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The assignment is in the form of a report which is aimed to support the proposal; “small business needs a different management style to large ones”. Report is broken down into different sections, where each section explains a particular subject. In this report, a small description of small and large business and their common differences are discussed. Due to the broader scope of the topic, it is broken down into separate entities. Each entity draws out a comparison between a small firm and a large firm in terms of management practices in major business functions like; HRM, finance, risk, performance, etc. Online journals, books, internet articles, newspaper, management models, and examples have been used to support the argument.
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Businesses, either small or large, are key drivers of the country’s economy. According to UK statistics, approximately 96% businesses are small or medium sized business and rest comprises of large businesses (UK Statistics, 2007). Small and large business can mean different in different countries and industries. Although, there are many similarities among different types of businesses, yet they all demand different management style; mainly because of the size and processes carried out in each business. “Large sized organisations are able to develop areas of special knowledge – sales – finance – marketing etc whereas a small business owner has to learn some basic level of skills in every element of his/her business through experience” (Bennett, and Robson, 2004). Small businesses are easy to set up and maintain but hard to grow because of the limited resources. On the other hand, each business function in large firms is; formalised, systematic, and organised because of the availability of the resources; mainly capital and human asset (Dawson, 1996; Kriby, 2003).
2.1 Small business:
‘Small business’ is a term which can be defined in many ways depending on context, for example; Cochran (1981) defines small business dependent on key factors like; total worth, relative size within industry, number of employees, value of products, annual sales or receipts, and net worth.
Similarly, Bolton Committee (1971) proposed a definition which states that:
“A small business is an independent business which is managed by its owner or part-owners in a personalised way and which has a relatively small market share”.
Different methods are used to define a small company which varies by country and industry. For example a company with 100 employees is regarded as small company in United States (Scarborough and Zimmerer, 2002) where as in EU it comprises of 50 employees (DTI website, 2007). Other criterion used to classify small company may include; annual sales, net profit, or balance sheet total (Cohran, 1981).
2.1.2 Overall view of management style in small businesses:
Most countries have small businesses in operation, number and size of which depend on the business conditions of that particular country. Small businesses play an important role in the economic stability of the country by; creating employment and generating revenue. Typical examples include; accountancy firms, convenience stores, law firms, artisans, restaurants, etc (Cochran, 1981).
Small businesses are easy to set up with low cost and little governmental legislation and provide the stepping stone to become a large business (Cox, and Fardon, 2005). Owner-manger has high motivation to make the business successful for which he/she relies on personal efforts.
2.2 Large business:
Like small business; the term ‘Large business’ can have different meanings depending on circumstances and perspectives. The department of trade and industry (DTI) defines large business as:
“A large business is an independent business which is managed by its owner, part-owners, or share holders in a personalised way and which has a large market share and provides jobs for 250 or more employees.”
2.2.2 Overall view of management style of large business:
Statistics show that large businesses only make 4% of the total business sector yet their collective annual turnover is more than rest 96% of the business, comprising of small and medium sized businesses (DTI website, 2007). Large businesses are very important for any country’s economic survival not only because they generate more revenue but they play a vital role in ongoing business sector growth (Walters, 2004).
Large businesses are not easy to set up because 1) they incur substantial cost for set up and initial investment 2) governmental legislation. A major advantage large business has over small business is that large business can raise money easily as compared to small business through share holders (Capon, 2004).
2.2.3 Importance of large businesses:
Large businesses can attract potential and competent employees from around the world. For example, experience shows that from a given sample of graduate students of a university, about 90% would prefer to work for a large company rather than having their own business or working for a small firm. It can be said that, on average, large businesses offer better jobs than small businesses, in terms of both compensation and stability. Employee turnover is low as wages are high and workers can see potential career in a large company (Fletcher, 2001).
However, it can also be argued that large firms often have undesirable working conditions such as; weaker autonomy, stricter rules and regulations, less flexible scheduling, and a more impersonal working environment (Murphy, 1996). Structural difference is quite evident between a small firm and large firm. In most cases, owner is treated as a separate entity from the company and who may or may not have the authority to make contracts and decision (Davies, 1999). A large company has different functional departments (like; finance, production, marketing…) which are managed by separate managers and the decisions are made depending upon the strategies formulated by top management of board of directors (Lloyd, 2000; article on www.bnet.com)
Small and large businesses typically differ in resources (like; money time, human resource, finance…), and effective use of these resources requite different style of management practices in large and small businesses.
