiny Body Shop in a cobbled back street in Brighton, England in

1976 the roof leaked and the ugly unpainted walls were covered with green garden lattice

primarily because it was cheap. The shop had lots of pine shelves but stocked only about a

dozen inexpensive, natural cosmetics, herbal creams and shampoos, so pot plants were placed

between the products.

Anita was the daughter of Italian immigrants who settled in the small town of Littlehampton

and ran the Clifton Cafe. Originally a teacher, she spent some time travelling around the world

before returning to England where she met her husband, Gordon. They wanted to travel

around the world together and then open a pineapple plantation but first the arrival of one and

then a second child forced them to change plans. Instead they opened a restaurant and later a

small hotel in Littlehampton. About a month after they opened the first shop Gordon left to ride

a horse across the Americas from Buenos Aires to New York. He did not get very far because

within a few months it was obvious that Body Shop was going to be an enormous success.

Now the Roddicks rank among the top 100 richest people in the UK and are no longer

actively involved with Body Shop. They started up a business that became a multinational

enterprise with a life of its own and harvested the fruits of their hard work. They have come a

long way from that first small shop in Brighton.

however, that this is a question of judgement and therefore this term, as with theterm entrepreneur, is likely to be used very loosely.

Notice also that, using these definitions, owner-managers need not beentrepreneurs. Indeed, most owner-managers are not entrepreneurial. This bookargues that entrepreneurs can be described in terms of their character and judged bytheir actions and one of the major factors differentiating them from owner-managersis the degree of innovation they practise.

Many managers of small firms do not own or control the firm they are employedby. The firm is controlled by its larger, parent company. The manager is therefore not


Table 1.1 The antecedence of modern entrepreneurship

Date Author Concept

1755 Cantillon Introduced the concept of entrepreneur from ‘entreprendre’

(ability to take charge).

1803, 1817 Jean Baptist Say Emphasised the ability of the entrepreneur to ‘marshal’

resources in order to respond to unfulfilled opportunities.

1871 Carl Menger Noted the ability of entrepreneurs to distinguish between

‘economic goods’ – those with a market or exchange value –

and all others.

1893 Ely and Hess Attributed to entrepreneurs the ability to take integrated action

in the enterprise as a whole, combining roles in capital, labour,

enterprise and entrepreneur.

1911, 1928 Schumpeter Envisioned that entrepreneurs proactively ‘created’ opportunity

using ‘innovative combinations’ which often included ‘creative

destruction’ of passive or lethargic economic markets.

1921 Knight Suggested that entrepreneurs were concerned with the

‘efficiency’ in economic factors by continually reducing waste,

increasing savings and thereby creating value, implicitly

understanding the opportunity-risk-reward relationship.

1948, 1952,

1967

Hayek Continued the Austrian tradition of analytical entrepreneurs

giving them capabilities of discovery and action, recognising the

existence of information asymmetry which they could exploit.

1975, 1984,

1985

Shapero Attributed a ‘judgement’ ability to entrepreneurs to identify

‘credible opportunities’ depending on two critical antecedents –

perceptions of ‘desirability’ and ‘feasibility’ from both personal

and social viewpoints.

1974 Drucker Attributed to entrepreneurs a sense to ‘foresee’ market trends

and make a timely response.

1973, 1979,

1997, 1999

Kirzner Attributed to entrepreneurs a sense of ‘alertness’ to identify

opportunities and exploit them accordingly.

Source: Adapted from Etemad, H. (2004) ‘International Entrepreneurship as a Dynamic Adaptive System: Towards a

Grounded Theory’, Journal of International Entrepreneurship, 2.

an owner-manager. Paradoxically, however, they might be entrepreneurs, dependingon the way they act. Figure 1.1 shows these relationships. Managers are differentpeople from owner-managers, but both can be entrepreneurs.

Defining small firms

As with the other terms, there is no uniformly acceptable definition of a small firm.Back in 1971, what is usually held to be a definitive report on the state of smallbusiness in Britain at the time, the Bolton Report (Bolton, 1971), made heavy weatherof providing a statistical definition. Recognising that one definition would not coverindustries as divergent as manufacturing and service, it used eight definitions forvarious industry groups. These ranged from under 200 employees for manufacturingfirms to over £50 000 turnover (in 1971) for retailing, and up to five vehicles or less forroad transport. So many definitions clearly cause practical problems. What is more,definitions based on financial criteria suffer from inherent problems related toinflation and currency translation.

Not withstanding this, the 1985 UK Companies Act which has special less stringentreporting requirements for small and medium-sized firms, uses the followingdefinitions:

Criterion Small business Medium businessMaximum annual turnover £2.8 million £11.2 millionMaximum annual balance sheet total £1.4 million £5.6 millionMaximum number of employees 50 250

The European Commission has coined the term ‘small and medium enterprise’(SME) and in 1996 defined it as an organisation employing fewer than 250 people.This is disaggregated into three parts and, to qualify as a SME, both the employee andthe independence criteria must be satisfied plus either the turnover or balance sheetcriteria:

Criterion Microbusiness

Smallbusiness

Mediumbusiness

Maximum number of employees 9 49 249Maximum annual turnover – 7 million 40 millionMaximum annual balance sheet total

(total assets)– 5 million 27 million

Maximum percentage owned by one,or jointly by several, enterprise(s)not satisfying the same criteria

– 25% 25%


Owner-managers Managers

Entrepreneurs

Figure 1.1 Managers, owner-managers and entrepreneurs

Despite the independence criteria, SMEs could still include organisations managed bynon-owner-managers. Even so, some of them may be entrepreneurs. We are still,therefore, left with our three groups – managers of small firms, owner-managers andentrepreneurs – without any clear delineation. However, it is likely to be true that thesmaller the firm, particularly the owner-managed firm, the more important thepersonality and influence of the managers, be they entrepreneurial or not.

Being a small firm is not just about size, defined in simple statistical terms. Smallfirms also have important defining characteristics. The Bolton Committee describeda small firm as satisfying three criteria, all of which defy practical statisticalapplication:

1 Market influence. In economic terms, the small firm has a small share of themarket. Therefore it is not large enough to influence the prices or nationalquantities of the good or service that it provides. Unfortunately, two fundamentalproblems arise with this, firstly with the definition of market and secondly withthe ability of the small firm to influence price and the quantity sold in thatmarket. Many of the most successful small firms operate in market niches so slimthat they dominate that market segment, with no clear competition, and they canand do influence both price and quantity sold. In that respect Bolton’s definitionlooks naıve and dated and was probably influenced by the economists’ definitionof perfect competition. It is certainly not one that I or most entrepreneurs wouldagree with.

2 Independence. The small firm is independent in the sense that it does not formpart of a larger enterprise and that the owner-managers are free from outsidecontrol in taking their principal decisions. This means that only owner-managedfirms are considered small firms. This is clearly unsatisfactory if you believe, as Ido, that there are certain specific characteristics about managing a small firm thatmark it out as different from a large one.

3 Personal influence. The small firm is managed in a personalised way and notthrough the medium of a formalised management structure. This person is involvedin all aspects of the management of the business and is involved in all majordecision-making. Frequently there is little devolution or delegation of authority.

Small firms start to make managerial appointments when they have some 10–20employees and at this point they start to take on the appearance of more formalstructures (Atkinson and Meager, 1994). Nevertheless, this third point is the key to adefinition of the real small firm – the one with potential, the one that economistscannot understand, the one that is so different from the large firm. Essentially the realsmall firm can be described as having ‘two arms, two legs and a giant ego’ – in otherwords it is an extension of a person, be he/she owner-manager or entrepreneur, to thefirm. The personality of the manager is imprinted on the way it operates and thepersonal risks they and their family face if the firm fails influences how businessdecisions are made.

