Small Business

Organizations come and go. Organizations as Pennsylvania Railroad, Nash, the Civil Aeronautics Board, the World Football League, and Pan American World Airways have disappeared from the landscape. Others have been swallowed up into other organizations: People Express, the Baltimore Colts, the Seattle Pilots, and Republic Airlines are cases in point. In the United States last year alone, an estimated 600,000 new businesses were formed. If history is any guide, most of those will disappear within a few years. For every Howard Schultz, there are many whose dreams do not become reality. Many more organizations are undergoing changes, as managers wrestle with questions about products, markets, organizational forms, global competitive pressures, and so on. In short, the story of organizations today is the story of managers inventing and reinventing organizations.

Small business plays a central role in our lives because we conduct much of our own personal economic activity with people running small businesses. Whenever you have your bicycle repaired, get your hair cut, or visit your dentist, you are part of the small business economy. The same holds true when you go for a late night snack at your neighborhood “Mom and Pop” pizzeria, buy the morning newspaper, or browse for Mother’s day and Father’s day greeting cards at a local shop. Small business refers to businesses locally owned and managed, often with very few employees working at a single location. By customary US government definition, a “small’ business is one with fewer than 500 employees. By this definition, Starbucks was, but is no longer a small business.

Small business is easy to overlook as you think about the world of organizations and management. You are not alone if the names of such large organizations as IBM, Exxon, and MTV come to mind more readily than do those listed, which identifies the fastest growing small businesses in the United States. But small business is where it all begins. Consider the following facts:

1. More than 36 million Americans work for organizations with fewer than 100 employees. In 1992, 53 percent of all jobs in America were held by people working in organizations with fewer than 500 employees – small businesses. Between 1988 to 1990, for example while large organizations accounted for a net loss of 500,000 jobs in the United States, organizations with fewer than 20 employees accounted or a net gain of 4 million net new jobs.
2. According to a Dun & Bradstreet analysis of the two million businesses formed in 1991, 20 percent were one person or two person operations, a significant increase from past patterns. As Bryce Kirchhoff, former chief economist of the Small Business Administration observes: a tremendous shift to self employment is under way. Some of this growth is driven by people who are concerned about the downsizing of large corporations. Some have started their own businesses after having been laid off. Others are interested in the freedom of being one’s own boss.
3. The well known “giant” organizations of the mid-1990s all had humble beginnings. Consider the origins of Wal-Mart, AT&T. and General Motors (GM). Wal-Mart began as a single store that Sam Walton opened in 1962 in Rogers, Arkansas. AT&T had its beginnings in the tinkering of Alexander Graham Bell, who was a teacher, not a financier or business tycoon. With the telephone patent that the he received in 1876, Bell and his advisers awarded franchises to people with the money and local political clout necessary to start local telephone systems. When Bell’s patents expired at the end of the nineteenth century, thousands of companies emerged to threaten a fledgling AT&T in the American market. It was not until the 1930s that AT&T took the organizational shape that endured as a unique monopoly for fifty years. Alfred Sloan, who is credited with shaping and leading the modern General Motors, started out with Hyatt Roller Bearings in Newark, New Jersey, after his graduation from MIT. As Sloan tells the story, Hyatt had twenty five employees, and one ten horse power motor ran the factory’s machinery. Twenty five years later, after Sloan moved into upper management at GM.

Joseph Schumpeter, an Austrian economist, wrote in the early 1940s that a healthy economic system was one frequently buffeted by a “personal gale of creative destruction”. The phrase still aptly describes today’s world of small business.