SPONSORSHIP, SELF-PERCEPTION AND SMALL BUSINESS PERFORMANCE

SPONSORSHIP, SELF-PERCEPTION AND SMALL BUSINESS PERFORMANCE

J. Matthew Kessler, Chatham College

Research on small businesses consistently demonstrates that up to 80 percent fail within ten years of startup (e.g., Dun and Bradstreet, 1993; Kirchoff, 1994; Watson and Everett, 1996). Two different explanations for this high failure rate exist within the literature. One explanation typically found in small business literature emphasizes insufficient individual competence and instrumental reasoning among those owning and managing small businesses. Another explanation commonly found in sociology literature emphasizes how institutional relationships among organizations affect organizational performance.

This paper has two objectives. Our first objective is to argue that sponsorship is an important vehicle for imparting individuals with both technical skills and social characteristics germane to particular institutional arrangements of markets. We suggest that sponsorship is partially a socialization process that contributes to the development of an institutionally appropriate self-identity. Thus, we propose that those who are sponsored are more successful than nonsponsored individuals. The second objective of this paper is to provide an empirical examination of this relationship by examining a singular industry comprised of "micro-businesses".

Review of Literature

Substantial research has attempted to explain organizational failure rates through examining the relationships between institutional arrangements and organizational forms (see Aldrich,1979; Baum and Singh, 1994; Carroll and Hannan, 1994; Hannan and Freeman, 1989; Stinchcombe, 1967). Other research explains failure by examining the human capital characteristics of small business owners, such as entrepreneurial traits or managerial expertise (e.g., Dun and Bradstreet, 1993; Peterson et. al., 1983; Weitzel and Jonsson, 1991). The former attempts to identify and establish common institutional characteristics associated with organizational failure while the latter attempts to establish common atomistic characteristics. We present a brief summary of these explanations beginning with the latter.

The Individualist Explanation for Small Business Success

Business literature has a long tradition of emphasizing the importance of instrumental (i.e., rational) thinking and behavior for successfully managing organizations and conducting business. This emphasis on instrumental reasoning (i.e., optimizing efficient and effective operations) is most evident in business literature on organizational operations, strategic planning, and decision making but it is ubiquitous throughout this literature. This is not to imply that this literature views individuals as inherently irrational because it clearly does not. Rather, this literature recognizes that individuals’ attempts to be rational are tempered for a variety of reasons. The often used concept "bounded rationality", for instance, suggests managers often fail to develop the best decisions, plans, or solutions because their thought processes are affected by personal biases and limited knowledge or information.

Although business literature recognizes the limitations of individual capacity to think and act rationally, it suggests that business organizations can still be instrumentally designed and operated. The ubiquitous use of Weberian ideas on bureaucracy throughout the business literature suggests that a means for compensating for human fallacy is to develop more professional and instrumental systems for operating businesses. Accordingly, management literature is devoted to the development and application of optimally efficient and effective systems for organizations. Many scholars note that the consequence of this "systems" perspective has been the "engineering" (e.g., Edwards, 1979; Gordon et. al. 1983; Nobel, 1977; Shaiken, 1986), or more recently, "reengineering" of organizations (e.g., Hammer and Champy,1993).

The development and management of "rational" systems, however, is considered a function of sufficient technical and analytical competencies embodied in the "professional manager". The greater the technical "human capital" of managers, the greater their abilities to increase organizational efficiency and effectiveness. The propensity for individualist explanations of business performance in this literature is due to this accepted premise that business performance is ultimately contingent upon the technical abilities of those who manage. The proficiencies and competencies of individual managers to plan, design, operate and market their businesses efficiently and effectively determine business performance. The absence of these abilities ensures failure. As one manual for small business planning (Bangs, 1997) succinctly states: Those who fail to plan, plan to fail. In other words, failing to engage in instrumental behavior, such as systematic planning, causes business failure. This may be a questionable conclusion given mixed research findings (Pearce et. al, 1987) but one that illuminates the point illustrated by Dun and Bradstreet studies (1993, 1995) that the majority of small business failures result from managerial inadequacies and incompetence.

