Small Business: Success or Failure

Muhammad Taqi European University of Lefke

Business Administration RES302 Research Methods

Abstract

This paper examines the determinants of success and failure of small businesses. Small business success and failurehas been the subject of extensive research. It is important to understand the external,internal, and motivational factors responsible for business start-up, the barriers faced during the initial and continuous stages of trading and the advice and assistance available to small businesses. Within all major economies, the role of the small business is significant; as such it is important to understand the factors associated with why some small businesses fail and why others are successful. In this paper we will assume that a small business is a for-profit enterprise which is owned independently and does not hold a dominant position in the broader industry. If we look widely there is an agreement that a nations prosperity is linked with the performance of its small businesses, as entrepreneurship creates jobs, develops innovation and creates wealth. Unfortunately though being a small business owner is not easy as there is a statistic in the United States which that more than 50% of smallbusinesses fail in its first year of operation and 95% fail within the first five years of operation. (Small Business Failure)

Keywords: Entrepreneurship, small business, performance, external, and internal.

1) Introduction

First of all lets look in to the definition of Small Business, A small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships. The legal definition of "small" varies by country and by industry, ranging from fewer than 15 employees under the Australian Fair Work Act 2009, 50 employees in the European Union, and fewer than 500 employees to qualify for many U.S. Small Business Administration programs. Small businesses can also be classified according to other methods such as sales, assets, or net profits. (Small Business) Small businesses can be a vehicle for both Schumpeterian entrepreneurs introducing new products and processes that change the industry and for people who simply run and own a business for a living (Thurik, R, and Weneekers, S 2001).For the past 20 years or so small businesses have been growing a lot but only two-thirds of new small businesses survive at least two years, and just 44 percent survive at least four years, according to a study by the U.S. Small Business Association. Small businesses are something that anyone with a little investment can start but in the past 5-10 years business market has risen to the top and dominated the economy. Everyone has started taking interest in Business World. Its making people rich with their unique ideas but at the same time its taking some businesses out of the market because of the strong competitors. In the past 2-3 years there has been an economic crisis which brought down the level of business and forced a lot of businesses into bankruptcy. Meanwhile a lot of businesses took advantage of this situation.

This study has been conducted to answer the question which is asked by a lot of entrepreneurs today which is Business started today will it be a success or a failure? Besides this small objective, I have tried to find out different way in which success can be brought to small businesses and the factors that bring failure to small businesses. Moreover this study will look into the types of small businesses which are being started in the market and can bring their owner success. This study has its importance for small entrepreneurs who want to start a small business in todays economy and be successful. Findings will help to identify those sectors in which entrepreneurs would want to invest in for a much better profit.

2) Material and Method

2.1)

External and internal factors which effect businesses Schumpeter has emphasized in his work that the role of the entrepreneur as prime cause

of economic development era which was the first decades of the last century, small businesses were both a vehicle for an entrepreneur and source of both income and employment (Schumpeter 1912). Post Fordist System of management is marked with entrepreneurs. Entrepreneurship and therefore the entrepreneur, is at the core of what makes an enterprise succeeds, whether you call it an entrepreneurial firm, a small business, a family business, a home-based business, or a new business (Thurik, R, and Weneekers, S 2001). If we were to make a framework for this study for success and failure of small businesses or any other types of business we would focus on the important factors. According to Wilken individuals pursuing a new business venture go through three stages of entrepreneurship, namely

raising idea, start-up activities and finally, activate the business. There are a lot of factors which are behind the formation of a new business venture and its subsequent success and failure. These factors include the internal factors (personalities of entrepreneurs, their motivation, efforts, taking risk and so on..) and external factors (economics and infrastructure conditions, inflation, market information, supply and demand for products and services, banks system and so on..) The internal and external environment of the small business both together will affect the base of developing a new business. 2.1. A) These two main factors together will start-up activities influence the entrepreneurs decision to initiate a business. The commencing and first year of a new freshly started business is critical stages in determining the success or failure of a new business. In this stage it is really important that the entrepreneur must compromise internal and external factors, keep good organization, and keep the structure of business in good condition.. 2.1. B) If the entrepreneur is able to make a reasonable compromising, than they will successfully continue their business. At the same time in order to survive they are supposed to struggle hard with different external, internal and compromising activities. If they could come over the raised problems they will survive, otherwise they would go bankrupted which means that business will end up a huge failure.

Figure 1: External Factors and Internal Factors results. (Mehralizadeh, Yadollah, HossainSajady, Ahmad Zandavanian, and YaserTimoury)

Figure 1: External Factors and Internal Factors results. The success and failure of a business is often dependent on overcoming a series of potential barriers.

Survival rates and failure rates of small businesses

New research from the U.S. Bureau of Labor Statistics suggests that most failures of American startups will occur in the first two years of their existence. After that, the rate of business failure slows. The data show that, across sectors, 66 percent of new establishments were still in existence 2 years after their birth, and 44 percent were still in existence 4 years after. (See Figure 2.) It is not surprising that most of the new establishments disappeared within the first 2 years
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after their birth, and then only a smaller percentage disappeared in the subsequent 2 years. These survival rates do not vary much by industry. The following chart shows business survival rates by industry sector. Interestingly, the sector with the highest survival rates is education and health services. The sector with the lowest survival rates is the information industry. Of course, this study tracked new business startups from between March of 1998 and March of 2002 the height of the dot com boom. (Campbell,
Anita)

Figure 2: Survival Rates

Figure 2: Survival Rates The figure shows that the most of the new firms drop out of the market with in the first year and around 40% to 50% survive to last more than 4 years.

