Entrepreneurship is an independent activity carried out at one’s own risk, aimed at gaining regular profit from the use of property, sale of goods, performing works or services by persons registered in the manner prescribed by law (Peters, 2006). Entrepreneurship is an essential attribute of a market economy, penetrating all its institutions.
Establishment (starting) of a business entity – a legal entity, as well as corporate rights ownership are not business activities, except cases provided by law.
An English professor Alan Hosking states that an individual entrepreneur is a person, who runs a business at his own expense, personally manages the business, is personally responsible for providing the necessary means, and makes decisions independently. His reward is a profit received as a result of business activity, and satisfaction he feels from running a free business (Rowley, 2010). But along with this, he also has to take the risk of losses in case of bankruptcy of his company. There is no generally accepted economic theory of entrepreneurship, although the need for such a theory has long been very urgent.
The development of scientific understanding of the practice of entrepreneurship could be roughly called the three waves of development of the theory of business function.
The first wave, which dates back to the 18th century, was associated with concentrating on the risks of an entrepreneur. The second wave in the scientific understanding of the entrepreneurship is associated with determination of innovation as its main feature. The third wave is specific for the focus on the particular personal qualities of the entrepreneur (the ability to react to changes in economic and social situation, independence in choosing and decision-making, management skills) and the role of entrepreneurship as a regulating principle in the balancing of eco system (Peters, 2006).
The current stage of development of the theory of business function can be attributed to the fourth wave, the emergence of which is associated with the focus on the management aspect in the analysis of actions of the entrepreneur, and therefore – on the interdisciplinary level of analysis of business problems.
Currently, theoretical studies pay attention not only to entrepreneurship as a way of running business on the independent basis, but also to internal entrepreneurship, or intrapreneurship (Pinchot, 2000). The emergence of intrapreneurship is associated with the factor that many large industrial structures overtake the entrepreneurial form of organization of production. Since entrepreneurship implies the compulsory right for creative freedom, the units of integrated production structures get the right for the freedom of action, which implies the existence of intracapital – the capital necessary for the implementation of the ideas lying in the base of the intra-company entrepreneurship (Pinchot, 2000; Teece, 2009).
Entrepreneurship is a specific kind of economic activity (by which we mean a purposeful activity aimed at profit-making), which is based on self-initiative, responsibility and innovative entrepreneurial idea.
Entrepreneurship is characterized by the presence of innovative moment – whether it be manufacturing of a new product, change of the profile of activity or establishment of a new enterprise. The new system of production and quality management, introducing new methods of organizing production or new technologies are also innovative moments (Jones, 2003). Entrepreneurship represents a specific type of economic activity, since its initial stage is connected, as a rule, only with the idea – the result of intellectual activity consequently gaining the materialized form.
1.2. Small and Medium Sized Enterprise
The classification of small and medium-sized enterprises is usually based on the recommendations of the EU Commission of 3 April 1996, which suggests the following parameters (Jeppesen, 2005):
Small and medium enterprises are the enterprises having less than 250 employees; or having an annual turnover of no more than ECU 40 million; or have a total annual balance sheet not exceeding ECU 27 million; satisfy the criterion of independence.
A small business is defined as an enterprise which has less than 50 employees; or has an annual turnover not exceeding ECU 7 million; or has a total annual balance sheet not exceeding ECU 5 million; satisfies the criterion of independence.
If a company initially operating as a small (medium) business within two years exceeds the criterion for the number of employees or capital structure, it loses its status as a small (medium) enterprise (Jeppesen, 2005).
Modern socio-economic situation in the world is characterized by (Jones, 2003):
– Globalization of production and markets, high rates of technological development and modernization, increasing share of high-tech products in the market;
– Short life cycles, high degree of diversification of products and services, sharp fluctuations of demand for different types of products;
– Increasing value of intangible production, creative capital and knowledge economy in the global economy;
– Limited material resources and increasing requirements for environmental friendliness and safety of products;
– Increased demands for quality of goods and services, introduction of unified international quality standards.
In these circumstances, SMEs are more flexible in responding to constantly changing market conditions, providing high efficiency of investment. As the engine of innovation, small firms provide a rapid generation of new jobs and self-employment of population when employment in traditional fields falls, thus weakening the social tension in depressed regions. Increase of the number of economically active citizens helps establish civic awareness of the population, increases creativity and willingness of society to social partnership, reduces the budget social loading, increasing opportunities to invest in development (Bhat, 2004; Jeppesen, 2005; Jones, 2003, Pinchot, 2000).
