Management styles: Small and large businesses

Management styles: Small and large businesses The overall aim of the essay is to explore the difference between management styles of small and large business. All organisations large or small, are today struggling to develop in an external operating environment which is epitomised by turbulence and uncertainty. Within the small business context research shows that owner-managers view of management as one of their most important roles, and yet one of the task they find the most difficult (Hankinson 1997), while a multitude of theories, concepts and guiding frames of insight have emerged and are embraced the best management style knowledge but it can be argued that much of this knowledge has relevance to large organisations and fails to address the distinctive characteristics of the small business. Management of any business consists of internal and external management, internal management involves human resources management and managing organisational structure and functions where external management can include developing strategies for business growth and development and managing influence of change on business activities. Within the context of management, small and large businesses have different ways to managing business activities. The detail discussion of management differences below covers the management issues that both businesses come cross during its growth. 2. Discussion What is a small business? What is a large business? There are differing definitions for small versus large businesses, depending on the context of the discussion. As an example, the United States Small Business Administration has established a size standard for most industries of the economy (United States Small Business Administration, 2002). Under these standards, for instance, in the manufacturing and mining industries, a business is small if it has fewer than 500 employees, while fewer than 100 employees makes businesses in the wholesale trade industry small. For the discussion in this paper, we use the term â€Å"small business† to imply organizations with fewer than 100 employees. Therefore, a â€Å"large business† implies 100 or more employees. Small and large organizations typically differ in resources, money, and time. [www.sbaer.uca.edu- 19-11-07] 2.1 Management It is known that freedom of information and communication, the culture of trust and confidence, and management systems that support policy implementation are the organisational factors that affect middle manager activities (Hancock and Hellawell, 2003). It appears these issues closely relate to the size of an organization and its form of ownership. For instance, it is easier for small organizations to act as a coherent whole and provide better two-way communication, while this is a challenge for large organisations. The middle managers proactiveness appears to be related to the issues of firm size and ownership: they are more visible in small companies and they get more extrinsic incentives to be active. The organisations size and form of ownership as two separate variables have been the focus of prior studies (for review, Wu, 2006; Chen and Hambrick, 1995), but a combination of these variables in large state-owned enterprises and small private companies has not been a subject of res earch. The difference between the managerial environments of state and private companies is evident: state-owned enterprises are very sensitive to institutional constraints, while private firms have an adaptive ability (Hoskisson et al., 2000); the state sector prioritises income per worker rather than profit, whereas private-sector firms are profit maximizes (Meng and Perkins, 1998); employee participation in decision making is highest in employee-owned enterprises, compared to enterprises with state or mixed ownership (Russell and Callanan, 2001). As to the differences between small and large companies, small firms show a lower degree of visibility as well as a lower degree of responsiveness to competitive actions; they are slower to announce responses, but they execute faster than larger firms (Chen and Hambrick, 1995). Large enterprises have more procedures and regulations regarding employee and managerial operations, while managers of small companies have less feelings of secur ity. Two different managerial environments â€Å"private, small business management† and â€Å"state, large enterprise management† -influence the implementation of middle managers decisions. The possibility of such influence is even sharper in economies that are moving from central planning to market competition. Divergent factors, such as national ideology, culture, and government policy are significantly influential â€Å"in shaping the values of middle managers which in turn affects the interpretation and enactment of their managerial roles† (Holden and Roberts, 2004, p. 270). [www.emeraldinsight.com 23-11-07] 2.2 Business structure and functions Small and large organisations are structured in radically different ways ranging from relatively fixed structures with positions, rules, and established chains of communication to dynamic structures in which people belong to teams that are continually being formed and reformed for the duration of a project. [www.thetimes100.co.uk 24-11-07] Typical organisation structure [www.tutor2u.net accessed 28-11-07] Typical ways of organising people are: By function dividing the organisation up into groups with similar specialises e.g. marketing, finance and accounts, human resources, etc. usually seen in large scale businesses By product grouping people together according to the product they make. For example, BIC has three main divisions pens, lighters, and razors. By process grouping people together according to the processes that they are carrying out. For