Managerial Issues and Problem-Solving in the Formative Years

Abstract

MANAGERIAL ISSUES AND PROBLEM-SOLVING IN THE FORMATIVE YEARS INTRODUCTION This is a study of the type of problems newly established firms encounter in their first three years and how the chief executives of these organizations solved these strategic problems. The success or failure of a business during its first year is generally attributed to pre-start-up planning and readiness along with entrepreneurial skills (Van Auken and Sexton 1985). Approximately 55 percent of all new ventures fail during the first three years, primarily due to managerial shortcomings (Siropolis 1986). Dun & Bradstrete (1981), which does an annual review of small business failures, defines the primary cause broadly as incompetence (O'Neill and Duker 1986). This view is supported by Ibrahim and Ellis (1987) and Landesberg and Edmunds (1983) who attribute the vast majority of business failures in the formative years to managerial shortcomings. What motivates a person to create a business and how one goes about starting a new business are well-researched topics (Brockhaus and Horwitz 1986, Welsh and White 1981). There is also substantial data on leadership and managerial behavior once the firm is well entrenched in its domain and is one its way toward rapid growth (Miller and Toulouse 1986, Saunders and Staunton 1976). These studies seem to focus upon the owner-manager's planning role during the formative years of the organization and explore the behavior of decision makers after their firms have become well established (Robinson et al. 1986, Mescon et al. 1984). On the other hand, our research focuses on the problems firms encounter in the first three years following their establishment and the actions of owner-managers in solving these problems. METHODOLOGY A nationally representative sample list of 526 businesses in food processing, electronics, and services, established between 1980 and 1985 which were still in operation in 1988, wa obtained from Dun's Marketing Service. The Dun's list was developed from a variety of sources: self referral, telephone directories, and other mailing lists. The representative sample in this study was randomly chosen from a list of 150,000 firms that met the following sample criteria we forwarded to Dun's Marketing Service. The primary criteria for selection of the list was the year of establishment, the form of ownership, and employment of fewer than 100 individuals in 1987. Only those firms established between 1980 and 1985 as single proprietorships or partnerships were included in this list. Although the SBA suggests fewer than 500 full-time employees is an average selection standard denoting a small business, our sample was limited to firms employing no more than 100 people in 1987. The rationale for studying firms with fewer than 100 employees was to focus on firms where size of the firm's start-up human resource pool is not a significant barrier to entry. Furthermore, we wanted our survey sample to reflect the fact that 65 percent of all U. S. small businesses employ fewer than 20 people. Subsidiaries of larger corporations were excluded. The firms selected for this study were able to break the start-up barrier and managed to register some growth during the first four to seven years of existence. This is no small feat. For instance, according to a Canadian study only 20 percent of small business start-ups survive the first few years in business (Department of Industry, Trade and Commerce, Government of Canada 1982). A four-part questionnaire was sent to 526 businesses representing each of the three SIC categories. In order to make the conclusions drawn from this survey representative of the general population, we needed 352 responses. Since only 122 were obtained, caution must be employed in extending these findings to the general population. However, from an exploratory perspective, the findings will be useful in developing future research projects. …

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