Differences in small business firms

Entrepreneurship is one of the most popular words in the English language today. People are buzzing about entrepreneurs and entrepreneurial companies. In addition, today’s media information makes us believe that anyone qualifies as an entrepreneur in some fashion way- from lawyers and doctors to artists and teachers. However, the term is so often used that many people are not quite sure what it stands for?

Furthermore, despite intensive analysis, we still know relatively little about the entrepreneur (Begley and Boyd 1987a; Cunningham 1991), particularly how an entrepreneur differs from a small business owner (Gartner 1985). Research has indicated that small business owners and entrepreneurs have different goals (Litzinger 1965) and decision-making styles (Busenitz 1992). An entrepreneur has a kind of behaviour intent on opportunities rather than on capital and the small business owner can be a vehicle mutually for Schumpeterian (1934) kind of initiating new products and processes that modify the industry and the owner run the business for a living.

Thus, the report will address how the small business owners and entrepreneurs differ and will also include a critical review of the academic theory concerning motivation, aspiration, business management practices and styles.

Definition of Entrepreneurs

According to Birley (1996), an entrepreneur is “an individual who establishes and manages a business for the principal purpose of profit and growth. The entrepreneur is characterised principally by innovative and creative behaviour and will employ strategic management practices in the business”. Thus, the modern thinkers emphasise that an entrepreneur is an individual who creates and recognise opportunities for something new, handles the uncertainty and risk of that new venture ( which is not restricted to stand alone business ventures), and has the managerial competence to gather required resources from the environment (like capital) without necessarily owning these resources, which includes an ability to plan, to lead a team and to network outside the venture (Timmons & Spinelli, 2004).

Definition of Small Business Owners

A small business owner is “an individual who establishes and manages a business for the principal purpose of furthering personal goals. The business must be the primary source of income and will consume the majority of the owner’s time and interest. The owner perceives the business as an extension of his or her personality, intricately bound with family needs and desires (Birley 1996).

Entrepreneurs versus Small Business Owners

Geber (1995) is very clear that there is a substantial difference between the entrepreneurs and small business owners, a view has been endorsed by many writers including Birley (1996) and Jenning and Breaver (1997). Entrepreneurs are motivated by their goals of profit and growth for their ventures and by their use of strategic planning, for example, Bill Gates, the best known entrepreneur in personal computer revolution. Alternatively, small business owners focus on providing family income and view the venture as an extension of their personalities, for example, the Chinese takeaways.

Characteristics of Entrepreneurs: a Distinction from Small Business Owners

Characteristics of entrepreneurs and small business owners are different for different ages, different industries and different stages of the business’ life cycle. Indeed, the personality characteristics are both born and made, for ‘there is also a good deal of evidence that …certain attitudes and behaviours can be acquired, developed, practiced and refined through a combination of experience and study.'(Timmons and Spinelli 2004, p.249)

In addition, different authors have mentioned different characteristics of entrepreneurs from their research. They distinguished the characteristics between ‘normative’ and ’empirical’ (Kuhn, 1960).

Figure : The characteristics of entrepreneurs; (d’ AMBOISE, D. and MULDOWNEY, M. -1988)

In a nutshell, according to Timmons and Spinelli (2004), there are five major attitudes and behaviours that characterise some entrepreneurs:

Commitment and determination

Need for achievement (McClelland, 1961), with its related attitudes towards risk

Internal locus of control

Opportunity orientation

Creativity and innovation

Besides, both small business owners and entrepreneurs are of critical importance to the economy. However, it is useful to draw a distinction between them since small businesses and entrepreneurial ventures serve different economic functions. Thus, it will also be more valuable to differentiate what they manage. Moreover, this will help us to have a better understanding of the management styles and business practices of the entrepreneurs and small business owners.

The Distinction between Small Business Venture and Entrepreneurial Venture

An entrepreneurial venture, according to Birley (1996) is “one that engages in at least one of Schumpeter’s four categories of behaviour: that is, the principal goals of an entrepreneurial venture are profitability and growth and the business is characterised by innovative strategic practices”. Alternatively, small business venture is “any business that is independently owned and operated, not dominant in its field and does not engage in any new marketing or innovative practices Birley (1996).