Human resource management:
Human resource management (HRM) is the performance of al the managerial functions involved in planning for recruiting, selection, developing, utilising, rewarding, and maximising the potential of the human resources in an organisation (Boddy, 2005). Regardless of size of the business, human asset needs to be managed effectively for maximum benefit.
3.1Comparison of HRM in small and large firms:
Large firms, normally, have separate HR department because of the workforce size and requirements. Its function is to devise strategies for; employment, placement, training and development, health and safety, and human resource planning (Armstrong, 1995). Where as, in small companies, all the HRM functions are performed by the owner/manager who has the authority to hire the people. At this point, it can be proposed that recruitment/ employment process is quick and cost effective in small companies because in large firms such a process involves lengthy procedures (Foot, and Hook, 1996; Armstrong, 1995).
Mathis and Jackson (2000) argue that a small business is generally more limited in time and money when it comes to recruiting employees. A large business, on the other hand, has more time and money to recruit employees. They typically have a wider range of recruitment processes and use a greater number of selection procedures in making hiring decisions.
3.2HR planning: Small Vs Large business:
Another major difference between management style of small business and large business is in the field of HR planning. HR planning is a process of making assumptions and forecasting future HR needs of the organisation (DeCenzo and Robbins, 1998).
Hernandez (2007) cites that both small and large businesses try to predict changes that may occur in the future but their strategy formulation is different. For example, a small business may look at improving employee skills level for future needs. In contrast, a large firm would hire a new employee for future vacancies. Similarly, a small company may look to expand the venture through growth strategies. A large business often looks at cash flow and cost control when it comes to HR planning and may take steps like reduce employee pay or redundancy (Full article at: www.saber.uca.edu, 2007).
3.3Training and development: Small Vs Large business:
Likewise, training and development of employees is also important both for employer and employees as it helps in overcoming future challenges and stay competitive in the business market. (Scarborough and Zimmerer, 2001) states that in a small firm, training is informal and often done on a voluntary basis by other employees. Large businesses opt to have for formalised way of training staff. These firms may have training specialists who are responsible for setting training objectives and following up on the progress to ensure that the training objectives have been achieved (Foot, and Hook, 1996).
Financial management is the management of finances of a business/organisation in order to achieve financial objectives (Atrill, 2003). Not considering size, industry, or type of business, financial management provides the framework for smooth running of the business. Finances of a business are often used as distinguishing aspect between a small and a large company (Atrill, P. 2003).
4.1 Financial management; Small Vs Large business:
Walker and Petty (1978) cite that managers of small businesses maintain that the financial management of their firms is fundamentally different from the management of the large corporation, because many large company financial practices simply are not necessary for the small companies. Also, the financial management of the small business often may be dictated by the restricted choices available to it, such as fewer options for investing excess liquidity.
4.2 Financial management in small businesses:
A small company has a limited finance available which needs to be managed in a way different to large businesses. Usually, there is no special finance department, money invested in a small business belongs to the owner/ manager, and financial management is done by owner or senior management. Poor financial management can make a small business suffer in terms of cash flow and liquidity problems (Davies, 1999). Also, because of limited investment, a small business cannot afford too many and too lengthy credit sales and management is always striving for quick credit recovery from its creditors. Owner of a small firm enjoys the sole right of spending the profits and has to bear all business losses. Lack of internal and external audits can lead to false information of financial position of the business presented to owner or senior management (Pandey, 2005; Davies, 1999).
4.3 Financial management in large businesses:
Large businesses, in comparison, have less financial problems as substantial amount of capital is employed and it is easier for a large business to raise money (when needed) from shareholders and other credit companies. Due to the size of the workforce and other legal and financial matters (like; tax, dividend etc) every large company has a dedicated finance department, managed and run by finance professionals. High sales targets can be achieved, as company can afford to make big credit sales. Large companies, mostly, are pubic limited companies which are obliged to disclose their financial statements (like profit and loss account, balance sheet, etc) publicly (Walters, 2004), where as, small companies are not required to disclose their financial statements (Davies, 1999).
