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Differentiating Entrepreneurs From Small Business Owners

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Differentiating Entrepreneurs From Small Business Owners
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   ^Academy of Management Review. 1984. Vol. 9, No. 2. 354-359. Differentiating Entrepreneurs fromSmall Business Owners:A Conceptualization JAMES W CARLAND Western Carolina University FRANK HOYWILLIAM R BOULTON University of GeorgiaJO ANN C.  CARLAND Western Carolina University The literature of small business and entrepreneurship is  explored It is es-tablished that although there is an overlap between entrepreneurial firmsand small business firms they are different entities. Using the  934  workof Schumpeter and  recognizing  the additions to thefteld of current writers a conceptual framework is established for the differentiation of entrepre- neurs  from small business owners. Schumpeter (1934) was among the first to identifythe entrepreneur as an entity worthy of study, distinctfrom business owners and managers. He describedentrepreneurs as individuals whose function was tocarry out new combinations of means of production.To Schumpeter, this function was fundamental toeconomic development. Entrepreneurs, therefore,warranted study independent of capitalists and busi-ness managers. Today there continues to be an im-plicit assumption that the entrepreneur contributesdisproportionately to the economy of a nation, yetlittle has been done to isolate this individual for fur-ther analysis. Extending the theory of Schumpeter,who argued that an entrepreneur was distinguishableboth by type and by conduct, two conceptualizationsare proposed in this paper: one for differentiatingentrepreneurs from small business owner/managersand the second for differentiating entrepreneurialventures from small businesses. Entrepreneurship: The Contribution Because the definition of entrepreneurship denotesthe creation of some combination that did not pre-viously exist, entrepreneurship often is equated withsmall business ownership and management. Thesmall business sector has received attention in the  eco- nomic and management literature because of its sig-nificance to the economy. The Small Business Ad-ministration (U.S. Government Printing Office,1982) has compiled a list of statistics that dramaticallydemonstrate the impact of small business on the na-tion's economy: 1.  There are 14.7 million businesses in the UnitedStates, of which 3.2 million are farms. 2.  Approximately 99.7 percent of these businesses areconsidered small by the SBA's size standards forloan applicants. 3.  The small businesses identified above account for:38 percent of the gross national product; 44 per-cent of the gross business product; and 47 percentof total U.S. business employment. 4.  The small business sector identified above ac-counted for the vast majority of the net new jobscreated by business between 1969 and  1976 Although there is no uniform definition of a smallfirm, the statistics above relate to businesses that fallwithin SBA guidelines as being small. The SmallBusiness Act states that a small business concernshall be deemed to be one which is independentlyowned and operated and which is not dominant in 354  its field of operation (U.S. Small Business Admin-istration, 1978, p. 121.1).As the SBA statistics demonstrate, small businessresearch  is  justified because of sheer numbers. It mustbe noted that small firms are treated as a separatesector, not because they are cohesive and homoge-neous, but because there are certain common man-agement limitations due to extremely limited re-sources as compared with the deep pockets of re-sources of larger corporate organizations. Researchoften is directed toward the implications of publicpolicy developments or the impact of environmen-tal variables on the small business sector (Chilton &Weidenbaum, 1982; Goodman,  1981;  Legler«&Hoy, 1982;  Robinson, 1982).Although small business is a significant segmentof the American economy, the entrepreneurial por-tion of that segment may wield a disproportionateinfiuence. If entrepreneurship can be viewed as in-corporating innovation and growth, the most fertileground for management research may be entrepre-neurs and entrepreneurial ventures. Entrepreneurshiphas been found to extend beyond small businesses:some large corporations have been described as en-gaging in entrepreneurial behavior (Ronstadt, 1982,Schollhammer, 1982, Shils, 1982). Additionally, aperson who owns an enterprise is not necessarily anentrepreneur (Martin, 1982). Clearly, an overlap ex-ists of entrepreneurship with the small business sec-tor. The concern of this paper is: If entrepreneursexist as entities distinct from small and large organi-zations and if entrepreneurial activity is a fundamen-tal contributor to economic development, on whatbases may entrepreneurs be separated from nonen-trepreneurial managers in order for the phenomenonof entrepreneurship to be studied and understood? Literature Review: The Entrepreneur One of the earliest definitions of an entrepreneurwas that of Cantillion (circa  1100 who described theindividual as a rational decision maker who assumedthe risk and provided management for the firm (Kil-by, 1971). Schumpeter (1934) credited Mill (1848)with bringing the term into general use among econ-omists. Mill, also, believed that the key factor in dis-tinguishing a manager from an entrepreneur was thebearing of  risk Schumpeter, however, countered thatrisk bearing was inherent in ownership and that en-trepreneurs, the combiners, were not necessarilyowners; therefore, the risk bearing propensity wouldnot be a trait. Martin (1982) believes that capital