Making the decision to start a small business is in itself a risky proposition. According to a study in the Journal of Small Business Management conducted by Alpander, Carter, and Forsgren (2001), “55 percent of all new ventures fail during the first three years,” (p.9). The success or failure of a business is determined by planning and intelligent decision-making processes. The most critical problems that small business owners encounter within the first three years of business include: obtaining financing, planning, marketing, human resource problems, and legal issues. In solving these critical problems it was reported that 88 percent of small business owners implemented moderate to high-risk strategies (Alpander et al., 2001). It is apparent by this statistic that small business owners are not afraid to take risks. However, intelligent entrepreneurs take calculated risks that oftentimes result in the success of their business. In order to make an intelligent decision, the entrepreneur must decide when the risks are acceptable and when the risks are too high. Therefore, it is imperative that every business owner consider the decisions that they make carefully. In navigating the decision-making process the business owner must consider their own personal views about risks, account for their individual perceptions of the risks that are involved, and decide what they consider an acceptable risk.
As stated in the introduction, the first three years of a business are the most crucial. The business owner needs to apply strong decision-making skills during this year. Efficient planning is essential for the success of the business. According to Alpander et al. (2001):
Human resource acquisition and utilization issues, recruiting employees, recruiting managers, and dealing with current employees are perceived to be the most critical problems by a combined total of 22 percent. Product pricing, market expansion, legal issues, product quality, and dealing with government agencies make up the remaining problems perceived as most critical in the first year (p.11).
The study reported that 70 percent of small businesses encountered these problems within the first year. However, in the second year, product pricing and maintaining product quality was the most critical problem. In the third year, legal and administrative issues presented the most critical problems.
Marketing or getting customers to buy the product was among the most crucial problems that entrepreneurs faced in the first year. Some of the small business owners who were surveyed chose to take an approach that they perceived as riskier and less expensive to solve the problems associated with marketing. They became more personally involved in sales and they spent most of their time networking. On the other hand, most of the small business owners surveyed chose to spend more money and take fewer risks creating a comprehensive business plan to solve their marketing problems. They invested in training new employees and offered incentives to boost productivity. Finally, these small business owners found new uses for their products and expanded their geographical sales base.
In the study conducted by Alpander et al. (2001), small business owners reported that the solutions they implemented were, “Logical, well thought out, having a long-term impact, and as creating significant changes in the organization,” (p. 17). The owners also described their decisions to be based on, “significant thought, conscious analysis of the problem, and evaluation of available alternatives,” (p.17). In the study, the empirical evidence suggested that the small business owner made well thought out decisions whether they were high-risk decisions or not and that they did not rely on “haunches” to make their decisions.
The study concluded that the solutions, whether perceived as risky or not, were not based upon impulse, and that whether the solution outcome was positive or negative it was almost always an unexpected outcome. Alpander et al. (2001) statistics pointed to 73 percent of the owners being satisfied with the decisions they made. In the end, whether the solution to the problem was perceived as a high-risk business proposition by the entrepreneur or whether the solution to the problem was perceived as a low-risk business proposition by the entrepreneur all of the entrepreneurs in the study made careful decisions.
Although most entrepreneurs make deliberate and careful choices, according to David Foriani and John W. Mullins (2000), “Risk plays a central role in most entrepreneurial decision making,” (p.1). In the study conducted entrepreneurs avoided delving into high-risk ventures. However, the risk is a part of business and those who take higher risks have the potential of making greater gains. The question then is when is it advantageous to the small business owner to take greater risks. In situations where there is a great deal of uncertainty entrepreneurs are less likely to take risks. Some of the conditions that make business owners uncertain about making risky decisions include the state of the economy and the resources that the entrepreneur has at their disposal.
According to a study conducted by Bernard and Leroy (2004), “The greater the environmental uncertainty, the lower the level of production. It might be deduced from this statement that since the incidence of high-risk decision-making processes is replaced by purely logical business planning when the environment is uncertain, that the lower levels of production might be a result of the absence of high-risk business plans. Although many studies have pointed out the negative effects of uncertainty on small businesses, there has not been much empirical evidence produced on the impact of risk-aversion on small businesses.