Wickham (2004) stated that there are three main characteristics which distinguish the entrepreneurial ventures from small businesses:

Innovation and Creativity

The successful entrepreneurial venture is usually based on a significant innovation and creativity. This might be technological, an innovation and creativity in offering a new service; or a new way something is marketed or distributed; or possibly an innovation or creativity in a way the organisation is structured or managed. An entrepreneur is recognised for their innovative and creative ability, for example, James Dyson, who came up with the creative idea of the ball-wheel- barrow business and continue his innovation by moving on to the cyclone vacuum cleaner business. On the other hand, the small business is usually involved in delivering an established product or service. So, while a small business may be new to a locality, it is not doing anything new in a global sense for example, cost-cutters shop, whereas an entrepreneurial venture is usually based on a significantly new way of doing something.

Potential for Growth

An entrepreneurial venture has more potential for growth than a small business does. This results from the fact that it is usually based on a significant creativity. The market potential for than innovation, will more than enough to support a small firm. It may even be more than enough to support a large firm and signal the start of an entire new industry. For example, Adam Osborne (1939 -2003) was the best known entrepreneur as creator of the first portable computer, but he was also an author who made a successful move into publishing computer books. On the other hand, the small businesses which operate within an established industry are unique only in terms of its locality. Therefore, it is limited in its growth potential by competitors in adjacent localities. A small business operates within a given market; the entrepreneurial venture is in a position to create its own market.

Strategic Objectives

Most businesses have at least some objectives. Even the smallest firm should have sales targets if not more detailed financial objectives. Objectives may be set for the benefits of external investors as well as for consumption by internal management.

The entrepreneurial venture will usually go beyond the small business in the objectives it sets itself in, that it will have strategic objectives. Strategic objectives relate to such things as:

• Growth targets
• Market development
• Market share
• Market potential

Growth Potential

Strategic objectives

Figure : the differences between a small business and an entrepreneurial venture

However, not all entrepreneurial ventures will necessary show an obvious innovation, clear growth potential or formally articulated strategic objectives, and some small businesses may demonstrate one or two of these characteristics. Nevertheless, in combination they add up to distinguish the key character of an entrepreneurial venture, that is, a business that makes significant changes to the world.

Therefore, entrepreneurs and small business owners pursue and create new opportunities differently; they fulfil the ambitions of their founders and managers in different ways. Supporting them presents different challenges to economic policy makers.

For instance, the self-employed owner of a neighbourhood pub has very little in common with the founders of a Bennigan’s or T.G.I. Friday’s. Furthermore, studies of the psychological characteristics of the small business owners and the entrepreneurs suggest differences that affect both the management styles and cultures of the firms. Sexton and Bowman- Upton (1991) found that the entrepreneur, the founder of Bennigan’s, has unique set of psychological traits which they collectively labelled as “propensity towards growth”.

Factors in this propensity included a high energy level, a preference for high risk/high return activities, a desire for control, a separation of personal and professional activities and little need for support from others. On the other hand, the small business owner, the self-employed owner of the pub, were found to have priorities that tend to suggest that other factors (for example, family and social) are more important that the business.

The Differences between the Entrepreneurs and Small Business Owners

Small Business Owner

Entrepreneur

Low propensity towards growth

High propensity towards growth (looking for new opportunities)

Preference for low-risk taking and low return activities

Preference for high-risk taking and high return on activities

Non business concerns more important

The business itself takes priority

Less control-driver

Strong need for control (an internal locus of control)

Prefers repetition of tried and true ways

Likes to experiment with novel approaches (innovation)

Detail-oriented

Does not take time for precision

Sceptical of inspiration

Driven by aspiration (needs for achievement)

Works at steady pace

Works with bursts of energy

Rarely makes errors of fact : Works problems all the way through

Often makes errors of fact; jump to conclusions

Patient with routine delays

Impatient with routine details

People-oriented, Aware of people’s feeling

Task-oriented, oblivious to people’s feeling

Trustful of others

Distrustful of others

Source: M. Joseph Sirgy, A. Coskun Samli (1995)

Carland (1990) indicated that entrepreneurs have a stronger preference for creativity than owners of small businesses. Entrepreneurs tended to spend more time finding new and different ways of doing things. For example, Richard Branson, who is a portfolio entrepreneur, has diversified his virgin group into different areas. While small business owners concentrated on making established procedures more efficient, for example, small local pub; or corner shops all selling the same types of products and service.

