The Roles Of Small Businesses Business Essay

This chapter will synthesize the various growth strategies into a set of dimensions or elements that will best describe this concept. The discussion will progress to a focus on the small business sector.The chapter reviews both theoretical and empirical theories underpinning organizational growth. Issues concerning strategies of corporate growth, strategies of sustaining that growth, corporate planning, internal and external forces affecting growth are discussed. In addition, the chapter makes a critique on the literature review in the area of corporate growth. To this end, issues pertaining to viability and sustainability of SMEs in particular law firm’s growth are discussed.

2.1 Roles of Small Businesses

Aside from their contribution to employment and income small businesses are also engine for growth and sustainable development (Birley 2001). Levine et al (2005) elucidates that there is a strong positive correlation between the importance of law firms in an economy and growth in GDP per capita in both developed and developing world.

Rwigema and Karungu (1999) points out that business partnerships are dominant in numbers in most economies. In First World countries like the United States of America and the United Kingdom, small enterprises play an important role in the economy, accounting for an estimated one third of industrial employment and a lower percentage of output (Berger and Udell 2001). According to Mandl (2008), in Hungary 70-80% is small business where at least 20% of sole proprietors are family businesses. Chua, Chrisman and Sharma (2009) posit that small businesses account for 99% of all UK businesses. Together they provide more than half of all UK employment, employing over 13 million people, and have a combined annual turnover of £1,500 billion (Horváth, 2009).

The importance of small businesses is widely recognised in numerous African countries such as Togo, Uganda, Ghana, Cote d’voire, Nigeria, Kenya, Malawi, Burkina Faso, as well as others (Rwigema and Karungu 1999). In Third World countries like Zimbabwe where small businesses dominate economically active enterprises, the SMEs prosperity is considered far more important than in First World countries (Kotze and Smit 2008).). It has long been debated that SMEs are pivotal to employment creation and economic growth, particularly in countries such as Zimbabwe that has a high unemployment rate, estimated at up to 70% (Friedrich, 2004; Watson, 2009). In South Africa, it is estimated that 90% of all formal businesses are small, medium or micro enterprises (Rwigema and Karungu, 1999).

Research by Hughes (2005) has indicates that the economic activity of small firms such as law firms has increased substantially in the past. The employment growth rate has also been greater in small firms than large organisations offering further evidence of the importance of the small firm sector (Enterprise in Europe 1994).

2.2 Small businesses survival

Based on surveys in the U.S, 30% of family and partnership enterprises are passed on to the next generation, and only 13% of these enterprises remain in family ownership through three generations (O’Gorman, 2001). Plourd (2009) notes that in Australia 11% of small businesses survive to be third generation enterprises and 6% of these to be fourth generation businesses. The reason of succession failures is mainly the lack of planning and preparations (Westhead 2003). Basing on Poza (2007) researches, 85% of new enterprises fail in the first 5 years of operation. From those family businesses that survive, only 30% is handed over successfully to second generation of the founder-owner. This rate is even worse in the case of the second-third and third-fourth generation (Tatoglu et al. 2008). According to Reynolds and Lancaster (2006), 12% of these enterprises remain in the ownership of the third generation and 4% of them remain for the fourth generation to the family. Surveys performed in the UK show that 30% of family businesses will be second generation enterprises and 2/3rd of these get into the hands of the third generation and the rate of those enterprises which survive after the third generation is 13% (Chirico 2008). The highest rates of second generation small businesses are in Belgium (55%), Italy (48%), Finland (44%) and the U.S. (40%) (Birley 2001). Likewise, King (2009) notes that the highest rates of third generation family businesses are in Germany (34%), Finland (24%), the UK (23%), Italy (22%) and the U.S. (20%).

The work of O ‘Farrell and Hitchins (2009) offers the argument that many law firms wish to continue to exercise their own trade skills, and may be reluctant or unable to become more heavily involved in the administration, management and paperwork required by technological complexity. Woo et al (1989) identified that lawyers and independent entrepreneurs had less experience in marketing and sales. These are areas that current theoretical thinking considers to be imperative if small firms are to succeed within a global market. The Cambridge Study (1992) quoted in Stokes, (1995) and Szirmai, (2006) suggests that law firms generally are not adept at marketing, financial control, or management, and often possess little motivation in terms of accelerating the firm’s innovative capacity. These factors can be construed as contrary to the atypical large organisation (Kiong, 2008).

