by: Michael T. Schaper, Ph.D.
SEAANZ Affiliate
Adjunct Professor, Curtin University of Technology, Western Australia
Deputy Chairman, Australian Competition & Consumer Commission[1]
Email: Michael.Schaper@accc.gov.au or michael.schaper@gmail.com
Small businesses face an interesting, two-edged sword when dealing with the marketplace. On the one hand, free markets are essential to entrepreneurial success – they provide the means by which new ideas, new products, innovations and original business models can be introduced and, if they are effective enough, succeed.
At the same time, though, SMEs often have less capacity than their larger counterparts to succeed and thrive in an arena of open competition. They have smaller market share, less money, fewer in-house marketing skills and market data, and less access to professional advisers to help them fight back effectively, to name just a few comparative weaknesses (see table).
| SMEs | Large Firms | |
| Number of business establishments | Single | Multiple |
| Geographical distribution | Limited | Limited or wide |
| Product/service range | Limited | Limited or wide |
| Market share | Limited | Significant |
| Customer base | Small | Numerous |
| Likelihood of business failure/exit | High | Low |
| Knowledge of, and to access to, regulatory information | Limited; ad-hoc | Sophisticated; extensive |
| Knowledge of, and to access to, marketplace information | Limited; ad-hoc | Sophisticated; extensive |
| Ability to access established supply sources | Difficult | Easy |
| Level of financial resources | Typically small and limited | Substantial |
| Use of external legal and economic advisers | Limited; ad-hoc | Systematic; structured |
Surprisingly, although it’s an issue that has pre-occupied many economists, there is very limited research into the effect of competition on SMEs.
The limited data published to date seems to suggest some unusual findings as well – for example, most small businesses report that other SMEs are just as much a competitive threat as are large firms. Most SMEs state that they face a moderate-to-high level of challenge from their competitors, but another third seem to face very little competitive tension. And although a reasonable minority (somewhere between a quarter and a third) have had first-hand experience of anti-competitive conduct in their particular industry, most would not bother reporting any such breaches of competition laws to the relevant regulator for action.
Across the world, almost every country today has some form of legal framework for dealing with these competition issues. Amongst other things, there are rules that prohibit the formation of cartels, and which outlaw market-sharing, price-fixing and bid-rigging. There are laws for the vetting of mergers (especially if these might lead to market dominance or a reduction in competition overall), and mechanisms to ensure businesses don’t engage in false or misleading conduct, deceive consumers, or tell untruths.
But it’s not always easy to ensure that the role of small businesses is taken into account. For example, most competition laws treat all businesses (regardless of size) in the same way – which might mean, for example, that a self-employed micro-business owner is bound by the same rules that are designed to deal with the actions of large multinational corporations. SME owners often have little knowledge of what their rights and responsibilities are in this area, and may not have the capacity or the funds to employ legal counsel. Some regulators will enforce the law on behalf of consumers and the general public, but will expect business enterprises to fund their own legal actions when they are the victim of anti-competitive behaviour – which can be difficult if you don’t have a lot of money to begin with.
On the other hand, plenty of SMEs already succeed despite these challenges. They start, grow and succeed and, in the process, are able to effectively overcome all of the obstacles thrown at them by their competitors. For many of them, the relative imbalance in competitive power is just one more issue to deal with, not the determinant of their success or failure.
This produces two interesting questions:
- Do we need to make special provisions for SMEs – and if so, are there particular “best practice” ways in which we can design laws and regulatory regimes to ensure that they have the best chance of succeeding on their own merits in a fully competitive marketplace?
- Can more academic research help us to better understand this phenomenon, and to test the impact of different regulatory approaches on small business?
I’d be interested in hearing your opinions
[1] The views expressed in this paper are those of the author only and do not necessarily reflect those of the Australian Competition & Consumer Commission (ACCC) itself.
Hi, you can leave a comment here.
