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  • Subject area(s): Marketing
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  • Published on: 14th September 2019
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Recent changes in the economies of developed countries, including the decline of manufacturing and the increase of service sector knowledge-based firms, has resulted in the rapid growth of the number of small businesses. Small businesses can be defined as firms that have less than 49 employees. At the start of 2017 they accounted for 99.3% of all businesses in the private sector and contributed to 60% of all private sector employment in the UK (FSB, 2017). It is therefore clear that small businesses play a critical role in the economies of developed countries. It is mostly agreed that small firms are characterised by taking an ‘informal' approach to HR policies including recruitment, training and discipline and, as a result, many commentators claim that this is associated with ‘bleakness'. However, it is also important to consider the context in which a small business operates and to understand that, while formal HRM policies work in large firms, this ‘one-size-fits-all' approach may not necessarily be the case for a small business. Additionally, there are a wide variety of small business types including entrepreneurial and high growth firms. This means that for some, informality may be beneficial and leads to the view that ‘small is beautiful'. In many cases, informality in small firms can be seen to increase flexibility and also encourage harmonious and fulfilling working environments benefiting both the employer and employee.  

It is widely agreed that small businesses take an informal and ‘ad hoc' approach to their HR policies (Mayson & Barrett, 2006).  Marlow, Taylor & Thompson (2009) define informality as a process of social negotiation rather than a written rule-based system. For example, in research conducted by Cassell et al (2002) it was found that 64% of all the firms they had studied had no HR policies at all. This, coupled with ‘resource poverty' and the ‘liability of newness' mean that many take the stance that small businesses are characterised by being a ‘bleak house'. “Working in a small business can be a health hazard for an employee as the firms are dictatorially run and often in poor working conditions” (Kotey & Sheridan, 2004, pg. 474). This view was originally highlighted by Rannie (1989) as cited in Marlow & Pattern (2002, pg. 536), who stated “The dependent relationship between smaller firms and their corporate customers ensures that larger firms can set down parameters of price, quality and delivery based upon their final product market”. As a result, he argues that small firms are therefore likely to be highly autocratic because large sub-contracting firms are in control and squeezing their margins. In small clothing firms in China, it was found that as a result of this unequal power relationship and large firm control, “workers lack any formal employment protection” (Li & Edwards, 2008, pg. 296). Employees in this type of dependent small firm have a low ability to resist any employment demands from their employer. In return, the employer has a low dependency on their employees resulting in working conditions that Goss (1991), as cited in Kinnie et al (1999) described as ‘sweating'.  These employees are unlikely to have any meaningful rights and little if any union representation which means that there is no ‘collective' element to the workforce and they therefore cannot strike for better employment conditions. As a result of this under representation, this means that in many cases employment laws and regulations are not always followed as “many firms paying below the minimum wage can be found in this sector.” (Wilkinson, 1999, pg. 208).

Informal management approaches to recruitment, training and discipline can also contribute to the ‘bleak house' argument. Methods such as word-of-mouth are used as recruitment tools in small firms. Cassell et al (2002) argue that the informal approach often means that small businesses are not engaging in strategic thinking and, whilst they might recruit people that ‘fit in', this might not necessarily mean they're recruiting people who are technically best for the job. The Resource-Based-View of the firm suggests that HRM should be used as a strategic way of gaining competitive advantage. Therefore, in the absence of knowledge about this strategic approach small businesses are likely to just opt for short–term informal fixes to their HR problems. This short-termism can also be seen in many small firms' approach to discipline “such disregard to formality has led to high tribunal cases of unfair dismissal” (Marlow & Pattern, 2002, pg. 527). The unique close relationship between the owner and the employees in small firms often means that business owners are reluctant to assert more formal control over their employees as such practices reveal the true relationship between the owner and employees (Marlow & Pattern, 2002). This, coupled with lack of knowledge on employment laws means that owners take a relaxed approach to disciplinary issues and often just have a “friendly word” with employees (Marlow & Pattern, 2002 pg.536) if a problem was to occur. Furthermore, access to training in small firms is also informal, with little or no access to formal training and development programmes. It has been described as “on-the-job, with little or no provision for management development.” (Kotey & Sheridan, 2004, pg.475). 41% of respondents in research by Marlow & Pattern (2002), said they would prefer to work in a large business because of better training opportunities. Additionally, 68% said they would prefer to work in a large firm because job security and the terms and conditions of employment would be enhanced, for example sick pay and maternity pay.