Why small firms are different

Small firms are not just scaled down versions of large ones. They go about theirbusiness in a number of fundamentally different ways. The key to understanding how


a particular small firm goes about management and why and how decisions are madeis to understand the personality of the owner-manager. Their personality and theirbehavioural characteristics will strongly influence this. More than large firms, smallfirms are social entities that revolve around personal relationships. They approachrisk and uncertainty in a particular way that sometimes may seem far from rational,which explains why they are so little understood by economists.

There are a number of other characteristics that are typical of small firms andunderline their different approach to management and business. The first is that theyare typically short of cash. They cannot raise capital in the same way that a largecompany can. This has major strategic implications. Firstly, it constrains thestrategies that they can adopt. For example, they cannot afford to adopt expensiveadvertising and promotion campaigns, so instead managers develop closerelationships with customers and prospective customers, investing their time ratherthan money. Secondly, it dictates that business decisions must have a quick pay-offand therefore decision-making is short-term. For a growing business it means thatraising finance becomes a major strategic issue and relationships with financinginstitutions such as banks and venture capitalists can become a major resource issue.

The second characteristic is that small firms are likely to operate in a single market,or a limited range of markets, probably offering a limited range of products orservices. This means that their scope of operations is, or at least should be, limited. Inthat sense they face fewer strategic issues than larger firms and often business strategyis synonymous with marketing strategy. However, unlike large firms, they find itdifficult to diversify their business risk, which is another reason they find it hard toraise finance.

Related to this is the characteristic that most small firms are over reliant on a smallnumber of customers. This means that they are particularly vulnerable to losing anyone customer and the effect on the firm of such a loss will be disproportionately large.This is yet another reason why they are riskier prospects than large firms and finddifficulty raising finance.

The final characteristic is the effect of scale on the economics of the business andhow that translates into financial evaluation and decision-making. Most BusinessFinance textbooks are written with large companies in mind; consequently, whilstthe principles they espouse are sound, the examples they use and generalisations thatresult are not. For example, taking on an additional member of staff for a small firm isa major strategic decision involving relatively large sums of money that represent astep increase in their fixed costs. Consequently they are reluctant to do so unlessabsolutely necessary. Yet in most Business Finance textbooks wage costs are treated asa variable cost, a view that can only be justified when there are a large number of staff.As we shall see later in this book, this error can lead to quite incorrect businessdecisions being made. It is little wonder that managers of small firms have little faithin professional advisors and accountants. Banks have for some time realised thattraditional financial analysis says little about the health of the small firm and havestarted to broaden their approach.

These characteristics start to combine to distinguish small firms from large ones ona basis other than scale. Wynarczyk et al. (1993), strongly influenced by Casson(1982), argue that the much greater role played by uncertainty, innovation and firmevolution is the real defining characteristic of small firms. Small firms face moreuncertain markets than large firms. They have a limited customer base and often


cannot influence price. The owner-manager’s own aspirations and motivations mayalso be uncertain. The effect of this high degree of uncertainty is to force decision-making to become short-term. Small firms also innovate in a particular way that weshall explore in a subsequent chapter that makes them different to large firms. Thefinal distinguishing characteristic is evolution – the recognition that the nature, styleand functions of management change considerably as the small firm grows andevolves. Once more, we shall explore this in detail in a subsequent chapter, inparticular looking at the ‘stage theories’ of how firms grow.

Lifestyle and growth firms

Small firms and entrepreneurship have often been linked together in a very loosefashion. They are broadly overlapping sets. As Storey and Sykes (1996) explained,

the small firm is less concerned with formal systems and its decision-makingprocess will be more judgemental, involving fewer individuals, and can thereforebe quicker. It can be much more responsive to changes in the market-place but,conversely, is much less able to influence such developments. Hence the small firmis likely to adjust more quickly than the large firm to situations of marketdisequilibrium and, in these senses, embodies the characteristics of the classicentrepreneur.

However, this is a question of scale and, just as it was necessary to distinguishbetween owner-managers and entrepreneurs, it might be useful to distinguishbetween two categories of small firms:

1 Lifestyle firms. These are businesses that are set up primarily to undertake anactivity that the owner-manager enjoys or gets some comfort from whilst alsoproviding an adequate income, for example craft-based businesses. They are notset up to grow and, therefore, once a level of activity that provides the adequateincome is reached, management becomes routine and tactical. There is probablylittle thought about strategic management unless things start to go wrong, and themost likely thing to go wrong is that the market changes without the owner-manager realising it. These firms are rarely managed by entrepreneurs and, if theyare, the entrepreneur will be extremely frustrated. Most owner-managed firms fallinto this category. Many are sole-traders (un-incorporated businesses). However, alifestyle business can change if the owner-manager’s motivations change and theyhave the entrepreneurial qualities to see it through.

2 Growth firms. These are set up with the intention of growth, usually byentrepreneurs. Occasionally a lifestyle business can turn into a growth businessunintentionally. However, if the manager does not have entrepreneurialcharacteristics they are unlikely to succeed in the long run. Rapid growth is riskyand creates major problems that must be addressed within very short time frames.Effective strategic management is vital if the firm is to succeed, indeed possiblysurvive. Notwithstanding this, these firms will face numerous problems and crisesas they grow, some of which are predictable, others that are not. This is the classicentrepreneurial firm so beloved by the financial press.


It is important to realise that the small firm sector is far from homogeneous.Consider issues of size and age of business, sector, location, growth and decline,economic and market conditions. What is more, the people that manage them aremany and varied. You do not have to own a small firm to manage it and you certainlydo not have to be an entrepreneur. Consider also issues of age, sex, ethnicity, socialorigins, family relationships and then you start to realise the scale of the complexity.

Generalisations about small firms and the people that manage them are thereforejust that – vast generalisations that are supposed to cover what makes up some 95 percent of firms in most countries. Small firms are not homogeneous but,notwithstanding this, let us try to paint a broad picture of their nature and role inthe UK.

The UK small firms sector

Over the last century, until the 1960s, the UK saw a decrease in the importance ofsmall firms, measured in terms of their share of manufacturing employment andoutput. The proportion of the UK labour force classified as self-employed was at itslowest point in the 1960s. It was no wonder that the Bolton Committee (op. cit.), setup in the late 1960s to investigate the role of small firms in the economy, concludedthat ‘the small firm sector was in a state of long-term decline, both in size and itsshare of economic activity’. From the 1970s the situation has been reversed. Sincethen small firms have increased in importance, measured in terms of their numberand their share of employment and turnover. The number of small firms continues torise, as does the number of people classified as self-employed. In 1979 there were only2.4 million SMEs in the UK (see preceding definition). By 2004 this had grown to 4.3million – an increase of almost 80 per cent in 25 years.

In fact the number of small firms is now increasing in most advanced countries, asis their share of employment. 99.7 per cent of enterprises in the EU are SMEs (seedefinition on page 13), compared to 99.9 per cent in the UK. SMEs are a vital part ofall EU economies, accounting for two-thirds of turnover in the EU. In the UK this is51 per cent. They generate 70 per cent of employment across the EU. In the UK thisis 59 per cent. And these percentages are increasing year on year. Small firmsdominate many service sectors, particularly hotels, catering, retailing andwholesaling, and are important in construction. In the USA it is estimated that smallfirms now generate 50 per cent of GDP. Small firms are a vital and growing part ofbusiness in all countries.


