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SBE Lect 1Part 2: Ch1-SB- The big picture (Business size: Key differences…
SBE Lect 1Part 2: Ch1-SB- The big picture
Four (general) ways a small business can
limit uncertainty
Focus on short-term survival (not on long-term benefits, e.g., training)
Invest less heavily in equipment (e.g., machinery)
Register as a limited company – this may protect the personal assets of the entrepreneur
Establish a portfolio of businesses – this spreads the risks faced by the entrepreneur
Uncertainty
◦ Entrepreneurship involves dealing with uncertainty
◦ Uncertainty and an “ever-changing world” create entrepreneurial opportunities that can be exploited
◦ If we know the future entrepreneurship is not needed
◦ Uncertainty includes “risk” (as possibility of loss) and “opportunity” (as possibility of gains)
Three degrees of uncertainty slide 30/58 see appendix (1)
There is a notion of possible outcomes and probabilities
Anything might happen
Possible outcomes and their probabilities are known
How well can you deal with uncertainty? slide 31/58
People prefer certainty over uncertainty, but the extent varies
Country level: Wennekers et al. (2007), “Uncertainty avoidance and the rate of business ownership across 21 OECD countries, 1976–2004”
Uncertainty avoidance is one of Hofstede’s cultural dimensions
It indicates to what extent a culture programs its members to feel either uncomfortable or comfortable in unstructured situations
Unstructured situations are novel, unknown, surprising, and different from usual. Uncertainty avoiding cultures try to minimize the possibility of such situations by strict laws and rules, safety and security measures
Uncertainty avoidance map
Effect on business ownership is positive because it increases business ownership --> average business size decreases
A positive coefficient for UA?
If the business ownership rate increases, then the average business size decreases
Explanation authors: “A restrictive climate of large organizations in high uncertainty avoidance countries pushes individuals striving for autonomy towards starting their own business”
Only OECD countries in sample, so focus on developed countries
Business size: Key differences between small and large business (Table 1.1)
Market power
◦ Price taker versus price maker
◦ SB should focus on niche
Brand
◦ No value versus important value
◦ SB should focus on other things than brand
Risk of failure: High versus low
◦ No news if SB fails or if in trouble
◦ SB should focus on survival and growth
Strategy (competitive advantage and innovation)
◦ Flexibility (response to customer) versus price
◦ SB no economies of scale, more likely to pioneer innovation
Formal training
◦ Low versus high
◦ SB seen as “backward”, but there is “informal training”
Human resources, employee wages and other benefits
◦ SB hires different types of workers, LB attracts educated workers seeking a specialized career
◦ SB job satisfaction higher but LB have better pay
Management
◦ Owner-manager versus employee-manager
◦ In SB incentives more aligned between those in charge and the business as a whole
Owner’s motivation
◦ Diverse versus shareholder value
◦ Unclear what “good performance” is
Internal organization
◦ Informal versus formal (hierarchy)
◦ In SB less focus needed on internal uncertainty reduction