ENTREPRENEUR S AND SME S CHARACTERISTICS AND COMPETITIVE ADVANTAGE. A KIND OF ROADMAP TO SME S SUCCESS. APOSTOLOS D. ZARIDIS Hellenic Open University

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1 ENTREPRENEUR S AND SME S CHARACTERISTICS AND COMPETITIVE ADVANTAGE. A KIND OF ROADMAP TO SME S SUCCESS. APOSTOLOS D. ZARIDIS Hellenic Open University NIKOLAOS KONSTANTOPOULOS University of the Aegean KONSTANTINOS KARAMANIS T.E.I. of Epirus, H.O.U. ABSTRACT Purpose of this study is to highlight some of entrepreneur s and sme s characteristics that are sources of competitive advantage. Further, the sources of competitive advantage drive to it. Thus, via the obtainment and maintenance of a diachronically long-term competitive advantage, a small business can achieve the principal objective of a firm which is maximization of its wealth and continuous stay on profit areas. Plethora of resources and competences were proposed as sources of competitive advantage in resource-based view and add continually new ones. It appears to suffer hierarchy of sources of competitive advantage regarding sustainability of these. Literature about sme and entrepreneur emphasizes the significant role of certain factors such as business size, management, ownership, data relating to the survival and competitiveness of sme, sales, profitability, liquidity, lack of skilled personnel, distribution channels data and market information, potential fundraising, use of innovation or new technologies, organizational structure, resources control, networking and clustering. Between factors that make up features of a successful small business are these influencing business size of sme, such as characteristics of entrepreneur, management strategies, external environment s influence, and sme s characteristics. Little difference exists between sme s failure and success. Apart from environmental factors, there are three categories of failures mentioned: functional knowledge, managerial skills and managerial behaviour, related to entrepreneur s and sme s characteristics. Keywords: entrepreneur, sme, small business, characteristics, competitive advantage, sme s success. 1

2 ENTREPRENEUR S AND SME S CHARACTERISTICS AND COMPETITIVE ADVANTAGE. A KIND OF ROADMAP TO SME S SUCCESS. 1. INTRODUCTION Business is influenced by external and internal factors to the road to success and achievement of the main and long-lasting objective of firm that is the maximization of its wealth and consequently the continuous remaining in profit regions. The external environment refers to outside forces that may affect an organization. Two kinds of factors make up external environment that is task and general environment. Task environment consists of external groups affecting business operations, and general environment refers to outside forces may influence its ability to do business. In an evolving environment and particularly in a crisis era as nowadays, it is difficult for business to control and further change environmental factors or adapt to them. Thus, it is very important for business to take advantage supremely the whole of internal factors. So it s necessary for business to exploit all internal sources of competitive advantage in order to achieve the obtainment and maintenance of diachronically long-term competitive advantage. 2. DEFINITIONS Porter (1980) mentioned that competitive advantage for a firm is the result of complete comprehension of its external and internal environment. After it comprehends the market which it is activated in, its competitors, general external environment but also its strengths and weaknesses, it is possible later to discover its own unique core competencies and focus to them. Porter (1985) expressed his conviction that competitive advantage springs from value that a firm is capable to offer in its customers, which surpasses the cost of value creation from the firm. Two basic types of competitive advantage exist that is leadership of cost and differentiation, which are emanated by capability of a firm to deal with five forces better than competition. It is necessary for a firm to discover a unique value that can be transferred in a concrete market. If a firm seeks the achievement and maintenance of sovereign role in a market, it should decide type of value that wants to offer in its customers. Resource - based theory is the main theory of competitive advantage (Powell, 2001; Barney, 1991). Resource - based view has been discussed a lot and attracted important empirical studies. A firm acquires competitive advantage creating capabilities that are precious, rare, inimitable or non-substitutable (Petts, 1997). The cornerstones of competitive advantage according to Peteraf (1993) are: heterogeneity of resources that creates monopoly or Ricardian rents a posteriori limits in the competition that protect rents from permanent competition, since they maintain heterogeneity of resources and consequently rents imperfect mobility of production factors that ensures precious factors remain in the firm, as that rents are shared inside this ex ante limits to competition that prevent costs from offsetting rents, since they maintain costs of strategy implementation in low level. 2