riskis a function of the investor. Further, Brockhaus(1980) cast doubt on the validity of the risk takingpropensity as an entrepreneurial characteristic withhis descriptive work. Brockhaus found no statisticaldifference in the risk preference patterns of a groupof entrepreneurs and a group of managers. It shouldbe noted that Brockhaus used the establishment ofa business as the criterion for inclusion of the par-ticipants in the entrepreneur group. Omitting busi-ness ownership as a designation of entrepreneurshippermits both the inclusion of corporate entrepreneursand the elimination of the risk bearing characteristic.However, many writers have asserted and continueto assert that risk bearing is a prime factor in the en-trepreneurial character and function (McClelland,1%1; Palmer,  1971;  Timmons, 1978; Welsh   White,1981).Numerous normative and descriptive studies havesupported various sets of personality characteristicsof entrepreneurship. Brockhaus (1982) has presentedan excellent historic overview of the definitions ofentrepreneurs. Perhaps the most important factorfrom a societal perspective is the characteristic of in-novation. Schumpeter (1934) believed that innova-tion was the central characteristic of the entrepre-neurial endeavor. His emphasis on this point is re-vealed in his declaration that one behaves as an en-trepreneur only when carrying out innovations.McClelland (1961) stated that energetic and/or novelinstrumental activity was a key factor in entrepre-neurial activity. Martin (1982) stressed that entrepre-neurial creativity is different from literary or artisticcreativity in that the entrepreneur does not innovateby creating ideas but by exploiting the value of ideas.Table  1  displays a sampling of entrepreneurial char-acteristics appearing in the literature.The characteristics listed in Table  1  represent atti-tudes and behaviors that may be manifested by en-trepreneurs. Demographic characteristics such asbirth order, sex, or marital status have been examinedin certain of the studies cited and in various otherinvestigations (Vaught   Hoy, 1981). They have beenexcluded from the present conceptualization becauseof the inability of a prospective entrepreneur to alterthose variables in order to increase his/her probabil-ity of success.Schein's (1974) work on career anchors clarifiessome of the differences in individual approaches tocareers. In studying M.I.T. graduates' careers, he355  Table 1Characteristics of Entrepreneurs  te Author s)Characteristic s)Normative Empirical 18481917193419541959196119631964197119711973197419741977197819801981MillWeberSchumpeterSuttonHartmanMcClellandDavidsPicklePalmerHornaday  &  AboudWinterBorlandLilesGasseTimmonsSextonWelsh  &  White1982 Dunkelberg  &  CooperRiskbearingSource  of  formal authorityInnovation, initiativeDesire  for  responsibilitySource  of  formal authorityRisk taking, need  for  achievementAmbition; desire  for  independence; responsibility; self-confidenceDrive/mental; human relations; communication ability; technical knowledgeRisk measurementNeed  for  achievement; autonomy; aggression; power; recognition; innovative/independentNeed  for  powerInternal locus  of  controlNeed  for  achievementPersonal value orientationDrive/self-confidence; goal oriented moderated risk taker; internal locus  of control; creativity/innovationEnergetic/ambitious; positive reaction  to  setbacksNeed  to  control; responsibility seeker; self-confidence/drive; challenge taker;moderate risk takerGrowth oriented; independence oriented; craftsman oriented   found that five types of job directions were prevalent.He described these as career anchors that includedmanagerial competence, technical/functional com-petence, security need, independence need, and crea-tivity. The entrepreneurs made up his creative group. The group concerned with creativity is the most in-teresting in that it contains the entrepreneurs. Fourof these men are successful in that they have been ableto launch enterprises which have succeeded and havebrought to their founders either fame or fortune orboth. The kinds of activities vary greatly—but theyall have in common that they are clear extensions ofthe person and his identity is heavily involved in thevehicle which is created (1974, p. 19). It is difficult to sketch a profile of an entrepreneurfrom the attitudinal and behavioral characteristicslisted in Table 1. It may be more appropriate to ac-cept Vesper's (1980) view of  a  continuum along whichseveral types of entrepreneurs exist. The questionthen becomes: Which characteristics and what levelof intensity do the entrepreneurs possess at variouspoints on the continuum? Vesper described the en-trepreneur as an individual but implied that he or shecould be found working with others in larger orga-nizations. His first type, the Solo Self-EmployedIndividual, is essentially what is treated here as thesmall business owner/operator, but not truly an en-trepreneur in the Schumpeterian sense because a newcombination is  not  created.A major obstacle preventing the attribution ofcharacteristics to entrepreneurs in firms along Vesper's  continuum is the great diversity of sourcesfrom which the authors cited in Table 1 derived theidentified characteristics. Those citations that are in-dicated in Table 1 as normative are generally anec-dotal, describing either the authors' personal impres-sions or conclusions drawn from reading the worksof others. The empirical studies draw from quite di-verse samples. McClelland's (1961) entrepreneurswere in fact business executives representing variousfunctional specialities: general management, salesand marketing, finance, engineering, and personnel.Senior marketing managers were found to have thehighest need