Conceptual framework and small business

The conceptual framework for this study was the general systems theory

involving a holistic view of an environment as a system with interacting processes and

parts. The small business environment may comprise of several processes and factors

interacting to produce and prosper. Von Bertalanffy (1950) found the general systems

theory within the field of biology during 1950 to gain a whole perspective of the parts

that function within an organism. It benefits stakeholders and policy makers in the

business community to gain a whole view of the processes involved in small business

environment, and in particular, small business growth. A focus on the behavior of every

process and the interactions between processes results in a holistic view of the whole

organism (von Bertalanffy, 1950). Organizational management from various disciplines

have benefited from a holistic view of its areas and processes. Researchers in fields of

management, social science, and organizational design have applied a systems thinking

approach (Hieronymi, 2013). Additionally, small business managers are the key growth

strategists making decisions within the context of their environment (Majumdar, 2013).

The manager facilitates the processes within the small business system. Soojin et al.

(2011) noted the importance of the primary strategist within the system to make choices

within the parameters or rules of the system. Management should explore growth

strategies with a holistic view of the small business environment from the perspective of

the manager who is the primary strategist.

I explored growth strategies to understand the processes managers encounter in

their environment as functions within the whole system. The processes of small business

growth includes identifying growth opportunities, financing growth strategies, and

developing and managing growth strategies. Applying a systems view can result in

improving strategic growth management and organization adaptability to industry

organized discussion of each process and its function within the whole system of the

small business environment. The literature review begins with a chronological overview

of support for small business growth and the economic value of small business activity.

As the primary strategist, the manager makes choices within the boundaries of the

system (Soojin, Miso, & Joonhwan, 2011). A key role of small business managers is

making decisions regarding growth within the context of their environment (Majumdar,

2013). The entrepreneurial tasks involve assessing and combining resources and

developing strategies (Kozan & Akdeniz, 2014; Majumdar, 2013). Like any system,

various interacting processes and factors influence the outcome of strategic management

decisions.

A business’ age and size might be determinants of its available resources. In

contrast to large businesses, small businesses have fewer resources such as financial,

human capital, and skilled management (Prajogo, McDermott, & McDermott, 2013;

Webb, Morris, & Pillay, 2013). Small businesses have fewer financial options than large

businesses to support growth strategies, sometimes minimizing managers’ confidence to

pursue growth initiatives (Fort, Haltiwanger, Jarmin, & Miranda, 2013; Geho & Frakes,

2013). Although there are limitations on small business resources, an important role of

managers is to assess and combine available resources to support developing and

implementing growth strategies (Kozan & Adkeniz, 2014). An environment consisting

of dynamic interaction between areas or processes can benefit from the perspective of a

functioning system (von Bertalanffy, 1950; Soojin et al., 2011).

A History of Supporting Small Business

The history of supporting small business in the U.S. originates from European

policies established to regulate public business activities. The early 1600s involved trade
between India and Europe, primarily large, publicly held companies with support

provided by sovereign governments (Harris, 2013). Businesses received support from

government, but with extensive government intervention. Early companies formed on

the continents of Asia, Africa, and North America under sovereign leadership providing

funds, support, and military protection to minimize business interruptions (Beets, 2011).

Policy-makers focused on maintaining trade among countries and keeping municipal

services operating. The policies developed included recognition of public companies, but

with large, municipality and trade companies such as railway, utility, or shipping (Beets,

2011). The large companies included regional trade alliances such as the East India

Company or the Royal African Company (Beets, 2011). Public companies, government

leaders supported types of business structure to assist large, privately held companies in

doing business.

Supporting private business began with earlier European business formations.

Beets (2011) found Roman Collegia, a form of proprietorship and partnership, and the

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British large, private companies were common business structures (Beets, 2011). Both

Collegia and the private company styles included a structure with legal rights and

protection when forming agreements for trade of products or services (Beets, 2011;

Neumark, Wall, & Junfu, 2011). Acknowledging companies as having rights to form

agreements, merge, or contract with other persons or entities led to further support for

sole proprietorships, partnerships, and corporations.