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Small & Medium Entrepreneurship is the basis of a stable civil society. SMEs not only play a huge social role in supporting the economic activity of most of the population, but also provide significant tax revenue. In the current difficult situation, it is the SMEs that can act as a stabilizer, and therefore are worth the appropriate attention of society and government (Peters, 2006).
World experience shows that if the state wants to develop dynamically and steadily, its socio-economic programs should always include measures to encourage small and medium businesses. Today, in developed countries, SMEs provide 40% to 90% of the gross domestic product (GDP) (Jeppesen, 2005). And so, it is natural that the governments of these states give priority to support the sector, providing high guarantees of private property preservation, broad economic independence and freedom of action, support of fair competition and anti-monopolistic activities, preferential loans and financing, substantial assistance in investment.
Small and medium enterprises (SMEs) are recognized as an important part of the world economy and its economic structure, increasing flexibility, adaptability, enhancing stability at the expense of attracting new workers. The growing importance of small and medium-sized enterprises in industrial development, exports and employment is proved by the data of the labor force participation rates of non-agricultural SMEs (China – 84.3%, Hong Kong – 63.0% Indonesia – 79.2%, Republic of Korea -78.5% Mexico – 58.5%, Philippines – 32,0%, Taiwan – 68,6%, Thailand – 73.8%) (Jeppesen, 2005).
In the 90’s, it was typical for TNCs to use the form of small business to expand their production and marketing networks. Such involvement of small enterprises is determined, above all, by the extent of their distribution. Small business is a kind of an antipode to orientation on a standardized large-scale production, which certainly played a role in the 50’s and 70’s creating in developed countries the basis for their welfare (Peters, 2006).
The decisive role in the reassessment of SMEs was played by shifts in the socio-economic structure of developed countries, the change of orientation in consumer attitudes, motivation of labor. A differentiated point demand started to form. Individualization of consumption has changed the paradigms of service provision, stipulated the emergence of small flexible units able to rapidly respond to consumer demand (Bhat, 2004).
Partial modernization that helped SMEs to fix in the world economic structure, and most importantly, rapidly changing consumer demand have created a new principle of production and sales, named customization. Its meaning is the orientation of manufacturer to the universal satisfaction of buyers’ requests, constant appeasing of consumer, and his binding to manufacturer.
So the increase in the number of SMEs and their forms are directly dependent on industrial policy in general: small businesses are closely related to large ones, which updates the SMEs. Governments of the newly industrialized countries have managed to create competitive conditions in the economy, despite the strong position of major national conglomerates. Achieving a critical mass of SMEs in the national economy may be a factor of self-sustaining growth.
2. Entrepreneurial Competencies and SME Performance
In the study “The competitiveness of small and medium enterprises. A conceptualization with focus on entrepreneurial competencies”, Man, Lau and Chan (2002) developed and analyzed a conceptual model describing the relationship between the specific characteristics of SMEs’ owners and their companies’ effectiveness. The presented pattern is built out of four concepts – competitive scope, organizational capabilities, entrepreneurial competencies and firm performance, which will be analyzed in further subsections.
Fig.4. A multi-dimensional construct of SME competitiveness
Source: Model of (Man et al, 2002), The competitiveness of small and medium enterprises: A conceptualization with focus on entrepreneurial competences.
2.1. Competitive scope
The competitiveness of the enterprise is a relative feature that expresses the difference between the development of the company from the development of competitive firms in the degree of satisfaction of people’s needs and in the efficiency of production. The competitiveness describes the capabilities and dynamics of the company’s adaptation to the conditions of market competition.
The competitiveness of the enterprise depends on several factors: the competitiveness of goods in a domestic and foreign markets, type of goods produced, market capacity (number of annual sales), simplicity of market access, homogeneity of market, competitive position of companies already operating in the market, competitiveness of the industry, ability of technological innovation in the industry, competitiveness of the region and country (Man 2002; Jeppesen, 2005; Jones 2003).
As the world practice of market relations shows, the general principles that provide a competitive advantage to producers are (Jeppesen, 2005; Jones 2003):
-Aim of each employee to act, to continue the job once it started.
-Closeness to the customer.
-Establishment of autonomy and creative atmosphere at the company.
-Increased productivity through the use of people’s abilities and their desire to work.
-Demonstrating the importance of common values.
-Ability to hold one’s ground.