Hellriegel, Slocum and Woodman (1983) have identified other differences, including a tendency for entrepreneurs to work with bursts of energy rather than steadily, to jump into conclusions, to be patient with complicated situations and impatient with routine delays and to follow their inspirations. For example, despite Oswald Boetang, the Ghanaian designer and tailor, endured two bankruptcies, divorce and the break-up of his business partner, he has that inspiration and determination to be successful (a need for achievement), that motivates him not to take time for precision; learn by his mistake and to continue innovating new fashionable ideas.

However, Joseph Sirgy (1995), stating that entrepreneurs are task-oriented is quite misleading. Top entrepreneurs like Bill Gates; Warren Buffet and Richard Branson have proved in their ventures to be people-oriented, looking for the best interest in people.

Furthermore, entrepreneurs have an internal locus of control. They actively look for opportunities to place themselves in situations where they do not have to rely on other people or luck- they think life is under control and they can affect what happens around them. For example, Duncan Bannatyne from the Dragons Den TV Show started his entrepreneurial life by trading in cars. Being brought up from a poor family background, Duncan did not believe in luck, on the contrary, he believed in his determination and commitment to be successful. He had a control over his life and he also take up risks.

Motivation and Aspirations: Distinction between Small business owners and Entrepreneurs

Motivation, the condition that makes individuals undertake, or at least desire to undertake, certain courses of action, is a subject that has received lot of attention from psychologists over the past hundred years. Different approaches will be used to understand motivation and adding up to a general picture of what motivates an entrepreneur.

Maslow Hierarchy of Needs

Entrepreneurs and small business owners have different set of needs, which hence, motivate them differently. The idea of a series of needs that can be resolved into separate components was the basis for Maslow’s (1943) well-known hierarchy of needs in which physiological, security, social and self-actualisation needs were satisfied in that order of priority. Miner (1997) has used Maslow hierarchy of needs to provide a distinction between the set of needs that motivate an entrepreneur and small business owners.

Small business Owners

Entrepreneurs

Figure : Maslow Hierarchy of needs; source: www.businessballs.com

Entrepreneurs are at the highest level of needs, which, is self-actualisation. These needs can be supported by their characteristics and personality traits. Entrepreneurs are driven by their aspiration. They are motivated by the goals of profit and growth. They are committed and determined individuals who want to be successful; creative and innovative by creating new opportunities.

Entrepreneurs have an internal locus of control which enables them to transcend all the needs. For example, lord Alan Sugar, is at a self-actualisation stage, he has satisfied all the other needs. He was brought up in a council flat in Hackney and despite leaving school at 16, his driven aspiration of being a successful British entrepreneur, made him climb the hierarchy reaching at the transcendence needs where he is satisfying his desire for self-fulfilment and personal growth.

Moreover, Miner (1997) conducted a survey about list of motivation factors for small business owners and concluded that it is reasonable to say that small business owners are at the esteem needs:

Important motivational factors for small business owners

Mean Score

Satisfaction

4.5

Independence

4.1

Financial

3.6

Picking people you work with

3.4

Building an enterprise that can survive

3.0

Leading others

2.5

Figure : Small business Owners motivational factors from a mean scale of 0-5; source: Miner (1997)

The survey shows that small business owners are motivated by their performance, status and condition. Hence, this leads to the satisfaction of their competence, individual achievement, reputation, responsibility and independence. For example, small corner shops or Indian restaurants are satisfying their esteem needs. They may be reputed in the locality due to their great achievement in having a good customer service and also by handling their responsibilities effectively.

However, Maslow hierarchy of needs has received several criticisms. Alderfer (1964) stated that people sometimes try to satisfy more than one need at a time. For instance, Entrepreneurs may be satisfying the esteem needs and self-actualisation needs at the same time, which according to Alderfer is the growth needs.

In addition, frustration of a higher order need can lead to efforts to satisfy a lower-level need (frustration regression hypothesis). For example, some entrepreneurs may be at the self-actualisation stage, but due to a failure in one of their venture, can lead to the efforts of satisfying the esteem needs, such as finding ways to make their venture reputable.

McClelland (1961): Achievement Motivation

In McClelland’s view behaviour is directed towards an aspirational picture of delivering personal excellence. What constitutes this excellence may be derived from internally referenced considerations or it may be picked up from external signals. McClelland was particular interested in achievement as a motivator for young entrepreneurs.