Case insight

In the late 1980s Julian Leaver and Tim Slade were looking for ways to finance their lifestyle as

‘ski-bums’ in the French Alps. They travelled the world financed by selling printed T-shirts out of

rucksacks. In 1993 they decided to open a clothes shop in London’s Fulham Road selling a

range of high quality sports clothing. Named after a famous downhill run in Val d’Isere, Fat

Face really took off, selling both to fashion conscious young people and a ‘niche’ technical

market.

Find out how they got on in Chapter 11.

In the UK a range of SME statistics are produced and are available free on thewebsite of the Small Business Service (www.sbs.gov.uk). These are updated annually.The SME statistics for 2004 show that:

. 72.8 per cent of all firms in the UK had no employees (3.1 million).These comprisesole proprietors, partnerships with only self-employed partners and companieswith only an employee/director. By definition these firms generated noemployment. They generated 7.9 per cent of UK turnover (£190 billion).

. 99.3 per cent of all firms in the UK were classified as small (0–49 employees). Thesegenerated 46.8 per cent of employment (10.3 million) and 37 per cent of UKturnover (£888 billion).

. 99.9 per cent of all firms in the UK were classified as SMEs (0–249 employees).These generated 58.5 per cent of employment (12.9 million) and 51.3 per cent ofUK turnover (£1231 billion).

These statistics reinforce the fact that most UK small firms really are small, offeringno more than self-employment. Most of these are probably lifestyle businesses. Fewfirms grow to any significant size. And only 0.1 per cent of firms in the UK are ‘large’with 250 employees or more. But employment in small firms varies widely fromsector to sector. Over 70 per cent of employment in both construction and agricultureis in SMEs. At the other extreme, less than 10 per cent of employment in financialintermediaries is in SMEs. Small firms are not a homogeneous group.

Table 1.2 summarises some international comparisons. SMEs in Europe generate69.8 per cent of employment, compared to 58.5 per cent in the UK. The averagenumber of people employed by a SME in the UK was estimated as seven in 2003,compared to an EU average of only five. This in turn compares to five in Japan andonly three in the USA (European Commission, 2003). Indeed the USA does notcompare too well in these statistics since its SME sector generates only 49.1 per cent ofemployment.

But aggregate statistics can create some misleading conclusions. One widely heldmisconception is that Britain has a smaller proportion of middle-sized, or‘mittelstand’, companies than Germany. The high level of start-ups since the 1980shas made this seem to be the case but Storey (1998) concludes that ‘the size structureof the UK and (pre-unification) Germany is in fact closer than between any other twolarge countries in the European Community’. However, Storey also concludes – andthis is evident from Table 1.1 – that employment in the USA, and to a lesser extent theUK, is still more concentrated in very large companies than in other EC countriesor Japan.

In the UK, there are also a range of VAT statistics that inform us about SMEs. Theseare available free on the website of the Small Business Service (www.sbs.gov.uk).Information about VAT registrations and deregistrations is widely used as the bestguide to patterns of change in the small-firm sector – levels of entrepreneurship andthe health of the business population. They are also used in regional and localeconomic planning. The net change in business stocks is a particularly importantfigure that often gets reported in national newspapers. The net change in stock tendsto be highly related to the state of the economy. Small firms are particularlyvulnerable to economic changes because of their often precarious financing situation.In times when the economy is in recession there tends to be a net decrease in the


stock of businesses and vice versa. So, the 1980s saw a large increase in the stock ofregistered companies, whereas the stock decreased between 1991 and 1994. From1995 until 2004 stocks increased. 2004 saw a net increase of only 2000 firms(181 400 registrations less 179 400 deregistrations), the smallest rise since 1995. Thesestatistics are also broken down by sector and region. So, whilst most sectors saw no ora small net increase, the manufacturing and agriculture and fisheries sectorscontinued a long decline. At the same time London and the South East of Englandcontinued to see the largest net increases. One interesting point is that areas withhigh registrations tend to also have high deregistrations – an effect called ‘churning’ –indicating that high economic growth may cause or be caused by more firms cominginto existence (register) but the increased competition means that more will cease(deregister).

These VAT statistics have also been used to show that the most dangerous time fora new business is in its first three years of existence. Almost 50 per cent of businesseswill cease trading within that period. This does not, of course, mean that the closuresrepresent failure in terms of leaving creditors and unpaid debts. Most are simplywound down. Businesses that cease trading do so for a number of reasons. Some willclose because the business ceases to be lucrative. Others because of the death orretirement of the proprietor, or changes in their personal motivations andaspirations. Some will simply close to move on to other, more lucrative opportunities.This ‘churning effect’ of small firms closing and opening is part of the dynamism ofthe sector as they respond to changing opportunities in the market place and is whythe net change in the stock of businesses is more important than the individualnumber of failures.


Table 1.2 SME international comparisons

Total SMEs Large

% micro % small % medium Total

Number of enterprises (x 1000)

EU (2003) 19 310 92.3 6.5 0.9 99.7 0.3

Japan (2001) 4 703 n.a. n.a. n.a. 99.7 0.3

USA (2000) 21 223 94.2 4.8 0.8 99.8 0.2

Number of occupied persons (x 1000)

EU (2003) 139 710 39.4 17.4 13.0 69.8 30.2

Japan (2001) 38 277 n.a. n.a. n.a. 66.9 33.1

USA (2000) 129 635 21.5 15.5 12.1 49.1 50.9

Average number of occupied people per enterprise

EU (2003) 7 3 19 98 5 1 052

Japan (2001) 8 n.a. n.a. n.a. 5 975

USA (2000) 6 1 20 94 3 1 119

Source: European Commission (2003) 2003 Observatory of European SMEs: 2003/8 Highlights from the 2003

Observatory; available free online at http://ec.europa.eu.int/comm/enterprise/enterprise_policy/analysis/doc/

smes_observatory_2003_report8_en.pdf.

Other studies have given an insight into the UK small firms sector. Small firms tendto have lower productivity than large firms, even in the same industry. Firms withfewer than 200 employees had 55 per cent of the productivity (measured in valueadded per employee) of firms with 1000 or more employees. In the computer andoffice machinery sectors SME productivity is only a third of that of larger firms. Thesedifferences are largely because of lower capital backing. Not surprisingly therefore, the1998 Workplace Employee Relations Survey (DTI, 1998) showed that employees inSMEs tend to have lower pay and have less job security than in large firms, withemployers making extensive use of dismissal as a disciplinary device. Research alsoindicates that SMEs have a disproportionately high number of ‘bad jobs’ (McGovernet al., 2004) and higher accident rates (Walters, 2001). The availability of flexibleworking practices to encourage family-friendly working appears arbitrary in SMEs(Dex and Smith, 2002) and there is low take-up of training initiatives such as NVQs(national vocational qualifications) and IIP (Investors in People) (Matlay, 2002).However it would be wrong to characterise SMEs as poor employers as there isenormous diversity of practice (Barret and Rainnie, 2002; Ram and Edwards, 2003).


Case insight

Stories of successful entrepreneurs always make good reading. And successful entrepreneurs

have been with us for many, many years in Britain. Joseph Cyril Bamford gave his initials to the

ubiquitous yellow hydraulic excavator and digger seen on just about every building site or road

works – the JCB. In fact JCB became one of the few post-war British industrial success stories.

By the time of his death in 2001 the company employed over 4500 people across three

continents and had a turnover of £833 million. Over 70 per cent of JCB production is for

overseas markets.

