Small Business: Start-Up and Management

By Luke Ike

This book is about small business start-ups and management. The book provides those fundamental principles needed for identifying and developing business ideas before and during the process of business start-ups and management respectively. These are principles needed to translate business ideas into profitable and sustainable small business enterprise.

• Language: English
• Publisher: Xlibris UK
• Release date: Jun 20, 2018
• ISBN: 9781543490909

Luke Ike

Dr Luke Ike is a lecturer and management consultant. He obtained his MSc degree in Business Administration from the University of Innsbruck, Austria Europe, and PhD degree in Business Administration from the University of Economics and Business Administration Vienna, Austria Europe. He completed post graduate studies in Ethnic and Minority Small Business Management at the London Guildhall University, United Kingdom, (now London Metropolitan University). He also obtained Post Graduate Certificate in Education (PGCE) from University of Greenwich, London, United Kingdom. Dr Luke Ike is the founder and CEO of COLNNECT Ltd Centre for Education, Management Studies and Consultancy, London, United Kingdom. He is also the author of many classic business textbooks such as - Management (Principles & Practices), Risk Management & Captive Insurance, International Management (Principles & Practices), Strategic Management (Concepts & Practices), International Business (Environments & Operations), Business Strategy (An Introduction), Entrepreneurship (Initiating and Developing a New Venture), Marketing (Traditional, Digital and Integrated). ContactE-mail:[e-mail]

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Copyright © 2018 by Luke Ike.

ISBN:                  Softcover                        978-1-5434-9091-6

                            eBook                             978-1-5434-9090-9

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the copyright owner.

Any people depicted in stock imagery provided by Getty Images are models, and such images are being used for illustrative purposes only.

Certain stock imagery © Getty Images.