However, the train of thought that Bernard and Leroy (2004) introduced in the study that they conducted is enlightening. Risk-taking is defined by Bernard and Leroy (2004) as, “The will to carry out actions with an uncertain outcome but with potentially high returns” (p.3). Risk-averse small business owners make decisions that result in lower returns but maintain a stable company. On the other hand, risk-takers adopt the opposite behavior. They make risky decisions that might result in their company becoming a high-profit business, or their company may fail because of the decisions that were made. Thus, risk aversion translates into the small business owners’ fear of loss, but risk-takers gamble on the chance that they might actually lose their business.
Most of the literature suggests that productive investments sometimes involve risky decisions. However, the risks that are taken must be calculated. Risks that are not calculated into the business plan will end up being too costly for the company. Some high risks decisions will be made in the life of a small business. Taking risks in business cannot be avoided. In fact, Bernard and Leroy believe that risk aversion can be as damaging to a business as making careless high-risk decisions. According to Bernard and Leroy (2004), “The greater the risk aversion, the lower the level of productive investment” (p.4).
The study that Bernard and Leroy (2004) conducted concluded that there is a negative correlation between uncertainty, risk aversion, and productive investment. Bernard and Leroy (2004) also emphasized in their study that investment decisions should be carried out strategically whether they are high-risk decisions or low-risk decisions. One of the most interesting findings in the study suggested that the entrepreneurs’ behavior with regard to risk was very important to the success of the business. The study also emphasized that calculating risk is subjective and it is also a product of perception.
Improvisation in making business decisions is an important and necessary part of being a small business owner. In business, there will be times when it is necessary to make decisions that are impromptu. There will also be times when the business owner has to be creative in their decision-making process because they lack the resources and the time to plan out a decision strategically. In these cases, the risk is directly related to the improvised decision. These kinds of decisions are risky by nature. However, in a study developed by Hmieleski and Corbett personalities who were successful in making a competent decision based on improvisation were more likely to become entrepreneurs.
Those who were likely to become entrepreneurs were those who had the Big five personality, were motivated, had a cognitive style and family social models that prepared them for business, and were also able to make improvisational decisions. In a study conducted by Hmieleski and Corbett (2006) evidence shows that being able to make improvisational decisions played a significant role in whether or not someone became an entrepreneur. The conclusion that might be drawn from this statement is that in order to become an entrepreneur one must have a sense of how to make the correct decision under pressure and at times how to calculate intuitively the risks present and then to act appropriately.
In the current literature, theorists believe that entrepreneurs should identify a problem, evaluate it, and then execute a business plan. This process is described as strategically viable and is the starting point for an investigation into the subject of risk and improvisational decision-making. According to Hmieleski and Corbett (2006):
The gap has been filled to some degree by research that has considered how entrepreneurs use cognitive basis and heuristics. When information for rational decision-making is unavailable and time pressures are high, entrepreneurs use familiar mental shortcuts to make decisions. In conjunction with the strategic planning view, these complementary perspectives suggest that entrepreneurs develop and enact plans when adequate resources are available and follow pre-scripted routines when rational planning is not possible. We suggest that both these views are correct within certain boundary conditions – such as when resources are available for planning or when a heuristic is available for making a quick decision (45).
However, the question that arises is what do entrepreneurs do when there is no time for planning and no available guidelines to follow? The entrepreneur is then forced to make an improvisational decision.
In some cases, neither strategic planning nor heuristics are feasible solutions to problems that arise. Hmielesk and Corbett (2004) cite the author’s Baker, Miner, and Eesly (2003) in their paper as having studied 68 firms and had found that none of the firms behaved in a manner that was primarily strategically planned. In fact, many of the firms did not have the background to form heuristics to fall back upon during uncertain conditions. Instead, these 68 firms relied on improvisational decision-making skills. Hmielesk and Corbett (2004) write, “This is to say that the norm for these new ventures was to extemporaneously compose and execute novel solutions to the problems and opportunities that they encountered” (45).