example retailing organisations like Argos and Travis Perkins will group employees according to whether they are involved in packing and display or customer service. By geographical area most large companies are widely dispersed. Companies like BIC, Gillette, Kelloggs, etc have European and North American divisions. Small and large firms can also be highly centralised or largely decentralised. In a highly centralised structure control will be tight from the centre or Head Office of the firm, mostly implies on large firms. In contrast, in a decentralised organisation power will be passed down to the various project managers and teams typically used in small firms where culture relies on informal management and employee relation and business activities . [www.thetimes100.co.uk 24-11-07] Managers of small and large firms need to learn to work with both formal and informal structures. A flexible manager will realise that elements of the informal structure can be formalised i.e. by adapting the formal structure to incorporate improvements which result from the day-to-day working of the informal structure. When managers nurture these informal groups and mould them into the formal structure this can lead to high levels of motivation for the staff involved. [www.thetimes100.co.uk 24-11-07] 2.3 Bureaucratic versus Pre bureaucratic management Bureaucracy is the structure and set of regulations in place to control activity, usually in large organizations and government. It is characterized by standardized procedure (rule-following), formal division of responsibility, hierarchy, and impersonal relationships. In practice the interpretation and execution of policy can lead to informal influence Pre- bureaucratic (entrepreneurial) structures lack standardisation of task, this structure is most common in smaller organizations and is best used to solve simple tasks. The structure is totally centralized. The strategic leader makes all key decisions and most communication is done by one on one conversations. It is particularly useful for new (Entrepreneurial) business as it enables the founder to control growth and development. [en.wikipedia.org 28-11-07] Regardless the size of the business management styles applies the same, management can be considered as leadership and leadership has various different styles to manage business as well as people working for it. Management of any business based upon the culture of the business and culture or basic assumptions, values, belief and attitudes. These elements are the basic of any management to consider before implementing any managerial styles on business. 2.4 Management and employee relation: All firms, small and large, should emphasize honesty, trust, fairness, and clarity in employee and labour relations. Employers and employees must take the time to build a cooperative relationship for the success of the organization and individual employees. Both non-unionised and unionised environments must emphasize communication, disciplinary action, and conflict and dispute resolutions to achieve harmony in the workplace. [www.sbaer.uca.edu- 19-11-07] A small business is often portrayed as close, friendly, and harmonious. Owner/manager and employee relationships are facilitated through informal communication and greater flexibility (Dundon, Grugulis, and Wilkinson, 1999). Communication takes place one-on-one and face-to-face that typically leads to increased cooperation and less formal policies. [www.sbaer.uca.edu- 19-11-07] Labour relations in a large unionised business are similar to that in a small unionised business. Communication, disciplinary actions, and conflict and dispute resolutions involve the union, employee, and management. One possible difference is that unionisation in a large business may be more desirable for employees than in a small business (Brown, Hamilton, and Medoff, 1990). [www.sbaer.uca.edu- 19-11-07] The small firm provides a better environment for the employee than is possible in most large firms. Although physical working conditions may sometimes be inferior in small forms, most people prefer to work in small groups where communication presents few problems. The employee in a small firm can more easily see the relation between what he is doing and the objectives and performances of the firm as a whole. Where management is more direct and flexible, working rules can be varied to suit the individual. Each employee each employee also likely to have more varied role with a chance to participate in several kinds of work, turnover in small firms is very low and strikes and other kinds of industry dispute are relatively infrequent. The fact that smaller firms offer lower earnings than larger firms suggests that convenience of location and generally the non material satisfactions of working in them more than out weigh any financial sacrifice involved.(Bolton report 1971), (Carter S, Jo nes D, 2000, p309) 2.5 Human resource management Substantial work has been undertaken in the field of human resource management (HRM) as it applies to large organizations. However, for small business these models frequently do not apply. The small business lacks adequate systems to ensure the efficient management of human resources. Further, most small businesses are the product of their owners, whose personality and personal involvement dominate. [www.sbaer.uca.edu- 19-11-07] Human resource management (HRM) is the performance of all the managerial functions involved in planning for recruiting, selecting, developing, utilizing, rewarding, and maximizing the potential of the human resources in an organization (Megginson, Franklin, and Byrd, 1995). Human resource (HR) personnel also support and advice managers, serve as employee advocates, resolve problems, and implement organization policies. Small and large