Institutional Explanation for Small Business Success

An institutional perspective explains organizational failure rates by examining the relationship between environmental factors and organizational forms, (e.g., see Aldridge, 1977; Baum and Singh, 1994; Carroll and Hanan, 1995; Granovetter, 1985; Hannan and Freeman, 1989; Scott, 1992; Stinchcombe, 1965). Generally, this body of literature suggests that organizations exist within institutionalized environments comprised of socially constructed inter-organizational relationships and institutional rules and mechanisms. These rules and relationships significantly influence how organizations access resources, operate and adapt to changing environmental conditions.

Institutional explanations note that organizational failure is often attributable to the inability of organizations to adapt within their environments. Several factors account for this inability. The first is failure to adequately select, retain and change organizational structures and processes (i.e., organizational form) to fit the environment. The second is the failure to develop and maintain the necessary linkages with other organizations that are capable of providing resources and legitimization. New organizations are particularly vulnerable because of what population ecologists refer to as the "liability of newness". Finally, organizational failure occurs in environments where there is an imbalance between organizational "density" and available resources. In short, the institutional explanation suggests that organizations must be able to comprehend their environments to successfully navigate through existent institutional arrangements to gain the resources and legitimization necessary to survive.

Although both explanations contribute significantly to our understanding of organizational failure, both have inherent weaknesses due to their particular units of analysis; individuals versus groups (e.g., markets, industries). Consequently, the linkage between individuals managing their businesses and the process of learning the larger institutional arrangement remains unclear and problematic. We recognize that while technical and analytical competencies are important for organizational performance so too is learning how to navigate through particularistic institutional arrangements. We now turn to a discussion about the mechanism that may help explain how owners learn to navigate their environment and improve organizational performance.

Sponsorship and Small Business Success

Sponsorship has been touted as an effective process for acquiring both vocational and social skills (e.g., Scherer, 1990). In this section, we summarily review two forms of sponsorship, one with a long historical association with crafts and one that is more contemporarily associated with careers (Epstein, 1998; Kanter, 1977; Keiser, 1989; Resch, 1998; Watt, 1998).

The earliest form of sponsorship, apprenticing, was an institutionalized component of the socially endogamous pre-industrial guild systems. Labor scholars note that guilds were religiously based production systems intimately entwined in the institutional fabric of society and stringently controlled by master craftsmen. Master craftsmen determined the quality and quantity of production, established prices of commodities within their respective trades, and controlled market competition through institutional rules and regulated the number of apprentices. By controlling "secret" knowledge about production processes that they only gradually shared with their apprentices, craftsmen maintained control over production (e.g., see Haydu, 1988; Keiser, 1989; Thompson, 1966).

In exchange for the opportunity to learn about production, apprentices spent years in "family-type relationships" demonstrating commitment and loyalty through serving their craft and master craftsmen (Kaiser, 1989). During their apprenticing, men acquired skills and knowledge about production as well as appropriate "mentalities and manners" (i.e., rules of behavior) associated with their guilds. Guild rules (e.g., "value of honor") dictated social and commercial interactions and thereby maintained guild solidarity. Both technical competency and conformity to rules provided apprentices with credentials and legitimacy for advancement to journeymen and eventually master craftsmen (Haydu, 1988; Keiser, 1989). Hence, apprenticing served as both vocational and socialization mechanisms that ensured continuance of the craft and guild control.

With the ascent of industrial capitalism, slow adapting guild systems gradually changed toward craft shops, namely "putting-out" and factory systems (Keiser, 1989). These systems required skilled workers knowledgeable about production in order to operate so journeymen and apprentices were monetarily sought by businesses for their skills and willingness to share production knowledge (Thompson, 1966; Marglin, 1974). Now unrestricted by guild rules, knowledge about production became market commodities that led to new forms of production (Edwards, 1979; Nobel, 1977). Nevertheless, apprenticing persists in many skilled trades such as plumbing (see Resch, 1998; Watt, 1998).