Joseph Bamford came from a prosperous Staffordshire engineering family which had been

making agricultural equipment since mid-Victorian times. When he returned to civilian life after

the Second World War he decided to start up on his own doing what he knew best. Starting his

business with only an electric welder he bought for £2.50, he started producing tipping farm

trailers from a garage in Uttoxeter, using materials from old air-raid shelters. These sold well,

but in 1948 he decided to branch out into hydraulic equipment and, in 1953, went into

partnership to produce a range of earth-moving machines before eventually coming up with

the famous backhoe loader that combined the two functions of excavator and shovel and

became the visual embodiment of the initials JCB.

Joseph Bamford was a paternalistic employer, who provided a social club and a fishing lake

next to his factory in Rochester. He ran a tight ship but rewarded effort. He also knew how to

get PR. In 1964, when he famously paid his workers £250 000 in bonuses because the

company’s turnover had topped £8 million, he personally handed out the bonus to each

employee standing on the first farm tractor he had designed in 1947.

Joseph Bamford made JCB into one of the most successful privately owned companies in

Britain. Eventually the company diversified from his central control into a group of several

operating companies. He gave up his chairmanship of the group in 1975, handing it over to his

eldest son, now Sir Anthony Bamford, and retired to Montreux, Switzerland where he enjoyed

yacht designing and landscape gardening.

Small firms vary widely in the resources they allocate to innovation. Of small firmswith over 20 employees, about one in ten spends 10 per cent or more of turnover onnew product or process development. However, one-third of manufacturing smallfirms spend nothing at all.

Global Entrepreneurship Monitor (GEM)

GEM is a research programme which was started in 1999 in 10 countries. By 2005 ithad been extended to 39 countries. It is a harmonised assessment of the level ofnational entrepreneurial activity in each of the countries. In the UK it is based uponan annual survey of 22 500 adults of working age. It asks a number of questions but acentral one is whether or not they are starting up a business, or already own ormanage a business. From this information a figure for total entrepreneurial activity(TEA) is calculated for each country. In 2003 the TEA index for the UK was 6.4 percent (5.4 per cent in 2002) – in other words 6.4 per cent of the UK population wereengaged in some form of entrepreneurial activity (GEM, 2003). The UK ranked 23 outof the 37 in this survey but it ranked higher than all other EU countries apart fromIreland, Spain and Greece. As you might expect, the USA with a score of 12 per centwas higher.

GEM 2003 came up with some interesting conclusions that, by and large, supportother research, much of which we shall return to in the next chapter.

. Not surprisingly given actual start-up rates, the 2003 GEM report found that the UKTEA in males at 8.9 per cent was far higher than in females at 3.9 per cent. ‘Womenare more likely to fear failure, see fewer opportunities, have a lower perception oftheir skills to start business and are less likely to know an entrepreneur than men.’(GEM, 2003)

. Ethnic minorities were more likely to be involved in start-ups than white people.By and large they have a more positive attitude to entrepreneurship.

. Entrepreneurs were most likely to be in the age range 25 to 34.

. People with higher incomes and better education were more likely to beentrepreneurs.

. UK business start-ups were predominantly UK focused.

. There was a visible equity gap between £150 000 and £1 175 000.

. It also concluded that the culture encouraging entrepreneurship in the UK hadimproved, with more respondents having a positive attitude to entrepreneurship.

Central to the GEM approach is the hypothesis of a causal relationship betweenentrepreneurial activity in the economy and the level of economic growth – we shallsee the economic justification for this in the next section. The GEM model is shownin Figure 1.2. The demand side is represented by entrepreneurial opportunity and thesupply side by entrepreneurial capacity. These are affected in different ways bydemography, education, economic infrastructure and culture.

GEM is an enormous research endeavour generating quantitative data that can beused for both cross-sectional analysis and, probably most importantly, longitudinalanalysis, allowing us to track individuals from entrepreneurial aspiration (called‘nascent entrepreneurship’) to action. However, by its own admission problems


remain in understanding this data and the relationships with ‘highly entrepreneurialcountries reflecting low economic growth’ (GEM, 2003). Obvious methodologicalproblems exist. For example, it does not attempt to measure differences in culture.Also the use of a single questionnaire across all the countries is clearly problematic.Nevertheless data from GEM is increasingly being pored over by econometricianseager to find statistical relationships of any kind, no matter how unsupported bytheory or other research. GEM reports can be downloaded free of charge fromwww.gemconsortium.org/default.asp. There is a range of reports. In 2006, in additionto the 2003 Global Report, there were special reports on Women and Enterprise,High-Expectation Entrepreneurs and a Financing Report, as well as a UK SocialEntrepreneurship Report.

The economics of entrepreneurship

The question arises as to whether there are any underlying theories to explain thegrowth in number and importance of small firms. Marxist theory predicts thatcapitalism will degenerate into economies dominated by a small number of largefirms and society will polarise between those that own them and those that work inthem. To a Marxist, the rise of small firms is just another, subtler way for this trend tomanifest itself. The small firms are dependent upon larger firms for their custom andwell being. They absorb risk and push down pay and conditions for workers as theyare rarely unionised. However, the successful growth of so many small firms over theperiod, the increasing fragmentation of industries and markets and the increasingpopularity of self-employment by choice would seem to belie this theory.


ECONOMIC GROWTH

LEVEL OF ENTREPRENEURIAL ACTIVITY

Entrepreneurialopportunity

Entrepreneurialcapacity

Demography EducationEconomic

infrastructureCulture

Source: Adapted from Global Entrepreneurship Monitor (2001) Executive Report, GEM Project, Babson College/

London Business School, Boston, USA.

Figure 1.2 The GEM approach to measuring entrepreneurial activity

People like Fritz Schumacher (1974) would have us believe that the growth of smallfirms is part of a social trend towards a more democratic and responsive society –‘small is beautiful’. To him the quality of life is more important than materialism. Heis very much in favour of ‘intermediate technology’ – simpler, cheaper and easier touse – with production on a smaller scale and more locally based. However, thetechnologies that fuelled the growth of small firms at the end of the twentiethcentury were far from simple and for many quality of life improved alongsidematerialism. Which leads us on to free-market economics. At one extreme the growthof small firms can be seen as the triumph of the free market and the success of the‘enterprise culture’ promulgated by politicians like Ronald Reagan and MargaretThatcher. Increasing numbers of small firms are the natural result of increasedcompetition and a drive to prevent private and public monopoly. But what exactlydoes economic theory have to say about small firm creation?

Traditional industrial economists would explain the growth of new firms in termsof industry profitability, growth, barriers to entry and concentration. However, theyare more concerned with ‘entry’ to an industry, rather than whether this is by a newor an existing firm. They assume an endless supply of potential new entrants. Theywould say that entry to an industry is high when expected profits and growth arehigh. Entry is deterred by high barriers to entry and high concentration, whencollusion between existing firms can take place. However, much of this work does notspecifically consider the role of new or smaller firms. Indeed, Acs and Audretsch(1989) show that entry by small, primarily new, firms is not the same as entry by largefirms and that small firm birth is lower in highly concentrated industries and oneswhere innovation plays an important part.

By way of contrast, labour market economists have been more interested in whatinfluences individuals to become potential entrants to an industry by becoming self-employed. Psychologists have also contributed greatly to this work which has focusedon the character or personality of the individual, the antecedent influences on themsuch as age, sex, education, employment status, experience and ethnicity as well asother societal influences. This work has proved far more successful and informativeand we examine it in detail in the next chapter.