The two questions raised in terms of SME development are very relevant in today’s business environment. It is inevitable that SMEs going global despite many limitations they face. I have done research on successful small businesses and found they have unique advantages in making decisions quickly to take advantages of instant opportunities and market situations. Usually for many SMEs, the owner is also the manger and the key decision maker. Therefore in many cases, the success or the failure lies on the key decision maker’s vision, mission, goals, skills, knowledge and so on. While some SMEs fail some others survive and grow internationally. Factors related to personalities and efficient decision making are crucial aspects I found in my research. They also use more personalized and affective ways of dealing with their clients, employees and business counterparts.
In terms of policy, certainly there should be viable policies to survive. In many developing countries, especially, import and export policies, tax and freight policies matters, nations political involvements can be useful aspects for future research. Inability to obtain credit is another limitation for them to be active in their production or services. However, I found that many SMEs found personalized means of finding recourses from friends and families when the formal banking system fails to help SMEs. That way, social capital plays a major role in SME development. I think it is good time to discuss about viable global policy framework in addition to nation-wide policies. Probably, social capital theory, systems theory, and decision making theory are some of the theoretical bases we may use in our research. These are my experience and thoughts about the suggestion. I really like to get involve in further research if you all are keen in furthering these questions. We probably can do research in our countries and later put together to have a bigger picture.
I agree with Gertrude. The advantages of being an SME are enormous mainly because of the ability to reacte to the make with speed. I’m glad that Gertrude has pointed out the key ingredient of SMEs namely that the individual is the business and so can make decisions quickly. Certainly our research has shown http://www.contractworld.com.au/research/ica-small-micro-business-profiling-2010.php that SME’s have higher competency levels than public policy usually assumes.
But Michael is also correct. SME’s frequently can’t be regulated in exactly the same way that large businesses are. There are differences and these need to be understood so that regulations can be reviewed accordingly. More research needed here! But I’ll give one example. Work safety laws are generally designed around the assumption that an ‘employer’ must look after ‘employees’. This design assumption is entirely ‘big organisation’ focused. But self-employed people are employer and employee all in one which makes a nonsense of the general assumption. The truth is work safety is about ‘people’ keeping ‘people’ safe. So how does this fit with competition laws? I’m not yet sure. But at least we have to ask the question!
From a practitioner point of view, the impact of competition policy on SMEs could be looked at on a sectoral basis. Some economic sectors (eg: tourism, hospitality, retail) show higher concentrations of SME’s than others (eg: biosciences, high-end manufacturing). Still, most competitive policy is formulated from a macro-economic perspective, and even when rules target the needs of a particular industry or market, the underlying assumptions remain that 1) fairness entails treating all firms the same and 2) differentiating among firms on the basis of size somehow constitutes an improper form of governemnt intervention in the marketplace.
Perhaps, policy-makers and researchers should move beyond the macro level and pay closer attention to the needs of SME’s within their respective economic sectors and geographies. For instance, do large hotel chains face the same types of competitive pressures and adaptive learning constraints faced by hostals and inns (which more closely resemble an SME profile)? Do cooperative procurement structures offer a viable strategic option for locally owned and operated drug stores to counter the economies of scale enjoyed by larger competitors such as CVS or Walgreen’s? Again, in line with Gertrude and Ken , it is important to ask these questions at a level that takes into account the characterisitics and the real needs of SMEs.
An excellent topic that needs to be discussed. I am an entrepreneur as well as a researcher on the topic. Not withstanding Friedman’s well argued case that technology has helped level the playing field to some extend, from the practice perspective there are far too many challenges that free markets pose to entrepreneurs, especially those who are the initial stages of launching a venture in a difficult economy. Some of these that I personally faced are: (a) limited access to credit and capital- invariably banks like up to give your money when you do need it, (b) the sometimes irrational preference for clients to do business with a established incumbent even when a new competitor has a vastly superior product or service, (c) preference of skikked employees to opt for the ‘safer job’ with a established firm to taking a change with a new venture, (d) cumbersome and costly regulations (Federal, State and Local in the US) related to immigration policy, taxes, employee benefits and reporting that does not make any distinction between new firms with scarce resources and established Fortune 500 firms and (e) the risk-reward ratio barring a few exception are heavily skewed in favor of larger firms, in other words, a professional CEO running a wall street bank who is really not taking any personal risk gets disproportionately rewarded as compared to the owner-CEO of a new venture who in most cases has all his assets are risk for the business.