2.3 Succession in Small Businesses

It is important to note that succession is the final test of any business enterprise. If an enterprise comes from a one-man business into a partnership business, continuity becomes a unifying interest. If the enterprise is passed on while it is profitable and in good condition, it will be the main driving force for the new generation (Gersick et al. 1997). According to the survey of Chua (2003) involving Canadian partnership entrepreneurs, the main concern of entrepreneurs is related to succession. More so, other factors such as personal and family reasons and changing of market conditions influence the decision about the handover (European Commission 2002).

According to the survey performed by the Barclays Bank (2002) 61% of the partnership law enterprise leaders do not know what future the enterprise will have. Regarding other non-family businesses this rate is 71% and only 16% of them are ready for the handover. Based on a survey in Finland by Malinen (2004), 61.1% of partners deal with problems of succession due to their old age, 9.5% due to they got tired of being partners, 7.1% due to they are no longer capable of operating the enterprise with profit. From the involved 492 firms 24.8% said that their companies will become involved in succession in the near future, 9.3% say that a change like that is not due, 65.8% did not share their opinion (Malinen (2004).

2.4 Sustainable Growth Strategies for Small Firms

Burns (2001) notes that small businesses need to change the way it operates and must strategize of corporate growth, strategies of corporate planning, internal and external forces affecting the firm, become more formal without becoming too bureaucratic and these changes must be properly managed if the firm is to grow successfully. Hall (1995) states that over time a business will change and that some changes will reflect the need to respond to new threats or opportunities, which can arise in even the most stable environments.

Burns (2001) believes that the sustainable growth models that seek to describe the changes faced by the entrepreneurs will also provide them with ways and means of managing such change. Dodge and Robbins (1992) point out the development of any business organisation, large or small, tends to follow a predictable pattern that is usually characterised by sequential and progressive phases. Some of these growth models are explained below.

2.4.1 Blue Ocean Strategy

The blue ocean strategy by Kim and Maubourgne (2005) reveals ways to reconstruct boundaries and open up avenues to a firm’s noncustomers which, if followed, allow an organization to create and capture new demand. According to Kim and Maubourgne (2005), searching for commonalities across noncustomer types allows organizations to see how to collapse strategy canvases and capture a far greater share of noncustomers than would creating a strategic offering for a single large type of noncustomers. By reconstructing market boundaries and focusing on the framework of eliminating, reducing, raising and creating, organizations are able to achieve differentiation and low cost -these are no longer tradeoffs. These are explained diagrammatically below:

Figure 2.1 Formulating the blue ocean strategy for small business

Source : Kim and Maubourgne (2005)

2.4.2 The Churchill and Lewis Growth Model

According to Halttunen (1999), many scholars have described the sustainable growth path of a law firms as a lifecycle model which is usually based on the size of the business and its maturity where the chronological stages in the model represent the growth phases in the firm’s development. Churchill and Lewis (1983) developed a growth model, which explains the predictable growth pattern of a small-to-medium sized enterprise. These five stages are illustrated below:

Figure: 2.2 small business growth paths

Source: Churchill and Lewis, 1983

The model developed by Churchill and Lewis (1983) has five stages, namely existence, survival, success, take-off and resource maturity. In the existence stage, the key focus is on obtaining customers and as such the extent of formal systems is minimal and in some cases non-existent. In addition, the organisational structure is flat and therefore the owner manager adopts a management style where there is direct supervision of those working in the business. As the business progresses to the second stage, survival, the business begins to employ some formal systems as the organisational structure develops more levels and hence, the owner manager begins to delegate some of the responsibilities to employees. The success stage is characterized by the owner-manager deciding either to keep the business at its current operational level or to use the business to launch into some form of growth. The decision to will be driven by the owner-manager’s motivation, opportunity recognition and resources.

Churchill and Lewis emphasize the resource requirements and the varying demands placed upon the entrepreneur during growth, their stages of growth parallel Chandler’s. The resource requirements at formation are predominantly financial, whereas during growth, managerial skills and human resources become critical.

2.4.3 Value Discipline Model by Treacy, Wiersema and Wesley

Treacy, Wiersema and Wesley (1995) introduced another set of strategies based on value discipline and this can also be used by a company as growth strategy to short circuit to the market leader pinnacle. This includes operational excellence whereby the company provides superior value by leading its industry in price and convenience. The second strategy equally important will be customer intimacy whereby the company provides superior value by precisely segmenting its markets and tailoring its products and services to match exactly the needs of targeted customers. A company is headed in the right direction when it realizes that the customer viewpoint is more important than the company viewpoint (Naicker, 2006).  Accordingly the services will be tailored such that they will exceed customer expectations in terms of rreliability, responsiveness, empathy and assurance.