The link between entrepreneurship – the creation of new firms – and economicgrowth has until recently been far from clear, as far as economists are concerned. Infact, traditional theories tended to suggest entrepreneurship impeded rather thanencouraged growth. Only the recent theories of ‘industrial evolution’ have linkedentrepreneurship and economic growth (Jovanovic, 1982; Lambson, 1991;Hopenhayn, 1992; Audretsch, 1995; Ericson and Pakes, 1995 and Klepper, 1996).These new theories focus on change as the central phenomenon and emphasise therole knowledge plays in charting a way through this. Innovation is seen as the key toentry, growth and survival for an enterprise and the way entire industries change overtime. But the information they need to innovate is crucial – being inherentlyuncertain, asymmetric (one party may have more than another) and associated withhigh transaction costs. As a result there are differences in the expected value of newideas and people therefore have an incentive to leave secure employment to start up anew enterprise in order to capitalise on a commercial idea they believe in more thanothers. Once established, if economies of scale are important (see Chapter 5), theenterprise must grow, simply to survive. In this way the economic performance ofnations is linked to how well the potential from innovation is tapped – start-ups


encouraged and growth facilitated. And inherent in the process is churning – firmsbeing displaced by newer, more innovative rivals.

These new evolutionary theories, supported by empirical evidence, therefore statethat entrepreneurship encourages economic growth for three reasons:

1 It encourages competition by increasing the number of enterprises. Whilst thisincreases growth in itself, it is a cumulative phenomenon because competition ismore conducive to knowledge externalities – new ideas – than is local monopoly.And so entrepreneurship encourages entrepreneurship – a factor we return to inthe next chapter.

2 It is a mechanism for ‘knowledge spillovers’ – transmission of knowledge from itspoint of origin to other individuals or organisations. Knowledge spillover is animportant mechanism underlying endogenous growth and start-ups –entrepreneurs – are seen as particularly adept at appropriating knowledge fromother sources. In other words entrepreneurs spot opportunities and innovate – afactor we shall also return to in the next chapter.

3 It generates diversity and variety among enterprises in any location. Eachenterprise is in some way different or unique and this influences economicgrowth.

Summary

In the late twentieth century the focus of business interest shifted from large to smallfirms. Their contribution to the economy became recognised as did the shortcomingsof large companies. Start-up entrepreneurs like Bill Gates, founder of Microsoft,Michael Dell, founder of Dell Computers, Richard Branson, founder of Virgin, andAnita and Gordon Roddick, founders of Body Shop, demonstrated they couldbecome world-class, outstanding successes very quickly, and at the same time theybecame ‘the stuff of dreams’ – at least in the financial press.

Entrepreneurs use innovation to exploit or create change and opportunity for thepurpose of making profit. They do this by shifting economic resources from an area oflower productivity into an area of higher productivity and greater yield, accepting ahigh degree of risk and uncertainty in doing so.

Owner-managers own the business they manage. Sole traders are owner-managers.Managers of companies owning over 50 per cent of the share capital, and therebycontrolling the business, are owner-managers. However, the term is also used looselywhen a small group of managers own and control the business. Not all owner-managers are entrepreneurs, indeed most are not entrepreneurial. Entrepreneurs aredefined primarily by their actions although, as we shall see in the next chapter, theycan have certain identifiable characteristics. They are the particular type of owner-manager that the financial press love so much. They make ‘the stuff of dreams’come true.

A small or medium-sized enterprise (SME) is one with under 250 employees. Amicro business has up to 9 employees, a small business up to 49 employees and amedium-sized business up to 249 employees. A defining characteristic of the smallfirm is the influence of the owner-manager. It is managed in an informal,personalised way and the character and preoccupations of the manager are significantinfluences on decision-making.


There are a number of other significant characteristics, which include shortage ofcash and difficulty in raising finance, limitations in product or service range andmarkets they operate in, reliance on a small number of customers and the effects oftheir small scale on financial evaluation and decision-making. But perhaps the otherdefining characteristics are uncertainty, innovation and firm evolution.

Small firms and entrepreneurship are broadly overlapping sets. However, the twoconcepts are not necessarily synonymous. We broadly characterised small firms aseither lifestyle – set up to allow the owner-manager to pursue an activity they enjoy –or growth – one set up to make money and grow. However, as in the case of Fat Face,one can change into the other.

Notwithstanding the success of firms like JCB, until the 1960s the UK saw adecrease in the importance of small firms. Since the 1970s this has been reversed andSMEs are now an important part of the UK and EU economies, generating significantemployment and wealth. However, most small firms in the UK do not grow to anysize.

The increasing number of small firms is a result of many trends – the move frommanufacturing to the service sectors, the ‘deconstruction’ of many large firms and thetrend towards sub-contracting, the influence of new technologies, and social andmarket changes.

Whilst Marxist theory would seem to be able to accommodate the growth of smallfirms, many politicians would claim that it is a manifestation of the success of free-market capitalism. But whilst industrial economists would have little to say to explainthe phenomenon, labour economists and psychologists have been more successful.Recent theories of ‘industrial evolution’ have linked entrepreneurship and economicgrowth through their tendency to increase competition, make the most of knowledgespillovers and the increase in diversity they produce.

Essays and discussion topics

1 Are small firms worthy of special treatment? If so, by whom and what form should it take?2 List the pros and cons of running your own business.3 Do you think you might have what it takes to be an entrepreneur? Return to this question

after you have read the next chapter.4 Do you think the definition of an entrepreneur is adequate?5 How does the management of a small firm differ from the management of a large one?6 What are the characteristics of small firms that distinguish them from large firms and what

are their implications? Do these mean that small firms really are sufficiently different towarrant special study?

7 Are small firms sufficiently homogeneous to justify special study? What further segmentationmight you suggest and what are the special and different characteristics of these segments?

8 Does your country have a culture that encourages entrepreneurship and business start-ups?Return to this question when you have read the next chapter.

9 From the data in this chapter, how do you evaluate the performance of SMEs in the UKcompared to the rest of the EU and the USA?

10 Is it good that so many businesses close in their first three years?11 Why have the number of small firms been increasing in the UK since the late 1960s?12 Does Marxism say anything to explain the increasing number of small firms?13 How does entrepreneurship encourage economic growth?14 How might entrepreneurship be encouraged?


15 Is small really beautiful?16 What are the real defining characteristics of a small firm?

Exercises and assignments

1 Research the history and profile of an entrepreneur who set up their own business and grew itsuccessfully.

2 Update the statistics on small firms in Britain (from the Small Business Service website) and inthe EU (from the Europa website). Alternatively, obtain similar statistics on the performanceof small firms in your country. What does this tell you about recent developments?Summarise your findings in a report.