3 Conclusively, terms mentioned above should be satisfied in order that a firm has sustainable above average economic rents. Firms acquire viable competitive advantages (Barney, 1991) with strategies implementation that exploit their internal forces, neutralizing exterior threats and avoiding internal weaknesses, focusing mainly in the analysis of opportunities and threats of firm in its competitive environment. As mentioned above, four empirical indicators of firm resources potential to create sustainable competitive advantage were proposed: value, rarity, inimitability and substitutability. In order to have potential of creating competitive advantage, a firm resource should be: precious, under significance that it exploits opportunities and/or it neutralizes threats in firm s environment rare, between current and potential in the future firm s competition imperfect imitable, or via the unique historical terms, or via the causal ambiguity or the social complexity without strategic equivalent substitutes. Sustainable competitive advantage is the basis of above average performance of a firm in the long run (Porter, 1985) and without this permanent rents don t exist. Sustainability of competitive advantage depends from specific source of advantage possessed by a firm, number of different sources possessed by it and also continuous improvement and upgrade of the sources or not (Porter, 1998). Existence of diversity of economic entities requires a classification of these various categories. This distinction can be done based on a number of criteria with most important the business size. Thus, firms are divided into small, medium and large. This discrimination is performed under separate criteria such as number of employees, turnover, invested capital (equity), installed power (Bourandas and Papalexandri, 1998), market share, if managed and owned by an independent and personal way (Murphy, 1996), etc. Small and medium-sized entities, based on size, were termed SMEs. Globally, there are many different definitions for smes and so makes the comparison of smes difficult between different countries, particularly when benchmark is not the number of employees, but economics of business like annual turnover and total assets. Usually, international studies prefer number of persons employed as size comparison of smes (Carter and Jones-Evans, 2006). Besides, there is difficulty in collecting financial data from firms, mainly due to voluntary aversion of entrepreneurs to the assignment in question, and is compounded in smes due to the absence or ignorance of these. Use of number of persons employed as a measure of business size tries to restore justice with regard to the delimitation of sme, since businesses come from different areas and sectors of economy. Number of employed persons is considered the most important (Siropolis, 1997). 3. ENTREPRENEUR S AND SME S CHARACTERISTICS AS SOURCES OF COMPETITIVE ADVANTAGE Smes are a notable size globally because of their large number and their contribution to employment. But role of smes in world economy is often underestimated due to their image that they have a reduced role in economic activities, in contradiction to large businesses, especially multinationals, but also difficulty in estimating their number (Curran and Blackburn, 2001). A common characteristic of smes is that owned by an individual or a small group of people exercising managerial role and financing business. Smes are labour intensive, have inadequate distribution networks and market information, 3

4 shortage of skilled labour, and their R&D depts. do not exist or have limited role. Smes may be established and easily enter the market but high infant mortality in these businesses is presented (Bourandas and Papalexandri, 1998). The differences between successful and unsuccessful smes are few (Lussier and Corman, 1995) and literature has been identified some factors they lead smes to actual failure or success, while there is no definitive cataloging because of conflicting conclusions. Main factors mentioned in international literature are as follows (Lussier and Corman, 1995): Capital. Smes beginning their life underinvested have increased chances of failure compared to those with sufficient investment. But in many countries, fundraising for smes remains a major problem in primary and secondary sector (Zaridis, 2006). Record keeping and financial control. Increased chances of failure for smes do not do so. Industrial experience. Smes, managed by persons possess it, have more chances of success. Managerial experience. As above. Planning. Small or medium-sized businesses that do not have developed a specialized business plan face many chances of failure. Professional advice. Smes using it face higher chances of success. Educational level. Entrepreneurs that received university level education have higher chances of success. Personnel. Smes which attract and retain quality staff, have greater chances of success. Election of appropriate time to provide products or services. Smes providing very young or old products / services increase chances of failure. Economic circumstances. Smes starting in economic recession are more likely to fail than others starting in economic prosperity. Age. Younger entrepreneurs have a greater chance of failure. Partners. Businesses established by two or more people are more likely to succeed than those by one. Parents. Entrepreneurs whose parents were business owners face decreased chances of failure than those whose parents did not own a sme. Minorities. Greater chance of failure for these entrepreneurs. Marketing. Smes owners having marketing skills have a greater chance of success. It s difficult to be made a valid and reliable list of relevant variables even in a particular industry (Lussier and Corman, 1995) and recommended that it s very important for research studies for smes to focus on a single industry (Cochran, 1981; Lussier and Corman, 1995; Robinson and Pearce, 1984). Business size is an important factor that separates successful from unsuccessful smes. In literature, it is mentioned that the ease of sme s creation - easy entry, freedom of opportunity, and freedom of decision making - and lack of managerial skills - skills and knowledge to manage smes - generated by the increase of business size are causes for sme s failure (Zaridis, 2012). Smes mortality rate is a function of the ease or difficulty of overcoming the obstacles encountered, some of which are found in the areas of competition, technology, markets (saturated or not, market knowledge, market dispersion or not), production capacity (excess or full), product range, level of entrepreneurs skills and product quality assurance (Murphy, 1996). End of business life has implications in task and general external environment, as well as internal environment, since affects directly or indirectly owners, employees, customers, suppliers, creditors, but also the government itself. 4

