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SMALL BUSINESS SUCCESS: A REVIEW OF THE LITERATURE

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SMALL BUSINESS SUCCESS: A REVIEW OF THE LITERATURE

Linda Shonesy and Robert D. Gulbro

Athens State College

ABSTRACT

Much has been written in the literature regarding reasons for

small business failure, leading to confusion about those studies,

as it is often difficult to define failure. There are fewer

studies citing reasons for small firm success. Factors citing

reasons for failure may also appear as factors affecting success

according to Gaskill, VanAuken, and Manning (1993). Therefore,

this review of the literature will concentrate on reasons for

small business success, which can in turn also infer reasons for

failure for those who are interested in that topic. Three

categories for success emerge in this review. They are strategic

issues, demographics, and owner characteristics. However, there

appears to be no one set of reliable variables that will always

consistently promote success, because of the differences that

exist within each individual small firm, including owner/manager

differences.

INTRODUCTION

Rather than dwelling on the mountain of confusing data that has

been compiled, as to why small businesses fail, this article

seeks to look at the research that has been placed before us

regarding what it takes to succeed in the small business arena.

Granted the two different perspectives, failure and success, are

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related, but a positive perspective is chosen for this review, so

that current businesses and their owners can prevent failure by

correcting problems, or new businesses can be made aware of what

must be done before they enter the market. Therefore, this

article seeks to review positive ways to encourage success as the

focus of this paper. The review of the literature covers the

past fifteen years to concentrate on the most recent data that

would seem relevant to the economy of today.

There have been several studies, which seek to identify the

critical success factors for small businesses. However,

according to Castragiovanni (1996), there appears to be little

research which has specifically looked at factors dealing with

small business survival. It is important to define these factors

for any new business, as the owner should be concerned about the

chances for success (Lussier, 1996). Our country depends upon

information relative to the success or failure of businesses for

maintaining a stable economy. (Gaskill, Van Auken, & Manning,

1993). This paper is not focused upon the failure of small

businesses, however, failure data must be mentioned to indicate

how this data can be translated into survival information, and to

discuss discrepancies in the existing data. It is a fact that

failure and success are somewhat bound together, even though at

opposite ends of a continuum.

Since researchers have argued that failure rates tend to be

confusing and possibly overrated, because of factors such as

differences in definitions regarding failure and demographics

concerning small businesses, as well as, methodology used in the

collection of data (Justis & Chan, 1993); it may not be possible

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to accurately report data concerning failures. However, using

the data compiled by the Census Bureau (the Characteristics of

Business Owners), Bates (1995) reports that of the 90,000 small

businesses surveyed (formed between 1984-1987), approximately 65%

of the franchise firms were still in operation in 1991, while 72%

of independent small firms were still operational. That

indicates that over 28% of young firms went out of business. Dun

and Bradstreet reported that 51.8% of firms fail during the first

five years, with 9.5% failing per year (Dun & Bradstreet, 1989).

If the positive aspects of these figures are considered, a large

portion of firms are still in business, rather than the erroneous

failure numbers that are often reported.

REVIEW OF THE LITERATURE

According to Ponthieu and Insley (1996), "Small businesses

constitute 97% of all businesses in the United States and employ

more than 58% of the labor force" (p. 35). The small business

sector is growing at a very impressive rate, with small

businesses making up more than 50% of the sales and products in

the private sector (U.S. SBA, 1994). The importance of small

businesses to the economy is quite evident.

Why are some firms successful while other firms appearing to

follow the same paths are not successful? It has been said that

specific success strategies used in one business may not work for

another; as all businesses, like people, are different (Hand,

Sineath, & Howle, 1987). There are so many variables to sift

through. It would appear that the majority of studies in this

area have found that most businesses that demonstrated success

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were found to have characteristics or to use tools in three

separate areas. These are characteristics of the

owners/entrepreneurs, demographic characteristics of the

business, or strategic tools used by the business.

A study by Beckman and Marks (1996) found that business

experience was a factor in the success of small firms. Another

study by Costa, 1994, indicated that strategic planning

contributes to long-running success for businesses. Other

factors for success include quality, customer focus, innovative

marketing practices, flexibility and employee empowerment

(Zetlin, 1994). Filley and Pricer (1991) defined several tools

for small business success. These included good management

techniques, such as appropriate operating strategies, leadership

and time management. Other tools were good financial management

and pricing strategies, motivational strategies for employees,

and ensuring only those employees with ability are hired.

Studies that have looked at appropriate management and financial

planning and skill development of managers were conducted by

Ibrahim and Goodwin (1986), Montagno, Kuratko, and Scarcella

(1986), Hofer and Sandberg (1987), Lumpkin and Ireland (1988),

and Susbauer and Baker (1989). These studies also looked at

environmental factors and entrepreneurial characteristics as

factors in business success.