3 Access the latest GEM report for your country and summarise its findings in a report.

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Author Index

3i 115, 269

AAbdesselam 41Abell 294Acs 23, 70, 98Adair 233Aggarwal 434, 437Aldrich 32, 441Alexander 465Allday 239Altman 333Amit 490Anderson 9, 10, 32, 36Ansoff 295, 304Aston Business School 368Atkinson 14Audretsch 23, 70, 98Autio 441

BBank of England 354Bannock 326, 360Barney 37Barret 20Bartlet 223, 474Baty 32Bauerschmidt 440Bayus 129Beaver 4, 333Belbin 235Bell 32Bennett 507, 509Bennis 226Berryman 328Bessant 58Bhide 117Binks 357, 360Birch 5Birkinshaw 472, 492Birley 116, 269Blake 231Blanchflower 32Bolton Report 13, 17Bolton 40, 63, 67, 103Bond 48Bonnet 41Boschee 454

Boston Consulting Group 269Bowman 228, 304Box 465Brady 154Branson 10Brinckerhoff 454Bruce 218Brush 32Bryan 435Burgelman 474Burns 4, 115, 218, 232, 253,

269, 306, 337, 349, 350,354, 418, 428, 442, 474,481, 487

Busenitz 37Buttner 32Buzell 269BVCA 360

CCachon 40Caird 32Camagni 71Cannon 4, 56, 304Cantillon 11, 12Carr 4, 48Carson 146, 434Carter 40Casson 15Chaston 142, 377Chell 32Chen 42Chesbrough 472Chittenden 312, 413, 418Choudhry 443Christensen 472Churchill 216, 419Clute 330, 331Collins 482Cook 465Cooper 100, 481Cornwall 484Cosh 107, 119, 252, 331, 368,

377Coviello 437Covin 490, 491, 492Crainer 4Crick 443

Cruickshank 351Cuba 32

DDaley 326Dalgic 141de Bono 32, 79, 80de Geus 4de Vries 34, 42, 213Deakins 32, 70Dearlove 4deLeon 465Dell 7, 9Denhardt 465Dewhurst 4Dex 20Dicken 437, 439, 444Dixon 360Drucker 12, 64, 65, 66, 68, 472,

483D’Silva 334DTI 20, 350, 351, 356Dubini 441Dunkelberg 269

EEdwards 20Eikenberry 465Ely 12Ennew 360Ericson 23ESRC 107Etemad 12European Commission 19Evans 40, 327

FFaulkner 228, 304Fisher 440Foster 473Fowler 454, 455, 465Freel 70

GGalbraith 472, 489Gardner 225Garud 492GEM 21, 22, 40, 42, 453, 458

531

Ghoshal 223, 474Gilligan 444Ginsberg 471Goss 462, 463Greiner 210, 471, 489Grousebeck 117Guiltinan 288Gumperter 295Guth 471

HHalbauer 446Hamel 7, 254, 266, 473Harper 41Harrison 6, 249, 252, 269Hatten 419Hayek 12Hess 12Hibbert 457Hirsch 32HLB Kidson 365Hofstede 45, 48, 484Holliday 417Hoon-Halbauer 446Hopenhayn 23Horwitz 32Hughes 107, 119, 252, 331, 357,

360, 368, 377Hutchinson 232, 269

IInstitute for Small Business

Affairs 413

JJankovicz 88, 355Johanson 434, 438, 441Johnson 302, 437, 438, 441Jovanovic 23Joyce 269

KKakabadse 220Kanter 32, 56, 473, 474Kaplan 473Karagozoglu 443Katsikeas 439Kay 309, 474, 475,481Keasey 333Keeble 71Kim 478King 465Kinsella 373Kirby 78, 240, 462Kirton 59Kirzner 12, 32Klepper 23

Kluver 465Knight 12Kondratieff 62Kotter 226Kuratko 58, 59, 486

LLambson 23Larson 330, 331, 441Le Pape 41Leach 412, 422, 424Leadbeater 453, 454, 458, 460,

461, 462, 463Leavy 311Leeuw 14Leighton 40Leonidou 439Leppard 67, 68Lessem 240Levingson 421Lewis 216Lindbolm 309Lindell 443Litvak 437Lord 441Lorenz 71Lott 360Loustarinen 440Love 334

MMacmillan 348Macrae 269Majaro 79Markoczy 479Martinez 32Mathewson 310Matlay 20McCarthy 311McClelland 32McDougall 436, 437, 441McGovern 20Meager 14Menger 12Meyer 32Michaelas 312Miller 479, 488Mintzberg 58, 79, 310Mitra 71Montgomery 303Morris 48, 58, 59, 484Morse 471Mort 454, 459Mouton 231Munroe 437Murray 360, 362

NNamiki 442Nanus 223, 226Nelton 412, 415Nohria 269Nonaka 228Norburn 116

OOakley 437O’Connor 48O’Reilly 474Oviatt 436, 441

P, QPage 79Pakes 23Parkhurst 78Paul 288Pavitt 70Pearce 456Pedler 477Perlman 484Peters 294, 474, 484Pinchot 32, 463, 473Porras 482Porter 56, 58, 63, 107, 109, 263,

304, 307Post 458, 459Poutziouris 312, 413, 415, 418Prahalad 254, 266Priest 507

RRafferty 435Rainnie 20Ram 20, 417Ranft 441Ray 232, 269Reid 331Reuber 440Roberts 117Rogers 277Rosa 32Rosenblatt 415Ross 462Rothwell 70

SSapienza 363Say 9, 12Schein 32, 228, 485Scholes 302Schumacher 4, 22Schumpeter 12, 32, 58, 61Schwartz 32Scott 32, 218

532 Author Index

Selassie 442Senge 225, 476, 477Shapero 12, 32Shaver 32Siegel 269Sinetar 89Slevin 490, 491, 492Smith 62Solem 269Sonnenfield 427Spence 239Stanworth 41Steiner 37, 269Stevenson 117, 295Stiglitz 355Stokes 129Storey 6, 16, 18, 32, 40, 41, 42,

44, 70, 107, 115, 249, 269,327, 368

Strivers 465Sullivan 440Sykes 16, 32Symon 479

TTaffler 333Taylor 6, 249, 252, 269

Tellis 279Terry 466Thompson 63, 67, 103, 455Thornhill 490Timmons 46, 221, 230, 232,

233, 243, 363, 373, 477,484

Treacy 256Tushman 474

UUnwalla 462

VVahlne 434, 438, 441Valery 64Van de Ven 492Van Grundy 56Vesper 473Von Oech 82, 83Vossen 70Vyakarnham 67, 68

W, XWaddock 458, 459Walters 20

Waterman 294, 474Watkins 331Watson 333Webster 142Weiss 355Welch 440Welsch 46Wernerfelt 303Westhead 269Whitehouse 115, 232, 337, 349,

350, 418, 428Wickham 224Wiedershheim-Paul 434Wiersema 256Wilkinson 71Wilpert 479Wilson 444Woo 269, 373Wynarczyk 15, 269

YYelle 269

ZZahra 471

Author Index 533

Subject Index

AABC analysis 289–90accounting records/

systems 194–9ACORN 139achievement 33, 42acquisition 306, 307–9, 378, 382adopters 277–8advertising 70, 128–9, 385advice 119, 504–8age (of entrepreneur) 41, 43, 44,

327aged listing of debtors 179alliances 434, 436, 441Alternative Investment Market

(AIM) 336, 365analogy 85–6Ansoff matrix see

product/market matrixantecedent influences 30,

39–45, 100–1architecture 474–6asset efficiency 260, 262attribute analysis 87average cost 131, 135

Bbad debts 354balance sheet 174–6, 199, 321–3bankruptcy 326banks/bankers 261, 326–7,

