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Success Criteria of Small Business

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Success Criteria of Small Business Owners in the Netherlands

2 Master Thesis Business Administration – Small Business & Entrepreneurship

Success Criteria of Small Business

Owners in the Netherlands;

The use and importance of financial versus non-financial success criteria

By: Tim Maatman Student number: 1717588

December 1th, 2011

University of Groningen, the Netherlands First Supervisor:Dr. M.J. Brand Second Supervisor: Dr. ir. H. Zhou

Abstract

Much research provides insight in the criteria and characteristics that make entrepreneurs successful. However, the personal view of the business owner towards success is mostly ignored. Therefore, this study focuses on the criteria that business owners themselves rank as important to judge business success. Central in this research are the criteria used to measure business success by small business owners and the importance of different success criteria. Seven criteria were defined and tested in a quantitative research among 275 small business owners. Findings indicate that financial and non-financial criteria are used to measure success but that non-financial are more important for small business owners.

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3 Acknowledgements

I would like to thank some special people who have been involved in this process, in particular:

My supervisor Dr. M. J. Brand for her, constantly provided, valuable feedback and assistance.

Dr. E. A. Walker for cooperating with this thesis by sending her PhD research. Many Dutch small business owners that participated in the quantitative

research. Without them, this thesis would not be possible.

My fellow master students of Small Business & Entrepreneurship for their encouragement and support.

And last but not lease I would like to use this opportunity to thank my beloved family who provided me great support in the last four years and provided me useful advice and ideas for my thesis.

I hope you will enjoy reading my thesis.

Tim Maatman

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1. Introduction

6

2. Theory

9

2.1 Small business owner 2.2 Success criteria

- Financial success criteria - Non-financial criteria of success

2.3 Factors affecting the use and importance of success constructs

- Gender - Age - Education - Industry - Size

3. Method

18

3.1 Dependent variable

- Financial success criteria - Non-financial criteria of success

3.2 Success constructs 3.3 Independent variables 3.4 Questionnaire development 3.5 Procedure 3.6 Representativity

4. Findings

25

4.1 Use and importance of success criteria

- Use of success criteria - Importance of success criteria

- Success constructs; use and importance combined

4.2 Statistical tests

- Correlation - ANNOVA - Regression

5. Analysis and Discussion

31

5.1 Descriptives

- Use and importance of success criteria

5.2 Personal and organizational characteristics influencing success constructs

- Organizational characteristics - Necessity of income

5.3 Comparison with Walker and Brown

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6. Conclusion

36

- Conclusion

- Limitations and further research - Implications

7. References

39 Appendixes

Appendix A: Concept-Question-Literature 47

Appendix B: Illustrated representation of formative versus normative constructs 51

Appendix C: Final Questionnaire 52

Appendix D: Outcomes Pearson’s Correlation Test 57

List of Figures

Figure 1. Growth aspirations of young enterprises 12

Figure 2. Conceptual Model 17

List of Tables

Table 1. Number of businesses in the Netherlands 10

Table 2. Factors affecting the perception of success from the literature 14

Table 3. Financial success criteria 18

Table 4. Non-financial success criteria 19

Table 5. Reliability Statistics Overview 20

Table 6. Independent variables defined 21

Table 7. Early versus Late response 24

Table 8. Criteria used to measure success (top four) 25

Table 9. Importance of success criteria (top eight) 26

Table 10. Use and Importance of success criteria 26

Table 11. Significant outcomes of the Correlation tests 28

Table 12. Significant outcomes of the ANOVA tests 28

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How do we measure success? Financial and non-financial criteria have their advantages and disadvantages in using them as a criteria to measure business success. It is argued that the use of one single criterion for measuring small business success is not appropriate. Researches state that a mixture of financial and non-financial criteria would be the best way to measure small business success (Ahmad and Seet, 2009; Murphy, Trailer and Hill, 1996; Song, Podoynitsyna, van der Bij and Halman, 2008; Walker and Brown, 2004; Westhead, Wright and Ucbasaran, 2001). In order to see which criteria would fit the best in this mixture, more research is needed towards the perception of success among small business owners and the way they measure business success in their companies (Ahmad and Seet, 2009).

Determining success or failure of a small business is quite a complex and problematic issue, which is also supported by Jenning and Beaver (1997) who state that “…..the attribution of success and/or failure to small firms is complex, dynamic and problematic”. In the literature, success is mostly measured in terms of financial criteria such as profit, market share and number of employees. These criteria are used because of their easiness to measure and are used by banks and governments to value companies performances (Duchesneau and William, 1990; Murphy et al., 1996; Richard, 2000; Santos-Requejo and González-Benito, 2000).

It is likely that businesses in the first years of their existence do not make profits or significant growth in the number of employees (McGee, Dowling and Megginson, 1995; Bosman, van Praag, Thurik and de Wit, 2004). Besides, business owners can have a different perception of success. Financial success does not have to mean that the business owner thinks that he/she is successful and financial success could not even be a primary goal for the small business owner. Therefore, small business owners can measure the success of their business through other, non-financial, criteria.