Rev. date: 06/19/2018

Xlibris

800-056-3182

www.Xlibrispublishing.co.uk

778385

CONTENTS

AKNOWLEDGEMENTS

INTRODUCTION TO THE BOOK

PART 1

AN INTRODUCTION TO SMALL BUSINESS

Introduction

Chapter 1     THE NATURE OF SMALL BUSINESS

1.1 Small Business - Definitions

1.2 Characteristics of Small Business

1.3 Small Business and Entrepreneurship

1.4 The Small Business Owner / Manager

1.5 Characteristics of Successful Small Business Owner/Managers

Further reading

Chapter 2     INNOVATION AND SMALL BUSINESS

2.1 Introduction

2.2 Innovation as Key to Small Business Entrepreneurial Activity

2.3 Innovation and Small Business Creation

2.4 Creating Capacity for Innovation

2.5 Barriers to Innovation

Further reading

Chapter 3     SMALL BUSINESS IN THE SOCIETY AND ECONOMY

3.1 The Small Business Revival

3.2 Significant Roles of Small Business in the Society and Economy

Further reading

PART 2

THE SMALL BUSINESS START- UP

Introduction

Chapter 4     THE NEED FOR BUSINESS IDEA

4.1 The Business Idea

4.2 Finding A Good Business Idea

4.3 Protecting the Idea

Further reading

Chapter 5     FACTORS INFLUENCING SMALL BUSINESS START-UPs

5.1 Introduction

5.2 Pull Influences

5.3 Push Influences

Further reading

Chapter 6     WAYS OF STARTING A SMALL BUSINESS

6.1 Introduction

6.2 Setting Up Alone

6.3 Setting Up With Others

6.4 Buying Existing Business

6.5 Buy a Franchise

6.6 Using Licensing

Further reading

Chapter 7     THE LEGAL FORMS OF BUSINESS

7.1 Introduction

7.2 The Sole Trader

7.3 Partnership

7.4 Private Limited Company

7.5 Small Business Co- operatives

7.6 Small Business Charities

Further reading

Chapter 8     THE SMALL BUSINESS TAXATION

8.1 Introduction

8.2 Sole Trader Taxation

8.3 Partnership Taxation

8.4 Small Company Taxation

8.5 Tax Savings Hints for Sole Traders and Partnerships

8.6 Tax Savings Hints for Small Companies

Further reading

Chapter 9     SOURCES OF ADIVICE AND ASSISTANCE FOR SMALL BUSINESS

9.1 Introduction

9.2 Sources of Advice and Assistance for Small Business in UK

9.3 The Need for A business Plan

Further reading

PART 3

THE SMALL BUSINESS MANAGEMENT

Introduction

Chapter 10   AN INTRODUCTION TO SMALL BUSINESS MANAGEMENT

10.1 Introduction

10.2 Management Roles

10.3 Management Skills to Achieve Small Business Performance

Chapter 11   THE SMALL BUSINESS ENVIRONMENT

11.1 Introduction

11.2. The Business Environment

11.2.1 The Internal Environment

11.2.2 The External Environment

11.2.2.1 The Task Environment

11.2.2.2 The General Business Environment

11.2.2.3 The Business Stakeholders

11.3 Understanding The Small Business Environment

11.4 Response to Business Environment

Further reading

Chapter 12   PLANNING, STRATEGY, AND DECISION MAKING

12.1 PLANNING

12.1.1 Introduction

12.1.2 Purposes of Small Business Planning

12.1.3 The Planning Premise

12.1.4 Gathering Planning Information

12.1.5 Business Planning

12.1.6 The Business Planning Process

12.1.7 The Business Plan

Further reading

12.2 STRATEGY

12.2.1 Introduction

12.2.2 Types of Strategy

12.2.3 The Small Business Strategy

12.2.4 The Strategic Process

Further reading

12.3 DECISION MAKING

12.3.1 Introduction

12.3.2 Levels of Decisions Making

12.3.3 Categories of Management Decisions

12.3.4 Decision Making Conditions

12.3.5 Decision Making Models

12.3.6 Decision Making Process

Further reading

Chapter 13   ORGANISING

13.1 Introduction

13.2 Basic Principles of Organising

13.2.1 Vertical Principle of Organising

13.2.2 Lateral Principle of Organising

13.2.3 Balancing Vertical and Lateral Organising

13.3 Theories of Organisation Structure

13.4 Structural Designs

13.4.1 Organisation Structure

13.4.2 Organisation Chart

13.4.3 Common Forms of Small Business Structure

13.5 Coordinating Work

Further reading

Chapter 14   FINANCING THE SMALL BUSINESS

14.1 Introduction

14.2 Sources of Fund

14.2.1 Internal Sources of Fund

14.2.2 External Sources of Fund

14.2.3 Government Financial Assistance Programmes and Incentives

14.3 Uses of Fund

14.4 Factors to Consider When Financing the Venture

Further reading

Chapter 15   MARKETING AND THE SMALL BUSINESS

15.1 Marketing - Definitions

15.2 The Small Business Marketing Challenges

15.3 Marketing Management Philosophies

15.4 The Marketing Process

15.5 Understanding Customers

15.5.1 Introduction

15.5.2 The Marketing Information System (MIS)

15.5.3 Informal Information gathering

15.5.4 Marketing Research

15.5.5 Types of Market Research

15.5.6 The Marketing Research Process

15.5.7 The Small Business Market Research Options

15.5.8 Measuring and Forecasting Demand

15.5.9 Market Segmentation, Targeting and Positioning for Competitive Advantage

15.6 The Marketing Mix

15.7 Relationship Marketing

15.8 Interactive Marketing

15.9 Total Quality Management (TQM)

Further reading

Chapter 16   LEADING

16.1 Leadership in Small Business

16.1.1 Introduction

16.1.2 Leadership and Power

16.1.3 Theories of Leadership

16.1.4 Leadership in practice

16.1.5 Leadership development

16.2 Groups and Small Business

16.2.1 Introduction

16.2.2 Group Development

16.2.3 Group Cohesiveness

16.2.4 Group Effectiveness

16.2.5 Group Interaction and Improvement

16.2.6 Group Cooperation

16.3 Motivation in Small Business

16.3.1 Introduction

16.3.2 Motivation Theories

16.4 Culture and Small Business

Further reading

Chapter 17   CONTROLLING

17.1 Introduction

17.2 Control Focus

17.3 Control Methods

17.4 Management Control Systems

17.4.1 Budgetary Control Systems

17.4.2 Financial Control Systems

17.4.3 Performance Appraisal Systems

17.4.4 Purchasing and Stock Control Systems

17.4.5 Total Quality Control Systems

17.4.6 Information Systems for Management Control

17.5 Management Control Techniques

17.6 CALCULATING RATIOS

Further reading

REFERENCES

AKNOWLEDGEMENTS

This book is dedicated to the memory of my beloved father Hyacinth, my beloved mother Eunice and my beloved sister Philomena.