businesses often develop and implement policies and procedures related to these functional areas differently, primarily due to the size and nature of the firms. [www.sbaer.uca.edu- 19-11-07] Small firms may have different HR practices than larger firms because of different workforce requirements and/or a lack of understanding of HRM issues by small business owners (Deshpande and Golhar, 1994). Regardless of size, employees are vital assets, and a well established and maintained HRM department, or just functional area for smaller firms, provides a strong structure which is an organizational asset and crucial to ultimate success. [www.sbaer.uca.edu- 19-11-07] HR planning is part of HRM, particularly the staffing process required by all types of organizations. In many instances, the owner of a small business handles the HRM function himself or herself because the firm only employs a few individuals (Hornsby and Kuratko, 1990). It is easier for the small business owner to make decisions and hire employees due to the owners single authority. In contrast, in a larger organization, this task is often handled by the HRM department, which employs fulltime personnel to recruit, hire, and fulfil the other HRM functions. Such a process may involve lengthy hiring procedures due to the number of individuals and departments who may be involved in the final hiring decision. [www.sbaer.uca.edu- 19-11-07] As a small business grows its owners must begin to increase their staff and learn how to develop and implement human resource management (HRM) policies. The faster the growth experienced by the small firm the more likely it will experience HR problems. For many fast growing small to medium enterprises the main problem is finding and retaining high quality employees (Fraza, 1998). As a firm grows and its employee numbers increase the complexity of its HRM deepens. The owner-manager is usually burdened with a variety of HR functions for which he/she is generally poorly equipped (Thatcher, 1996). Managing such issues as recruitment and selection, staff promotion and retention, wages and salary negotiations, compliance with government employment, tax and insurance regulations and training and development can severely tax the average small business owner. What is required is the development of suitable HR policy and procedure. Ideally this should be flexible and not a mere addition to the bureaucracy (Caudron, 1993). [www.emeraldinsight.com 20-11-07] For e.g. Marks and Spencer CEO Stuart Rose has given all new look to marks and Spencer at the stage where its growth has almost declined. Stuart Rose introduced a new strategy with the element of human resource management, he believed that any thing can save Marks and Spencer is a new effective human resource strategy. His, strategy built a new image of Marks and Spencer in market and enable it to compete with rivalries. 2.5.1 Human resources planning HR planningprocess makes assumptions and forecasting future HR needs of the organization. This involves issues concerning revenue, number of employees, and expansion or downsizing of the company. Both small and large businesses try to predict changes that may occur in the future. Small businesses may look to expand the venture through growth strategies. In this case, forecasting the need for additional employees is the first step. The company may also look at required employee skill levels, particularly when the business relies heavily on technology or other change elements. A large business often looks at cash flow and cost control when it comes to HR planning. It may or may not hire additional employees, provide raises, reduce employee pay, and expand or downsize the company. [www.sbaer.uca.edu- 19-11-07] As a small or large company evolves or grows, employees need proper training to help the company achieve its goals. Training is essential to improve skills and overcome deficiencies. Not only do employees benefit, but the company also benefits. Training and development is also essential to stay ahead of competitors, especially in the area of innovation and technology. Research suggests that the investment made by entrepreneurs in training their employees strengthens a firms technical excellence and innovative capabilities (Gundry, 1991). Small businesses usually do not have large training budgets like many large firms, but they can still get the most out of their training dollars. Smaller companies assess their training needs by finding out what is important to the organization and employees. The most serious challenges small firms face in terms of training and developing employees are restrictions on time, money, space, and staff (Cohen, 1998). Larger businesses typically have more time, space, money, and staff to train employees than smaller organizations. These firms may have training specialists who are responsible for setting training objectives, developing and presenting training materials, and following up on the progress to ensure that the training objectives have been achieved. [www.sbaer.uca.edu- 19-11-07] 2.6 Strategic management Strategic management involves developing a game plan to guide a company as its strive to accomplished its vision, mission, goals and objectives and to keep it from straying off its desired course (Zimmerer.T.W Scarborough N.M, 2005, pg. 69). The goal of developing a strategic plan is to create for the small business a competitive advantage- the aggregation of factors that sets a small business apart from its competitors and gives it a unique position in the market superior to its competition. [www.fm-kp.si- 20-11-07] [www.tutor2u.net accessed 28-11-07] When it comes to developing a strategy for establishing a competitive advantage, small businesses have a variety of natural advantages over their larger competitors. A small