Meanwhile, in 1776 in the U.S corporate enterprises formed with an influx of

immigrants seeking a new land. Settlers came with entrepreneurial ambitions for
economic prosperity and the European business policies about private companies (Beets,

2011; Harris, 2013). Small business entrepreneurs were amid the pioneers with minimal

obligations to their native sovereign, but seeking prosperity on their own as artisans in a

particular field. The British government created policies to acknowledge companies and

provide certain protections, but again with large companies in mind. British policy

makers did not anticipate small company owners would register under the Registration,

Incorporation, and Regulation Act of 1844 or seek limited liability protection under the

Companies Act of 1855 amended in 1907 (Harris, 2013). Shortly after the end of the 19th

century, policies targeted large companies such as railways, roads, insurance, banking,

and shipping (Harris, 2013; Hunter, 2013). Contrarily, many small, private business

owners registered their businesses to receive support and protection such as limited

liability. By 1919, 90% of the 145,000 companies registered were small, private

companies (Harris, 2013). Policies in Britain and the U.S. continued to evolve in support

of small business needs and legal rights.

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Further policies used included support for small business, but based on the

recognized value of small businesses to economic growth. According to the SBA, small

business activity is an important function of a healthy economy because it results in job

creation (U.S. SBA Strategic Plan, 2014). Governments in many countries including the

United States began to view entrepreneurship as valuable to grow their economies and

increase employment (Hunter, 2013). The Small Business Act of 1953 included support

for small business interests and the formation of the SBA ensuring fair opportunity for

government contracts and business loans (Neumark et al., 2011; U.S. SBA Strategic Plan,
2014). Small business growth increased significantly in the 1980s and 1990s due to

reduced job security in a postindustrial economy resulting in one in 10 citizens becoming

self-employed (Hunter, 2013). Policymakers might justify continued support for small

business activity because of the economic benefits of job creation, a distinguishable

product of small business growth.

Start-up, Young, and Mature Small Businesses

A primary, social attribute of small businesses is job creation through either new

establishments or growth, although a management focus is to increase customer-base,

production, and profitability (Majumdar, 2013; Neumark et al., 2011). Policy makers

support entrepreneurship for job creation, but the high failure rate of startups and young,

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small businesses make it imperative for surviving, mature small businesses to grow

(Decker et al., 2014).

Policy makers use employment as a measure of value of small business to the

economy and form policy to assist and support continued growth. The SBA policies

include a definition of small businesses based on employment of less than 500 employees

and include job creation and an increase in the number of large businesses as a measure

of growth (Gale & Brown, 2013). The value of small businesses to economic growth is

apparent in the significant contribution to employment. The SBA leadership reported

more than 99% of all businesses with employees in the U.S. are small businesses of

which 49% are private sector employers (Gale & Brown, 2013). Small businesses

account for new jobs and many current jobs in the employment market today. Small

business activity resulted in 18.5 million jobs between 1993 and 2011 and 64% or 1.3
million of new jobs in 2011 (Gale & Brown, 2013). The significance of small businesses

in creating and maintaining jobs justifies research on this topic for economic and social

benefit. Furthermore, Haltiwanger et al. (2013) purported the importance of considering

the age of a small business when exploring growth and found growth slowed with age.

Small business managers could gain understanding about creating and sustaining value

and growth as their business continues from startup to young, and mature.

Start-up Business. Many start-up small businesses have high growth, but have a

high failure rate than mature businesses. Start-ups account for a substantial portion of

new jobs, but are more prone to failure and subsequent job losses when compared to

mature businesses. Between 1980 and 2010, new establishments employed 1.4 million

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workers or 3% of total employment per year (Decker et al., 2014; Haltiwanger et al.,

2013). Conversely, most start-ups fail or exit within 5 years subsequently causing a 40%

loss of the jobs created (Gale & Brown, 2013; Haltiwanger et al., 2013). Start-ups enter

and exit the market quickly. Some managers of start-ups adopt a move up or move out

strategy (Decker et al., 2014; Haltiwanger et al., 2013). Start-up businesses that survive

to become young businesses, less than 2 years old, experience rapid growth and job

creation, but still have a higher exit or failure rate than mature small businesses.

Young Business. If a business sustains through the start-up stage, as a young

business the growth rate is the highest at any period of the business. Young, small

businesses grow faster than any other group of small businesses and create new jobs

through innovation (Gale & Brown, 2013). When compared to businesses that are older,

young businesses have a higher growth rate. Between 1992 and 2003, young, small
businesses less than 2 years old had an average, estimated growth rate of 11.9% (Decker

et al., 2014). Conversely, maturing, small businesses 5 to 6 years old had an average,

estimated growth rate of 2.3% (Decker et al., 2014). Continuing young, small businesses

initially have a high growth rate that declines as the business ages. Young businesses are

similar to start-ups with a higher failure rates than mature businesses. The high failure

rate is due to high vulnerability of startup, younger, smaller businesses to business or

economic cycles.