Luke Ike

INTRODUCTION TO THE BOOK

This book is about small business start-up and management.

The book provides those fundamental principles needed for identifying and developing business ideas before and during the process of business start -up and management respectively - principles needed to translate business ideas into profitable and sustainable small business enterprise.

The book aims to fill a gap. There are many publications targeted at would be entrepreneurs and existing small business owners, most of which give general and not detailed advice on how to set up and run a small enterprise. There are also many articles and books of a more academic nature which survey the small business scene, investigating crucial topics on small business management and common experience of small business in a wider variety of management contents and situations without being specific to the needs of small business owner/manager level of management understanding.

Many of these books and research studies and publications have failed to give the much needed attention to how small businesses should be managed successfully. They have only focused on general instruction and complex mixture of management principles presented in a complex way that makes it very difficult for small business owners to understand, most of whom are not management literate, with little or basic knowledge of management.

In addition, many researches carried out on small business relating to their performance show increase in small business start- up in many countries all over the world, but also increase in the failure of many small businesses to survive and continue after the first three years of start up. This represents the effect of a very large number of births but a large number of "deaths. The most vulnerable period is between 12 and 30 months after registration. This evidence goes to show that there is less problems in start -up of small businesses, but more problems in maintaining or continuing small business operations, which has been related among others, to poor or lack of management understanding.

This book is structured to fill the gap much needed for effective small business start –up and management in response to these prevailing situations as indicated above. It will do so by providing the much needed information and principles for developing business ideas and management of small business. The aim is to impact skills and knowledge on small business start-up and management to students of management, existing and potential small business owners.

PART 1

AN INTRODUCTION TO SMALL BUSINESS

INTRODUCTION

Small business has been, and will continue to be a subject of interest for many individuals, groups and nations.

This increased and sustained interest on small business and its development can be traced to the significant contributions of small business to individual and national economic and social development across borders, as well the need to see this sub-sector grow and remain efficient and effective in their performance.

This first part of the book provides the general background information that will help the reader as a potential or existing small business owner know him/herself, by examining individual characteristics and personal requirements for small business start-up and success, as well as acquire the knowledge and understanding of the small business and its environment.

This part has been designed to include chapters 1, 2, and 3 of the book. Chapter 1 introduces the nature and definitions of small business, characteristics of Small Business, the Small Business and Entrepreneurship, the small business owner / manager, and characteristics of successful small business owner/managers.

In chapter 2, the concept of innovation and relationship to small is introduced. Chapter 3 introduces the various reasons for small business revival and roles they play in the society and economy.

CHAPTER 1

THE NATURE OF SMALL BUSINESS

Aim

To introduce the nature of small business.

Objectives

After studying this chapter you should be able to:

• Understand the meaning of small business.

• Outline characteristics of small business.

• Understand the relationship between the small business and entrepreneurship.

• Describe the small business owner / manager.

• Describe characteristics of successful small business owner/managers.

WHAT IS A SMALL BUSINESS?

1.1 Small Business - Definitions

Generally, it is difficult to come by a concise and acceptable definition of small business.

What is regarded small in one country or industry or by an institution may be seen as big or large in another. The term small is therefore relative and definitions in this respect differ from country to country, industry to industry, and even within institutions in a given country or regional groups.

Each country, institution, or industry tend to derive its definition based on the role small businesses are expected to play in the economy, or the programme of assistance being designed for them, or classification or identification purposes, or the personalities of those that run them.

Despite the above varied aspects of the basis for definition of the subject matter, a number of limited criteria have been used in an attempt to define small business that cut across boundaries - countries, industries, and institutions concerned with small business establishment and development.

Some of the criteria used include:

• Size - employees, turnover /capital, balance sheet.

• Economic and control - market share, independence, personal management.

In terms of size, the use of employees is very popular with countries, institutions and industries because it is regarded to be easy to apply and recognised. Generally, a small business is defined in this regard as a business employing between 50 -500 employees although the level of employees vary among regional groups, institutions and countries. For example, most EU countries allow up to 500 employees as being small. However, in UK, the diversity of the small business sector has been recognised as definitions depend on industry type - egg manufacturing- 200 or less; construction- 25 employees or less (as reported in the Bolton reports 1971). In many developing countries, most small businesses are defined as businesses employing 5-25 employees or less.