for achievement. More frequently, sam-ples of small business owners are chosen for study(Hornaday Aboud, 1971; Pickle, 1964). The as-sumption underlying these selections is that the en-trepreneur was the individual who brought the re-sources together and initiated the venture. Success-ful entrepreneurs are defined as those whose enter-prises have survived some period of time, perhapstwo years. The question then is: Are the characteris-tics listed in Table   those of entrepreneurs, of smallbusiness owners, or of some mixture that may or maynot be capable of demonstrating the entrepreneurialfunction of economic development? The Entrepreneurial Venture A considerable body of literature has been builtup treating the stages of organizational development356  (VoziKis, 1979). This growth-orientation, in and of its lf would represent an entrepreneurial character-istic to some scholars (Dunkelberg Cooper, 1982).Yet, as Vesper (1980) has pointed out in his con-tinuum of venture types, many business owners neverintend for their businesses to grow beyond what theyconsider to be a controllable size. It is necessary togo beyond the notion of corporate life cycles andstages to conceive of an entrepreneurial venture.Glueck (1980) distinguished between entrepreneu-rial ventures and what he termed family business ven-tures by focusing on strategic practices. Strategicmanagement in Glueck's family business must em-phasize preferences and needs of the family as op-posed to those of the business. When in confiict, theneeds of the family will override those of the busi-ness. Glueck cited the oft observed family businessstrategies to remain independent and to provide out-lets for family investment and careers for familymembers as an example of confiict. In contrast, anentrepreneurial strategist would opt for pursuit ofgrowth and maintenance of the firm's distinctivecompetence through obtaining the best personnelavailable. Glueck's distinction is that strategic prac-tices oriented toward the best interests of the firmare observed in entrepreneurial ventures.An entrepreneurial venture can be identified by thestrategic behavior of the firms. Schumpeter (1934)suggested that five categories of behavior can be ob-served that are characteristic of an entrepreneurialventure. These categories, listed below, are supportedby Vesper (1980) and can be used as the basis for clas-sification criteria.1. Introduction of new goods 2.  Introduction of new methods of production 3.  Opening of new markets 4.  Opening of new sources of supply 5.  Industrial reorganizationBecause of the ambiguity of criterion 4, it is notemployed in this study. If any one of the remainingfour criteria is observed in a firm's strategic actions,then that firm can be classified as an entrepreneurialventure. These criteria do permit the classificationof a new small traditional firm as entrepreneurial ifthat firm represents an srcinal entry into a market.Again, the determining factor would be whether or-ganizational activity in any of the four criteria re-sulted in a new combination, indicating innovativebehavior. Additionally, these criteria permit mediumand large firms to be classified either as entrepre-neurial ventures themselves or as the instigators ofentrepreneurial ventures.Schumpeter's criteria represent evidence of inno-vative strategies or innovative strategic postures. Thecriteria also emphasize the behavior of a firm con-sistent with its own best interests. This perspectiveis congruent with the development and pursuit of adistinctive competence prescribed by Vesper (1980)as a requirement for an entrepreneurial venture.  Conceptual Distinction BetweenSmall Business and Entrepreneurship From the foregoing discussion, it can be seen that,although there is considerable overlap between smallbusiness and entrepreneurship, the concepts are notthe same. All new ventures are not entrepreneurialin nature. Entrepreneurial firms may begin at any sizelevel, but key on growth over time. Some new smallfirms may grow, but many will remain small busi-nesses for their organizational lifetimes.The critical factor proposed here to distinguish en-trepreneurs from nonentrepreneurial managers and,in particular, small business owners is innovation.The entrepreneur is characterized by a preference forcreating activity, manifested by some innovative com-bination of resources for profit. Drawing further onthe characteristics outlined in Table 1, it is suggestedthat analyses of prospective entrepreneurial charac-teristics examine such traits as need for achievement(perhaps more appropriately labeled goal-orienta-tion), internal locus of control, need for indepen-dence, need for responsibility, and need for power.Although a risk taking propensity is mentioned fre-quently in the literature, Schumpeter noted that it isinherent in ownership rather than entrepreneurship.Further, Brockhaus (1980) supported Schumpeterwith empirical results demonstrating that risk takingbehavior cannot be used as a distinguishing charac-teristic of entrepreneurship.From this analysis, it is suggested that many pub-lished studies may be misleading in their conclusions.Economic theorists propose that the entrepreneur isessential to economic development (Schumpeter,1934; Williams, 1981). Yet studies of entrepreneur-ship neglect to distinguish adequately between entre-preneurs and other business managers, primarilysmall business owners. Erroneous descriptions of en-trepreneurs can jeopardize investigations in a vari-ety of ways. Specifically, analyses of how entrepre-neurs make their fundamental contributions to eco-nomic development cannot draw sound conclusionsif the case studies are not entrepreneurial.357
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