Small Business Survival Rates (Business Failure Rates Highest In) Small Business Openings & Closings in 2008: There were 627,200 new businesses, 595,600 business closures and 43,546 bankruptcies. Seven out of 10 new employer firms survive at least two years, and about half survive five years. Findings do not differ greatly across industry sectors.

Figure 2: Start-up failure rates The Real Numbers (Shane, Scott)

Figure 2: Start-up failure rates The Real Numbers (Shane, Scott) The figure illustrates the percentage of small businesses which survive and fail over 10 years of time.

If you look at this image it shows that the most percentage of failed businesses is in the first two years of new businesss life. Most of the businesses drop out in the first year and after that easily others drop off as well only the competitive ones stay in the game.

3) Results and Discussion After looking at the above data collected from different sources we can now discuss how a small business would be a success or failure. If we look at the external and internal factors we can say that the entrepreneur (someone who starts a new business or arranges business deals in order to make money, often in a way that involves financial risk) main part of a business and the most important because entrepreneur is the one who will run the business specially in the beginning, they are the ones who make all the decision for what will happen and how the business will be organized. They control every part of the business and are responsible for any mistakes or positive points for the business. If they control the business then it should be controlled and be competitive to others in the market they will survive and take the top place in the game. Entrepreneurs take the risk in context of time and money to play this business game even after knowing that they might fail because there are thousands of other businesses out there who will try to out run them in market. They need to be unique in bringing a product to the market or a unique idea of how to bring any product that is already in the market. They bring ideas of presenting their products to the market in which no one else has ever done it. After this is done the business will be successful otherwise they will be a failure just like other thousands of businesses which fail in their first year as statistics show that 40% to 50% of new businesses fail in their first year and other 95% fail within the first 4 years.

There are a lot of different categories in which one can start a business and be success. When deciding what business to start and entrepreneur should look at the interest of market and what is the demand in market and what is not being supplied to people. If the entrepreneur is able to find that one niche in which they can supply consumers with what they demand in a unique way they will take the lead in the market and it is possible that they might just make loyal customers because when customers are given what they need by one company in the beginning they might stick to them. Because they are getting what they wanted when no one else was supplying it. Even if another company comes in it will be harder for the new company to win the customers because customers do not like to try new products which they dont know about as much. Failure is the one of most important thing that businesses are afraid of, so they dont bring that up while planning the business plan. They are afraid that if they bring up chances of failure they wont be able to succeed while this is one thing that brings up most businesses to success. While planning the business plan if a company just put the things that will come in their way to reach the goals they can try to avoid them or overcome them which some strategy but if not looked at they will come in later on and bring failure to business no matter what. If business has made it till the fourth or fifth year after that it is really hard for a business to collapse or go down. Because once the base of a business has been set up it is hard to challenge it with a new business.

4) Conclusion I would like to conclude this research by saying that by the stats most of the small businesses do fail in their early years but if the management has been looked after really carefully and taken care of it can survive to be the next Wal-Mart, Microsoft, or any big business out there in the world today. It does not matter what type of business you do just make it unique so that its that one thing everyone wants and they want it just from you not others. In in the end you will be the winner and the most competitive in the market.

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References

"Business Failure Rates Highest In." Small Biz Trends. 2010. Web. 25 Mar. 2011. <http://www.score.org/small_biz_stats.html>. Campbell, Anita. "Business Failure Rates: What Percentage of Businesses Fail?" Small Business News, Tips, Advice - Small Business Trends. Small Business Trends, 7 July 2005. Web. 25 Mar. 2011. <http://smallbiztrends.com/2005/07/business-failure-rates-highestin.html>. Schumpeter, J.A., 1912, The Theory of Economic Development, Oxford University Press. Shane, Scott. "Startup Failure Rates The REAL Numbers." Small Business News, Tips, Advice - Small Business Trends. 28 Apr. 2008. Web. 27 Mar. 2011. <http://smallbiztrends.com/2008/04/startup-failure-rates.html>. "Small Business Failure."Small Business Credit | Dun and Bradstreet Credibility Corp. Web. 27 Mar. 2011. <http://smallbusiness.dnb.com/?cm_mmc=dnb-_-home-_-sbs-_-sbs>. "Small Business."Wikipedia, the Free Encyclopedia. Wikipedia, 13 Mar. 2011. Web. 25 Mar. 2011. <http://en.wikipedia.org/wiki/Small_business>. Thurik, R, and Weneekers, S (2001). A Note on Entrepreneurship, Small Business and Economic Growth, Centre for Advanced Small Business Economics "What Are the Small Business Size Standards? | SBA.gov."The U.S. Small Business Administration | SBA.gov. 2011. Web. 27 Mar. 2011. <http://www.sba.gov/content/whatare-small-business-size-standards>.

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