Financial management of large companies differ from small companies in terms of their internal and external financial audits. These audits ensure the correctness of financial statements (Walters, 2004).
Inventory management is a system and process that identifies inventory requirements, set targets, provides replenishment techniques and reports actual and projected inventory status (Fletcher, 2001). Apart from service industry, every business has to maintain inventory but inventory management style differs from small to large company.
5.1 Inventory management in small businesses:
Experience shows that small firms follow informal inventory management style. Usually there is no special procurement department and stock control system. Buying and purchasing is done by owner or managers and their decisions are based on historical sales data. Inventory purchase, sales, and record keeping are done manually and no specialised soft-wares are used for this purpose (Walters, 2004; Pandey, 2005; Davies, 1999).
5.2 Inventory management in large business:
Like other functions, large business has a separate inventory department. It is responsible for making purchase orders, keeping sales record, forecast purchase and sales, and stock count. Inventory data is processed and analysed and specialised soft-wares are used to make inventory system systematic and easy to handle. Management for warehouses, predominantly used for storing large amount of stock, is also managed by inventory department (Pandey, 2005).
5.3 A conclusion; inventory management:
Due to the small size of the business, the inventory level is also low and therefore requirement of an inventory manager may not be considered. Stock count in not done on regular basis which may lead to stock loss in the form of stealing and forecasted sales figures may prove wrong. Supplier power is high over the business which results in high purchasing cost to small business.
Large businesses have sufficient funds available which enable them to do bulk purchase, while enjoying economies of scale. Regular stock checks are carried out to make sure that sufficient stock is available to meet future needs. Suppliers have low power over the business and inventory managers are appointed to deal with any inventory concern.
5.4 Example of Tesco:
Tesco is the leading supermarket chain of UK employing more than 400,000 employees (Tesco, 2007). The inventory management system adopted by Tesco is very systematic and is called just in time (JIT). JIT is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated cost (Capon, 2004). New stock is ordered when current stock level drop below the re-order level. This saves warehouse space and cost. Hence, inventory management system of a large business is very different to a small business.
“The real concept of performance management is associated with an approach to creating a shared vision of the purpose and aims of the organisation, helping each employee understand and recognise their part in contributing to them, and in so doing, manage and enhance the performance of the individual and the organisation”. (Fletcher, 1993)
6.2 Performance management process:
Performance management comprises of two major elements 1) performance measurement 2) actions in the light of feed back i.e. either reward system or disciplinary actions (Fletcher, 1993). Performance management involves, setting and agreeing objectives, measurement and appraisal of performance, actions in the light of feedback, and continues monitoring. It also emphasis that the “micro objectives at individual level of employees should be linked with macro issues of organisation” and performance management should operate at all levels i.e. corporate level, department level and employee level (Gillani, 2007).
The nature of the performance management depends on the organizational context and size.
6.3 Performance management in small organisations:
6.3.1 Performance measurement:
Top level management is directly supervising performance measurement in the small organisations. There is no formal approach regarding performance measurement adopted by the management and no personal appraisal interviews are being conducted. Performance is easy to measure because of the nature of work remains constant for long time and employee’s performance is compared against historic data. Performance of one employee affects the performance of whole organisation (Gillani, 2007).
6.3.2 Reward systems and disciplinary actions:
Reward systems and disciplinary actions are usually not written and agreed and may base on employee needs and personal liking of the supervisors. Reward system in small organisations is usually effective because they can be altered depending on the situation and the needs of the employee (Randall et al. 1984).
6.4 Performance management in large organisations:
6.4.1 Performance measurement:
Performance measurement, in large organisations, is a continuous process. Measurement is carried out, on average, by section managers with the help of tools like annual reviews, appraisal interviews, mystery shoppers, surveys, and mostly by gathering 360 degree information as a whole. Goals of the organisation are clearly specified and targets are set and agreed. Large organisations, now a day, are becoming more group work oriented and employee’s performance is considered in terms of group work. Though, performance measurement is result oriented, can be lengthy and costly process (Randall et al, 1984).
