Failure Literature

LITERATURE SURVEY

2.1. FAILURE LITERATURE

2.1.1. The theoretical literature on failure

Several papers have been published in recent years on small business failure e.g. Storey, D. (1994) and Cressy, R. (1999) that have sought empirical explanations for failure, particularly at the micro-economic level. Such research has investigated the role of both human and financial capital in this process. These papers offer �static’ models of survival and do not explicitly address the issue of learning by the owner-manager over time. Jovanovic (1982), cited in Cressy (1999) developed a model in which this occurs. Business is �a learning experiment’ in which the entrepreneur learns about his/her fixed level of entrepreneurial skills over time. However, there is no possibility of learning by doing here: the ability to improve one’s skills by rectifying mistakes, finding better ways of doing things, and so on . Furthermore, the Jovanovic model assumes entrepreneurs are �one-shot’: they are in business only once. In practice, however, many entrepreneurs are serial owners: they have managed previous businesses. Accordingly, there still remains the interesting research question of whether SMEs fail primarily because they have insufficient financial and human capital to survive and grow, or because their proprietors fail to learn from the experiences of earlier failed business proprietors. One way of approaching this issue would be to conduct a �post-mortem’ from the owner-manager’s perspective to discover how much learning actually occurred. This is exactly what this research seeks to provide: a dataset that has provided some rich empirical insights into the phenomenon of SME failure.

2.1.2. The official statistics on SME failure

Data for a survey of failed business people in the UK do exist; for example, there are detailed records maintained by the �Official Receiver’ as to why businesses have failed. However, these records are not in the �public domain’ and as such researchers cannot gain access to them. But there is data available from both Internet sources and Companies House which can be used to derive a sample of failed, incorporated SMEs. This dataset was one that was used for the empirical findings provided in this thesis.

2.2. ENTREPRENEURIAL LEARNING AND DECISION-MAKING LITERATURE

In attempting to understand decision-making styles of entrepreneurs, one has to reach an understanding of what activities typical entrepreneurial owner-managers undertake. Major activities of an entrepreneur include the making of decisions, concerning both operational and strategic issues. This role is influenced by a number of factors, including: a level of evaluation of the available information and intuition, or perhaps relying to some extent upon past industry experience. An important strategic choice for most entrepreneurs is that of building and maintaining an effective and supportive relationship portfolio. The knowledge that individual entrepreneurs may have when aspiring to take the best course of action, in any given situation, is clearly influenced by many rich contextual factors prevailing at the time of decision-making. An under-examined area of entrepreneurial literature is that of the role of the entrepreneur’s formal and informal support networks on the success, or failure, of a new venture. The level of consultation with professional advisors, actors in the formal network, when seeking advice on business matters, such as the evaluation and interpretation of contextual complexity, is variable. There is considerable variation both in the frequency of contact and the level to which advice is followed, or indeed actively listened to. The purpose of this section is to evaluate the importance of an entrepreneur’s relationship portfolio and in particular, the role of his/her personal support network in the subsequent success, or failure of a new venture. It seems very clear from the literature that trust and expectation are major elements in relationship-building and network relationship maintenance over time. The durability, however, of this �trusting relationship’ depends on many variables. Paradoxically, there are also aspects of short term decision-making, made under managerial time constraints and SME limited-resource pressures, to meet increasing customer demands that could impair long term relationships. These short-term pressures might lead to some irrational decisions being made, that could affect the level of trust between the network providers and the entrepreneur. Reference to these aspects was made by Fuller and Lewis in their ISBA Conference paper, presented at Brighton (2002, 1845). TABLE 2.6 provides details of their typology, extracted from the conference paper, and is reproduced on page 33.

2.2.1. Relationship Marketing and Network Development

One aspect of networking that the entrepreneur may actively yet unconsciously engage in is that of relationship marketing. This subsection explores its characteristics and role.

Marketing management was for many years built around the simple concept of transactions, reflected in the concept of the �marketing mix’. This concept was developed primarily for fast moving consumer good (FMCG) markets, (Ford, 1984) being based around a narrow concept of the 4 P’s; Product, Price, Place and Promotion; (McCarthy, 1960). This was seen by its critics as supplier-dominated (Cunningham, 1985, 1) and was focused mainly on the attainment of new business, with no ambition to climb a �loyalty ladder’ (Gummesson, 1999, 12). An important measure of commercial success was market share, �with managers treating the customer as faceless’ (Gruen, 1997, 33). However, beginning with the gradual realisation of the importance of relationships in services and industrial marketing (Aijo, 1996, 8), the concept of Relationship Marketing (RM) has gained a stronger presence in the literature. Some authors have argued that RM should be recognised as less of a paradigm shift and more a case of a strategic choice, as an alternative to transactional marketing (Li and Nicholls, 2000, 363, Morris et al., 1998). The value of a long-term relationship orientation has been long recognised by many entrepreneurs (the exception being those with a lack of business ethics), particularly with important �partners’