Although much research exists towards the motivation and goals of business owners, little research is dedicated to the actual criteria that small business owners use themselves to measure success of their company. Majority of research on small business owners investigates the motivation and goals for starting the business, but does not investigate the goals and objectives when having the business. Research on success criteria are focused on investigating the criteria that a company must have in order to be financially successful and do not take the perception of the small business owner into account. Therefore, it remains unclear to what extent financial criteria reflect the success criteria that business owners indeed apply to determine whether or not they are successful (Gorgievski, Ascalon and Stephan, 2011). It is already stated by Watson (2003) that the perception of success among business owners is under researched. In recent years, only a few authors tried to investigate the success criteria that are used by

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small business owners in order to measure success of their business. In spite of the fact that the success of small businesses has been a widely studied topic, no consensus on what is understood by the success of a firm can be found in the literature (Pérez and Canino, 2009).

One of the articles in the scarce literature that did investigate the perception of success among small business owners is the article of Walker and Brown (2004). They did a study among small business owners in Australia and are one of the first who empirically test the perception of success among small business owners. They concluded that both financial and non-financial criteria are important to small business owners and that non-financial criteria are relatively more important to small business owners to measure the success of their business. Unfortunately, the findings of Walker and Brown (2004) are limited to a single industry (the property and business services sector). Besides, showing the importance of financial and non-financial success criteria in Australia does not have to mean that these criteria are applicable for small business owners in the Netherlands and the rest of the world. Due to cultural, economic and regulatory differences between countries, we cannot generalize between success criteria used in Australia and in the rest of the world (Ahmad and Seet, 2009; Yusuf, 1995). More research is needed in order to get a clear picture of the use of success criteria among small business owners.

Another recent study among 150 Dutch small business owners investigates the relationship between a business owners understanding of success and their personal values. In this study, business owners ranked 10 success criteria that they use to measure business success. Personal satisfaction, profitability and satisfied stakeholders are ranked highest (Gorgievski et al., 2011). Although this study showed that a mixture of financial and non-financial criteria are used by small business owners, they do not distinguish between criteria that measure personal satisfaction (e.g. flexibility and autonomy). Besides, the study of Gorgievski et al. (2011), uses only a single question to measure the success criteria of small business owner, which can decrease the validity of this research. Another limitation of the study of Gorgievski et al. (2011), is that it is published recently, but the data was already collected in 2003. This means that the findings could be outdated, especially if we take the current financial crisis (which started in 2007) into account which could have an influence on the perception of success among small business owners (Hartog, Hessels, van Stel and Wennekers, 2011; Latham, 2009).

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euro1 (!) is spent to stimulate growth and innovation of small and medium sized enterprises (SME) in the Netherlands (Tweede Kamer, 2010). High unemployment rates are not good for the economy and social status of a country and therefore much money is spent to stimulating growth in the SME sector. Small businesses are a major part of the economy and policies for these businesses represent a way to encourage the growth of a countries economy. Since small businesses can contribute much to job creation, policies towards the SME sector become extremely important (Carter and Jones-Evans, 2006). However, if a group of small business owners think that other criteria are more important than growth and financial criteria, policy makers should take this serious. Recent research of the EIM (National Research Center for entrepreneurship) shows that the Netherlands is the most entrepreneurial country in the European Union. 7,2% of all people between the age of 18 and 64 are starting a company or active as an entrepreneur. With this percentage, the Netherlands is ranked first in the EU-ranking and fifth in the worldwide ranking of the Global Entrepreneurship Monitor (Hartog et al., 2011). An interesting finding is that the growth expectations of small business owners in the Netherlands are modest (Hartog et al., 2011). Showing high popularity towards entrepreneurial activity (starting and having a business) on the one hand and modest growth expectations on the other hand makes research towards business owners success factors an interesting topic.

This paper explores therefore the following questions:

1. What are the success criteria used by Dutch small business owners in order to measure business success?

2. How important are these different success criteria for Dutch small business owners?

3. Do personal and organizational characteristics influence the use and importance of success criteria by Dutch small business owners?

As stated in the questions, we make a distinction between the use of success criteria (question 1) on the one hand and the importance of success criteria (question 2) on the other hand. We therefore assume that the use of a success criterion differ from the importance of the same criterion. For the third research questions, the use and importance are taken together into new success constructs that represent the different success criteria. The answers to these questions will lead to a more clear understanding of the use and importance of success criteria among small business owners. A more clear understanding is necessary for policy makers in order to make those policies more relevant for small businesses. This research will also contribute to the field of scientific research that deals with success and performance measurements. This will lead to a comprehensive view of the importance and use of success criteria by small business owners.

1

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This part reviews the main literature regarding success criteria of small businesses owners. First, the small business owner will be discussed in order to understand the nature and the special characteristics of a small business owner and his/her business. Second, the financial and non-financial success criteria that are used to measure business success will be discussed and finally, factors that influence the use and importance of small business owners success criteria are discussed. This section will end with a conceptual model which explains the relations in this research.

2.1 Small business owner

As it is known from the small business literature, the owners of small and medium sized businesses have a special role compared to owners of large businesses. Because small businesses do not have many employees, not much hierarchical layers are present. This means that the small business owner has a multiple role in the business e.g. in coordinating his/her employees and in setting the strategy for the company. Carter and Jones-Evans (2006) compare the small business owner with a Jazz band:

“In some ways, the modern business owner is like the leader of a jazz band. She decides on the music to be played, gathers around her the musicians to plan it and then allows them to improvise to create the required sounds.”