6.4.2 Reward system and disciplinary actions:
Performance measurement is aimed at reviewing employee’s productivity and to point out the need of reward, training, or disciplinary action. “Written and uniform criterion is used to measure employee productivity throughout the organisation” (Wong, and Aspinwall, 2004). It can be proposed that impersonal nature of reward system, in large organisations, can be less effective as compared to small organisations (Gillani, 2007).
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6.5 A conclusion; performance management:
Small businesses can not build a methodical performance measurement system and reward and disciplinary system because of lack of money and professionalism. Normally appraisal is done by informal approaches like personal liking. With close relation to employees, they bypass their policies, if written, according to situation and need.
Effects sometime suit the organisations, but usually can result in undesired achievement and ineffective performance management system which can result in discrepancy in reward and disciplinary actions.
Large organisations, due to the size of their workforce, have to establish uniform policies for performance measurement, reward system, and disciplinary actions. Performance management is a core function for large businesses as they relate employee productivity to organisational productivity.
Performance management becomes transparent process and employees is rewarded or disciplined on their performance and actions.
The association for operations management (APICS) defines operations management as
“The field of study that focuses on the effective planning, scheduling, use and control of manufacturing and service organisation through the study of concepts from design engineering, industrial engineering, management information systems, quality management, production management, and other functions as they affect the organisation”. (APICS, 2007)
In other words, it can be stated that operational management is important both for small and large businesses. Operational management provides the over arching strategy which supervises business to success path. Its prime role is to oversee all other business functions (e.g. finance, investment, marketing, etc) in terms of their strategy formulation and target achievement.
7.1 Operation management in small firms:
Operational management in small firms, though not evident, is done at a small scale and which is based on short-term benefits. Typically, operation management in small firms is concerned about the survival in the competitive business market (the most important concern for a small business). Again, operational management becomes the responsibility of the owner or senior employees and their policies are based on organisational flexibility and innovation. Also, small business operational strategies are volatile and subject to change in case of change in business market (Yoo, Lemak, and Choi 2006).
7.2 Operation management in large firms:
Motwani, Jiang, and Kumar (1998) believe that operation management is the responsibility of the senior team management, who act as a driver of the specific operational strategy element. The top management commitment is evident via their communication of this commitment to all members of the organisation through actions such as investing appropriately in human and financial resources.
“Large firms put special emphasis on operational management as it dictates the agenda for business development and growth. There is no special department as function of this management is to oversee procedures of other business department” (Yoo, Lemak, and Choi 2006).
Another differentiating factor associated with large firms, as seen by Bennett and Robson (2004), is that operation management strategy may differ from industry to industry or region to region. Their basic business assumption might be same, but their strategic choice might be different from each other. For example, performance management system (a sub-group of operational management) for a production company would base on number of output produced, where as, in a service industry, performance management would be related to number and loyalty of the customers.
7.3 A conclusion: operation management:
So, it can be proposed that operational management is not different among small and large firms; the only differentiating factor is the size of scale it is done in both types of businesses. Also, the operations manager may be able to have one on one access to the operational team if it is smaller business. If it is larger, then the information has to be passed down through the hierarchy of management, so there is an importance on the correct team being hired so all the information is communicated and managed correctly
The dynamic nature of the business market gives rise to uncertainty for business owners and managers, and to keep pace with the change and stay competitive in business market, organisations are required to take initiatives which may have different outcome. These outcomes become a source of a risk, which needs to be managed effectively, to save a business from failure (Tchankova, 2002).
Scarborough and Zimmerer (2002) state that managing risk successful requires a combination of four risk management strategies;
- Anticipating, and
- Transferring (spreading)
They argue that risk in a business cannot be eliminated; however, it can be reduced by using one or a combination of risk management strategies.
8.1 Risk management in small businesses:
Different types of risks are associated with the size and industry of the business. Generally, risk management for small businesses means; “planning for potential deviation from expected business results” (Reiss and Arm, 2004). They further say that a small business owner is especially well adapted to manage risk because they are closely involved in all aspects of operations, and know many of the business’ strengths and vulnerabilities.
Markgraf (2005) explains that risks are always high for small businesses because they do not have enough resources to overcome the loss and failures; posing potential threat to their survival. He further reveals that risk management in small businesses is not a routine function and which does not get underway until a possible risk is viewed.