Equally indispensable, is product leadership where the company provides superior value by offering a continuous stream of leading-edge products or services that make their own and competing products obsolete (Gersick et.al 1999]). As such law firms must be on the cutting edge of new technologies and innovative business processes. The company’s customer value proposition will offer a superior solution to customers’ problems, and all products will be well differentiated.

The greatest tragedy in business is that the strong survive and the weak do not. According to Drucker (1992), winners and market challengers will be those who insist upon being the number one or number two fastest, leanest, lower-cost, world-wide producers of quality goods or services and those who have a clear technological edge or a clear competitive advantage in their chosen niche.

2.4.4 Continuous Innovation

Innovation and technological change are powerful drivers of economic growth. According to Colli (2003), law firm management committees just naturally focus their attention on that which is presented to them. Most often, what is presented are internal problems which include partner performance that falls below budget, juniors that are not achieving according to expectation, and clients that are not being fully serviced. However, it is not sufficient for a managing partner to simply think of the time to develop a new strategic plan for a firm. The whole firm must be made receptive to the concept of innovation, and made comfortable with perceiving change as an opportunity rather than a threat (Casson et.al 2009).

Innovation must be part and parcel of the ordinary, the norm, the routine and the concept must be communicated in such a way as to be made attractive and beneficial to partners. According to a February 2000 Economist article, a Price-WaterhouseCoopers study on innovation claimed that innovation will be the dominant value proposition for the next century. Innovation is the basic imperative for new approaches, new processes, new delivery systems, new services, and the prerequisite for sustainable growth (Reynolds and Lancaster, 2006). The primary strategic challenge is not to find new sources of funds to fuel innovation, but rather to discover new ways to change attitudes and mind-sets throughout the firm. Every professional in a firm must come to understand that it is his or her job to think of new solutions and new ways of doing things.

2.4.5 Corporate growth

In their pursuit of growth, business organizations undertake varying strategies. These strategies can be classified either as internal or external, Thompson and Strickland (2003). According to Kotler (2000), internal growth is when a company harnesses its resources to carry out its business activities such as expansion by adding a new product line or increasing production capacity in anticipation of increased market demand or focusing a niche in the market or opening totally new markets. To enhance corporate growth, Kotler (2000) identified the following four businesses strategies which can be pursued singly or in combination:

2.4.6 Ansoff product growth model

Ansoff (1957) proposed a useful tool, the product-market expansion grid (as shown in Table 2.2 below) for identifying new intensive growth opportunities. With the tool, a company has to consider whether to increase market share with its existing products in the current markets, thus market penetration. Further, it has to consider whether to establish new markets for its existing products – market-development strategy. Also, it can consider whether to develop new products of particular interest to its current markets – product development strategy. Finally, opportunities can be reviewed to develop new products for new markets – diversification strategy.

Table 2.2: Three Intensive Growth Strategies: Ansoff’s Product-Market Expansion Grid

Current

Products

New

Products

Current

Markets

New

Markets

1. Market – penetration

strategy

3. Product-development

strategy

2. Market-development

strategy

(Diversification strategy)

Source: Ansoff (1957:114)

According to Ansoff (1957), business sales and profits can be increased through backward, forward or horizontal integration within an industry. Backward integration occurs when an organisation takes control of its suppliers. Forward integration is whereby a business entity takes control of the distribution channels. The motive behind these two approaches is to enhance the value chain efficiency. With horizontal integration, a business entity acquires competitors so as to reduce competition and benefit from economies of scale (Ansoff, 1957).

Diversification growth exploits opportunities which are outside and unrelated, to the current business. However, they must be attractive and having opportunities. Diversification usually takes three forms (Kotler, 2003).

2.4.3 Resource Based Review (RBV) model

Management gurus like Grant (1991) and McKinsey (1997), have written a lot on corporate growth. However, the most notable among them is Penrose’s (1959). The work focuses on processes through which firms grow and these are:

Firms can be viewed as bundles of resources in an administrative coordination. The heterogeneity of services from resources gives each firm its uniqueness.

Always, firms have excess resources due to resource indivisibilities and knowledge creation. Excess resources can provide services at marginal cost. They motivate entrepreneurs to apply them to new activities, promoting growth and diversification.

Penrose (1959) has an immense influence on corporate growth and has further provided fundamentals for the development of the Resource-Based View (RBV) theory of the firm.

