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SBE Lect 1Part 1: Ch1-SB- The big picture (Why Small Business (most…
SBE Lect 1Part 1: Ch1-SB- The big picture
Why Small Business
most economic theories not based on small businesses, but on giants-stigler
Administrative structure between small and big companies are so different (caterpillar-butterfly)-Penrose
Small firms created virtually all new jobs between 1988 and 1991- Birch
Eco Approach
Evaluation actions in terms of costs and benefits: chooses actions that provide
maximum net benefit
or maximum benefit minus cost
Frank Knight 1921:“
An ever-changing world brings new opportunities for businesses
to make profits, but also means we have imperfect knowledge of future events.”
SB owners make decisions despite
"uncertainty"
such as buy less machinery, temporary workers, no permanent contracts, delay investments
"Risk, Uncertainty and Profit (1921)
Risk
: Possible outcomes are known, as are their probabilities of occurring
Uncertainty
:Outcomes and/or probabilities are unknown (or estimated with low precision)
Risk as effective certainty
Frank Knight: “A known risk” (P) is “easily converted into an effective certainty,” while “true uncertainty” is “not susceptible to measurement.”
Assumption: In the business world all events are so complex that forecasting is always a matter of grappling with “true uncertainty,” not risk
“Risk” would be best applied to a highly controlled environment (e.g., casino), and “uncertainty” would apply to nearly everything else
But we may “translate” perceptions of uncertainty into “risk”
Uncertainty the business faces
Comparison between Large and Small Businesses:
Internal uncertainty: Is the business doing what the owner wants it to do?
Managers of large businesses more likely to face the difficulty of translating their ‘vision’ of the business to their employees (
internal uncertainty
)
Owners of small businesses can limit such uncertainty by
‘managing by walking around’
but more likely to face a challenging environment (external uncertainty) => Alignment strategy by involving workforce
Dimensions of external uncertainty:
Customer uncertainty
Entrepreneurs are uncertain about their revenue (cf. employees)
◦ Quantity is beyond control
◦ 1 customer makes usually a large difference
Response: Certainty vs. profitability
◦ Subcontracting (stability / specificity)
◦ Solo self-employment “own-account worker (ZZP)”
Market uncertainty
Concentration in particular (easy to get into) sectors --> Little economies of scale and fierce competition (e.g., hair dressers, window cleaners)
A key difference between LB and SB is market power:
the small businesses more likely to be a price taker than a price maker
Price is beyond control
Usually a limited number of customers
Perfect competition vs. monopoly
Response: Cut down costs and focus on ‘niche’ advantages (e.g., specialist, timely or geographical advantages)
◦ Above average earnings (for some time)
Aspirational Uncertainty
Huge diversity of motivations for setting up and running a business (e.g., to earn an income, to provide for a family, to grow the business)
◦ No external party that sets the goal for you
◦ So, you can’t assume SB is profit maximizer
No straightforward response, note:
Mostly very small business has no intention of growing
Differences in aspirations greater if we include those with more than one business (portfolio entrepreneurs) or business run by a team
Entrepreneurs tend to be ‘super optimists’