The emergence of novel and sometimes risky business planning is due to an increase in innovation, as well as, an increase in uncertain and turbulent environments in which small businesses operate today. Personality also plays a role in the small business owners’ attitudes towards making risky, impromptu decisions. In recent literature, there has been a resurgence in the discussion of individual differences in organizational behavior. According to Hmieleski and Corbett (2006), this has spawned an investigation into the five fundamental dimensions of personality known as The Big Five (p.49). Those who believe in The Big Five claim that most personality traits can be traced back to five individual dimensions. These five different personality dimensions distinguish those who might be inclined to become entrepreneurs and those who might not have the desire to become an entrepreneur. The following types of personalities make up The Big Five: extraversion, contentiousness, agreeableness, emotional stability, and openness. As stated earlier, those who had personality dimensions that were agreeable to becoming an entrepreneur were those that were also pre-disposed to making risky or improvised decisions.
In the end, the study by Hmieleski and Corbett (2006) provided an analysis that opened the doors to a discussion about what makes someone become an entrepreneur. The ability to make improvisational decisions appeared to be a significant factor in predicting who would become an entrepreneur. Measuring personality, motivation, cognition style and social models seem to be equally important in determining who would become an entrepreneur.
Beyond comprehensive studies about personality, situational factors are important in understanding entrepreneurial behavior. According to a study conducted by Stewart and Roth (2007), the personality of the small business owner is more pronounced under stressful situations. Stewart and Roth (2007) believe that more research is needed that links the personality of the small business owner with environmental constraints. This research will be particularly useful in clarifying variations in business owners’ decision-making processes under different circumstances. Strong reasoning skills influence perception and cognition relevant to the identification of future business opportunities. With this in mind, the study of personality and cognition is important to the future success of entrepreneurs.
According to a study conducted by Carolis and Saparito (2006), the recognition and exploration of business opportunities are related to social capital and personal factors as well as personality traits. A recent stream in research emphasizes the importance of networks and social capital inherent in the life of the entrepreneur. Social capital is described by Carolis and Saparito (2007) as being the “Goodwill available to individuals or groups that includes feelings of gratitude, reciprocity, respect, and friendship” (p.41).
Growth and the development in the world economy are due to both the social capital and behavior of entrepreneurs in the last ten years. Linan and Santos (2007) examine the new socioeconomic factor on social capital in the formation of entrepreneurial intentions. According to Linan and Santos (2007), “The main reason is the central role nowadays assigned to human capital and entrepreneurs by the scientific community in the growth of different regions of the world economy,” (p. 443). There have been big changes in recent decades, such as, fast technological developments and globalization processes that have been introduced by liberal markets formed from the transition of communism to capitalism. With such developments the need for creativity by entrepreneurs is paramount.
Numerous studies have been conducted on the psychological characteristics and personality traits that differentiate successful entrepreneurs from non-successful entrepreneurs, and entrepreneurs from the rest of the population. Other studies have emphasized the importance of different demographic factors, such as age, gender, religion, ethnic group, education, family, socioeconomic status, and professional experience. However, the most significant traits that make an entrepreneur successful are creativity, flexibility, and the ability to make good choices whether the choices are risky or strategically planned.
References
Alpander, G. G., Carter, K. D., Forsgren, R. A., (2001). Managerial issues and problem-solving in the formative years. Journal of Small Business Management, 28(2), 9-20.
Bernard, J., Leroy, S., (2004). Managers and productive investment decisions: the Impact of uncertainty and risk aversion. Journal of Small business Management, 42(1), 1-18.
Carolis, D. M. D., Saparito, (2006). Social capital, cognition, and entrepreneurial: a theoretical framework. Entrepreneurship: Theory and Practice, 30(1), 41-56.
Foriani, D., Mullins, J. W., (2000).Perceived risks and choices in entrepreneurs’ new venture decisions. Journal of Business Venturing, 15(4), 305-350.
Hmieleski, K.M., Corbett, A. C., (2006). Proclivity for improvisation as a predictor of entrepreneurial intentions. Journal of Small Business Management, 44(1), 45-64.
Linan, F., Santos, F. J., (2007). Does social capital affect entrepreneurial intentions? International Advances in Economic Research, 13(4), 443-454.
Stewart, W. H., Roth, P. L., (2007). A meta-analysis of achievement motivation differences between entrepreneurs and managers. Journal of Small Business Management, 45(4), 401-422.