5 When barriers to entry are low for smes then the survival rate is also low, while higher chances of survival exist when entry barriers are high (Murphy, 1996). Low barriers to entry are related to factors such as rapid assets circulation, low skill level of workforce, existence of protection in specialized areas, rapid market growth, slow technological change, low-level total investment and technological inputs, while high barriers to entry have relation in factors such as large amount of total investment, inaccessible technology and specialized skills, high investments in research and development and slow assets circulation, absolute cost advantages in market, excess production capacity and capital intensity, markets specifically regulated, and finally, forced exit (Murphy, 1996). A young entrepreneur, besides desire and perhaps a certain amount of capital, has no knowledge of prudent business planning, which is leading to the presence of high sme mortality (Lambropoulos, 2005). Diversified customer base and slow growth in business size in order to be supported by adequate funding are also factors that can lead to success or at least to prevent the failure of a sme (Lussier, 1996). One of common smes characteristics is lack of available time for planning, business organizing, even arranging entrepreneur s ideas and thoughts about optimizing business functions, while entrepreneur usually has the impression that sme has no need for reform or he could achieve it himself, without outside help, just with difficulty due to the limited time and his preoccupation with business matters, and shows no confidence in external consultants and the so-called scientific management (Pappis, 1996). Success or failure factors may depend on the phases of sme s lifecycle and there are indications that job creation in each of the three classes of smes can vary in their lifecycle (Haltiwanger, 1999). Small and medium-sized firms are basic contributors in the world economy and the leverage of knowledge is critical for them, while innovation and new products development in some sectors, e.g. food sector, are factors that drive them to competitive advantage (Zaridis, 2009). Usually, sme owner and entrepreneur are treated as related and neighbouring meanings, but many times and in many high frequency in smes there is co-ownership, as happened in one of our field researches (Zaridis, 2012). It is accepted that small firms have a higher probability of failure than large ones (Murphy, 1996). Specific factors affecting probability for a firm to fail identified (Storey, 1994). These are business size, age, property, activity sector, former performance, personnel, geographical location, business type, macroeconomic environment, government funding (subsidies) and some other reasons. Business failure factors divided into two categories that are environmental factors and symptoms of management disability (Murphy, 1996). Apart from environmental factors, there are three categories of failures mentioned. These are functional knowledge, managerial skills and managerial behaviour. Factors affecting smes size such as characteristics of entrepreneur, characteristics of enterprise, management strategies, and external environment s influence constitute elements of a successful or non-successful business (Carter and Jones-Evans, 2006). The latter is not considered as a distinct factor by some writers such as Storey (1994), but seems to separate large firms from smes, concerning their ability to control these influences. As business size increasing, it is harder for a sme to control and supervise its organizational structure, while all measures will be taken by the owner in such a case of increase, such as tighter control on financial and administrative level, administrative levels, and standardized procedures, tend to transform entrepreneurial firm to bureaucratic one, and that was known as entrepreneur s dilemma (Deakins and Freel, 2005). 5