We can conclude that the small business owner plays a major role in the company. Gibb and Davies (1990) state that the business owner is seen as the key figure to development of the business. The personal goals and characteristics of a business owner have a major impact on the orientation and performance of the business and the organizational culture typically reflects the personality traits and aspirations of the business owner (Carter et al., 2006). Whilst over time a firm’s historical development path will affect this culture, the owner is likely to have a predominant influence on the business.

This major impact of the owner is also shown in the strategy of a business. Whether a firm will start to grow or not depends mainly on the business owner’s attitude towards growth (Bjerke and Hultman, 2003). If the business owner considers growth as not important, the company will not grow. This also applies to other objectives, e.g. if the business owner considers employing people as important, the business will employ a lot of people. The same situation counts for success criteria; the business owner decides what criteria are important to measure the success of the business. The perception of the business owner plays an important role in this. It is said that a business must be financially viable in order to survive. However, this level must be set personally by the owner and cannot be determined by an arbitrary figure (Marlow and Strange, 1994).

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Table 1.

Number of businesses in the Netherlands

Size Definition

(European Commission, 2003)

Number of businesses in the Netherlands

(CBS, 2010)

Micro <10 employees and annual

turnover not exceed €2mln 791.630

Small 11-50 employees and annual

turnover not exceed €10mln 57.340

Medium 51-250 employees and annual turnover not exceed €50mln

14.870* Large More than 250 employees or

exceed annual turnover of €50mln

* The CBS does not distinguish between medium or large businesses in the Netherlands

For these reasons, we agree that the perception of success of the small business owner determines whether the business is successful or not. We assume that a business is successful when the business owner finds the company successful according to his/her success criteria. The way in which success is defined and measured depends on the attitude of the small business owner (Jenning et al., 1997). Business owners are not a homogeneous group, some are interested in making as much money as possible, others only want to create a business large enough to support them and their families and some aspirations may decline once they have achieved what they consider to be a satisfactory level of income from their enterprise (Carter et al., 2006). A small business owner is defined as the person that has the most influence on the business and gets his primary source of income from the company (Carland, Hoy, Boulton and Carland, 1984).

In order to properly understand and measure the success criteria used by small business owners, we need to define the size of the business in order to categorize it as a small sized business. For this definition, the EU definition of small and medium size enterprise will be used. This definition states that micro and small businesses contains not more than 50 employees and do not exceed a turnover of 10 million euro (European Commission, 2003). An overview of the number of businesses in the Netherlands is given in Table 1. which is based on CBS data (2010). This data shows that 98% of the businesses are labeled as micro and small sized businesses.

2.2 Success criteria

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Criteria to measure business success can be linked to the motivation to start a business. The literature distinguishes between push or pull motivations to start a business. A pull motivation to start a business is associated with an internal, positive desire of a person to start a business. The opposite is a push motivation in which the business owner is pushed into business and has a strong desire to go into business based on negative, external reasons. A couple of pull factors mentioned in the literature are: personal freedom, independence, autonomy, personal satisfaction, flexibility and job satisfaction (Buttner and Moore, 1997; Ohran, 2004). Push factors are for example: unemployment, need for money, limited job opportunities, job frustration and unsafe working conditions (Buttner and Moore, 1997). The motivation to start a business can influence the way in which success is measured when having a company. We see push and pull factors as the underlying reason to start a business and because this study is exploratory towards success criteria, push and pull factors will only been taken into account in defining different success factors. The focus will therefore be on the criteria that small business owners use to measure success of their company and not on the criteria for what they started the business.

Financial success criteria

In the literature, most attention is given to financial criteria that measure business success. It is likely that these criteria are used because of the objectivity in measuring them. These criteria are for example: sales, number of employees, market share, turnover and return on investment. As the number of employees is not a real financial criteria, it is used in the bulk of literature as financial criterion (Duchesneau and William, 1990; Murphy et al., 1996; Richard, 2000; Santos-Requejo and González-Benito, 2000). These ‘hard’ measures can be used in a comparative way against existing data and as a benchmark with other data. The disadvantage of this data is that access to financial data is very difficult and the reliability is questionable (Rosseau and Shperling, 2003). Most small business owners are not required to make annual reports and when they do, they do not want to share this (Brush and Vanderwerf, 1992; Curran and Blackburn, 2001). When business owners are willing to share this data, and financial data is available, the reliability of these numbers can be questioned because of the ease in which companies can play with these numbers (Brush et al., 1992). Besides, the small business owner can change the information and only give the information that is positive in the eyes of the owner (Rosseau et al., 2003).

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expectations in the Netherlands are relatively low compared to other economies (Hartog et al., 2011).

Figure 1. Growth aspirations of young enterprises

Source: Global Entrepreneurship Monitor, 2010

One reason for keeping his business small is the personal preferences of the small business owner. It could be that making money and growing the business is not an initial goal for the small business owner when starting the company (Gray, 2002; Greenbank, 2001). Another reason for avoiding growth is the inability of the small business owner to achieve growth. In the literature it is mentioned that especially small businesses have a lot of difficulties in finding and attracting good employees that fit the organization (Hartog et al., 2011; Fourcade, 1985). When attracting employees is a problem, growth will not be achieved. For all these reasons, financial criteria could not be accurate or applicable to measure small business success.