-Simple organization, minimum of management levels and personnel.
-Ability to be both soft and hard. Keep the most important issues tightly controlled and pass less important ones to subordinates.
The competitiveness of product and competitiveness of manufacturer relate to each other as part and whole. Company’s ability to compete on a certain commodity market is directly dependent on the competitiveness of goods and the range of economic methods of the enterprise, impacting the results of competition.
In the entrepreneur-consumer relations, the consumer acts as an indicator of the business process. The entrepreneur, in planning and organizing his activities cannot ignore consumer’s interests, expectations, and estimates. However, this situation does not mean that the entrepreneur is obliged to act only in strict accordance with the identified interests of consumers. He himself can form consumer demand and create new shopping needs.
Thus, the entrepreneur’s aim is the necessity to win consumers, to create his own range of consumers.
The main means of entrepreneur’s influence on consumer are the following factors (Jones, 2003):
â€¢ novelty of the product and its compliance with consumer interests;
â€¢ price, availability of goods;
â€¢ degree of universality of goods;
â€¢ presentation and packaging;
â€¢ positive characteristics differing the goods from other producers;
â€¢ access to after-sales services;
â€¢ conformity with generally accepted or government standards;
â€¢ prestige and attractiveness of advertisement, etc.
Competition is an adversary activity between producers for the most profitable markets. The competition serves as a motivational force that compels manufacturers to improve product quality, reduce production costs, and increase productivity.
Market competition and competition of countries they are located in have a mutual influence. At the heart of these main aspects of competitiveness is something that can be called “soft” components of competition, which cannot be evaluated in monetary terms and are difficult to quantify.
In the industrialized countries, these components are usually more important than in developing countries. At the same time, “soft” components cannot be politically manipulated, and changing them requires more time than, for example, increasing productivity or building infrastructure. Despite the lack of developed methods of study, this group of factors of competition cannot be ignored. They include the following (Pinchot, 2000; Man 2002; Steenkamp 2010): work ethics, flexibility and willingness to self-improvement, willingness to work in the service sector, level of claims, openness to the outside world, labour mobility, spirit of competition.
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2.2. Organizational capabilities
Obviously, the stock market is ready to appreciate the value of some businesses higher, while the value of these estimates exceed than the indicators that reflect the real results of their activities. The gap between market and balance value of equity can be explained by the influence of those resources that are not included in the balance. These resources can justify the high market valuation only in the future when they start to work effectively, providing the company a substantial increase in profits. Such expectations are largely associated with intangible organizational capabilities (Man, 2002).
Considering organizational capabilities as dynamic units, D. Teece (2009) defines them as the possibility of firms to integrate, build and reconfigure internal and external competencies in response to rapid environmental change. In fact, we are talking about controlling processes, which occur at all organizational levels of the enterprise. These processes in turn can be regarded as taking place in the time sequence of actions to meet the challenges. Each process can be controlled good or bad. Quality of control depends on the organizational capabilities of the enterprise.
Dynamic capabilities of an enterprise can be narrowed to controlling three types of processes – integration, reconfiguration, and training (Teece, 2009). The purpose of the integration process is to ensure efficient and effective coordination of resources. Moreover, these processes are the re-treatment of the already known tasks. Therefore, organizational capabilities, associated with the control over the integration processes, can be characterized as the replication capacity. Numerous case studies indicate the presence of a positive relationship between replication capability of the enterprise and the growth of business.
The ability to control reconfiguration processes can be described as the ability to recognize the need of reconfiguring the structure of corporate assets and carry out the necessary internal and external transformation. This requires continuous monitoring of markets and technologies and the willingness to use the best practical experience. Reconfiguration processes lead to broad changes in the resource equipment of the enterprise (Bhat, 2004).
The organizational capability to control the learning process includes the processes which through repetition and experimentation are helping to solve problems better and faster. It also allows the entrepreneur to identify new industrial opportunities. These organizational capabilities are seen as an important part of the replication and reconfiguration ability of the enterprise and are effectively expressed in them (Pinchot, 2000; Teece, 2009). D. Teece (2009) also distinguishes two types of training – analytic (learning before doing) and experimental (doing before learning).
Consolidation of organizational capabilities in the enterprise is the important factor in the calculations on the extended growth of the company, which requires the right balance between “exploitation” of existing and new capabilities. The essence of “exploitation” is to improve and expand existing skills and experiment with new alternatives (Steenkamp, 2010).