6 Firm s maintenance at market s top level depends on preservation of competitive advantage, via the obtainment of some source of competitive advantage. According to Resource - based theory, in-depth time competitiveness of firm depends on resources possessed by it that differentiate it from its competitors and are durable and difficult to imitate and substitute. Several classifications of resources have been proposed like classification of resources in tangible, such as human, economic or physical resources and intangible, as reputation, know-how or patents (Collis and Montgomery, 1995; Hall, 1992), division into assets, something that a firm possesses e.g. brand name and skills, that is something that a firm is capable to do e.g. advertising, disaggregation of resources in homogeneous categories, such as physical resources, financial resources, human resources, technological resources, organizational resources, etc. (Grant, 1991), and use of significances of competence and capability, considering these as part of resources and as potential of firm to manage them and consequently obtain a competitive advantage (Grant, 1991; Stalk et al., 1992). But R.B.V. doesn t examine every resource possessed by a firm but focuses more or less on critical (or strategic) resources that constitute the basis of firm s sustainable competitive advantage. Enough tests have been proposed in order to decide on such resources. At 90s, there was a change over from attention drawn to industry to the results - observations related closely with firm, in regard to sources of sustainable competitive advantage (Spanos and Lioukas, 2001), while it is supported that competitive advantage emanates from organizational capabilities (Peteraf, 1993). It was reported that competitive advantage and performance results are a consequence of firm-specific resources and capabilities and that the core of the resource-based view is that firms differ in fundamental ways as each has its own bundle of resources (O Regan et al., 2006). The source of competitive advantage within a firm is often multifactorial (O Regan et al., 2006) and consequently it cannot be attributed exclusively to a resource but the interaction of these resources leads to competitive advantage. Some of the sources of competitive advantage mentioned by literature will be reported hereafter. Barney (1991) reported strategic planning process, information processing systems and positive firm reputations were proposed as sources of sustained competitive advantage. Barney (1986) supports that a firm can acquire expected advantages by analyzing information from assets already possessed. Also, it is proposed that role of managers in comprehension and description of resources possessed by a firm is critical in obtainment of sustainable competitive advantage. Software tools development (Hudson, 1995) in order to make easier import of products process, direct costs management, production of current work and process and development of planning and control systems constitute sources of competitive advantage. Also, it is proved that a total qualitative program that includes a combination of techniques can be successful in achievement of essential competitive advantages for a successful manufacturing firm. Moreover, exterior factors - general external environment - constitute sources of competitive advantage, concerning firms that are activated in the same market, but are emanated from other countries, make very usual in current internationalized markets. According to Porter (1998), firms and not nations rival in international markets, while competitiveness of nations and countries can be found only in competitive firms and not in the opinions of political decisions. Knowledge appears as a critical resource (Pillania, 2006), while leverage of knowledge, the basic resource of economy of knowledge, is the better way to a sustained competitive advantage. 6

7 Also, personnel s training is a strategic variable that can lead a firm to competitive advantage. The basis of competitive advantage has been shifted from static efficiencies to the rhythm of dynamic improvement. They are not inputs or scale that firm possesses today, but its capability to innovate perpetually and upgrade its skills and technology in the competition. With this form of competition, role of geographic location changes deeply. Firms function worldwide in the supply of inputs and the access in the markets. The competitive advantage however, emanates from the process of innovation that is located in the domestic base of firm or the place of its strategic administrative team, or research activities or complex production for a particular line of products. Achieved firms have recognized that technology constitutes tool, via which they can acquire competitive advantage (Efstathiades et al., 1998). Innovation and development of new products in food sector constitute for the sector s smes efficient ways for obtaining advantage in the market (Ngamkroeckjoti et al., 2005). From above, it is understood that certain factors related mainly with entrepreneur s and sme s characteristics act as sources of competitive advantage, and consequently drive to it. They are recognized as elements of potential sme s success, since they may spout diachronically long-term competitive advantage. REFERENCES Barney, J. B. (1986), Strategic Factor Markets: Expectations, luck and business strategy, Management Science 1986 (42): Barney, J. B. (1991), Firm Resources and Sustained Competitive Advantage, Journal of Management, 17, Bourandas, D. and Papalexandri, N. (1998) Introduction to Business Administration, Benou Publ. Carter, S. and Jones-Evans, D. (2006) Enterprise and small business. Principles, practice and policy, 2nd edition, Prentice Hall Financial Times. Cochran, A. (1981), Small business mortality rates: A review of the literature, Journal of Small Business Management, 19 (4): Collis, D. J. and Montgomery, C. (1995), Competing on Resources: Strategy in the 1990s, Harvard Business Review 1995 (July-August): Curran, J. and Blackburn, A. (2001) Researching the Small Enterprise, London: Sage. Deakins, D. and Freel, M. (2012) Entrepreneurship and Small Firms, 6 th European Edition, Mc Grow Hill Education. Efstathiades, A., Tassou, S. A., Antoniou, A. and Oxinos, G. (1998), Strategic considerations in the introduction of advanced manufacturing technologies in the Cypriot industry, Technovation December (2): Grant, R. M. (1991), The Resource Based Theory of Competitive Advantage: Implications for Strategy Formulation, California Management Review 1991 (Spring): Haltiwanger, J. (1999) Job Creation and Destruction by Employer Size and Age: Cyclical Dynamics, in Acs, Z., Carlsson and Karlsson, C. (eds.) (1999) Entrepreneurship, Small and Medium Sized Enterprises and the Macroeconomy, Cambridge: Cambridge University Press: Hudson, A. S. (1995), Design, implementation and testing of a business improvement methodology for small- and medium-sized enterprises, Queen s University of Belfast, United Kingdom 1995, 373 pages, AAT C481483, ProQuest. 7

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