Ibrahim and Goodwin (1986) stated that "Success in business is

defined in terms of rate of return on sales, and age or longevity

of the firm" (p. 42). Cuba, Decenzo, and Anish (1983) and Khan

and Rocha (1982) also found that sales, profit, and longevity

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were important to success. Hofer and Sandberg (1987) noted that

high quality services or production was the key to success for

firms and was directly related to effective management and

planning, which relied upon effective management decisions.

According to Lussier (1996), "There is no generally accepted list

of variables distinguishing business success from failure ..."

(p.10). The two most commonly stated variables, however, that

seem to make the difference are capital and management

experience. Steiner and Solem (1988) reported key success

factors in small manufacturing businesses would include an

owner/manager with experience in the business or prior

experience; adequate financial resources; a competitive advantage

based upon customer and product specialization; and strategic

planning. Dyke, Fischer, and Reuben (1992) found that management

experience may be a significant factor in achieving success or

successful performance in the small business environment. It

stated that "would-be business owners should be concerned to gain

related industry, management, and start-up experience...

regardless of the type of industry in which they plan to operate"

(p.86). It was also noted, however, that while experience was a

significant factor, it could vary by industry in importance.

This would support Cochran (1981), who suggested that research

for specific industries in specific regions might prove more

useful than national studies. This study was referring to

research regarding failures of small businesses, however, this

may apply to successes also.

Hand, Sineath, and Howle (1987) discussed variables thought to be

related to business performance, such as characteristics of the

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entrepreneur (age, education, experience, willingness to work,

and ability to deal with customers and employees). Also

discussed were the planning abilities of the entrepreneur.

Chaganti and Chaganti (1983) indicated that key success factors

were innovation, creativity, and managerial competence, which are

characteristics found in owners/entrepreneurs. Keats and Bracker

(1988) found that success factors are a part of an organization's

general environment, task environment, or characteristics of the

business owner.

Chawla, Pullig, and Alexander (1997) found that "owner experience

and industry trend are not critical to the success of a

manufacturing/construction firm in the early stages of the life

cycle. Comparing retail firms to manufacturing/construction

firms in the same stage of the life cycle, differences were found

in the importance of the owner's experience, market knowledge,

industry trend, location issues, and purchasing/inventory

control" (p.47). Location issues were more critical to success

for retail firms both during early and late stages of the life

cycle. Purchasing/inventory control also was critical for retail

firms in both the early and later stages.

According to Zetlin (1994), small business owners feel that

having a good product is most important, however, other means of

achieving success include a commitment to quality and to the

customer, innovation in marketing, being flexible when change is

needed, maintaining good supplier/customer relationships, and

hiring good people that can be empowered. Bird (1989) stated

that firms where owners showed innovation, risk-taking, and had

previous training were most successful. Another study dealing

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with characteristics of the owner was by Duchesneau and Gartner

(1990). They found that the characteristics of the

owner/manager, the strategy of the firm, and the way the business

approached start-up were most important to success. Prior

experience, long working hours, good communication skills,

customer service, planning, flexible management, and risk

reduction were other factors cited. Hills and Narayana (1990)

also found a myriad of factors that were possible contributors to

success. These included customer treatment, good products,

management practices, good treatment of employees, and a good

reputation for the company. O'Neill and Duker (1986) indicated

that small businesses that were successful had higher quality

products, lower levels of debt, and lower capital intensity, as

well as, relied on the good advice of their accountants.

Cooper, Dunkleberg, and Woo (1989) looked at demographic factors,

such as age, gender, and race, and found that older, nonminority,

male entrepreneurs with four or more years of college were

usually associated with successful firms. A study by Bates and

Nucci (1989) confirmed that the age and size of the firm had an

impact upon survival. The older the firm, the more likely it was

to remain in business, and the larger the firm, the more likely

it was to be successful. Boyle and Desai (1991) also pointed out

that statistics have shown that the longer a small business has

been in operation, the better the chance that it will stay in

business. Success breeds success.

Mintzberg (1994) stated that small business owners must be able

to define the required strategies to find success as they

continue to change within their organizations. Castrogiovanni

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(1996) explored the impact that planning has on the survival or

success of firms. Pre-planning was specifically investigated

using three environmental conditions, which were uncertainty,

munificence, and industry maturity. He also investigated two

founding conditions, knowledge and capital. Findings included a

negative relationship between uncertainty and the survival of new

businesses. Munificence (abundance of demand) was positively

related to survival, while industry maturity had mixed effects on

the degree of planning and survival. Pre-existing founder

knowledge was found to be positively related to survival, while

capital reduced incentives to plan and, thus, was likely to

negatively impact planning.

Bates (1995) conducted a study of survival rates among franchise

and independent small firms, and found that for the period 1984-

1987, the survival rate was much higher for independent firms, as

opposed to franchise businesses. The study also stated that

while existing studies identifying traits leading to long-term

success of small businesses are not incorrect, small firms should

not enter markets that are saturated; which would lead to the

assumption that a knowledge of the market is most important. In

1990, Bates indicated that a firm's likelihood for success was

increased if owners were educated, and if an adequate resource

investment was made at start-up.