business has often narrower product lines, more clearly defined customer bases, and more specific geographic market areas than big businesses. Due to simplicity of organisational structures, small business owners are in touch with employees daily, often working together, allowing them to communicate strategic moves firsthand. Consequently, small businesses find that strategic management comes more naturally to them than to larger companies with their layers of bureaucracy and far flung operations. [www.fm-kp.si- 20-11-07] Strategic management can increase small business effectiveness, but entrepreneurs first must have a process designed to meet their needs and their businesss special characteristics. It is a mistake to attempt to apply a big businesss strategic development techniques to a small business because small business is not a little big business. Because of their size and their particular characteristics small resource base, flexible managerial style, informal organisational structure and adaptability to change; small businesses need a different approach to the strategic management process [www.fm-kp.si- 20-11-07]. The value of strategic planning for firm performance may lay more in the future orientation and planning practices than in the formal form of a strategic plan (Hunger and Wheelen 1998). Small firms in particular tend to plan informally and not on a regular basis. Strategic planning can be beneficial for small firm performance, because it forces the entrepreneur to think about open business questions and search for solutions, and also encourages the entrepreneurs learning and making improvements (Wickham 1998). Strategic planning is a process that helps to forecast the future and prepare for the future, and can be beneficial for firm growth (Zimmerer and Scarborough 1996); [www.fm-kp.si- 20-11-07] Successful small firms tend to a large extent to use advanced planning and activity analysis (Zimmerer and Scarborough, 1996). Strategic orientation can be considered a driver of strategy formulation; a strategically oriented entrepreneur will pursue opportunities regardless of resources under his or her control, whereas a strategically not-oriented entrepreneur will limit his or her activities by the resources that are currently under control (Sahlman et al. 1999).[ www.fm-kp.si- 20-11-07] 2.7 Change management: More than ever, organisations are being subjected to a host of pressures for change from elements in the environment, both internal and external. According to Churchill and Lewis (1983), there are five main stages of development in a businesss growth. These include existence, survival, success, take off, and resource maturity. As an organisation moves from one stage to another, it must adjust to the challenges of that phase. There is a need for continual renewal if the organisation is to maintain a sustainable competitive advantage which will ensure its survival in a turbulent business environment. Organisational change is the process by which the organisation moves from its current position and state towards some future position as a way of increasing its overall effectiveness (Jones, 2001). The management of change is a complex process, which according to Larkin and Larkin (1996) is something which many organisations get wrong. (Jenny Hayes, Managing Change, 2004) Although much has been written about managing change in large private and public companies, very little has been written about managing change in the unique context of small firms. Concerns particular to small firms include their relative lack of control over their environment, commingling of business and personal priorities, and lack of resources to carry out the magnitude of change that is appropriate to meet accurately diagnosed problems or recognized opportunities.. [www.smeal.psu.edu -27-11-07] Change occurs frequently in most large and small companies. The problem is that it is not always well planned, deliberately executed, and successful. It is also often reactive to events rather than proactive in anticipating or even creating them. The typical small firms has not invested much in planning, pursues change haphazardly, and adopts generic or packaged change initiatives (Smart et al., 2004). Owners and managers of small firms should engage their company and its environment in a proactive manner, which means they cause something to happen rather than wait to respond to it after it happens. Owners and managers are more likely to engage in generative learning when they are proactive because they have time to explore potential problems and opportunities. Small firms that are reactive do not have adequate time to explore problems and even less, if any, time to explore opportunities. Learning under these conditions tends to be adaptive. Problems can be solved in this manner, but this may not contribute to long-term survival or prosperity. [www.smeal.psu.edu -27-11-07] [www.managingchange.com accessed 28-11-07] 2.8 Organisational culture Culture is often deeply rooted within an organisation and results in formal and informal systems, rules, and shared expectations that govern attitudes, beliefs and behaviour. Organisational culture, or corporate culture, comprises the attitudes, experiences, beliefs and values of an organisation. It has been defined as the specific collection of values and norms that are shared by people and groups in an organisation and that control the way they interact with each other and with stakeholders outside the organisation. Organisational values are beliefs and ideas about what kinds of goals members of an organisation should pursue and ideas about the appropriate kinds or standards of behaviour organisational members should use to achieve these goals. From organisational values develop organisational norms, guidelines or