10. Dilemmas of small enterprise
The
preceding items in this blog, plus further analysis, yield a number of dilemmas
for small enterprise.
Especially
small enterprises need to collaborate with outside partners, in view of the
limited availability of inside specialities and support, which due to
diseconomies of small scale could not be efficiently employed. On the other
hand, many entrepreneurs have become self-employed because they wanted to be
independent, and are often stubborn in their views and convictions, and indeed
need to be, in order to persevere under the hardships and uncertainties of
entrepreneurship. However, this is not conducive to collaboration. This problem
may be mitigated by the use of judicious, skilful intermediaries or advisors.
Small
enterprises need to collaborate but transaction costs are relatively high for
them and for their partners, due to diseconomies of small scale there also. The
latter may be mitigated by adequate documentation for outsiders to judge the
enterprise.
There are a
large variety of motives and ways of doing things in small enterprises, which
requires custom made, tailored government regulations and schemes (e.g. in
legal duties and restrictions, tax and subsidy schemes). On the other hand, due
to diseconomies of scale in transaction costs that is too expensive. It may
help to employ intermediaries (bookkeepers, banks) to add some
differentiation.
To avoid
pressures of economies of scale, small enterprise can often best focus on niche
markets with specialized products, but this increases their vulnerability due
to limited diversification of risk. Some differentiation of products will help.
Due to
personal involvement in the enterprise, in income, allocation of time, and
sometimes housing, self-employed are highly motivation and willing to absorb
setbacks, which is good, given the uncertainties of innovation, but this also
makes many self-employed unwilling to take much risk, which hampers innovation.
Hence few self-employed are innovative, but when they are they are very
motivated and efficient in it.
As a ‘lone
wolf’, an entrepreneur can make decisions fast, but this carries the danger of
myopic, badly informed decisions. Listening more to the shop floor, engaging a
trusted partner or employing an advisory board can mitigate this.
Due to
direct contact between entrepreneur and shop floor, with direct supervision and
involvement, there can be limited formal procedures of reporting and control.
This saves costs and furthers flexibility. However, it entails much tacit
knowledge, in the mind of the entrepreneur, which further increases transaction
costs for outside partners and government, and makes the enterprise vulnerable
to exit of the entrepreneur. This yields an additional argument for some
documentation of knowledge, and an argument for timely involvement of a
successor.
When a new
enterprise is successful and grows, more management is needed, in the
specification and delegation of tasks, in an increasingly complex division of
labour, and some formal reporting and control, when the distance between the
leadership and the shop floor increases. However, many entrepreneurs like to
undertake new ventures better than managing going concerns. They can then sell
the enterprise, in a management buy-out, and move elsewhere, in serial
entrepreneurship. When they do stay,
and they have no aptitude for operational management, they should muster the
wisdom to recognize their weaknesses and step down from leading the enterprise
to adopt an advisory or inspirational role. Often this does not sit well in the
psychology of the entrepreneur.
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