348–60, 378–81barriers to entry/exit 23, 70, 98,

108, 110, 138, 252, 296, 474see also Porter’s Five Forces

barriers to growth see growthBenchmark Index 258benchmark/benchmarking

257–8, 261, 445, 465benefits of a

product/service 126–7, 151,224, 330

board of directors 238–9, 424body language 153bootstrapping 68, 117Boston matrix see portfolio of

productsbrain 78–9

brainstorming 83–5, 265brainwriting 85brand/branding 108, 115, 136,

138, 154, 268, 297–8, 301,304, 437, 442

brands – familial 413–14break-even 132–4, 177, 179–82,

259, 262, 358, 375–6, 379,380, 386, 387

British Business AngelAssociation 362, 370

British FranchiseAssociation 158–9

British Venture CapitalAssociation (BVCA) 360–1,370

budgets 311, 315–23, 375–6,493

business angels 69, 349, 353,360–2, 383

business ethics 239Business Link 117, 258, 350,

351, 361, 362, 370business model 73, 92, 154–5business plan 118, 254–5, 353,

357, 362–3, 373–407business-to-business (B2B) 150,

154, 434business-to-consumer

(B2C) 154, 434buying signals 153

CCambridge 71, 251CAMPARI 357–8capital 174–5, 196–7cash 176, 194–5, 197cash book 194–5cash cow see portfolio of

productscash flow 15, 167–9, 288–9,

311–12, 331, 357–8cash flow forecast 167–9, 358,

375–6, 378, 379, 388Centre for Interfirm

Comparison 257, 261Chamber of Commerce 117,

149, 443, 507

change 7, 9, 23, 210–12, 215–21,476, 480

channels of distribution 106,129, 136, 154, 286–7, 300,333, 442, 444–6

character traits(entrepreneurial) 29–52,211, 213–14, 226, 330–1,333, 457–9

churning 19, 23civic enterprise/

entrepreneurship 7, 453–66clusters 71, 436, 481cognitive processes 230cognitive theory 40–3collateral 349, 355–7, 358, 367collective learning 71commodity suppliers 110–12,

267Companies Act 13, 157–8, 194company valuation see

valuationcompetitive advantage 59–60,

114, 138, 218, 224, 254, 256,266–8, 294–5, 330, 374, 378,381, 383, 385, 436, 441, 474

competitors 106–9, 118, 146–7,295, 330, 374, 378, 385

conflict 233–4, 339, 412,416–18, 419–22, 423, 424–5,441, 463, 466

contribution see break-evencontribution margin 132–4

see also break-evencontrol, organisational 167–82,

492–3see also locus of control

convertible preferred ordinaryshares 361

copyright 267, 385cooperatives 455, 504core business 294core competencies 254, 256,

294, 306, 308corporate entrepreneurship

470–96definition 471–2

corporate governance 239

534

corporate venturing 472cost-plus pricing 131cost–profit–volume – see

break-evencost ratios 260, 262creativity 4, 63–4, 77–92, 226,

240, 458, 484, 487, 492barriers 83, 488definition 78laboratory 82resources 91

credibility 116–17, 118, 441credit unions 455crises 210–12, 220, 331, 333critical success factors 374cross elasticity of demand 58,

133, 135Cruickshank Report 351culture 66, 443, 484

definition 45enterprise 8, 12, 21, 30entrepreneurial 30, 45–8family 412, 413, 416–18firm/organisational 89, 223,

228–30, 233, 258, 412,416–18, 477, 480–1, 484–7

current assets 174–5, 261, 262current liabilities 174–5current ratio 261, 262, 359customer loyalty ladder 138customers 106, 126, 146–7, 330,

331, 374, 378, 385, 441cycling 491–2

DDeath Valley 167, 311, 331, 356,

379debtors 178–9, 260, 262, 331,

354, 355, 356, 357decision-making 15–16, 182–7,

235, 266–7, 330–1, 333, 339,413, 423

decision-making unit(DMU) 150

deconstruction (of largecompanies) 8, 488

demographics 139, 147Department of Trade and

Industry (DTI) 351, 454,503

depreciation 172–5differential advantage 114, 269differentiation 98, 108, 113,

136–8, 154, 263–4, 267–9,294, 374

direct costs 387directors see board of directors

distribution channels seechannels of distribution

distributor see sales agentdiversification 114, 254, 301–4,

308dot.com 153–5, 332double entry

book-keeping 195–9due diligence 383dyslexia 79

Ee-business/commerce see

dot.comeconomics of

entrepreneurship 22–4economies of scale 4, 23, 98,

110–11, 131, 155, 257–8,267, 295, 304, 307, 308, 436

economies of small scale 112–13education 40–1, 117, 330, 358elasticity of demand see cross

elasticity of demandemergent strategy see strategy

development andstrategising

employee rights 505employment, influence of 41empowerment 226, 454, 477,

485–7entrepreneur

and innovation 61–3definition 9–11, 56

entrepreneurialarchitecture see architecturecharacter see personality traitsintensity 480personality see personality

traitsmanagement/leadership

482–4; see also leadershipmarketing 142–6transformation 474

equity investor 352, 353, 360–5,379–80, 381–3

ethnicity 21, 40, 43, 45, 46European Franchise

Association 159exporting 265, 300, 434, 435,

437–9, 442–4

Ffactoring 350–1, 352, 353, 356failure 42, 44, 210, 325–44, 354,

482prediction 333–4

family culture 41, 42, 45

family firms 6–7, 239, 337,412–28, 466

definition 415constitution 424–5life cycle 419–20strategic plan 424–5

features of a product/service 126–7

Federation of SmallBusinesses 351

financial control 194–9, 269,328, 331, 352, 357

see also financial driversfinancial drivers 176–9financial gearing/leverage see

gearingfinancial performance

analysis 259–63, 362–3financial ratios 257–8, 262,

333–4, 358–9, 379see also financial performance

analysisfinancial records 194–9financing gap 15, 21, 252, 348,

356–7, 360, 366–8first-mover advantage 436, 440,

472fixed asset turnover 260, 262fixed assets 174–5, 349, 352,

354–5, 356fixed costs 8, 131–4, 259, 387focus 68, 115, 138, 139–42,

303franchise 158–61, 445–6, 504futures thinking 265

Ggap analysis 87Gates, Bill 5, 71, 249gearing

financial 180–1, 261, 262,331, 338, 354, 358–9, 380,460

operating 179–80, 331gender 43, 45, 419–22General Enterprise Tendency

test 50generic marketing

strategies 109–16, 257–8,266–7, 294, 375

Global Entrepreneurship Monitor(GEM) 21–2

goodwill 338, 427, 460Graham Review 350grants 351, 352Greiner’s growth model 210–12,

330

Subject Index 535

gross profit margin 260growth

barriers to 251–2, 366, 368firms 6, 16, 327influences 35–50models 210–12, 215–20, 330,

339strategies 268–9

HHarvard 4, 5, 146harvest 326, 334–7health and safety 265, 507help and advice 507–8hierarchical structures 214hire purchase (HP) 350, 352,

353, 356horizontal integration 302

IICC Business Ratios 257, 261ideas – for businesses 66, 101–4immigrants 41–2incubation process 81–2independence 33industrial economics 23industrial evolution

theory 23–4information asymmetry 23, 333,

354–6, 360, 367, 442innovation 11, 15, 21, 23, 36,

46, 136, 268, 294, 296, 304,306, 339, 436, 437, 442, 459,462, 471, 475, 484, 487

definition 56, 58encouragement of 55–74,

492and location 71–2, 436and size 69–71

Innovative Potential Indicator(IPI) 74

innovators 277–8insolvency 326Institute of Management 239interstices of the economy 113intrapreneur/

intrapreneurship 472–3internet see dot.cominteractive marketing 129, 138interest cover 262, 263internationalisation 6internet 153–5intrapreneur/

intrapreneurship 462–3,473

introvert firm 423–4, 425

invent/inventor/invention 56–61, 475

invoice discounting seefactoring

Jjoint venture 298, 306, 434, 441,

446

Kknowledge 23–4, 66, 71, 101,

434, 441, 475, 484see also learning organisation

knowledge spillovers 24

Llabour market economics 23laggards 278–9launch strategy 129leadership 211, 221–3, 235–6,