As the systems of production and commerce changed, office or administrative work increased. This type of work required different social interaction and different kinds of knowledge and skills than manufacturing work. Davis (1982) suggests that a new form of apprenticing emerged whereby owners trained and groomed office clerks for positions of authority within the firm. We presently refer to this as mentoring. Although, mentoring was gradually replaced by more accessible and formal systems of administrative education, it did not entirely fade away. As Kanter (1977) convincingly demonstrated, mentoring remained an effective social mechanism for facilitating career mobility among particular white males in corporate America. Although an effective system for facilitating careers, mentoring practices were endogamous and homogamous. Mentors typically chose to mentor individuals sharing similar social characteristics. Such mentoring practices were detrimental to women and people of color. Viewed as "good ole boys networks", mentoring presented significant obstacles to the upward mobility of minorities as well as contributing to a segmented labor markets (e.g., see Beck et. al, 1978; Oppenheimer, 1970; Rosenfeld, 1979).

Along with passage of anti-discrimination legislation, programmatic mentoring of minorities received increasing attention as a mechanism for facilitating minority career mobility (Kanter, 1977; Scherer, 1990). As with apprenticing, mentoring has been viewed as a useful socialization mechanism for instilling minorities with appropriate values, attitudes, expectations and behavior necessary for success (e.g., see Ragin, 1997; Scherer and Brodzinski, 1990; Turban and Doughtery, 1994). Consequently, apprenticing and mentoring persist because many consider them effective career enhancing mechanisms (Tigges, 1998; Watt, 1998). Specific research shows they positively impact the overall long-term careers of individuals by providing vocational skills and technical knowledge. It is also anticipatory socialization that includes role modeling, counseling, confirmation and social support for developing a professional identity, (e.g., see Karm and Issabella, 1985; Larwood and Gattiker, 1987; Ragins, 1997; Turban and Dougherty, 1994). Moreover, mentoring is "empowering" because it provides individuals with legitimization and access to resources and social networks that facilitate career development. Sponsorship, then, appears to provide individuals with two ingredients for career success; an "accepted" social identity and increased access to resources including knowledge and skills.

Although most discussions of sponsorship focus on career development, some recognize that sponsorship may have a similar impact on small business performance. Unfortunately, research on this relationship is scarce and diffuse. Nevertheless, this research suggests that some forms of sponsorship benefit small business owners (e.g., Flynn, 1993).

Sponsorship of small business owners, either in the form of apprenticing or mentoring, can theoretically provide many assets for small business owners. Foremost, it provides potential business owners with specific skills and knowledge necessary for operating businesses within their industry. Secondly, sponsorships can assist new owners with access to resources and organizational relationships that promote performance and buffer them from environmental threats (Flynn, 1993). Third, an owner mentored by a respected owner is likely to see transference of that reputation and thereby attain more immediate legitimacy. Fourth, owners gain an understanding of the institutional structure and dynamics affecting their markets. A final benefit from mentoring is that owners receive anticipatory socialization leading to internalization of appropriate behavior and identity associated with their business. In sum, sponsorship provides small business owners with increased vocational and social benefits that enhances access to resources (e.g., capitalization) that should help improve business performance.

Methodology

Population

To examine the sponsorship-performance relationship among small business owners, we chose the custom bicycle manufacturing industry for both conceptual and methodological purposes. Conceptually, this is a labor intensive, "make-to-order" industry with "craft shops" using "craft technologies" (see Daft and Macintosh, 1978; Perrow, 1967). This industry is comprised of micro-businesses that are typically "one man shows" or having a few "assistants" (Kessler, 1996). It has traditionally occupied a small specialized niche in the bicycle market by providing customers with an alternative to the limited selection produced by mass-production bicycle companies. This business requires owners to work closely with customers (usually professional racers or serious cycling enthusiasts) to design, engineer, and manufacture a bicycle frame conforming to the cyclist’s anatomical composition and riding preferences. While these bicycle frames may appear similar, they are distinguishable.

