Review Subject: The Foundations of Small Business Enterprise: An Entrepreneurial Analysis of Small Firm Inception and Growth by Gavin C. Reid, Routledge, 2007.

 

The Reviewer: Rana Tassabehji, University of Bradford School of Management, Bradford, UK  in International Journal of Entrepreneurial Behaviour & Research, Volume: 16, Number: 2; Year: 2010 pp. 172-174

 

"…The book is mainly aimed at academics, to demonstrate rigour in the testing of theories and there are many. However the non-academic and non-economist can benefit from the very interesting conclusions in this book.

The book is divided into 18 chapters and six parts, covering 244 pages with an additional 130 page appendix on instrumentation, which includes pre-letters and a copy of the 4 questionnaires that were the basis of the face-to-face interviews with entrepreneurs, which highlights the rigour underpinning the research and analysis of the findings in the book….

 

The first part is made up of two chapters providing background information to the study. The first chapter is very useful and summarises the findings of the study for each of the four years in which the data were collected broken down into market data, finance, costs, business and pricing strategy, human resources, organisation and technical change. Data about information systems were only collected in the last year and are not included here. In the next two chapters full details are provided about the research instrument developed and the data acquisition process which is central to understanding the subsequent analysis using econometrics and statistical inference.

 

The second part (chapters 4-5) lays the theoretical ground for expounding theory about growth and profitability of micro-firms using variants of Gibrat's Law. Gibrat's Law is tested and refuted concluding that smaller small firms tend to grow faster than larger small firms following a stable growth process and an alternative managerial hypothesis is presented implying a growth/profitability trade off. Chapter 5 refutes neo-classical financial saturated hypothesis, rather suggesting that the flexibility of hiring part-time employees is successfully exploited by mature micro-firms to avert funding shortages. Other findings include funding shortages could be as a result of over-trading.

 

Part 3 (chapters 6-8) focuses on Finance, based on a literature review Reid identifies dynamic theory of the firm as the perspective which he will adopt to evaluate small firm financing and growth. Chapter 7 investigates whether financial structure at inception has an impact on early performance of the micro-firm. Many financial features were found not to change across firms that continue to trade compared to those that cease, gearing and assets appear unimportant but trade credit arrangements and purchase commitments are more important as were more macro-economic effects such as advertising, business planning, employment and innovation. Chapter 8 tests financial hypotheses using the dynamic financial theory of the firm which is lacking in the extant literature.

 

Part 4 deals with performance: the development of a classification for measuring performance (chapter 9); a statistical explanation of the ranking of performance by the business strategies deployed by owner managers (chapter 10) where long range planning and pursuit of pecuniary goals emerge as being particularly important; and finally (chapter 11) testing a model to estimate the effects of entrepreneurial action on new business survival. This had very interesting results, namely that product, and to a lesser extent process innovation, have a negative impact on survival where factors such as attitudinal variables (not often used in econometrics) and organisational structure have a positive impact on survivability.

 

Part 5 looks specifically at information systems and information needs of organisations. A link between information and performance was found where the timing of events (based on contingency theory) was found to be associated with adaptations in IS. The final part explores flexibility, growth and survival and refutes Gibrat's Law (chapter 16) when considering scale flexibility and optimal size, niche flexibility (chapter 17) using Markov chain modelling and best market and organisational adaption to turbulence and flexibility of decision making (Chapter 18). The main factors that influenced the long-lived small business positively are: entrepreneurs being able to recognise change drivers; adapt their organisation to it quickly; make all the necessary adjustments for organisational change in particular investment decisions; and delaying adjustments might have a positive consequence for performance.

 

Overall, this book achieved its major objective, which was to consolidate all the results of Professor Reid's research in one place and link the different strands of the studies with a strong theoretical underpinning drawn from a number of different disciplines – economics, entrepreneurship and IS. It is well written and although intended to stand alone chapter by chapter, it is better read as a whole, as many of the early chapters form the foundations on which the following parts are built. Although much of this information is in the public domain already, by placing it in one book, it provides an overarching view by the author himself which adds to the explanation and understanding of the issues he raises."

 

Overall, this book achieved its major objective, which was to consolidate all the results of Professor Reid's research in one place and link the different strands of the studies with a strong theoretical underpinning drawn from a number of different disciplines – economics, entrepreneurship and IS. It is well written and although intended to stand alone chapter by chapter, it is better read as a whole, as many of the early chapters form the foundations on which the following parts are built. Although much of this information is in the public domain already, by placing it in one book, it provides an overarching view by the author himself which adds to the explanation and understanding of the issues he raises.

Information System Development in the Small Firm

By Falconer Mitchell, Gavin C Reid and Julia A Smith

Publication details: © CIMA, Information System Development in the Small Firm, CIMA Publishing, London (ISBN: 1 85971 453 6) pp. 1-114 + i-vii.

Reports on research funded by the Research Foundation of the Chartered Institute of Management Accountants (CIMA) and by the Leverhulme Trust

 

Summary

• Sets out three modern theories of how information systems enhance performance: contingency theory; markets and hierarchies; principal-agent analysis
• Considers the management accounting information system (MAS) as an exemplar of such a system in the small firm
• Provides the latest evidence on the link between performance and information system development
• Shows how in practice both struggling and successful small firms use information for improved decision-making and control
• Reports on how small firms cope with the complexity and reliability of information
• Statistically estimates the effects of markets, strategy, production and technology on the best organisation of the small firm
• Shows which factors determine the complexity of MAS
• Presents practical case studies of how information systems can be adapted to changed circumstances.

 

This work is grounded in contemporary evidence on current practice in small firms.  Such evidence was gathered by face-to-face interviews within the firms over a four-year period.  It covers all aspects of operations and strategy, with particularly detailed attention being given to the development and handling of accounting information.

 

After setting out the relevant theoretical and empirical background, the work uses this evidence to investigate the link between the form of the firm and the contingencies which impinge upon its information system.  It does so using both qualitative and quantitative evidence.  Thus concrete case studies of the experience of specific firms are backed up with statistical evidence of general patterns of behaviour across the sample of firms.

 

The work shows that accounting information can help a small firm in two major ways.  First, for the successful, growing firm, in a dynamic and competitive environment, it is used to integrate operational considerations within long-term strategic plans.  Second, for the struggling firm, it is used to manage short-term problems in areas like costing, expenditure and cash-flow, by appropriate monitoring and control.  Further, it shows how complex factors mould and develop the management accounting system.  These include external factors, like competitiveness, and internal factors, like the emergence of hierarchy.

 

Overall, the work suggests that the small firm need not be at the mercy of internal and external forces.  In all circumstances, it can take rational steps to modify monitoring and control mechanisms, typically by adjustments to its information system, to the end of enhancing economic performance.

 

Key Features

• Information system in the small firm: management accounting system (MAS) as an exemplar information system
• How is this information handled by MAS in the small firm?
• How does this information structure change over time?
• Can modern economic theory help to explain the nature and development of the management accounting system in the small firm?
• The theories examined are:
• contingency theory
• agency theory
• markets vs hierarchies
• All these theories emphasise the use of information within the small firm’s organisation.