374, 458, 471–96, 484skills 240–1style 231–5

learning organisation 476–80,484, 485, 487

learning style, ofentrepreneurs 38

learning theory 440–2, 478–9lease/leasing 350, 352, 353,

356legal forms of business 156–9,

504leverage see gearinglicences 439, 506life cycle, of product 258,

277–81, 294, 436, 437lifestyle firms 16, 296, 442limited companies 157, 504limited resources 185–7liquidation 326, 429Loan Guarantee

Scheme 349–50, 352loans 348–60Local Investment Network

Company (LINC) 362location 107, 148locus of control 32, 34, 42, 211,

213–14, 226, 330London Stock Exchange 365luck 105, 250

Mmanagement buy-ins/

buy-outs 335–6, 360–1, 426management team see teamsmanufacturing 377, 400–5marginal cost 131

marginal revenue 131margin of safety 177, 259, 262,

263, 358, 363, 379market

development 294, 300–1,304, 444

entry/exit barriers 444penetration 295–6, 304research 106, 129, 146–50,

257–8, 268, 385segment/segmentation

113–14, 139–42, 277,300–1, 330, 374, 378

traders 112–13marketing

mix 127–8, 131, 135, 139,264, 300, 374–5, 441

strategy 126–30, 278, 283–4,375–6

see also generic marketingstrategies

Marxism 22matrix structures 214–15, 489mergers see acquisitionsmission/mission statement

224–6, 374–6, 466motivation 223, 233, 383mutual guarantee schemes 357

Nnascent entrepreneurship 21national advantage 56, 63net profit 172networks/networking 70, 71,

117, 118, 119, 129, 151, 339,361, 415, 428, 436, 457,474–5

network theory 436, 440–2niche markets/marketing 8, 14,

68, 111, 113–15, 139, 140,154, 268, 269, 294, 301, 374,434, 437

non-executive directors 239,363, 365, 383, 425

non-metric mapping 88not-for-profit see social

enterprise

Oobjections, sales 152objectives 373–6, 378, 384OFEX 365operating

gearing/leverage see gearingrisk see margin of safety

opportunistic 35–6opportunity 63–9

536 Subject Index

organisation structure 212–15,229, 458, 480–1, 488–90

organisational processes 229outstanding success 115–16over-trading 328, 333, 356

see also Death Valley Curveoverdraft 350, 352, 353, 354,

355overhead costs see fixed costsowner-manager,

definition 11–12

Ppartnerships 156–7, 194, 504patents 136, 267, 385, 437paternalism 417penetration

market see marketpenetration

price see price, lowperceptual mapping 87personal construct theory 87personal guarantees see

collateralpersonality traits see character

traitspicking winners 31, 45place 129planning see business planPost-it notes 67Porter’s Five Forces 107–9,

257–8, 308, 333, 374portfolio

of lending/investments 355,363

of products 258, 281–91, 294preference shares 360–1premises 385, 507price/pricing 66, 71, 130–6, 331,

374, 385, 442cuts, effect of 134, 296, 300increases, effects of 134low 109–13, 136, 154premium 113 , 130, 136

price-earnings ratio 338price elasticity see cross

elasticity of demandPrince’s Youth Business

Trust 351proactive 38product

development 296–9, 304, 442extension 287–8, 296–7life cycle see life cyclemodification 287portfolio see portfolio of

products

product/market matrix 294–304productivity 20, 177–8profit

forecast/statement 168–73,198, 378, 387

margin 176, 260, 262profit–volume chart 180promotion 128–9, 378, 385public knowledge 71push/pull factors 99–100

Qquality of earnings 338quick ratio 261, 262

RR&D 70, 111, 308, 437ratio analysis see financial ratiosred tape 252re-engineering 264Regional Development

Agency 351relationship marketing 128–9,

142, 144, 297, 304, 339relationships 117, 151, 153,

233, 264, 306, 358–60, 363,384, 441, 457, 460–1, 474–5,487

repertory grid 88resources 116–17, 118, 457, 458,

463retail/retailing 377–8, 390–5,

413return on investment 62return on total assets 259–60,

262, 338return to shareholders 259, 262risk 7, 8, 9, 15, 22, 34–5, 39,

66–7, 105, 115, 179–80, 226,259, 263, 288, 296–7, 301–7,338, 357–9, 360, 362–3,379–81, 439, 442, 460–9,463, 480, 482, 487

measures of see break-even,margin of safety andgearing/leverage

mitigation 306, 443routes to market see channels of

distribution

Ssales 172, 176

agent 444–6commission 307mix 184–7projections/targets 307see also selling skills

scenario planning 265School for Social

Entrepreneurs 458, 467segment/segmentation see

market segment/segmentation

self-confidence 37, 42self-efficacy 42self motivation 38selling potential matrix 150selling skills 150–3serial entrepreneurs 9, 65, 119,

235service 377, 396–401share capital 348skimming see price premiumslack, organisational 492–3SLEPT analysis 258, 264–5, 308,

374Small Business Development

Centre 46, 117Small Business Service 18small firm(s)

characteristics 14–16contribution to the economy

(GDP, employment,exports etc.) 5–6

definition 5, 13–14failure 327–34starts, stops and

stocks 17–21Small Firms Loan Guarantee

Scheme see Loan GuaranteeScheme

SMEs see small firm(s)social capital 460social enterprise/

entrepreneurship 7, 453–66social entrepreneur

character traits 457–9definition 454

sole traders 156–7, 194spider’s web 212, 216, 339,

488–9spin-offs 71, 473stage models

of growth see growth modelsof internationalisation 434,

437–40of social

entrepreneurship 461–2start-up(s)

influences on 30–50international 434, 436–7social enterprise 455statistics see small firm(s)

statistics see small firm(s)

Subject Index 537

stock exchange/market 336,363–5

stock turnover 178–9, 260, 262strategic

alliance 306, 488intent 266, 310

strategising 309–11, 478–9strategy 484

development/formulation222–3, 252–5, 309–11,339, 375, 378, 480–1; seealso strategising

for growth see growthstrategies

misfit 266social enterprise 459, 466

success 42, 249–51succession 418–19, 423,

426–8supply chain 263–4, 481

see also value chainsustainable competitive

advantage see competitiveadvantage

switch costs 107–8, 264, 354SWOT analysis 250, 252–8, 266,

374–7synergy 70, 302, 308, 335

Ttax/taxation 382, 427, 442, 504

see also VATteam building/working 211,

233, 235–8, 258see also management team

technology 8, 62, 66, 69, 71,265, 437, 442

Third Way 453, 465Thomas–Kilman conflict

modes 233–4Trade Association 117training 45, 358, 360, 386trait theory see character traitstransaction marketing 142, 144triggers, for

self-employment 99–100trust 227, 235, 236, 297, 348,

358, 380, 384, 412, 414, 416,441, 458, 460–1, 474

Uuncertainty see riskunemployment, influence of 8,

41Unlisted Securities Market 336unique selling proposition (USP)

113, 115, 118, 218, 365

uniqueness, of product/service 113, 436

unitarism 477

Vvaluation, company 337–9value chain 58, 258, 263–4values 226–8, 238, 414, 415, 424,

458, 459, 460, 466, 477, 487variable cost 131–4, 387VAT 18–19, 168, 172–3venture capital 349, 352, 353,

360–3, 473venture capitalists 239, 349, 379vision 39, 222, 223–6, 252–3,

310, 375–6, 437, 459, 487voluntary liquidation 326

Wwalk-the-talk 225, 226, 227what if questions 183–4why? why? diagrams 67–8, 87women 21Workplace Employee Relations

Survey 20

X, Y, ZZ score 333–4

538 Subject Index

enterprenurship.pdf

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