Studying this single industry is consistent with Cochran’s (1991) ideas on the usefulness of studying business subgroups and it has specific methodological advantages for this study. Not only is this industry comprised of micro-businesses but previous research shows that they share important operational and social characteristics (Kessler, 1996) allowing us to control significant variables. These commonalties include: 1) using similar traditional materials such as steel composites; 2) using similar traditional processes and methods for constructing frames; 3) having similar capital requirements; and 5) sharing similar market conditions; and 6) is comprised of men. Hence, we can apply a quasi-experimental design to control extraneous variables while examining the relationship between sponsorship and performance.

Sample

No complete sampling frame of this industry was available for this study. We compiled one from directories, articles and advertisements of custom-bicycle frame manufactures posted in three cycling periodicals (Bicycling, Bicyclist, and Velo News) during the years 1994 through 1997. During that period, 46 different custom frame manufacturers appeared and all were used in our sample.

Variables

A survey was used to measure variables for this study. Sponsorship was measured by asking respondents two questions. First, if they had learned how to build frames from an established frame builder or had learned this through other methods. Second, if a respondent had apprenticed, how long he had apprenticed. For verification purposes, also asked was with whom the frame-builder apprenticed. There were several questions about financial performance: 1. the previous year’s sales revenue; 2. consistent with Dodge and Robbins (1992) life cycle theory, the number of years the in business; and, 3. a relative measure by asking owners if they had sufficient profit to support their lifestyles without needing additional employment.

Given the importance of human capital variables, we requested information about owners’ prior formal education by asking if they had attended college and whether they had graduated college. We asked owners about prior work experience by asking about years of management experience, and whether they had parents who owned a business.

Self-perception was measured by using a forced choice question based on Smith’s (1967) concepts of the artisan and opportunistic entrepreneur types. The artisan type has characteristics most aligned with craftsmen while opportunistic entrepreneurs are more commercially oriented. Respondents were given descriptions of each type and asked which type best represented their attitude toward their business. They could only choose one type.

Self-satisfaction was also measured by forced-choice technique. Respondents were asked if they felt either generally satisfied with operating their business or if they felt generally unsatisfied with operating their business. The level of measurement for all variables was either naturally continuous or coded variables as dummy variables measuring the presence of attributes.

Findings

Out of 46 mailed surveys, 26 responded for a response rate of 57 percent, which exceeds an acceptable level for business research (Alreck and Settle, 1986). However, the small N and number of variables can potentially reduce the amount of variation and hence, limit statistical computations (see Sekaran, 1992).

Descriptive Results

Table 1 one presents a descriptive summary of the respondents. Beginning with our independent variable, sponsorship, only 31 percent (N=8) indicate that they apprenticed with reputable frame builders prior to beginning their own frame-building business. Thirty five percent (N=9) had no frame building experience prior to starting their own business. Due to the type of labor-intensive technology used, the history and tradition of this industry, this is a surprising and unexpected finding.

Examination of human capital variables indicates that this is a highly educated group with over 80.8 percent attending college and 46 percent of them graduating. We find 46.2 percent (N=12) had prior management experience but that their average experience is only 2.5 years. The data suggests that most respondents had approximately three and half years of prior frame building experience and over 38 percent have parents who owned their own business.

Among the performance variables, 77 percent of the respondents indicated that they generated enough profit to support their lifestyles. This, however, is a relative measure depending on how one defines lifestyle. The two objective measures, sales revenue and number of years in business, indicate that these businesses averaged over two hundred thousand dollars in 1996 (the median and mode are substantially lower as the average is skewed by two outliers) and had operated an average of 13. 5 years evenly distributed over a range of one to 27 years.

Respondents who answered the self-perception question are evenly split between viewing themselves as craftsmen (N=8) or viewing themselves as opportunists (N=6). Interestingly, twelve respondents did not respond to this forced choice question. Finally, the data shows that the majority of respondents (65 percent) feel generally satisfied with their business.

Bivariate Analysis

The correlation coefficients presented Table 2 indicate that being mentored by a reputable framebuilder does not appear to be statistically related to objective measures of performance (revenue and longevity) and has a significant, inverse association with

our relative performance variable. This suggests that financial success is not contingent upon apprenticing with reputable framebuilders.