Risk management is an integral part of small business management.
8.2 Risk management in large businesses:
Larger the size of the business, greater is the risk. Risk management for large businesses is seen as core business function which is carried out in a strategic way. As Walters (2004) points out;
“Large organisations have reduced their activities down to core processes and capabilities, adopting the view that astute asset management and risk management are more about managing assets than about ownership”.
Different strategies are formulated in response to risk management which can only be employed by large businesses because of structure and resources of the business. Once such strategy explained by Walters (2004) is “shared risk at reduced level strategy”; in which risk is reduced by being dispersed among network of members and because of high aggregate level of expertise that is deployed.
Large businesses, due to substantial resource availability, are able to tackle risk more effectively and efficiently as compare to small firms. Large businesses manage their risk; through research, increased and focused communication, set up special risk management teams, and investing in business plans. For example, before investing in a new project, large business would tend to reduce the risk through research on the consequences of that particular project, enabling them of more surety and security (Boddy, 2005).
8.3 A conclusion: risk management
Due to the nature of the small businesses, they are more exposed to certain kinds of risks as compared to large businesses. Lack of funds, lack of research and development, and immaturity in the business market, are some of the potential barriers for risk management in small businesses.
By and large, large businesses like to take risk because they see a business growth opportunity by doing so. However, the importance of the risk management remains the same for large businesses as for small businesses.
Like any other business function, taxation management is also very important. It is important in two ways; 1) it is a legal requirement and 2) better tax management can save money for the businesses (Atrill, 2003).
9.1 Tax management in small businesses:
Small businesses in UK, mostly, are un-incorporated and are not subjected to corporation tax. Business setup is limited to either one person (sole trader) or few partners (up to 20 partners HRMC, 2007). The business’s profit equals to the owner’s profit, hence, the sole trader business’s profit is the owner’s personal income, which will be subjected to personal income tax (Pandey, 2005). For partnership business, each partner is liable for personal income tax on his share of profits. (Cox & Fardon, 2005)
9.2 Tax management in large businesses:
Large businesses in UK are incorporated businesses and are subjected to corporation tax. The employees are liable on their wages for Income tax and national insurance contributions (Atrill, 2003). The owner is a separate entity to business and has limited liability.
Power distance; small and large firms require different management style:
Greet Hofstede cultural dimension (power distance) can also be used to identify the difference (in terms of management style) between large and small companies. According to Hofstede;
“Power distance indicates a tendency to view the hierarchical gap between authorities and subordinates as substantial but also legitimate and acceptable”.
Source: www.greet-hofstede.com, 2007
10.1 Power distance in small firms:
Small firms, normally have high power distance. This is because all the authority is practiced by the owner and decisions are made by the owner. Superiors exercise autocratic or paternalistic leadership and subordinates do not expect to participate in decision making (Hofstede, 2001). This affects the motivation among employees and demands for a different management style as compared to large firms having low power distance (Wong and Aspinwall, 2004).
10.2 Power distance in large firms:
Typically, large firms have low power distance. This is because of the fact that decisions are made in coordination and collaboration with other employees (like; managers, team leaders…). This will have positive affect on management style as managers will experience responsibility acquired through participation in decision making, keeping them motivated and loyal to the company (Wong and Aspinwall, 2004).
Personal style of management; small Vs large:
Another key factor that can be used to differentiate between management styles of small and large business is the influence of owner or CEO on the business. Entrepreneurs run small businesses and can have customised management style which is suitable and adaptable to the nature and personality of the entrepreneurs. They hold the power and can affect management process to a large extent (Fincham, and Rhodes, 2004).
On the other hand, the power house (mostly) for large organisation, is controlled by board of director and CEO has a minimal personality effect on business processes and managerial styles. Personality traits of managers do not come in to play because managers have to follow rules, given to them by board of directors (Fincham, and Rhodes, 2004).
According to Boddy (2005) management models can be classified into four categories;
- Scientific/ rational goal
- Internal process
- Human relation
- Open system
Small businesses are managed in informal way therefore; no management model can be applied to explain the management style of small businesses. However, in the age of globalisation, management style of large businesses can be described as a combination of all four management models (Yoo, Lemak, and Choi, 2006)
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