Entrepreneurs are driven by strong need to excel against self-imposed standards- to achieve challenging goals. They have an internal locus of control that makes them have a low need for status and power, and a low need for affiliation with other people. Thus, according to McClelland, entrepreneurs are quite independent types. For example, the music entrepreneur, Simon Cowell, despite having a huge failure in his music recording industry in the 80’s, his need for achievement and his internal locus of control motivate him to be successful by showing his creativity of the X factor and American Idol.

Research has also proved that small business owner has a low need for achievement, and on the contrary, has a high need for power and status (to combat their competitors). However, the need for achievement may not be the most important variable for predicting the likelihood of starting a business. Borland research shows that achievement motivation was neither a significant factor among students who intended to become entrepreneurs and those who did not (Borland 1974), nor between those who indicated entrepreneurial interest through the choice of majors (Sexton and Bowman 1983). Yet, the question of whether students’ majors or stated intentions are appropriate surrogates for business ownership arises.

Entrepreneurial Motivation

It is important to understand the link between entrepreneur and motivation. Burns (2008) stated “motivation plays an important part in the creation of new organisations, thus, theories of organisation creation that fail to address this notion are incomplete”. Kumar (2008), stipulates that “particular goals, attitudes, and backgrounds where all important determinants of an entrepreneur’s eventual satisfaction”. In that manner, Douglas et al. (1994) examines the motivational process an entrepreneur experiences.

Figure : Model of Entrepreneurial Motivation; source: Naffiziger, D., Hornsby, J. and Kuratko, D. (1994)

The decision to behave entrepreneurial is the result of the interaction of several factors. One set of factors include “the individual personal characteristics, the individual personal environment, the relevant business environment, the individual’s personal goal set and the existence of a viable business idea” Douglas et.al (2004). In addition, the entrepreneur compares his/her perceptions of the probable outcome with the personal expectations.

However, it can be argued that entrepreneur psychological characteristics, such as drives for achievement and inspirations, are also important it as help them to be motivated by acknowledging what created a lower outcome than expected, and, thus learn by their mistake. Locke and Baum (2007), has provided a summary of key motivation variables based on previous findings and show general traits measures being mediated by specific measures affect the performance of entrepreneurs.

Figure : Summary of motivational traits and situationally specific motivators, source: Locke and Baum(2007)

Nevertheless, Kets de Vries (1985) referred to the ‘dark side’ of the entrepreneurs in discussing how the entrepreneurial personality and ego can be taken to extremes and cause failures, for example, they have a strong need of control and sometimes, may be seen as a bully. Their distrust of others, their desire for applause, and their defensiveness can also be a limitation for them to be successful and affect their potential as an entrepreneurial venture to grow.

According to Landau (1982), there are four different types of entrepreneurs as regard to the risk bearing and innovativeness. Thus, stating that all entrepreneurs are motivated by high risk taking and innovativeness is misleading.

Low

High

Risk-bearing

Low

High

Innovativeness

For example, the gambler is the entrepreneur characterised by low degree of innovation and high risk. Thus, they are motivated by high risk propensity. Therefore, different types of entrepreneurs are motivated differently. Hence, more research should be conducted on motivation vis-à-vis different types of entrepreneurs.

Business Management Practices and Styles

The entrepreneurial venture represents a particular management challenge. The nature of the entrepreneurial venture characterises and defines the management that is needed to drive it forward successfully. Moreover, the report has already provided a distinction of entrepreneurial ventures from small businesses (innovation; potential for growth and strategic objectives) which reflects to their business practices.

The figure above shows how practices in small businesses differ from entrepreneurial ventures. Wallach (1983) identified that innovative culture (challenging, creative, and enterprising) more closely fits the entrepreneurial venture, while small businesses demonstrate a supportive culture (family-like and humanistic). Carland (1990) has also found in her research that entrepreneurial ventures concentrate on strategic management whereas small businesses on tactical management.

Entrepreneurial Management

Entrepreneurial management is characterised by its whole organisation scope, its objective of creating change and a focus on exploiting opportunity Wickham (2004). These characteristics are shown in the figure below as a comparison of conventional management and entrepreneurial management.