Economic downturns and changes in the business climate may have a

significantly adverse effect on start-ups and young, small business performance. Fort et

al. (2013) found business cycle changes and economic indicators such as housing prices

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have an adverse effect on the net job creation rate of young, small businesses than on

large, small businesses. Young, small businesses experience high growth and create jobs,

have a high exit and job destruction rate, slower growth as they mature and are more

vulnerable to economic conditions than larger businesses.

Mature Business. Mature or continuing, small businesses that are more than 5

years old show a slow growth rate as indicated by a negative job creation rate. In 2005,

small businesses older than 5 years with five to less than 500 employees had a negative

net job creation ranging between -5,725 to -110,111 jobs (Haltiwanger et al., 2013).

Small businesses with less than 500 employees showed a decline in net job creation as

they aged beyond 5 years old (Haltiwanger et al., 2013).

A more current estimate of net job creation is illustrative of the decline among

small businesses from their first year and a negative job creation from five years older or
more. In 2012, small businesses with less than 50 employees and older than 5 years had

a negative net job creation rate ranging from -5,430 to -113,000 jobs lost (U.S. SBA

Statistics, 2013). When comparing businesses based on size and age, older, small

businesses had the lowest growth rates. Fort et al. (2013) made a comparison using older,

large businesses as a base and found differences between older and younger, small

businesses. Older, small businesses had the lowest net employment growth differential

rate between 1981 and 2010 of -0.258 and young, small businesses had a higher growth

rate of 0.551 (Fort et al., 2013). The growth rate of mature, small businesses declines

gradually with age, at 5 years old or more. The effect of age continues even as a business

becomes more than 10 years old. The average 10 year old small business grows 1.4%

faster than a business that is more than 16 years old (Decker et al., 2014). Consideration

of age as a factor of business growth is important long after 5 years old.

Conclusively, researchers have found small business growth slows as they age

resulting in reduced or negative job creation; it is important to consider age when

assessing growth. Fort et al. (2013) found that small businesses initially have high

growth during the start-up and young stage, but have a decline in growth when the

growth analysis controls for business age. Consideration of business age when

calculating growth has become an important aspect of understanding growth issues

among older, small businesses. Haltiwanger et al. (2013) concluded small businesses

have higher growth rates than larger businesses, but the comparison balances with age.

Decker et al. (2014) and Gale and Brown (2013) agreed that mature small businesses

have slow growth, resulting in many net job losses.

Besides the negative job creation and job losses, slow growth among small

businesses as they age affects the emergence of large businesses in the economy that

supply most jobs. Gale and Brown agreed with Hurst and Pugsley (2011) assessment that
in 2005 there were as many young small businesses (less than 10 years old) as older small

businesses which results in fewer emerging large businesses. Small businesses that do

not grow produce fewer large businesses that employ a significant portion of total jobs.

In 2013, large businesses employed 48% of total employment, but were only .32% of all

businesses in the U.S. (Decker et al., 2014; Statistics of U.S. Business, 2013). Decker et

al. (2014) stated large, startups are rare; most startups begin small. Subsequently, small

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business growth is the primary producer of large businesses, sustaining the most jobs in

the U.S. economy.

When exploring the development and use of growth strategies, it is essential to

consider the age of the business. The age of a business may influence the resources

available, the vulnerability of industry or economic cycles, the strength of its customer

base, and adaptability to new production demands (Hieronymi, 2013; Karniouchina et al.,

2013). Additionally, receiving support and assistance predicates on the perception of

policy makers about the social and economic value of the small business and overall

industry, namely job creation. Exploring the perspective of small business managers

regarding previous growth opportunities identified and strategies used within the context

of their environment and previous condition or age was a goal of this study. A manager’s

perception of strategies to capture growth opportunities might evolve as the business

ages. The boundaries of the study included small businesses that were more than 5 years

old, but the inquiry will encompass previous strategies and changes at the current

condition. The following presents the processes within the business environment and

small business growth. The discussion includes growth strategies to capture growth
opportunities, financing growth strategies, and the manager as the primary growth

strategist.