Non-financial criteria of success

Non-financial criteria, used by small business owners, can be more appropriate to measure business success. Non-financial success criteria that are mentioned in earlier research include: autonomy, job satisfaction, career progress, pride, independence, flexibility and balancing work and family (Kuratko, Hornsby and Naffziger, 1997; Tuck and Bellamy, 2004; Walker and Brown, 2004). However, these criteria are subjective and personally defined by the small business owner and are hard to measure. Therefore, these criteria are hardly used to measure business success. It is also difficult to make comparisons between companies based on non-financial success criteria because they are defined by the perception of the small business owner. Non-financial criteria are personally determined and are influenced by personal characteristics.

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a clear understanding of small business success, we need to know how the small businesses owner measures business success him- or herself.

2.3 Factors affecting the use and importance of success constructs

If small business owners use financial and non-financial criteria to measure business success, there could be factors that influence the use and importance of these success criteria. In the literature, some possible factors are mentioned that could influence the use and importance of success criteria. Table 2. gives a clear overview of the factors found in literature with the frequency of usage. It is interesting to see that the majority of studies investigate personal factors as factors that could influence the use and importance of success criteria. This article will therefore investigate the three most mentioned personal factors which are: gender, age and education. Besides these three personal factors, this article also takes two organizational factors into account. Two factors that fit with this research are industry and size of the business. The following section will describe five factors in order to provide a clear understanding of the concepts and their relation with the success criteria of a small business owner.

Gender

This study will examine to what extent the gender of a small business owner influences the way success is measured. The difference in gender is easy to measure and therefore many studies can be found that investigate the relation between gender and success. For example Carter and Cannon (1992) argue that women business owners are quite different from males in the way they measure success. They state that women do not measure success according to financial criteria as men do, but use other criteria. A study by Stigter (1999) on the differences and similarities between male and female entrepreneurs in the Netherlands, showed that female entrepreneurs are less ambitious than men entrepreneurs. Other studies found that men place greater emphasis on economic and quantitative measures of success, while women preferences are more targeted on social values and qualitative criteria (Buttner et al., 1997; Unger and Crowford, 1992; Williams, 1987). On the other hand, other researchers did not find any differences between male and female entrepreneurs in the way they measure success (Catley and Mamilton, 1998; Fisher, 1992; Kalleberg and Leight, 1991).

Another study on the perception of success and the differences across gender and family status by Justo, Cruz, de Castro and Coduras (2006) states:

“Our results indicate a number of similarities between men and women entrepreneurs but also real interesting gender-based differences related to family status”………..”in particular, women entrepreneurs with dependent children place more emphasis on independence as a measure of success than other type of entrepreneurs.”

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Table 2.

Factors affecting the perception of success from the literature

Literature*: _Ajz en , 1 9 9 1 B ai s, 2 0 1 1 B ru in s, 2 0 0 0 B ru in s & S n el , 2 0 0 4 C ar te r & C an n o n , 1 9 9 2 C B S -Z Z P N ed er la n d , 2 0 1 0 G o rg ie v sk i, A sc al o n & S te p h an , 2 0 1 1 G re en & P ry d e, 1 9 8 9 H ar ad a, 2 0 0 2 H ar to g e t al ., 2 0 1 1 H es se ls , B o sm a& W en n ek er s, 2 0 0 5 H u ls h o f, 2 0 0 1 Ju st o , C ru z, C as tr o , C o d u ra s, 2 0 0 6 K al le rb er g & L ei ch t, 1 9 9 1 K el le y , B o sm a& A m o ró s, 2 0 1 0 K n o w le s, 2 0 0 8 M as u o , F o n g , Y an ag id a& C ab al , 2 0 0 1 R o w e, H ay n es & B en tl ey , 1 9 9 3 S h ab b ir a n d G re g o ri o , 1 9 9 6 S im p so n , T u ck & B el la m y , 2 0 0 4 S ti g te r, 1 9 9 9 S tu rg es , 1 9 9 9 S w ie rc ze k a n d H a, 2 0 0 3 U x em , 1 9 9 9 W al k er & B ro w n , 2 0 0 4 W at so n , H o g h ar th -S co tt & W il so n , 1 9 9 8 Y u so f, 2 0 1 1 Personal factors Age X X X X X X X X X Gender X X X X X X X X X X X X X Education X X X X X X X Personality X X X Experience X X Motivation to start X X Organizational factors Working place home/external X Industry X X X X Size of business X X Part-time/Full-time X Environmental factors

Support from family X Parental status X X X More jobs X Role models X Lifestyle X X Cultural attitude X

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Age

The article of Sturges (1999) gives an insight in the way business owners measure success in different age categories. This article explores the managers personal definition of career success in order to provide the basis for a conceptualization of what success means to individuals. Although this article focused on how managers define success and not business owners, the findings show that material or financial criteria for career success generally reduce in importance with age and are often replaced by an emphasis on influence and autonomy.

Another research by Snel and Bruins (2004) shows similar results. They investigated the motivations to start a business among different age categories in the Netherlands. They found that younger people are more focused on profit maximization than people at older age. Another thing they found was that older business owners want to keep their business small. On the other hand, younger business owners are more focused on growth which can be seen as primary goal and shows that they are more financially oriented than older business owners (Snel and Bruins, 2004).