According to Connor (2002) the resource-based theory stresses the importance of firm-specific resources and capabilities for sustainable competitive advantage and growth. It argues that strategic success can be found through the acquisition, development and deployment over time of resources and skills that are either unique in themselves or in the way they are combined with other assets.

However, Wernefelt (1984) and Mahoney and Pandian (1992) argue that the resource-based view assumes that resources are heterogeneously distributed across firms and that resource differences persist over time. Conor (2002) argues that the RBV broadly views the firm’s resource endowment as the core of strategy options rather than constant repositioning of a firm in the face of shifts in the external environment. Scholars have linked resource-based view to dynamic markets and emphasized the ‘dynamic capabilities’ by which managers integrate, build, and restructure internal and external competencies to mitigate the fast changing environment (Teece, Pisano and Shuen, 1997). McKiernan (1997) reinforces this fact by stating that the RBV approach to strategic management decision-making is on the strategic capability of the firm rather than attempting to constantly ensure a perfect environmental fit. The decision makers are the architects of their environments.

2.5 Challenges faced by small firms

It can be gleaned from various literature sources (Berger and Udell, 2001; Reynolds and Lancaster, 2006; Bank of England, 2001) that a high percentage of small organizations fail in the first five years of trading, often as a result of over trading and financial strain. Firstly, access to finance has featured prominently in a number of studies as a constraint on SME development. Rogerson (2001) and Skinner (2005) concur that a lack of credit is a big constrain experienced by emerging African entrepreneurs, who depended on personal loans as their start-up capital. Furthermore, finance, skills, business training and less rigid regulations are the key elements to promote entrepreneurship, to enhance the enterprise environment, to improve competitiveness and capacity in the SME enterprise (Rogerson, 2008).

Although law firm owner-managers are most conversant with their enterprises, they are frequently not able to identify all the factors impacting on their enterprise activities and/or overrate the significance of external factors, while underrating internal weaknesses (Kesper, 2000). According to Naicker (2006), problems experienced by law partnerships can be categorised as enterprise based problems. Naicker (2006) and Watt (2007) agree that internal factors such as human resource problems encompassing poor staff planning, multi-functional management, high employee and the inability to identify the target market.

In South Africa, law firms are hampered by a structural problems, contrary to SMEs in other developing countries, do not complement larger organisations with specialised products or services, but they compete with larger enterprises in the same product markets (Rogerson, 2004), albeit for different consumer segments. Huang and Brown (2006) note that the impediments to SME success are numerous and varied, and include inherent organisational obstacles such as poor managerial skills and education and training; industry-related problems such as the entrepreneur’s inability to understand market expectations, and poor market access; and economy-based obstacles such as interest rate fluctuations.

Interesting to note is that SME owner-managers are primarily responsible for the management of their enterprises’ activities. Studies conducted by Filep, Pákozdi and Szirmai (2007) confirmed SME owner-managers’ ignorance pertaining to the risks their enterprises face from internal and external sources, including risks emanating from entrepreneurial actions. According to Bálint (2006), risk management techniques are primarily limited to risk avoidance actions, and to a lesser extent, risk transfer through insurance activities. Unfortunately, most risk activities tend to be construed reactively, thereby affecting the availability of enterprise resources in addressing these risks (Laforet and Tann 2006). If an enterprise embeds a structured approach to enterprise risk management within SMEs, potential benefits such as cost reductions, reducing the over-management of risks and organisational alignment towards the SME’s mission and objectives can be realised.

2.6 Risk Management Strategy for Law Firms

Law firms operate in a macro, micro and market environment that is affected by numerous internal and external influences which continuously change. These ‘change factors’ enable an entrepreneur to identify opportunities and threats (Watson, 2004). It is therefore of paramount importance that an entrepreneur has the capability to evaluate decisions to determine the enterprise’s future strategy (Watson, 2004).

Core Competencies

Hamel and Prahalad (1994) spearheaded and popularised the notion of core competence, which assists managers to think strategically in terms of resources and capabilities of the businesses. Thompson and Strickland (2003), defines core competence as a ‘competitively important internal activity that a company performs better than other competitively important internal activity’.

