Differentiating Small Business Owners from Entrepreneurs

Today there continues to be an implicit assumption that the entrepreneur contributes disproportionately to the economy of a nation, yet little has been done to Isolate this Individual for further analysis. Extending the theory of Schumacher, who argued that an entrepreneur was distinguishable both by type and by conduct, two conceptualizations are proposed in this paper: one for differentiating entrepreneurs from small business owner/managers and the second for differentiating entrepreneurial ventures from small businesses.

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Entrepreneurship: the Contribution Because the definition of entrepreneurship denotes the creation of some ambition that did not previously exist, entrepreneurship often is equated with small business ownership and management. The small business sector has received Originally published in Academy of Management Journal, 1984, 9(2):354-359. Reprinted by permission of Academy of Management Journal Vela the Copyright 74 James W. Garland, Frank Ho, William R. Bolton and Joe Ann C. Garland attention in the economic and management literature because of its significance to the economy.

The Small Business Administration (U. S. Government Printing Office, 1982) has compiled a fist of statistics that dramatically demonstrate the impact of mall business on the nation’s economy: 1. There are 14. 7 million businesses in the United States, of which 3. 2 million are farms. 2. Approximately 99. 7 percent of these businesses are considered small by the Saba’s size standards for loan applicants. 3. The small businesses identified above account for: 38 percent of the gross national product; 44 percent of the gross business product; and 47 percent of total U.

S. Business employment. 4. The small business sector identified above accounted for the vast majority of the net new Jobs created by business between 1969 and 1976. Although there is no uniform definition of a small firm, the statistics above relate to businesses that fall within SABA guidelines as being small. The Small Business Act states that “a small business concern shall be deemed to be one which is independently owned and operated and which is not dominant in its field of operation” (U. S. Small Business Administration, 1978, p. 121 . 1).

As the SABA statistics demonstrate, small business research is Justified because of sheer numbers. It must be noted that small firms are treated as a separate sector, not because they are cohesive and homogeneous, but because there are certain common management limitations due to extremely limited resources as compared with the “deep pockets” of resources of larger corporate organizations. Research often is directed toward the implications of public policy developments or the impact of environmental variables on the small business sector (Clinton & Weidman, 1982; Goodman, 1981; Ledger & Ho, 1982; Robinson, 1982).

Although small business is a significant segment of the American economy, the entrepreneurial portion of that segment may wield a disproportionate influence. If entrepreneurship can be viewed as incorporating innovation and growth, the most fertile ground for management research may be entrepreneurs and entrepreneurial ventures. Entrepreneurship has been found to extend beyond small businesses: some large corporations have been described as engaging in entrepreneurial behavior (Roundest, 1982, Schoolteacher, 1982, Shills, 1982).

Additionally, a person who owns an enterprise is not necessarily an entrepreneur (Martin, 1982). Clearly, an overlap exists of entrepreneurship with the small business sector. The concern of this paper is. If entrepreneurs exist as entities strict from small and large organizations and if entrepreneurial activity is a fundamental contributor to economic development, on what bases may entrepreneurs be separated from entrepreneurial managers in order for the phenomenon of entrepreneurship to be studied and understood?

Differentiating Entrepreneurs from Small Business Owners: A Conceptualization 75 Literature Review: the “Entrepreneur” One of the earliest definitions of an entrepreneur was that of Cancellation (circa 1700) provided management for the firm (Kills, 1971). Schumacher (1934) credited Mill (1848) with bringing the term into general use among economists. Mill, also, believed that the key factor in distinguishing a manager from an entrepreneur was the bearing of risk.

Schumacher, however, countered that risk bearing was inherent in ownership and that entrepreneurs, the combiners, were not necessarily owners; therefore, the risk bearing propensity would not be a trait. Martin (1982) believes that capital risk is a function of the investor. Further, Brouhahas (1980) cast doubt on the validity of the risk taking propensity as an entrepreneurial characteristic with his descriptive work. Brouhahas found no statistical difference in the risk preference tatters of a group of entrepreneurs and a group of managers.

It should be noted that Brouhahas used the establishment of a business as the criterion for inclusion of the participants in the entrepreneur group. Omitting business ownership as a designation of entrepreneurship permits both the inclusion of corporate entrepreneurs and the elimination of the risk bearing characteristic. However, many writers have asserted and continue to assert that risk bearing is a prime factor in the entrepreneurial character and function (McClellan, 1961; Palmer, 1971; Demotions, 1978; Welsh & White, 1981).