From these two articles we can conclude that the age of the business owners could influence the way in which business owners measure success. Younger business owners are generally more ambitious and more focused on financial criteria than older business owners. The latter group is more focused on non-financial criteria such as job satisfaction and autonomy.

Education

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we agree that the motivation of starting a business relates with the criteria to measure success, we can conclude that education can influence the way business owners measure success.

Industry

The first organizational factor that could influence the way small business owners judge and use success criteria is industry. The industry in which the small business operates may be an important factor that affects the importance of some specific success factors that are used by small business owners. In the Netherlands, there are two major industry sectors; the service and the non-service sector (Bais, 2011). The non-service industry consists of the primary sector (agriculture) and the secondary sector (manufacturing). The service industry contains three sectors: the tertiary sector (services), the public sector (non-commercial services) and the business services sector (Bruins, 2000). The service industry is booming at this moment, the majority of business start-ups in the Netherlands are service companies (Bais, 2011; Gorgievski et al., 2011). Because companies in the service sector are delivering services as product, they are totally dependent on people. Therefore satisfied customers are very important in this sector. It is obvious that criteria such as customer satisfaction, customer relationship, high involvement of employees and customer growth are very important for business owners in this industry. In the retail and manufacturing industry, there is less contact with customers. Therefore other criteria such as innovation and product quality should be more important in this industry, which are all performance criteria to measure success (Simpson, Tuck & Bellamy, 2004). We add industry to our research to see whether the dependency on people is related with the use and importance of success criteria.

Size

The size of the business can also influence the use and importance of measuring success criteria among business owners. Business growth will automatically lead to hiring employees. Having employees implies a lot more obligations than running a business without employees. Examples of these obligations are expenses of employee wages, responsibility for your employees and increased risks. In some industries, it is common to have a business without employees. In the Netherlands, business owners without employees are called ZZP-ers (zelfstandige zonder personeel). More than 700.000 people are categorized as ZZP-er, which is 10% of the total labor force in the Netherlands (CBS-ZZP Nederland, 2010).

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between the size of a business and the use and importance of success criteria by small business owners.

This research will test the personal factor gender, age and education, as well as the organizational factors industry and size, towards different success criteria to examine relationships between two variables. On the one hand, personal and organizational factors are tested towards financial criteria to explore relationships. On the other hand, they are used to explore relationships to the use and importance of non-financial criteria to measure business success. The conceptual model in Figure 2. summarizes the components discussed earlier in this paper and gives an overview of the relations that are investigated in this research.

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A quantitative approach is taken to identify the use and importance of success criteria by small business owners in the Netherlands. The empirical study consists of a questionnaire that is sent by email to business owners in the Netherlands. The first part of the questionnaire measures the importance of different success criteria. The second and third part measure the use of success criteria by small business owners and the final part contains the demographic variables of this research. The questions were derived from the concepts, items and questions that are used in the articles of Walker and Brown (2004) and Gorgievski et al. (2011). Walker and Brown based their questions on tested items from earlier research on motivation and small business start-ups from the articles of Birley (1996); Birley and Westhead (1994); Gatewood et al. (1995); Shane et al. (1991) and Volery et al. (1997). Gorgievski et al. (2011) based their success criteria and the questions on a review of 346 papers from the management, business, entrepreneurship and psychological literature written in the past 10 years and from in-depth interviews with five business owners. A description of the variables and items that we used is given below.

3.1 Dependent variable:

The dependent variables are the criteria that are used by small business owners to measure success. As mentioned in the theory section, these success criteria can be divided in financial and non-financial criteria to measure success.

Financial success criteria. ‘Hard’ criteria that can be measured objectively in numbers, euro’s or percentages are labeled as financial success criteria. They have an economic nature or it is supposed that they have a strong connection with financial criteria (Ibrahim and Goodwin, 1986; Walker and Brown, 2004). The criteria that we took from the literature and for the use in this study are: Profit, Turnover, Return on investment, Number of employees and Growth in customer base. To avoid confusion with the word “financial” we use the term “performance” in order to describe these hard criteria. The explanation of these concepts can be found in Table 3. The questions concerning these concepts are explained in 3.3.

Table 3.

Performance success criteria defined

Variable: Definition:

Profit Turnover minus the expenses, before tax

Turnover Total amount of sales in €

Return on investment Revenue of the investment / the costs of the investment

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Number of employees Total amount of people working for the company measured in FTE and people employed.

Customer base Number of clients

Table 4.

Non-financial success criteria defined

Variable: Definition: Literature:

Autonomy To be your own boss, concerning work distribution

Volery, Doss and Mazzarol, 1997

Recognition/Pride The image of a business owner, determined by the society or the business owner himself

Volery, Doss and Mazzarol, 1997

Flexibility Having freedom in the things you do, concerning time distribution

Birley and Westhead, 1994

Social responsibility Goals related to further social and environmental welfare beyond the direct economic, technical, and legal interest of the firm

Gorgievski, Ascalon& Stephan, 2011

Personal satisfaction Personally oriented objectives of the business owner

Stakeholder satisfaction

The satisfaction of customers and employees

Non-financial success criteria are subjective and personally determined by the business owner and could be influenced by the personal preferences of the business owner (Green and Cohen, 1995; Parasuraman, Purohit, Godshalk and Beutell, 1996). In this paper we investigate the following non-financial criteria as were used in the research of Walker and Brown (2004) and Gorgievski et al. (2011): Autonomy, Recognition/Pride, Flexibility, Social responsibility, Personal satisfaction and Stakeholder satisfaction. The explanation of these concepts is given in Table 4., which also lists the literature concerning these concepts. The questions concerning these concepts are explained in section 3.4.