It is indeed an tribute to entrepreneurs that they succeed despite these obstacles. There is indeed need for research into this topic that will help shape policy that takes into account some of the challenges mentioned above. The playing field has to be further leveled fro there to be widespread and successful entrepreneurship.
Appreciate any feedback!
Thanks
Suresh Kumar
CEO, NexAge Technologies USA Inc
First- great to see some dialogue, regardless of topic. Small business clearly are not “little big businesses” (a beer to whoever remembers who’s credited for that line (hint) decades ago) and they need to be handled (regulated, etc.) differently.
However, if I might be a tad political — I must admit I was horrified to read of (US) presidential advisers referring to small businesses as “Scrooge & Marley”. After all, if you want to have great benefits & at least the illusion of great job security, aren’t large bureaucracies the answer? THAT is the focus of many regulators & policymakers… they do not get what small business contributes.
(Of course, small enterprise is hardly monolithic — high growth versus low/no-growth; necessity vs. lifestyle vs. opportunity vs.. etc.)
Thanks, Ayman, for starting the blog. Mind if I mention this on the ENTREP listserv, if you haven’t already
Hey Norris, doesn’t the line go back to WELSH & WHITE (1981): A Small Business is not a Little Big Business (Harvard Business Review, Vol. 59, Jul/Aug, pp. 18-32)? How about a beer? .-)
In this respect, I also remember DANDRIDGE, T. C. (1979): Children are not little grown-ups: Small business needs its own organizational theory (Journal of Small Business Management, Vol. 17, No. 2, pp. 53-57).
However, if we look at Small Business Research, we have to admit that most samples deal with medium sized firms. And most SME text books focus on the “M”-firm, not on the “S”-firm. Empirical research on really small firms still is limited in number. Researching the “S” in SME Research is very unattractive when it comes to the placement of journal articles, fundraising among donators (we prefer the “M” donators over the “S” donators among all SME-Entrepreneurs, don’t we?), or selling executive education. Hence there might be too little political AND academic awareness for the needs of very small firms. Before blaming others, do we need to actively encourage more research (and education) on the “S” in SME Research?
I agree about the competitive problems small business face in comparison with big business. However, it is precisely the regulation and laws that government imposes to the free market that prevent an equal competitive field. Trying to do more laws and regulations to assist SME to become “Most” competitive is a fatal error. It is like trying to cure a patient by prescribing the use of the same drugs that cause the patience to be ill in the first place. The more the government intervention the more we will see monopolies arising destroying the basis of fair competition for SME. At the same time big business had evidently show the need of small business for their own survival. There is a huge industry of licensing, Intellectual property, patents, etc….that big business relies for their innovative and entrepreneurial initiatives. Big business has prove to be the most that invest in innovation and entrepreneurship but at the same time has prove to be the less efficient in doing so ( here I am relying on William Baumol thesis).
Yes, our conceited temptation of solving problems for the SME by imposing laws and regulation has been part of human nature for a while.
Definitely, more research is needed just for the sake of investigating what we can do but also what we must not do. If I get the authority to decide what needs to be done I would say that let things as they are and not invent more regulations for big or small business. The entrepreneurs in their particular markets and in their particular circumstances will know how to cope with challenges. The market will take care of disappearing the big business that are not doing well as we have seen so many examples specially in these years ( and more will come). This is the time for small business to re-establish their dominance of the free market. The crisis is perfect for emerging as the dominance economic engine and if our intentions are to promote more regulations and laws then, this crisis will be wasted.