Numerous normative and descriptive studies have purported various sets of personality characteristics of entrepreneurship. Brouhahas (1982) has presented an excellent historic overview of the definitions of entrepreneurs. Perhaps the most important factor from a societal perspective is the characteristic of innovation. Schumacher (1934) believed that innovation was the central characteristic of the entrepreneurial endeavor.

His emphasis on this point is revealed in his declaration that one behaves as an entrepreneur only when carrying out innovations. McClellan (1961) stated that energetic and/or novel instrumental activity was a key factor in entrepreneurial activity. Martin (1982) stressed that entrepreneurial creativity is different from literary or artistic creativity in that the entrepreneur does not innovate by creating ideas but by exploiting the value of ideas. Table 1 displays a sampling of entrepreneurial characteristics appearing in the literature.

The characteristics listed in Table 1 represent attitudes and behaviors that may be manifested by entrepreneurs. Demographic characteristics such as birth order, sex, or marital status have been examined in certain of the studies cited and in various other investigations (Vaughn & Ho, 1981). They have been excluded from the resent conceptualization because of the inability of a prospective entrepreneur to alter those variables in order to increase his/her probability of success.

Mill Weber Schumacher Sutton Hartman McClellan Davis Pickle Palmer Workaday & 1980 1981 Sexton Welsh & White Dungaree & Cooper 1982 Registering Source of formal authority Innovation, initiative Desire for responsibility Source of formal authority Risk taking, need for achievement Ambition; desire for independence; responsibility; self-confidence Drive/mental; human relations; communication ability; technical knowledge Risk measurement Need for achievement; autonomy; aggression, power; recognition; Innovative/independent Need for power Internal locus of control Need for achievement Personal value orientation Drive/self-confidence; goal oriented moderated risk taker; internal locus of control; creativity/innovation Energetic/ambitious; positive reaction to setbacks Need to control; responsibility seeker; goldfinches/drive; Challenge taker; moderate risk taker Growth oriented; Independence oriented; craftsman oriented xxxxxxxxxxxxxxx anchors that included managerial competence, technical/functional competence, security need, independence need, and creativity. The entrepreneurs made up his creative group. The group concerned with creativity is the most interesting in that it contains the entrepreneurs. Four of these men are successful in that they have been able to launch enterprises which have succeeded and have brought to their founders either fame or fortune or both.

The kinds of activities vary greatly?but they all have in common that they are clear extensions of the person and his identity is heavily involved in the vehicle which is created (1974, p. 19). It is difficult to sketch a profile of an entrepreneur from the attitudinal and behavioral characteristics listed in Table 1 . It may be more appropriate to accept Vesper’s (1980) view of a continuum along which several “types” of entrepreneurs exist. The question hen becomes: Which characteristics and what level of intensity do the entrepreneurs possess at various points on the continuum? Vesper described the entrepreneur as an individual but implied that he or she could be found working with others in larger organizations.

His first type, the “Solo Self-Employed Individual,” is essentially what is treated here as the small business owner/operator, but not truly an entrepreneur in the Centenarians sense because a new combination is not Differentiating Entrepreneurs from Small Business Owners: A Conceptualization 77 A major obstacle preventing the attribution of characteristics to entrepreneurs in rims along Vesper’s continuum is the great diversity of sources from which the authors cited in Table 1 derived the identified characteristics. Those citations that are indicated in Table 1 as normative are generally anecdotal, describing either the authors’ personal impressions or conclusions drawn from reading the works of others.

The empirical studies draw from quite diverse samples. Miscellany’s (1961) entrepreneurs were in fact business executives representing various functional specialties: general management, sales and marketing, finance, engineering, and personnel. Senior marketing managers were found to have the highest need for achievement. More frequently, samples of small business owners are chosen for study (Workaday & About, 1971; Pickle, 1964). The assumption underlying these selections is that the entrepreneur was the individual who brought the resources together and initiated the venture. Successful entrepreneurs are defined as those whose enterprises have survived some period of time, perhaps two years.