3.2 Success constructs

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constructs that we defined before in the literature section. The criteria on which these constructs are based can be found in Table 5.

As showed in the table, some constructs that we defined are formative. Formative constructs are built with formative (causal) indicators and involve the creation of an index rather than a scale (Bollen and Lennox 1991). Together, the indicators lead to one construct but this construct is measured through different items. Take for example “innovation”, this can be measured through the sum of the items: new products, new processes and new markets. If one of these three items increases, innovation would increase. Conversely, if innovation increases, this would not necessarily mean an increase in all three items. Normative constructs, on the other hand, are built with items that measure the same subject. An increase in a normative constructs means automatically an increase in all the items (Diamantopoulos and Winklhofer, 2001). An illustrated representation of the difference between formative and normative constructs is given in Appendix B.

In order to test the reliability of the constructs we used Cronbach’s alpha. Cronbach’s alpha identify whether different items measure the same construct. A Cronbach’s alpha of a formative construct should therefore be interpreted with some care because the (individual) items of a formative construct do not measure the entire construct, together they measure a construct. The outcomes of the Cronbach’s alpha test can be found in Table 5. An Cronbach’s alpha above 0,6 means that the compound factor is reliable (Hair, Black, Babin, Anderson, and Tatham, 2007). As can be found in the table, all Cronbach alpha’s are above the 0,7 which means that all the constructs are reliable.

Table 5.

Reliability Statistics

Variable Construct Criteria Labels Cronbach's Alpha

Autonomy Atotal A1,A2,A3,A4 Freedom, Own boss,

Independency 0,735

Recognition/Pride Rtotal R1,R2,R3,R4,R5 Pride, Respect, Good

reputation 0,783

Flexibility Ftotal F1,F2,F3,F4,F5

Flexible lifestyle, Time with family, Divide own time

0,792

Social

responsibility SRtotal SR1,SR2,SR3,SR4

Responsibility, Employ

people, Social benefit 0,762 Personal

satisfaction PStotal PS1,PS2,PS3,PS4 Reach personal goals 0,734 Stakeholder satisfaction SHtotal SH1,SH2,SH3,SH4 Customer satisfaction, Employee satisfaction 0,708* Performance aspects Ptotal P1,P2,P3,P4,P5,P6,P7

Profit, Making money, Growth, ROI,

Continuity, Innovation

0,776*

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3.3 Independent variables

The independent variables concern the personal factors of the business owner and the organizational factors of the business. As mentioned before, the personal factors include the age, gender and education of the small business owner and the organizational factors include industry and size of the company. The definitions, along with the different measurement classes are given in Table 6.

3.4 Questionnaire development

Based on the articles of Walker and Brown (2004) and Gorgievski et al. (2011), we built our own questionnaire. The concepts and question methods are copied from these two articles but the actual questions are translated and rewritten in Dutch to make it easier for the business owners to fill in the questionnaire. The first part of the questionnaire contains an introduction and questions about the number of employees and turnover. These questions were used to identify the right company and person relevant for the questionnaire. A message was showed when the respondent did not fit the target group research and the respondent was asked to deliver the questionnaire to another person in the company that fit the description.

The second part of the questionnaire consists of 16 statements to measure the

importance of different success criteria. They are measured on a 6 point Likert scale

with the anchors strongly disagree (1) and strongly agree (6). A 6 point Likert scale was chosen to avoid mid-point options and let the respondent make a choice between important and not important. We used 10 statements, developed by Walker and Brown (2004) to measure the importance of different success criteria. Four of these questions were rewritten because in the initial questionnaire, they were asked relatively compared to money, without a clear reason for doing so. Because these 10 statements do not cover

Table 6.

Independent variables defined

Variable: Definition: Groups:

Age The age of the business owner 1: 0-40 years 2: 41-60 years 3: > 60 years Gender The gender of the business

owner

1: Men 2: Women Education The highest obtained degree in

school of the business owner

1: Primary school + VMBO 2: HAVO, VWO and MBO 3: HBO and WO

Industry The industry in which the company operates.

1: Other industries 2: Service industry Size The size of the company,

measured through the amount of FTE (a) the number of employees (b), and turnover (c)

A: FTE

B: People Employed C1: € 0-500.000

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all the items that we want to measure, we expanded them with six statements from Birley and Westhead (1994), Gatewood, Shaver and Gartner (1995) and Gorgievski et al. (2011). These questions were asked in the same way as they were asked by Walker and Brown (2004) in order not to confuse the respondents.