The use of turnover and balance sheet vary also among countries, institutions industries and regional groups. In the UK, the Company Act 1985 describes a small business as one having:

• Turnover not exceeding 8m.

• Balance sheet total not exceeding 3.8m.

The 1989 Company Act described a small business as one having:

• Turnover not exceeding 12m.

• Balance sheet total not exceeding 5m.

The EU also described a small business as one having:

• Turnover not exceeding ECU 20m.

• Net capital not exceeding 10m.

The use of economic and control include the following characteristics:

• Market share,

• Independence.

• Personal management.

To rank a business as small, it is essential that all these three characteristics must be satisfied. The business must have a small market share, be independent and personally managed to be described as small business.

The small firm market share means that it is not large enough to enable it to influence the price or national quantities of goods sold to any significant extent.

Independency means that the owner has control of the business himself. It therefore rules out those small subsidiaries which though in many ways fairly autonomous, nevertheless, have to refer major decisions to higher level of authority.

Personalised management implies that the owner manager actively participate in all aspects of the management of the business and in all major decision making process. There is little devolution or delegation of authority. One person is involved when anything material is concerned.

It is important to note that, all these criteria used for the definition of small business are open to several criticisms.

For example, using only employment as a criterion in defining small business could be highly illusory. Due to the use of computers, robots or other production machinery, most large scale projects can also be handled by a reasonable number of personnel. Also, 100 employees may make a small manufacturer, but large consultant or retailer.

The use of capital/turnover may also ignore the influence of inflation on capital/output ratio.

In addition, market share is not always the right characteristic to use. This is because a small business can operate in a highly specialised niches or limited geographical market where they have relatively high market share.

Independence is also difficult to measure. For example, a franchise can form part of a large enterprise and a subcontractor may well depend on the large owner.

In practice it is hard to define the characteristics and even harder to draw a precise line which separates small from large firms. Small businesses do not conform to any neat parameters. Much depends on the industry in which they operate and the personalities of those who run them. The sector varies (including manufacturers, professional managers, husband and wife teams, high growth and high tech start- ups funded venture capitalists, self-financed tradesmen content just to make a living, etc). It is this diversity which makes generalisations of any kind, including the definition of the sector, extremely difficult.

Although a small firms may be difficult to define precisely on paper but most are easy to recognise once they are in operation. There seem to be fundamental business differences in practice which enable us to distinguish between small and large firms. Wynarczyk (2000), identified three key aspects in which small and large firms differ:

1. Uncertainty - is a persistent feature of small firms which tend to have small customer base and limited resources.

2. The innovation - of either very new products, or marginal differences to well established ones, is a key factor in the success or failure of new business start-up.

3. Evolution - refers to the state of constant structural and market changes which small firms are likely to experience as they struggle to survive and develop.

Recognising all these problems associated with achieving a concise and acceptable definition of small business, the best clue is the revision of any acceptable definition from time to time to make identifiable, the right criteria at the right time for the right purpose, and to identify small businesses which share similar problems.

In this book, the term small business is used to describe a group of enterprises having less than 500 employees and how they are run. This implies that these enterprises have certain characteristics and management issues in common, which distinguish them from others.

1.2 Characteristics of Small Business

Small businesses are not just scale- down versions of large ones. They have some special characteristics that set them apart and make the process of management different from that of large firms.

These characteristics also make most small firms inherently riskier than large firms. These characteristics include:

• Owned and managed by one person.

• Tend to be labour intensive.

• Unlikely to be able to exert much influence on the market.

• Likely to operate in a single market.

• Likely to be over reliance on a small number of customers

• Not public limited companies (plc).

• Not homogenous.

Generally, small businesses are typically financed by an individual, his friends or relatives. This is due to many problems these businesses encounter in obtaining credit from financial and established institutions. Impelled by their personal concern for the venture and lack of access to established sources of finance, they put together funds wherever they can find them. If the spirit of entrepreneurship is really strong, they stint themselves to plow back earnings. The productive capital thus formed probably never would come into existence, except for small enterprises. The owner/manager has an overwhelming influence on the business activities. This means that business decisions will often become personal decisions. There is also the risk of over-dependency upon one individual for the well being of the firm.

