Sunday, 8 December 2013


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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