My business book of the week - Understanding the small business sector - by David Storey

Elsewhere on the internet, I have an infrequent column entitled "Business Book of the Week". The selection this time raises some interesting issues, and so I thought I'd post a variation on my article here, in case anyone would like to discuss it.

I'd like to begin by drawing your attention to a blog by Julian Thompson who is the director of projects at the Royal Society for the Arts, Manufactures and Commerce (the RSA). Julian has worked as a social researcher for 10 years. Specialising in qualitative methods, he has undertaken major participatory research programmes and strategic futures work for government, voluntary sector and private sector organisations. In a blog entitled "Entrepreneurs in the valley of death" which was published today, he begins:

"Having rather excited myself with the entrepreneurial potential of Gen Y in yesterday’s blog, I was subsequently given the research equivalent of a cold shower, courtesy of some fascinating data and insights provided by Prof David Storey of Sussex University. In an event at the RSA hosted by Prof Jay Mitra of Essex Business School, Storey laid bare the sobering facts surrounding the survival rates of new businesses. These are important lessons for those looking to run or invest in small businesses,and some of them go against the dominant myths of entrepreneurship. So I thought I’d share.

The rest of the blog can be read here: http://www.rsablogs.org.uk/2011/emboldened/entrepreneurs-valley-death/

The key points that Storey has pointed out (and he is such a meticulous statistician that I for one wouldn't want to question his numbers) are that:

  • 75% of new start-ups will fail within 6 years and the majority of these will do so after 18-24 months.
  • Despite what almost every business plan forecasts, only around 6% of businesses continuously increase their sales over that period. Most grow until year 3 and then flatten. But within that overall pattern there is often huge volatility in sales. It is virtually impossible to predict which will succeed at the outset, because the key determinant of success is to have some big wins, early on. This creates early growth spurts which increase the business’ credibility and attractiveness to investors.

 

David Storey, OBE, is Professor at the Department of Business Management and Economics at University of Sussex, UK. His book, "Understanding the Small Business Sector", although it was published in 1994, is currently said to be the most highly cited work on Entrepreneurship or Small Business.

Storey's talk will I hope soon be available as a podcast via the RSA - when I discover that it is there I shall pop a link to it here. In the meantime, perhaps you'd better get hold of a copy of his book anyway.

The concern that he raises is that the present UK government are placing a great deal of emphasis on the small business and entrepreneurial sector to deliver the economic turnaround that the country needs, and also to provide gainful employment for the millions of people who are being made redundant from both the private and public sectors. Aside from the capability of these people to handle the risk and uncertainty needed to be an entrepreneur, what Storey is effectively implying is that of those that do start up a business, usually investing all their own savings and securing their loans on their property (which they increasingly require as a safety net for eldery care and pension needs), three quarters will probably lose almost everything within six years. This, of course, is not only tragic for the individuals but is effectively going to place an even greater burden on the State within a few years.

So, what do you reckon? Is the Government's thinking fundamentally flawed? Are we morally wrong to encourage people to believe that they can make it as an entrepreneur?

I find myself torn - on the one hand, I help senior executives get back into employment - on the other I am a course director for entrepreneurship programmes in the UK and Asia.

Incidentally, if anyone reading this and visiting the RSA website is interested in applying for Fellowship of this quite extraordinary 21st century think-tank, let me know and I will be happy to explain more.

Best wishes

Graham.

Graham Wilson - 07785 222380

PS My free ebook, "The Senior Executive's Emergency Job Hunt", is available to download now.

Comments

Good post Graham.  Makes you wonder what the point of a business plan is if they're so often failing to predict the future with even a modicum of success.

Hello Mike

Yes, indeed.  I've never been convinced.  I know that this antagonises some people, and I DO acknowledge the value of spending time reflecting on the business from time-to-time.

However, there are some extremely dogmatic templates and even 'business plan writing' software suites out there and I seriously question the point of those.

The use of them within a larger organisation is even worse, because (given that they are extremely unlikely to match reality) they are usually only used as whipping posts for those who are doing their best to deliver a good result.  I recall one board, that I was a member of, where every month the CEO would go round the table abusing each person whose division hadn't hit their 'targets'.  They left demotivated, under increased pressure, and knowing that somehow they had to inspire their teams to push themselves even more, even though with each month passing they had even less chance of meeting this fictional performance goal.

Different tools suit different people, and I suspect that those who really enjoy having an up to date business plan with ongoing monitoring of their performance against it, fall into certain personality types.  This doesn't mean that everybody is the same!

Best wishes, Graham

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