Among the traditional human capital variables, only one variable appears to be associated with any of the performance variables. Being profitable is significantly related to having parents who operated their own business. One interesting finding is that the number of years in business is inversely related to attending college, suggesting that those who attended college are less likely to stay in this business as long as those not attending college.

Table 1. Descriptive Statistics of Key Variables

    • p<.01 **p<.001

An analysis of the significant statistical associations between self-perception and other variables shows that it is inversely related to parents owning their own business (-.58) and having prior management experience (-.49). While not significant, self-perception is inversely related to our two objective measures of performance (revenue and longevity). The data suggest that self-perception has a high significant positive association with having apprenticed with a reputable framebuilder. Other than having a significant association with prior framebuilding experience, satisfaction is statistically unassociated with the other variables. This is probably due to the lack of variation among a small N and a homogeneous response.

Discussion

Based on business and organizational literature, we suggested that small business owners who were sponsored would have (competitive) advantages leading to the development of an institutionally appropriate self-perception and have better financial performance. Our findings generally run counter to this reasoning. We find little positive statistical relationship between apprenticing with reputable framebuilders and performance variables. In fact, we find that a relatively low percent of respondents had apprenticed with established frame builders. Our finding also indicate that many respondents’ human capital variables (prior management experiences, education, and prior framebuilding experience) had little statistical relationships with the performance variables.

The only contention supported by the data is that self-perception is related to sponsorship. The bivariate analysis shows that those who apprenticed with reputable frame builders were more likely to develop self-perceptions as craftsmen rather than commercial opportunists. Those with management experience or having parents owning businesses were more likely to view themselves as opportunists. This supports the idea that the socialization component of sponsorship influences how individuals perceive themselves.

To explain why these results are contrary to what was expected we can use previously cited literature to provide a couple of plausible explanations for our findings. First, it is clear that parental influence on self-perception is significant and can influence business performance. This suggests that we shouldn’t necessarily refute our argument about sponsorship’s affects on performance. Rather, we apparently underestimated parents’ influence and overestimated influence of extra-familial sponsors. Owners develop particular self-perception through observing parents who own businesses and this, in turn, seems to influence business performance. Hence, our explanation needs further elaboration.

The second explanation utilizes the concept of organizational inertia found in the population ecology literature (see Carroll and Freeman, 1989; Carroll and Hannan, 1994). To begin, our data suggests that learning about frame building operations is accomplished through means other than apprenticing. Individuals can take courses, read how-to manuals and get information off the Internet to learn bicycle frame construction. All of these teach current and traditional knowledge and skills for building frames and take noticeably less time than apprenticing for a frame-builder. Hence, entry into this business is now easier. However, for this to be a plausible explanation, it is necessary that major manufacturers and suppliers (significant institutional players) make their bicycle frame tubing more available. This is something they had not previously done for liability and reputation reasons.

In addition to alternative learning, technological advances in large-batch bicycle manufacturing has lessened the quality differential and prestige of custom frames. Advances in computer-assisted design and numerically controlled manufacturing allow large-batch bicycle manufacturers greater flexibility for producing a greater variety of bicycles. They can now produce frames that better fit many cyclists’ anatomical and riding characteristics, are lower in price and have equivalent quality in materials and construction. Moreover, many mass bicycle producers now sell only frames to retailers who add bicycle components (i.e., drive train, wheels, saddle, etc.) according to their customers’ preferences. Technological advances may make custom frames seem excessively expensive thereby tarnishing its legitimacy as a viable alternative to mass-produced bicycle frames.

This explanation is consistent with the concept of organizational inertia. While they may view themselves as craftsmen, conformity to traditional craft methods of producing custom bicycle frames and conducting business may be disadvantageous for custom frame builders. Adherence to traditional processes and practices that had previously legitimated an owner’s business in this niche may now prevent owners from adapting to the technological changes and customer orientation, (i.e., such as pricing or convenience) that threatened their particular market niche.

In conclusion, this paper raises several questions that requires further research using larger cross-sectional data if we are to draw concrete conclusions about the influence of sponsorship forms on self-perception and small business performance. Yet, the findings here warrant that such research would be insightful to our understanding of organizational performance.

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