Their limited access to finance is reflected in the low level of fixed investment assets and therefore, they tend to be more labor intensive with a low capital/labor ratio.

Small firms are also known to have close contacts with their workers, the market and local resources due to the fact that their level of employment is small. They are likely to be over-reliant on a small number of customers. This means they are particularly vulnerable to losing any one customer and the effect on the firm of such a loss will be disproportionately large.

In most cases they operate in small and mostly local market, usually producing to the wishes of their close customers. They are likely to operate in a single market, or a limited range of markets, probably offering a limited range of products and services. This means that the scope of the firm’s operations is limited and less of strategic issue than in large firms. It also means that unlike large firms, small firms find it difficult to diversify their business risks. However, the small business also offers some advantages, prominent of which flexibility.

Although they lack bargaining power relative to larger industries, their small size, their low operating fixed cost, and the close personal contacts with workers and the market are, when used properly, a source of strength in many ways.

Small firms are not public companies. This means they often have problems raising capital and this can significantly constrain their choice of strategies. For many small firms seeking to grow, raising finance can become a major strategic issue and relationship with financing institutions can be a major source of management problem.

As already identified in relation to problems with definition, small firms are not homogenous. Each is different and has special characteristics. Trying to generalise about them is clearly difficult.

1.3 Small Business and Entrepreneurship

A small businesses owner is usually described as an entrepreneur because small business triumph and entrepreneurship are closely related.

The word entrepreneur can be traced back to history, especially the French history. The word entrepreneur drives from the French, literally meaning someone who takes between or who goes between - in most cases someone who managed large projects on behalf of a land owner or the church such as building of a castle or cathedral. (Stokes, 2006). This was extended to include some elements of risk and profit in the 17th century. Entrepreneurs were those who contracted with the state to perform certain duties, such as the collection of revenues or operation of banking and trading services. As the price was fixed, the entrepreneur could profit or lose from their performance of the contract.

Small is beautiful and the general perception that small business start-up and entrepreneurship is here to stay is a reality. This is because the small business is attributed with some natural features - smallness, flexibility, adaptability- that allows it to be entrepreneurial in nature, relatively easy to start and can be managed with a structure that is less bureaucratic without layers. Ass economy in the world evolves from manufacturing to service and information age, the requirement for entrepreneurial thinking has massively increased. It is been observed that the end of traditional jobs is at hand. This observation points out that the trend of self employment and small business is not a temporary phenomenon but a fundamental shift in the nature of work and entrepreneurship.

Today’s turbulent economic climate the need for entrepreneurs associated with many small business start-ups, as economic conditions is now compelling many individuals to think and act like an entrepreneur. This relates to individuals taking the risks of a starting small business as the best employment alternative.

Although many small firms once established can lack innovative entrepreneurship, there are still small firms today playing an important role in the innovation (developing new products, services and processes. and having successful business growth). This point can be reinforced by well published success stories of many innovative entrepreneurs who started their own business –small, and then grew it to success like Steve Jobs, Cliff Sinclair, Anita Roddick, etc.

The concept was made popular in the economic literature when Richard Cantillon (1734) made the concept of the entrepreneurpopular when he described three types of agents in the economy (Stokes 2006):

1. the land owner - who as the proprietor of land provided the primary resource.

2. Entrepreneurs - including farmers and merchants who organises resources and accepted risk by buying at certain price and selling at an uncertain price.

3. Hirelings - who rented their services.

Further, French economists J B Say distinguished between the profits of those who provided capital and profits of entrepreneur who use it. He defined an entrepreneur as someone who consciously moves economic resources from an area of lower and an area of higher productivity and greater yield. In other words, the entrepreneur takes existing resources, such as people, materials, buildings, and money and redeploys tem in such as way as to make them more productive and give them greater value. This definition implies changing what already exists; it sees entrepreneur as instrument of change.

Peter Drucker (1987) introduce the concept of change to these earlier ideas and made innovation a necessary part of entrepreneurship when he defined an entrepreneur as someone who always searches for change respond to it and exploited it as an opportunity.

Other writers (Hans 1997, Jones 2006, Anderson 2010) have described an entrepreneur as an individual who risk financial material and human resources in a way to creating new business concept or opportunity within existing firm.