The third and fourth part of the questionnaire are developed to measure the use of different success criteria. For the third part, we copied the question method of Walker and Brown (2004). Questions were asked in the form of: “I measure success of my company in/when …..”. Respondents were asked to score on a 6 point Likert scale with strongly disagree (1) and strongly agree (6). Again, a 6 point Likert scale is used to avoid mid-point answers. The third part consist of 19 statements based on the literature of Birley and Westhead (1994), Gatewood et al. (1995), Gorgievski et al. (2011) Kalleberg and Leicht (1991) and Walker and Brown (2004). The fourth part of the questionnaire is copied from Gorgievski et al. (2011) in which the respondents were asked to rank 10 factors that suit successful small business owners.

The final part of the questionnaire contains questions about the following demographic variables: age, gender, education, industry and size. An overview of the statements and questions from part 2-4 is given in a table in Appendix A. This table gives also an overview of the literature that is used to define these questions. Because Walker and Brown (2004) and Gorgievski et al. (2011) do not fully cover every concept that we want to measure, the questionnaire also includes other questions from existing research. These researches with the authors are also mentioned in this table. The final questionnaire that was sent to the small business owners can be found in Appendix C.

3.5 Procedure

The Dutch small business owners were identified through a commercial database Orbis, available from Bureau van Dijk. This international database contains addresses and information of 73.259.998 businesses from all over the world (Bureau van Dijk, 2011). In this database, all Dutch businesses that not exceed 50 employees were selected. Different legal business forms were taken including; One-person company (E), Partnership (M), Private limited liability company (BV) and Public limited liability company (NV). Because the questionnaire was sent through email, the businesses without email address were excluded from our selection and the email address of the highest executive in the company was selected by Orbis. The final database included 32.880 small businesses from the Netherlands. From this database, we derived a systematic sample frame of 3.288 small businesses from the original database. The systematic sample was drawn from every respondent ending with a “#1” to get a sample of 10% (e.g. 1, 11, 21, 31, 41 etc.) and the target response was set at 200 (with a minimum of 100) completed questionnaires to work with.

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in the company. If this was not the case, we asked the person to forward the email to the right person.

One week after the first email was sent we received 125 completed questionnaires and a second email was sent to the businesses that did not respond. Two weeks after this second email we reached the required number of respondents and decided to not send another email. In total, we received 275 filled in questionnaires which means a response rate of 8,4%. In order to get the most reliable data, we deleted the received questionnaires that missed one or more values in the questions directed towards the success criteria. This results in a workable dataset of 216 questionnaires to answer the research questions.

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3.6 Representativity

To test whether the answers are representative for the whole population we compared the answers of the early respondents against the late respondents. The dataset was split in half and tested with the independent sample t-test whether there were significant differences in the means of the two groups. The two groups consist of the respondents that respond early on the questionnaire versus the respondents that respond later on the questionnaire. Table 7. shows the outcomes of the t-tests. No significant difference was found in the answers dedicated to the success factors. Comparison of the demographic characteristics shows that in two of the seven criteria a significant difference exists; gender and age. Late respondents contains significant more female and older people than the early respondents. However, other tests (discussed in 5.2) show that gender does not influence the way business owners measure success of their company. This significant difference is therefore not important for the rest of the research.

Table 7.

Early versus Late response

Variable Response N M S. D. Variable Response N M S. D.

Autonomy Early 108 _5,10 _,68 Sector Early ₁₃₇ _3,53 _1,33

Late 108 4,99 ,65 Late 138 3,51 1,44

Recognition/

Pride Early 108 4,46 ,76 FTE Early 130 16,20 40,03

Late 108 4,56 ,66 Late 122 19,09 46,16

Flexibility Early 108 4,50 ,74 _employedPeople Early 114 20,32 48,01

Late 108 4,54 ,86 Late 114 16,45 23,27

Social

Responsibility Early 108 3,64 ,98 Turnover Early 137 3,23 1,82

Late 108 3,79 ,83 Late 138 3,49 1,84

Personal

Satisfaction Early 108 4,97 ,68 Gender** Early 107 1,07** ,32

Late 108 4,92 ,58 Late 107 1,17** ,38

Stake-holders Early 108 4,92 ,81 Age* Early 107 4,34* 1,18

Late 108 5,08 ,69 Late 107 4,45* ,88

Performance

aspects Early 108 4,37 ,67 Education Early 104 5,16 1,61

Late 108 4,51 ,57 Late 104 5,12 1,61

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This part of the paper will present the findings of the survey. First, the descriptives of the respondents are presented. Next, we will present the most frequently used and the most important success criteria used by the small business owners in our sample. Finally, using correlation, ANOVA and regression analysis, we investigate whether scores on these success criteria can be explained by personal and organizational characteristics.

4.1 Use and importance of success criteria

With 87% of the sample being male, the male entrepreneur is hugely the majority. The age of the business owners varies between: under 41 (15%), 41 till 60 (75%) and above 60 years (10%). The majority of respondents have a high education level and 55% of the respondents have a tertiary qualification. Most businesses belong to the service sector (74%), 21% to the manufacturing sector and 5% to the agricultural sector. Businesses with turnover up to €500.000 are represented for 44% against 26% with a turnover from €500.001 to €2.000.000 and 30% more than two million euro. The average number of employees is 18.

Use of success criteria

We asked the business owners about the criteria that they mostly use in order to measure the success of their company. Four criteria with the highest mean are given in Table 8. Out of the 17 statements, customer satisfaction is most frequently used. Good reputation and personal satisfaction ranked in second and third place respectively. The first financial criterion that is used to measure business success is profit and is ranked fourth.