Conventional

Management

Entrepreneurial Management

Scope

Whole organisation

Part of organisation

Objectives

Create change

Maintain status quo

Focus

Pursue opportunity

Conserve resources

A focus on Change

Entrepreneurs are managers of change. They bring people, money, resources and ideas together to build new organisations and to change existing ones. For example, Richard Branson started off his business as selling audio tapes recorder, and now he has made ‘entire new worlds’ by taking risk and diversifying his products namely, virgin media; virgin active, virgin airline etc. He keeps bringing in new changes to the world.

Entrepreneurs are different from conventional managers or owners whose main interest is in maintaining the status quo by sustaining the established organisation, protecting it and maintaining its market positions.

A focus on Opportunity

Entrepreneurs are attuned to opportunity and bring in creativity. They constantly seek the possibility of doing something differently and better. They innovate in order to create value. Entrepreneurs are more interested in pursuing opportunity than they are in conserving resources. Entrepreneurs see resources as a means to an end, not as an end in themselves. Entrepreneurs expose resources to risk but also make them work by stretching them to their limit in order to offer a good return.

In contrast, small business owners in established businesses are more often responsible for protecting ‘scarce’ resources than for using them to pursue the opportunities that are presented for their organisations.

Organisation Wide Management

The entrepreneur manages with an eye to the entire organisation. They benchmark themselves against organisational objectives. They label themselves as having a visionary management style rather than focusing on objectives in particular department. Thus, entrepreneurs develop a holistic approach as regard to their management style and business practices.

The effective entrepreneur does all these things when appropriate. There are times when the status quo is worth sustaining, and at times when it becomes unwise to expose resources. Part of the skill of the effective entrepreneur should know when not to venture.

In addition, entrepreneurs should use appropriate leadership, power and motivation as managerial tools to have a better control, focus and direction for the venture. These are tools entrepreneur should adopt in order to turn their vision into reality.

Furthermore, some entrepreneurs’ tend to adopt an autocratic business management style with a tall structure. For example, Lord Alan Sugar is recognised for this autocratic style following the steps of Taylorism. Critics have described Sugar as “out-of-touch” and his work ethic as “a model of bad management in the UK. Negative, bullying and narrow-minded… (Sugar) rules by fear”. http://www.dailymail.co.uk/news/article-461607/Why-earth-want-work-Sir-Alan-Sugar.html.

Therefore, entrepreneurs should ‘climb the growth wall’. Creativity and innovativeness alone would not make an entrepreneur successful. They should also empower and motivate their subordinates by giving them control to make decisions. If they do not do so, they will be too stress and tired, which can cause their venture to fail.

Thus, an entrepreneurial organisation should always learn through its success and failures. This will enable the entrepreneur to develop his vision into reality to achieve success (Wickham 2004).

Opportunities

Focus

Fit

Successes

Entrepreneur

Learning

Failures

Configuration

Organisation

Resources

Outcomes

Actions

Conclusion

Overall, the report has provided us with a better understanding of the differences between entrepreneurs and other owners of small businesses. The report has discussed the different characteristics of entrepreneurs and how it differs with those of small business owner. For example, psychological characteristics such as need for achievement, internal locus of control, need for autonomy, creativity and risk-taking are predominant in entrepreneurs. On the other hand, small business owner’s main priority is their family goals and their income.

Entrepreneurs are motivated to ‘create an entire new world’ Joerges & Wolff (1991). The report also explain Douglas entrepreneurial motivation model which surpass the psychological characteristics. He stated that the initial determination to behave entrepreneurially is the outcome of the dealing of a range of factors such as individual personal characteristics, personal goal set, personal environment, the existence of a viable business idea, and relevant business environment. On the other hand, small business owners are motivated by high need of power; status and independence (Miner 1997).

Kets de Vries (1985) has also discussed about the dark side of entrepreneurs, thus, in order to turn their vision into reality, entrepreneurs should learn from their mistakes and successes and also learn to climb the growth wall.

There are also different types of entrepreneurs, thus, each type of entrepreneurs are motivated and manage their ventures differently. Thus, motivation factors, business management style and practices would be different, for example, Alan Sugar management style and business practices are different from that of Richard Branson. Besides, an entrepreneurial performance are influenced not only by personal motivation and aspirations but the ability to motivate employees and having good human relationship skills; general management skills, effective leadership skills; proper use of power and industry knowledge.