Thus, the excess of market value of the enterprise over the balance value is due to the influence of its intangible resources, particularly organizational skills. Following the approach described by Man and Lau (2002), the potential organizational capabilities include innovative ability, ability to maintain or achieve high quality; cost effectiveness; and organicity as the ability to create organic organizational structures. The better the company codifies and transfers the knowledge of the staff, the higher is its efficiency, and thus the market value of the company. Generally, the market value of the enterprise grows, if it is well controlled processes of abstraction and absorption of knowledge and skills.
2.3. Entrepreneurial competencies
The main economic goals of the SMEs in the market conditions are improving production efficiency, profit maximization, conquest of new markets and meeting the needs of the team. However, with the growing of influence of economic risk factors, there appear the advantages of free pricing, the possibilities of self-selection of suppliers and consumers. Entrepreneurship as a process is a complex “chain” of targeted actions of entrepreneurs, possessing certain entrepreneurial competencies (Table 1), since the inception of entrepreneurial ideas and ending with their embodiment in specific business projects.
Table 1 showing Entrepreneurial competencies, their behavioral focus and preliminary elements.
Adapted from (Thi, 2009)
This process requires large expenditures of all factors of production, it is often doomed to a temporary setback, but eventually the entrepreneur is satisfied with the income. Consequently, entrepreneurship as a process involves the search for new creative ideas, their analysis and evaluation from the perspective of market needs and economic benefits, the formation of goals to implement the ideas, turning ideas into a new enterprise, the development of new products, improvement of the production organization, i.e. in implementing and translating ideas into concrete results (product, technology, services, etc.), bringing the entrepreneur the profit (Rowley, 2010; Steenkamp, 2010).
Development and implementation of enterprise strategy consists in managing the economy at the micro level (Steenkamp, 2010), which requires the construction of an appropriate system that performs the following functions: directing (justification of goals and choice of ways of achieve them); coordinating (balancing of the major resource constraints and coordination of conflicting interests of all participants of production process); stimulating (activation of the driving forces of development).
Experience shows that with the complexity of implementation of all tasks, one of the most difficult to implement is the last of these functions. It aims to motivate the employee to the success of the common business and the realization of his abilities and opportunities. Typically, traditional methods help to solve such a problem in practice only partially. According to experts (Jones, 2003; Bhat, 2004; Man, 2002; Rowley, 2010), most national economies now use less than a half of the creative potential of its employees (and this is obviously one of the root causes of the current crisis situation). Therefore, the way out of the deadlock should be sought in the motivation of people, in the first place, that is, in the sphere of interaction of their interests and benefits. But this requires a clear understanding of the composition and structure of economic interests in a managed team, it requires knowing and taking into account the interests not only common to the whole enterprise, but also the specific ones – those of teams units (primary, ancillary, administrative, etc.), as well as of different categories of workers (by gender, age, skill level, etc.). The internal mechanism of economic management, the mechanism of stimulation and motivation cannot operate without such knowledge (Bhat, 2004).
However, the external outline is equally important – the mechanism of interaction between enterprises with different agents and contractors, partners and competitors in the region, country and abroad. This mechanism is even more complicated because of its novelty and the set of largely unfamiliar requirements introduced today by the market. The development of the models of behavior of enterprises with entities of external outline of relationship requires continuous analysis – monitoring tracking the status of the external outline and timely identifying the emerging problems. First and foremost, it is the problem of marketing.
Thus, the tasks mentioned above can be divided into two levels: macroeconomic (development of rules of the game by public authorities) and microeconomic (direct adaptation of concrete businesses to the new conditions of production and consumption of goods).
According to the conceptualized model of the authors (Man, 2002), “Strategic and commitment competencies, competitive scope, and organizational capabilities will positively influence the performance of an SME through their interactive effect.”
2.4. Firm performance
Firm performance or efficiency is the most important qualitative characteristics of management at all levels. It is a measure of production activity on the distribution and processing of various resources (tangible and intangible) (Man, 2002; Peters, 2006; Phusavat, 2007). Performance can be measured through the coefficient – the ratio of results at the output of the resources and at their entrance.
The problem of performance is in general is not new; it exists in varying interpretation from the period of appearance of material production and reflects the relationship of production relations of a particular type of production. Under the conditions of market relations, when the results of one market actors depend on the clarity and coherence of other actors, the problem of efficiency is a decisive one.