Ultimately however, the ‘bleak house' argument fails to recognise that there are many different types of small firms, not all of which are dependent on business from larger organisations. Many small businesses are entrepreneurial, innovative and strive for fast growth; the “SME sector is heterogeneous” (Cassell et al, 2002, pg. 674).  Locke el al (1999) found that there was a large difference in the quality and availability of education, training and management expertise between high growth small firms and low growth small firms. There is also a common assumption “that large firms are the models that small firms should emulate” (Nadin & Cassell, 2007, pg. 420) which has led to the handing down of large firm HR policies and advice to smaller firms. However, a ‘one-size-fits-all' approach to HRM may not always be appropriate and the context in which the small firm operates should also be taken into consideration. The lack of resources or existence of ‘Resource Poverty' requires a different management approach and this “distinguishes them from their larger counterparts” (Welsh & White, 1981, as cited in Cassell et al, 2002). Therefore, although formal policies are beneficial for large firms, this may not be the case for smaller high growth entrepreneurial firms. Adopting an informal approach means that small firms are able to be flexible and adapt to their ever changing environment leading many to agree that small is beautiful.

Often, a more informal implementation of HRM policies in an innovative small business can be beneficial. “For new small firm owners, the focus of activities is likely to be on getting the business up and running, dealing with production, marketing, sales and cash flow and, as a result, HRM can be seen as a less important consideration.” (Mason & Barrett, 2006, pg.451). Additionally, the lack of formal employment contracts in small firms gives way for the development of a strong physiological contract. This can be defined as “the perceptions of both parties to the employment relationship - organization and individual - of the reciprocal promises and obligations implied in that relationship” (Guest & Conway, 2000, pg.22). Having a strong physiological contract results in increased flexibility because employees are not bound to formal written contracts. For example, loosely defined informal job descriptions can benefit both the employer, who will have a more flexible workforce, and employees, who are exposed to a variety of work, creating good conditions in a high growth context.

The physiological contract also means that there is a more meaningful relationship between the owner-manager and the employees and this strong relationship results in more commitment to the cause, “Small firms facilitate open communication and that the ‘family atmosphere' of the small firm builds high trust.” (Wilkinson, 1999 pg. 210). In many entrepreneurial high growth firms, the owner contributes an equal amount to production by working as one of the team by “minimising hierarchy and status, owners develop a close social and spatial working relationship with their employees…everyone is aware of their contribution and that this is critical to the fate of the firm whether it flounders or prospers.” (Marlow & Patton, 2002 pg. 527). This relationship means that, while it is true small firms are often criticised for recruiting informally, it can also be beneficial. Recruiting people with the correct ‘fit' is often crucial to the success of small businesses because of the unique working relationships. “If staff did not fit in socially, they would leave” (Nadin & Cassell, 2007, pg.429). Consequently, informality can be a good thing for both the employees and the employer in encouraging a harmonious working environment.

The physiological contract and consequently the close relationships in entrepreneurial firms can also benefit employees because they are able to individually negotiate their terms of employment leading to personalised working relationships and contributing to overall job satisfaction (Barrett et al, 2009). Barrett et al (2009), argue that this is the ‘Paradox of Happy Workers' where the close proximity of management caused by informality in small firms means that employees have fairer perceptions of organisational justice. For example, there is a higher amount of information sharing between management and employees which they call ‘interactional justice'.  Furthermore, Barrett et al, (2009) argue that in small entrepreneurial firm, employees have higher amounts of ‘job embeddedness' because of the informal nature of the business and the strong relationships within it; employees feel more committed and dedicated not just to the small firm itself but also the “community in which it operates” (Barrett et al, 2009, pg. 6).

More recently, innovative small firms have begun to recognise the value of HRM, although they continue to take a more informal approach to fit with their needs. “Small businesses now recognise the potential for HRM to add value, even though they do not follow the model of strategic HRM followed by the ‘design school'” (Nadin & Cassell, 2007, pg. 421). These small businesses who aim to grow often take a pix & mix contingency approach, picking the HR policies that they think are appropriate at that time after assessing the current business climate. A flexible and bespoke approach where owners are able to pick and choose their HRM policies retains their informal nature whilst at the same time giving them the opportunity to stay flexible and keep adapting to the fluctuating external environment. Castell et al (2002) characterises this as having an ‘emergent strategy'.

In conclusion, whist it is true that employment in dependent small businesses can be associated with ‘bleakness', this cannot be said for all small firms. There are many types of small firms with different aims and objectives that affect the employment relationship in varying ways. The weak negotiating power of employees and the dispensable nature of their labour in dependent small businesses is therefore not applicable in every case. In entrepreneurial small firms it is important to retain informal practices to encourage flexibility and harmonious working environments to support the pace of business growth. Formal HRM policies in this context would not promote the flexibility that small firms need and so it shouldn't be assumed that a large firm HR policy can naturally translate for the small business. Consequently, informality can have advantages for both owner-managers and employees. In some instances, therefore, small can be beautiful.

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