expectations that prescribe appropriate kinds of behaviour by employees in particular situations and control the behaviour of organisational members towards one another. [en.wikipedia.org 21-11-07] In an owner managed business (small firms), the organisational culture typically reflects the personality traits and aspirations of the owner-manager that, in turn, help to shape the enabling and constraining forces affecting the firm. The pervading sets of norms and values and the ways of doing things and the freedoms afforded to different individuals are often reflected in informal structures, systems and processes which themselves often the personality traits of the main owner (Carter S, Jones D, 2000). To support the argument there is an example of well known entrepreneur the owner of Virgin group Richard Branson, he introduced a culture at the early stages on Virgin group in mid 1970s a blame free culture, in which Branson and management considered the mistakes made by any employee or manager as the implications for the growth of the business, purpose of this culture is to encourage and motivate innovation among the workforce to produce sufficient outcomes. 2.9 Job quality at small business versus large business: Small businesses create a significant share of new jobs; it is natural to ask how these jobs compare to those at large firms. Simply put, large firms offer better jobs and higher wages than small firms. Benefits appear to be better at large firms as well, for everything from health insurance and retirement to paid holidays and vacations. Finally, job turnover, initiated by both employers and employees, is lower at large firms. The lower rates of employee initiated turnover suggest that job satisfaction and mobility are relatively greater at large firms; lower rates of employer initiated separations suggest that jobs at larger firms are more stable. For e.g. multinational organisations such ICI limited, Unilever limited, Pfizer, these are the known companies around the world due to their quality of work life and effective management styles. [www.emeraldinsight.com 20-11-07] Large firms often have desirable working conditions, such as weaker autonomy, stricter rules and regulations, less flexible scheduling, empirical evidence can capture these differences, working conditions can not explain the firm size wage effect (Brown and Medoff). The expansion lies in the migration of firms across size classes from year to year. In any given year, some small firms will grow beyond 20 workers and join a large size class. Such migration trims the share of firms in the smallest class size, in the same way that small business failures trim the class size. Likewise, some large firms will contract, falling below the 500 employee level and dropping into a smaller size class. Also, new small businesses are born, increasing the share of jobs in the small firm class. [www.emeraldinsight.com 20-11-07] Brown and Medoff and other theories suggested that larger employers may make greater use of high quality workers. This might occur, for example, because larger firms are more capital intensive and require higher skilled employees to operate that plant and equipment. [www.emeraldinsight.com 20-11-07] The critical factor in greater labour turnover at smaller businesses is that the failure rate of small businesses is somewhat greater than that of larger businesses, which leads to higher rates of employer initiated separations (Dunne and others; Idson). Failure rates of establishments drop markedly as firm size increases to 100 employees, but then turn upwards again such that firms with 500 or more employees have larger failure rates those firms with 20-99 employees. Nevertheless, the failure rates for the smallest firms (one to four employees) generally are about one and one half times higher those of larger firms. [www.emeraldinsight.com 20-11-07] 2.10 Management Characteristics, Small businesses Versus Large business There are some characteristics of small and large firms, which may represent an advantage as well as a disadvantage. For instance while the presence of fewer hierarchical layers in smaller firms may on the one hand reduce bureaucracy, increase flexibility and result in less filtering of proposals, it also limits career opportunities for their employees. [www.emeraldinsight.com 20-11-07] Small firms Large firms Little bureaucracy Formal management skills Rapid decision making Able to control complex organizations Risk taking Can spread risk over a portfolio of products Motivated and committed management Functional expertise in staff functionaries Motivated labour More specialized labour Rapid and effective internal communication, shorter decision chains Time and resources to establish comprehensive external Science Technology networks Fast reaction to changing market requirements Comprehensive distribution and servicing facilities Can dominate narrow market niches High market power with existing products RD efficiency Economies of scale and scope in RD Capacity for customisation Better able to fund diversification, synergy Capable of fast learning and adapting routines and strategy Able to obtain learning curve economies through investment in production Appropriation of rewards from innovation through tacitness of knowledge Able to erect entry barriers (www.emeraldinsight.com) 3. Conclusion The relative strengths of large firms lie mostly in resources, while those of small firms are generally argued in terms of behavioral characteristics. It is however not either small firms or large firms which are the better innovators. Small and large firms are likely to play complementary roles in the process of technical advance, in the sense that they are better at different types of innovation. A challenge for management would be to find ways to combin