Inhibitory Factors in Small Business Development
Factors that delay the development of small businesses are diverse and well documented. They include the inability of financial institutions to adjust and adapt to the needs of small businesses, lack of business and management skills, difficulties making connections and networking, and limitations of physical infrastructure. All of the above refer to the first stage of development of a small business. In this post I will focus on a different approach that looks at the issue from a more dynamic point of view, referring to two stages within the life cycle of a small business: foundation and ongoing operations (the first stage is the idea and the last stage is expansion).
This approach assumes that as the small business progresses, so do the inhibiting factors; they change in both their characterization and the strength of their influence. Looking at four different stages, we can find common ground: the need for capital, human resources, information, and location. The dependency of all aspects is a function of the characteristics of the business (age, size, technological dependency, organizational structure, industry, and markets), the capabilities of the owner (experience, family connections, networks, etc.), and the environment in which the business operates (distance from potential markets, local information networks, etc.).
We’ll take two factors as an example: capital and infrastructure. We can see that the strength of the “need for capital” variable is stronger in the early stages and is strongest at the first one (the idea). To clarify, I’m talking about raising capital from financial institutions. Since the first stage, the idea, is also the riskiest in terms of investment, the difficulty in raising capital is at its highest, and the variable’s influence has a strong effect on the growth of the small business. However, as the business grows, it has an easier time getting loans from banks (and larger amounts), approaching investors, etc.—and the influence is weaker. The opposite happens when it comes to infrastructure; the limitations grow as the business grows. At the first stage, all the entrepreneur needs is a desk, a computer, and maybe some office supplies, and then a small venue to start off. But as the business grows in size, limitations appear because of the low flexibility of infrastructure. For example, a business may be at the owner’s location of residence (town, city, etc.); however, that location might not have the infrastructure to expand the business, so the owner is now faced with the decision of whether to relocate or not. In this case we see that the influence strengthens as the business progresses. The same logic for infrastructure applies also to human resources and information; their influence strengthens as the business grows.
At the micro level, we see that size does have its advantages, especially when it comes to networking and costs. As the business grows new connections are easier to make, visibility levels are higher, and the owner might even get approached by others instead of reaching out to them. As for costs, first it’s important to remember that while it’s more expensive to maintain a large business, it also brings in more revenues and profits. The benefits come when talking about raw materials for the product. Look at pizza; a small neighborhood pizza place will have to pay more for cheese and therefore charge more for its final product. A huge chain like Pizza Hut that buys in bulk gets a much better price, which affects the competitive price of its product, which in turn increases the sales.
In summary, the inhibitory factors aren’t constants; they shift and change according to the shifts and changes that the business is undergoing. Some variables become significant over time and some exactly the opposite. A small-business owner must take all of the factors into consideration; knowing their effects and how they work will allow him to formulate the best strategy for the business and its success.
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