Edgar
edgar@e-leadpr.com
Industrial organization economics originated to provide guidance on antitrust policy. Such policy advice was needed in the USA after the Sherman Antitrust Act was passed by Congress in 1890 and the Clayton Act in 1914. Antitrust policy was meant to protect smaller businesses from monopolization by large businesses. And the Clayton Act was structured to prevent “reatraint of trade”. A considerable body of legal interpretations were developed and the Antitrust Division of the US Justice Department as well as the Federal Trade Commission to protect small businesses from large corporate power in markets. Enter the Reagan Administration in 1980 after which the Antitrust Division and FTC were purposefully diminished in budgets and staffing. In the academic world the field of strategic management – an offshoot of IO economics – works to find competitive advantages for corporate monopolies. So, for 30 years the corporation has reigned (except in high technology where entrepreneurs have created new industries). The view of the corporation as an “artificial person” allows the behemoths to be thought of akin to individual persons. The 2009 Supreme Court case that unlimits corporate political contributions is but one more indication of how bigness reigns. The investment banks and the present Great Recession are products of this kowtowing to monopoly. Many people who say that they believe in the unfettered market system show their ignorance by also worshipping big business, disdaining antitrust policy, and detesting governmental interference of any kind (including Justice Department and the Federal Trade Comission mandates to maintain free markets). Perhaps a short course for all voters (and academics) about the purpose and history of antitrust and restraint of trade policy is the best way to support SMEs. But I doubt that this would help since ideological myopia is hard to change.
In reply to Edwin I think we can look at how small business fits into the macro picture. In fact there are general market principles to be considered when we conceive of a business as a single individual. Here my attempt to put a framework around the issues in 2006. http://www.contractworld.com.au/ilo/ica-ilo-singlesolution.php
And yes Norris, great point. Small business people are not “little big businesses”. I think this is the starting point for research.
And Dale, this is my assessment of what the current US administration are doing to really damage SME’s. http://www.contractworld.com.au/general/ica-US-misclassification-laws-attack-self-employment-entrepreneurship.php
I amazed by how much anti-small business reg exists in the US, all under the guise of stopping ‘rorting’ etc. But on this assessment the US seems to have forgotten where entrepreneurship comes from. Is this part of the cause of the sickness of the US economy. If it is the ol USA is in deep trouble. It probably points to an urgent need for SME research that really gets to the heart of SME issues. This becomes a starting point for reg review.
Thanks for the reference Ken, and congratulations to ICSB for enabling the exchange of ideas on these issues we all are passionate about.
I certainly agree there is a fundamental difference between an employment contract and a commercial contract, with the latter being the legal framework for managing business relations with non-employees. I also agree governement intervention in the economy should be limited to those areas where social needs are not properly met by existing market structures.
However, regulation is just one aspect of SME competitiveness. My broader argument focuses on the strategic options faced by SME’s when competing against large incumbent firms. As Dale aptly pointed out, most economic analyses are formulated with larger firms in mind, with considerably less attention paid to how size (and the constraints it imposes) afffects a venture’s ability to compete. This is true both of public policy and most research into competitive strategy.
This may be partly a consequence of the view that full employment is a socially desirable goal. But this view ultimately undermines entrepreneurship as it unwittingly assumes employement is the only legitimate form of participation in the wealth created through economic production. My point simply is these questions need more attention from researchers to expand our current understanding of the competitive dynamics faced by SME’s and to inform the formulation of public policy that offers a workable compromise betwee free market principles and social goals.
Dr Ayman, I agree with you in everything . I had study titled: The Role of Entrepreneur in Global and International Orientation for Institution of Higher Education Under Globalization , 10 years ago and tried to look at the Entrepreneurship issue, and actually through my job as a staff in higher education, I encouraged students to set up small business .
Dr. Ayman, please help your country to raise awareness of the concept of Entrepreneur and small business, and effect it on individuals first then the Egyptian society
I think small and large organizations have their own advantages. I believe in general small organization are in much more danger of failure. The fair risk though I think is fine. The part that bothers me a great deal is how the anti-competitive behavior of large organization supported by captured regulators increases risk to small organizations and entrenches large organizations. Those large organizations use captured regulators to use massive capital resources to shut down competition, buy out organisations that threaten the status quo and stop a free market from existing.
We are not going to have perfect competition that is the root of the theory behind free markets providing maximum benefit. But we have incredibly limited competition enhanced by captured regulators actions.