In a study by Lussier and Corman (1995), it was noted that

successful firms used better professional advisors than did

nonsuccessful ones, and it made a significant difference if their

parents owned a business. However, the authors were unable to

find a reliable set of variables to firmly distinguish success

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from failure. Variables used in the study included capital,

recordkeeping and financial control, industry experience,

planning, professional advisors, education, staffing,

product/service timing, economic timing, age, partners, parents,

minority owners, and marketing. Various other studies have used

one or several of these to identify critical success factors.

IMPLICATIONS FOR FUTURE RESEARCH

As has been mentioned, Cochran (1981) suggested that research on

business failure would be better served by studying specific

industries by region, rather than national studies. The same

would seem to apply for research into success factors. It is

often difficult to infer accurate results when studies are too

broad, especially when there are so many variables to research.

Ibrahim and Goodwin (1986) also concluded that no one study could

address the entire population, and thus, smaller studies covering

different industries would be more appropriate to obtain accurate

data.

Future research is also needed to determine whether differences

in previous business experience by the small business owner is

essential or can affect success. In addition, research should

look at how the differences in owner management styles can affect

success rates. Management styles can be changed over the course

of business ownership and the number of years experience should

be explored as well.

One last area for future research that might be explored would

include a study of the effects that outside help would have on

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the success or survival of the small business. Some owners would

be more willing to ask for help or assistance than others. A

study of the differences between men and women owners of small

firms would seem logical to see if those who asked for help is

greater for one group than the other.

This paper contributes to the literature relative to small

business by offering a timely summary of success factors that are

concentrated on the more recent studies of the past fifteen

years. The need to concentrate on the more recent data is

important to determine whether success factors are changing in

recent years, and whether the knowledge of these factors by

educators and small business owners/entrepreneurs will make a

difference in the numbers of successful firms in the future. A

study to determine whether owners are influenced by the more

recent data concerning variables for success should be conducted

citing the three areas. These are demographics, characteristics

of owners/entrepreneurs, and strategic planning/decision issues.

Studies researching data in only one or two categories cannot

cover the array of possibilities.

Perhaps the major implication for small business owners is that

while there are many variables that can be used to help develop a

successful business, it is wise to consider the individual

business and develop those that will work best for that one firm

based upon demographics, characteristics of the owners, and

strategic planning.

CONCLUSIONS

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This review summarized much of the literature of the last fifteen

years to determine whether new information has emerged over time

regarding criteria leading to success. It was also written as an

aid for new and experienced small business owners, would-be small

business owners, lenders, policy makers, educators, and

researchers. It is important to look at the literature from time

to time, especially if there is contradictory data, to assess

what has been said and to explore future needs for more research.

While there have been many studies conducted concerning failure

rates, few summaries exist concerning success factors in recent

years. This review of the literature should be a more positive

aid to business owners and others, and it is hoped that a

knowledge of these various factors for success will assist in

helping to turn businesses around if problems arise.

While it is certain that all of these various factors will not

work for every organization, each one should be able to assess

their weaknesses relative to the suggested factors, and be able

to devise a plan to correct problems as needed. It is also

realized that across the various industries, small businesses

differ greatly. Certain of these factors may make a substantial

difference for some and be of no consequence for others.

However, the factors provided in this summary should allow

business owners and others to become aware of the many options

available for success in a small business environment.

It is apparent that many misconceptions about failure rates of

small businesses have developed over the years. In some cases it

is the interpretation of data, due to differences in definitions

of failures and what constitutes a small business, and in others

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it is simply the lack of good data. However, from the

perspective of those who wish to continue in business or start a

new business, realizing that there are misconceptions, it appears

to be more positive and proactive to look at the success factors

as a more vital way to approach the problems encountered by small

firms. The information gathered by studying success factors may

result in better decision making by owners. It was suggested by

O'Neill and Duker (1986) that small business educators need to

develop a body of knowledge focusing on strategic behaviors or on

decisions made in small business, rather than the characteristics

or personalities of owners. While a body of knowledge is being

developed in the area of small business success, a large number

of studies do not exist, as with failures. According to Ponthieu

and Insley (1996), the major focus of research has been on

failure of small businesses, because of the terrible effect that

failure can have on all concerned. The major reason for research

in this area is to find successful approaches and avoid the

unsuccessful approaches. It would appear that while there has

been much written concerning strategic issues, there is still an

abundance of data relative to demographics and characteristics of

owners. The literature seems to indicate that the three success

categories are equally important to study to understand the

process toward successful management of a small business. In

developing the body of knowledge it would seem remiss not to

consider all possibilities.

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prediction model for service industries. Journal of Business and

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