Hamel and Prahalad (1994), further state that core competencies are built through a process of continuous improvement and enhancement constituting the focus for corporate strategy. Thompson and Strickland (2003) stress the fact that a firm’s ‘core competence resides in its people and in its intellectual capital, not in assets on the balance sheet’. Hence it is vital for a firm to have a core competence as a strategy, as it is the source of competitive advantage

The management of core competencies is principal to strategic challenges facing a firm given their important relationship to superior profits (Winter, 2000). Once created, core competencies cannot be simply stockpiled for use when needed. Instead, these core competencies require constant use to maintain corporate fitness (Teece, 1990). To maintain corporate fitness, firms require not only investment in existing competences, but also the acquisition and development of new ones. As a result, one of the firm’s key factors in maintaining corporate competitive advantage involves striking a real balance between the development of new competencies and the improvement of existing ones (Penrose, 1959; Rubin, 1973; Wernerfelt, 1984). Winter (2000) argues that whatever this balance between the development of new competencies and the improvement of existing ones, investment in future capabilities must always continue.

2.8 Frameworks for Growth

Mckinsey et al (1999), provides three essential frameworks to assist corporate survival and growth. These are:

2.8.1 Three Horizons

The concept emphasizes the importance for active management of three distinct stages in continuous business creation so that the leader’s attention to manage their core business is balanced with efforts to develop new businesses. If continual growth is the goal, the pace of replenishment must be faster than the pace of decline. Building and managing a continuous pipeline of business creation is the key challenge of sustainable corporate survival and growth.

2.8.2 Seven Degrees of Freedom

It provides a systematic approach for identifying growth opportunities in existing and new customers, new products and services, new delivery approaches, new markets, new industry structure and new competitive fields. Through systematic address of each degree of freedom, managers can in turn ponder broadly about growth opportunities in their business.

2.9 Staircases to Growth

The approach suggests that successful growers embark on a series of calculated steps, neither big nor bold steps, to achieve their aspirations. However, each step takes them a little closer to their ultimate goal, making profits in its own right and adds capabilities that prepare them for more opportunities.

In analysing internal constraints in an organisation, and using them as a basis of formulating survival strategy on resource allocation, companies may use the Boston Consulting Group (BCG) model (Kotler, 2000). The BCG is an essential analytic tool to understand, manage and evaluate a diversified firm’s portfolio of activities or products. It is a tool to determine what priorities should be given in the product portfolio of business units. The matrix classifies products on the basis of two dimensions. First, it is based on the product’s market share relative to that of its competitors. This is aimed at measuring the comparative advantages evidenced by market dominance. The second classification is based on the market growth rate – an environmental assessment.

Strategic resources are thus allocated based on the BCG model. Thus, in short, the BCG enables companies to remain focused on their objectives on product development, marketing to mention a few. Figure 2.2 below illustrates the BCG Growth Share Matrix.

Figure 2.2: The BCG Matrix

Source: www.quickmba.com/strategy/matrix/bcg/, February 2005

2.9.1 Cash Cow

It is a business unit or product that has a high market share in a mature, slow growing industry. The cash cows generate high cash in excess of their needs and are most profitable. The cash generated can be invested elsewhere. Cash cows require low investments.

2.9.2 Star

These are products resulting from successful Question Marks or Problem Child. The products enjoy a large market share and are in a fast growing industry. This is an equivalent of the growth stage of the Product Life Cycle. The products are the firm’s best long-run opportunities for growth and profitability. Given their high relative market share and a high industry growth rate, the BCG advocates that the products should benefit from substantial investment to either maintain or strengthen their dominant position.

2.9.3 Question Marks (Problem Child)

This is the introductory stage of the product life cycle. The products have a negative cash flow, a low relative market share. In most cases, the firm needs high investment for these products and yet their cash generation is low. The fundamental issue is that no one wants to keep a problem child unless the prospects in the child are bright. Consequently, the firm has to make a fundamental decision on whether to keep or let go the problem child.

2.8.1.4 Dogs

These are products in the decline stage of their life. They may generate modest cash flows. They have a low relative market position and compete in a slow or no market growth industry. However, at their best, dogs are cash cows. They are products which have lost market share to competitors and operating in static

The main strength of the BCG is that it establishes a linkage between the strategic positioning of a firm and its financial resources (Mullender, 2004). However, Mullender also points at the limitations of the model. There is no clear definition of what constitutes a ‘market’. Market boundaries are often difficult to fix. Further, the BCG matrix is sensitive to choice of the methods of measuring market share and growth rate. Market growth is just only one factor in industry attractiveness. Relative market share is also just one factor in competitive advantage. The BCG matrix overlooks many other factors in these two important determinants of profitability. In addition, the matrix assumes that each business unit is independent of the others.

2.13 Summary

This chapter has reviewed literature on corporate growth. Literature on core competencies, constraints to corporate growth, and corporate governance was also reviewed in this chapter. The next chapter will provide a critical analysis of the research methodology. A justification of the methodology is also elaborated in the next chapter.