The question then is: Are the characteristics listed in Table 1 those of entrepreneurs, of small business owners, or of some mixture that may or may not be capable of demonstrating the entrepreneurial function of economic development? The Entrepreneurial Venture A considerable body of literature has been built up treating the stages of organizational development (Visions, 1979). This growth-orientation, in and of itself, would represent an entrepreneurial characteristic to some scholars (Dungaree & Cooper, 1982). Yet, as Vesper (1980) has pointed out in his continuum of venture types, many business owners never intend for their businesses to grow beyond what they consider to be a controllable size. It is necessary to go beyond the notion of corporate life cycles and stages to conceive of an entrepreneurial venture.

Glue 1980) distinguished between entrepreneurial ventures and what he termed family business ventures by focusing on strategic practices. Strategic management in Clucks family business must emphasize preferences and needs of the family as opposed to those of the business. When in conflict, the needs of the family will override those of the business. Glue cited the oft observed family business strategies to remain independent and to provide outlets for family investment and careers for family members as an example of conflict. In contrast, an entrepreneurial strategist would opt for pursuit of growth and maintenance of the firm’s distinctive impotence through obtaining, the best personnel available.

Clucks distinction is that strategic practices oriented toward the best interests of the firm are observed in entrepreneurial ventures. An entrepreneurial venture can be identified by the strategic behavior of the firms. Schumacher (1934) suggested that five categories of behavior can be observed that are characteristic of an entrepreneurial venture. These categories, listed below, are supported by Vesper (1980) and can be used as the basis for classification criteria. 1 . Introduction of new goods 2. Introduction of new methods of production 3. Opening of new markets 4. Opening of new sources of supply 5. Industrial reorganization Because of the ambiguity of criterion 4, it is not employed in this study.

If any one of the remaining four criteria is observed in a firm’s strategic actions, then that firm can be classified as an entrepreneurial venture. These criteria do permit the classification of a new small traditional firm as entrepreneurial if that firm represents an original entry into a market. Again, the determining factor would be whether organizational activity in any of the four criteria resulted in a new combination, indicating innovative behavior. Additionally, these criteria permit medium and large firms to be classified either as entrepreneurial ventures themselves or as the instigators of entrepreneurial ventures. Summerset’s criteria represent evidence of innovative strategies or innovative strategic postures.

The criteria also emphasize the behavior of a firm consistent with its own best interests. This perspective is congruent with the development and pursuit of a distinctive competence prescribed by Vesper (1980) as a requirement for an entrepreneurial venture. A Conceptual Distinction Between Small Business and Entrepreneurship From the region discussion, it can be seen that, although there is considerable overlap between small business and entrepreneurship, the concepts are not the same. All new ventures are not entrepreneurial in nature. Entrepreneurial firms may begin at any size level, but key on growth over time. Some new small firms may grow, but many will remain small businesses for their organizational lifetimes.

The critical factor proposed here to distinguish entrepreneurs from entrepreneurial managers and, in particular, small business owners is innovation. The entrepreneur is characterized by a preference for creating activity, manifested by some innovative ambition of resources for profit. Drawing further on the characteristics outlined in Table 1, it is suggested that analyses of prospective entrepreneurial characteristics examine such traits as need for achievement (perhaps more appropriately labeled goal-orientation), internal locus of control, need for independence, need for responsibility, and need for power. Although a risk taking propensity is mentioned frequently in the literature, Schumacher noted that it is inherent in ownership rather than entrepreneurship.

Further, Brouhahas (1980) supported Schumacher with empirical results demonstrating that risk taking behavior cannot be used as a distinguishing characteristic of entrepreneurship. From this analysis, it is suggested that many published studies may be misleading in their conclusions. Economic theorists propose that the entrepreneur is essential to economic development (Schumacher, 1934; Williams, 1981). Yet studies of Differentiating Entrepreneurs from Small Business Owners: A Conceptualization 79 entrepreneurship neglect to distinguish adequately between entrepreneurs and of entrepreneurs can Jeopardize investigations in a variety of ways. Specifically, analyses of how entrepreneurs make their fundamental contributions to economic development cannot draw sound conclusions if the case studies are not entrepreneurial.

To guide future studies, the following definitions are proposed to distinguish among the entities discuss on the paper: Small Business Venture: A small business venture is any business that is independently owned and operated, not dominant in its field, and does not engage in any new marketing or innovative practices. Entrepreneurial Venture: An entrepreneurial venture is one that engages at list in one of the Summerset’s categories of behavior: that is, the principal goals of n entrepreneurial venture are profitability and growth and the business is characterized by innovative strategic practices. Small Business Owner: A small business owner is an individual who establishes and manages a business for the principal purpose of furthering personal goals.