Because the word entrepreneur has been linked to small business, the term INTRAPRENUER was coined to describe someone who behaves in an entrepreneurial fashion in a large firm or organisation.

It is noticed that entrepreneurial small firms serve as training grounds for developing new skills of industrial workers and entrepreneurs. Many small business entrepreneurs do not have formal education. These people would have found it difficult to secure a well paid job in the labour market. More important is the training and experience which they acquire in the operation of their enterprise s or for working in any. Their role as incubator for future Giant Corporation is suited as launching pad for indigenous industrial breakthrough.

1.4 The Small Business Owner / Manager

The term owner-manager is also commonly used to describe those involved in running a small business. It encapsulates a condition which is typical of many small firms- the predominant role of the owner-manager.

As described earlier, majority of small businesses are small as the name indicates and owners of these firms are predominantly the managers as well, and likely to be the only manager. The owner-manager describes the reality for large number of small firms which are totally reliant and dominated by their owner.

Although less confusing than entrepreneur the term owner manager implies a uniformity of management which does not exist in practice. Owner-managers are not a homogeneous group which can be easily classified, or expected to behave in certain ways. The diversity of types of owner-managers and entrepreneurs has led to many attempts to classify them.

Some studies by industrial sociologists simply split them into the craftsmen and the opportunists - to reflect the differing backgrounds and aspirations of these types. Others have extended this to three distinct types:

1. Craftsmen - those small business owners ranging from joiners to hairdressers who themselves directly provide a product or service and who enjoys doing it.

2. Promoter – the archetypal wheeler- dealer who does deals, often starting, growing and selling several businesses in pursuit of personal wealth.

3. Professional manager – the owner who adapts a more structured approach to building an organisation on the lines of a little big business.

This basic typology has been extended by other writers to lengths which indicate the great diversity of small business managers such as:

• The life -style business set up to provide the owner/manager with an acceptable income at a comfort level of activity. Once that level of activity is reached, management becomes a routine, tactical activity. There is probably little thought about strategic management, unless things start to go wrong.

• The entrepreneurial business set up with the intention to grow. In this case the owner/manager is far closer to the classic concept of the entrepreneur, where innovation is a driving force and effective strategic management is vital if the firm is to develop.

1.5 Characteristics of Successful Small Business Owner/Managers

It is clear that the success or failure of a small business relies significantly on the people who start and manage it.

Efforts aimed at identifying what makes a successful small business owner/manager in terms particular traits or personality type - that helps to identify an archetype of an entrepreneur or a small business manager, and whether they are born or made, have not been an easy one . . .

Nevertheless, a number of traits or personality characteristics shared by successful small business owner/ managers have been put forward by many writers as important influences for their success (Warking 1986, Brown 1992, Chell1999).

The attempt to find traits or personality characteristics shared by successful small business owner/managers is useful in providing insights into some entrepreneurial types, However, it should be stressed the danger of over emphasising on one key trait which characterises the entrepreneur since many of these traits are inter-related. For example, people who are self-confident will probably accept responsibility for their own decision, be willing to take risk and become leaders. In addition, researches carried out in this respect have also identified both internal and external influences to entrepreneurship.

Behavioural scientists have differentiated between two classes of small business entrepreneurs. Those who believe they have the ability to control their environment described as having an internal locus of control and those who believe that their lives are dominated by chance and fate described as having external locus of control.

Small business survival and success has been linked to the internal locus of control beliefs of the owner-manager. Successful small business entrepreneurs are convinced that they can control their own destinies, with strong commitment to self determination him/her to overcome difficulties which defeat others, and risk taking also plays a role. Without a significant level of self determination or confidence small business owner/managers are unlikely to have taken the initial risk of starting their business. They are usually characterised as risk takers who instinctively know that gains do not accrue to those who always play safety first. However, there is a debate over the level of risk taken, which highlights a distinction between the entrepreneur and the owner-manager. The desire for independence and freedom to create their own futures are commonly recognised as prevailing among entrepreneurs and owner-managers alike. This can be linked to their internal locus of control. A well known investigation into the entrepreneurial personality by McClelland (2001) concluded that one of the particular internal trait acting as the driving force is the need for achievement.

Also external influences such as parental influences are significant in the development of small business owner personality. Small business owners in many cases have parents who expected them to be self reliant at an early age, and remaining supportive through the process of entrepreneurship.