The system of performance indicators should provide a comprehensive assessment of the usage of all enterprise resources and contain all the general economic indicators. General indicators primarily reflect the final results of production and implementation of strategic tasks. Functional indicators are used to analyze and identify the effectiveness of reserves, eliminate bottlenecks in production.
As a multidimensional phenomenon, performance can be measured by the following 4 groups of indicators (Phusavat, 2007):
1. General indicators of economic efficiency (the rate of output growth, overall profitability and its growth, etc.);
2. Labor efficiency indicators (growth rate of labor productivity, share of growth in output as a result of productivity growth, etc.);
3. Indicators of fixed assets, operating assets and capital investments (capital productivity ratio, growth of operating assets to the growth of commodity output, the relative savings of production capital funds, working capital turnover, payback period of capital investment, etc.);
4. Performance indicators of material resources (relative savings of material costs, decrease of specific consumption of materials, etc.).
Table 2 showing mostly used financial performance measures
Source: taken from the research of (Thi, 2009)
Table 3 showing financial and nonfinancial measures
The provided indicators reflect the combined result of entrepreneurial activity. They are aggregated by many factors and may, in fact, be called generalizing. However, entrepreneurship includes a number of relatively independent activities: industrial, financial, commercial, communication, each of which has a direct impact on the results and thus, largely determines the performance of the entire business system. Each activity creates its own results, calculated in the indicators, reflecting the performance of individual business subsystems.
If for evaluating the performance of the financial subsystem it is possible to use a set of indicators and parameters such as income from operations, cost of sales, net income excluding share of profit of associated companies, net tax before taxation and others, for a subsystem like the manufacturing one it is appropriate to suggest the following additional indicators (Peters, 2006; Phusavat, 2007):
â€¢ production efficiency calculated by the type of resource output;
â€¢ labor productivity;
â€¢ measure of the effectiveness of industrial relations;
â€¢ system of indicators reflecting the efficiency of production management;
â€¢ indicator of the efficiency of HR management;
â€¢ system of indicators characterizing the efficiency of use of production and marketing information and others.
The effectiveness of commercial subsystems can be assessed using ratios that make up the volume of product sales and expenses for the organization of its marketing and promotion, as well as indicators expressing coherence, interdependence and complementarity of the various elements of supply chain:
â€¢ indicator of the effectiveness of various sales channels, marketing systems, and intermediaries;
â€¢ system of indicators reflecting the effectiveness of sales network;
â€¢ index of reliability of intermediaries selection;
â€¢ system of indicators reflecting the effectiveness of sales and marketing information;
â€¢ indicators of the extent to which supply chain goals comply with objectives of marketing;
â€¢ duration of the implementation period (in relation to the cost of the marketing);
â€¢ indicator of the relative value of the profit in the total turnover.
Speaking separately on the effectiveness of communication subsystem, it must be emphasized that it is, in this case, not the whole system of market communication (effectiveness of various communication links is evaluated in different subsystems), but the communication between producer and consumer. This subsystem can use the following additional performance indicators (Steenkamp, 2010):
â€¢ effectiveness of advertising (economic and socio-psychological);
â€¢ effectiveness of sales promotion;
â€¢ system of indicators of exhibitions;
â€¢ effectiveness of use of various means of advertising influence
â€¢ effectiveness of motivation study;
â€¢ system of indicators that reflect the information components;
â€¢ effective use of tools for creating public opinion about the company and its products.
The index image of the enterprise deserves special attention. It can be used as an indicator of the result not only in the communicative subsystems, but in some cases and in relation to the entire system of entrepreneurship. For example, if a business entity is guided by the concept of socio-economic marketing and suggests operating in the long run, it can build target settings based on the need to strengthen consumer’s trust, to acquire the necessary social status and public recognition. In this case, the assessment of its performance can be performed through the characteristics that reflect its image (Steenkamp, 2010; Bhat, 2004; Man, 2002).
The disadvantage of such assessment is unavoidable conventionality of the resulting indicators obtained with the help of the expert method. It can be reduced by the full use of norms and rules pertaining to expert modeling.
In general, business performance can be evaluated not only by the size of the profit, but also by changes of the market value of the enterprise.
The economic efficiency of production refers to the degree of utilization of productive capacities, which is indicated by the relation of the results and costs of social production. The higher result at the same cost, the faster it grows in the calculation per unit of socially necessary labor cost, or the less the cost per unit of useful effect, the higher is the production efficiency. The generalized criterion of economic efficiency of social production is the level of labor productivity.
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