Further reading

Bacal, R. (2009), Perfect Phases for Managing Your Small Business, NY, McGraw Hill.

Burker, G. (2008), Growing Your Small Business: a handbook for ambitious owner/managers, NY, Routledge.

Byrd, M. (2009), Small Business Management, Boston, McGraw Hill.

Cannon, T. (1991), Enterprise Creation, Development and Growth, Butterworth – Heinemann.

Chaston, I. (2009), Entrepreneurial Management in Small Business, London.

Curran, J. et al, (2000), The Survival of the Small Firm, Gower.

Frank, M. (2009), Management of Small Enterprises, NY, Routledge.

Ganguly, T. (1983), UK Small Business Statistics and international comparisons, Harper & Row.

O’Farrel, F. N, (1986), Entrepreneurs and Industrial Change, Irish Management Institute.

Ray, G. H. And Hutchinson, P. J. (1983), The Financing and Financial Control of Small Enterprise Development, Govern.

Scarborough, N. (2009), Effective Small Business management, Prentice Hall.

Stanworth, J, et al, (1991), The Small Firm in the 1990s, Paul Chapman.

CHAPTER 2

INNOVATION AND SMALL BUSINESS

Aim

To introduce the concept of innovation and relationship with small business management.

Objectives

After studying this chapter you should be able to:

• Understand the meaning of innovation.

• Understand why innovation is key to small business entrepreneurial activity.

• Explain the relationship between innovation and small business creation.

• Explain ways of creating capacity for innovation.

• Identify different barriers to innovation.

2.1 Introduction

Innovation is a crucial part of the small business entrepreneurial process. It is the specific tool for small entrepreneurs, the means by which they exploit change as an opportunity for business or service creation.

Serious difficulties surround the concept of innovation as the term innovation is not easy to define.

The Oxford Dictionary defines innovation as making changes However, some equates innovation only with invention, development of new products or technology, originality, a one off process, or inspiration. Innovation is linked to all these but practically, is more.

Innovation is strongly linked to invention, but although they overlap they are not the same. An invention is essentially a creative idea, but innovation takes that idea and puts it to work. Innovation actively encourages the development of new ideas and also turns them into useful products or services which customers need.

In a business sense, innovation can mean more than just developing a new product or new technology. It encompasses any new way of doing something so that value is created. Innovation does not stop at products/services, it embraces other new developments:-new markets, new marketing methods, new method of operating . . . This can also include:

• A new way of delivering an existing product or service.

• A new way of informing the customer about a product and promoting it to them.

• A new way of organising labour and capital in order to produce the product or service.

• A new approach to managing relationship with consumers and other organisation, etc.

Innovation is not always original. This is so because innovation does not take place in a vacuum – new ideas always have root on the old. They start with what already exist and become original from the unique way in which they combine or connect these existing ideas and knowledge. Creative thinking starts by trying to make connection between concepts that already exists but are too far apart for others to see. It has been said that the secret of the entrepreneur success is to use other peoples’ brain.

Innovation is not always one off inspiration – it is not a fib but a trend. Innovation does not rely on sudden flash of inspiration to give the blue print from new development. Innovation is a gradual process - which builds into something new and worthwhile over a period of time through a variety of stages.

According to Stokes (2006) sources of innovation opportunity may include:

• The unexpected – unexpected success or failure often gives clues to underlying trends which can lead to innovation.

• The incongruous – described as a discrepancy between what is and what everyone expects - is an important source of innovation because incongruity is a further sign that changes are taking place.

• Process need – the importance of need as a source of innovation is captured in the proverb Necessity is the mother of invention.

• Industry and market structure – whole industry and market structure can change rapidly, sometimes after a long period of stability. Such changes offer exceptional opportunities to innovation and considerable threats to those who incorrectly read the changes.

• Demographic – changes in the environment of an enterprise inevitably contain many possibilities for innovation – population births, deaths, deceases, age structure, employment, income, education etc, and the trends which these figures show.

• Changes in perception – changes in perception can lead to innovation. For example, the fashion industry relies heavily on changes in perception.

• New technology – the most common innovation are often based on technology – new knowledge or invention.

Peter Drucker (2003), suggested that we can develop our innovation skills. He regards entrepreneurship and innovation as tasks that can be and should be organised in a purposeful systematic way, as part