Table 8.

Ranking of the use of different success criteria (top four)

Rank Success criteria N M* S. D.

1 Customer satisfaction 216 5,48 ,57

2 Reputation 216 5,43 ,56

3 Personal satisfaction 216 5,13 ,75

4 Profit 216 4,94 ,76

* Measured on a 6-point Likert scale

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Table 9.

Ranking of the importance of different success criteria (top eight)

Rank Success criteria N M* S. D.

1 Customer satisfaction 216 5,45 ,64 2 Personal satisfaction 216 5,26 ,76

3 Independence 216 5,21 ,81

4 Personal freedom 216 5,19 ,80

5 Being my own boss 216 5,13 ,92 6 Determine own time 216 4,82 ,91 7 Reach personal goals 216 4,77 1,04

8 Making money 216 4,72 ,86

Importance of success criteria

To investigate the importance of the success criteria we asked the business owners to rate 16 statements on the importance of the different success criteria. Table 9. shows the eight criteria that are the most important success criteria for small business owners. Customer satisfaction has again the highest mean with 5,45 and is therefore the most important success criterion. Personal satisfaction is also very important and takes the second place followed by three concepts of autonomy (independency, personal freedom and being my own boss) that are ranked respectively third, fourth and fifth. The first financial criterion (making money) is ranked eighth with a mean of 4,71.

Success constructs; use and importance combined

After putting the constructs together and testing the reliability of the constructs, we calculated the means of the combined constructs in order to investigate which criteria is the most important success criterion used by small business owners to measure success of their company. The outcomes in Table 10. show that autonomy is the success factor that is most important and mostly used to measure business success. Other non-financial success criteria follow from second till fifth place respectively: stakeholders, personal satisfaction, flexibility and recognition/pride. After these success criteria, performance or financial criteria become more important and are used to measure success (sixth place).

Table 10.

Ranking of the combined constructs

Rank Construct N M* S. D. 1 Autonomy 216 5,05 ,66 2 Stakeholders 216 4,99 ,75 3 Personal Satisfaction 216 4,96 ,62 4 Flexibility 216 4,54 ,79 5 Recognition/Pride 216 4,50 ,71 6 Performance aspect 216 4,45 ,62 7 Social Responsibility 216 3,71 ,91

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4.2 Statistical tests

With the seven constructs mentioned in Table 7. we conducted Correlation, ANOVA and Regression tests to investigate if personal and organizational characteristics influence these constructs. Personal factors that are included in this research are: Age, Gender and Education. Organizational factors are Industry and Size of the business (measured by turnover, FTE and people employed). First, the outcomes of the correlation test are briefly discussed and then followed by a more detailed explanation of the ANOVA tests. Finally, the outcomes of the regression tests are summarized.

Correlation

Correlation tests are widely used to analyze interval data from Likert or other scales (Göb, McCollin and Ramalhoto, 2007). It provides insight in the relationship between two variables and shows the strength of that relationship. In this research, Pearson’s correlation coefficient is used. This test can perfectly be used for describing relationships between two variables (Chen and Popovich, 2002). Pearson’s test should be used when variables are measured on interval or ratio scale and with a minimum sample size of 30 (Chen and Popovich, 2002). This research fit with the sample size but unfortunately, some variables are measured on a nominal or ordinal scale (e.g. gender). However, a correlation test can still be used in order to give a fist impression and estimation of the correlation between variables. These relationships will be analyzed in more detail in further analysis, suitable for the measurement level.

Correlation coefficients (r) range from -1 to 1 with positive values represent a positive relationship and negative values a negative relationship between two variables (Choi, Peters and Mueller, 2010). There is some discussion in the literature about the strength of the relationship. Some authors state that a correlation is substantial when the r value exceeds 0,3 or is below -0,3 (Hair et al., 2007). Parsad and Fulzele (2011) argue that a correlation is weak when r range from 0 to 0,3, modest when 0,3 < r < 0,7 and strong when r exceeds 0,7. This differs from Cohen (1988), who considers a correlation of 0,10 weak or small, a correlation of 0,30 moderate, and a correlation of 0,50 or higher asa strong or large correlation. These differences result from interpretation of researchers and differences in measurement levels. When Likert scales are used in questionnaires, correlations of 0,50 might be regarded as strong (Cohen, 1988). Cohen state that: “The terms small, medium, and large are relative, not only to each other, but to the area of behavioral science or even more particularly to the specific content and research method being employed in any given investigation (1988)”. The interpretation of the correlations strength is therefore arbitrary and based on the perception of the researcher. In this paper we will use the scales of strength defined by Cohen (1988) but take into account the perceptions of other researchers that correlation coefficients below 0,30 are not very substantial (Hair et al., 2007; Parsad and Fulzele, 2011).

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*. Correlation is significant at the 0.05 level (2-tailed).

**. Correlation is significant at the 0.01 level (2-tailed).

criteria are used. Therefore, in the rest of the research, we include the necessity of income in all tests and further investigate this relation.

ANOVA

For the nominal and ordinal scaled data, ANOVA tests were performed. These tests help to determine if the means of different groups are equal to each other. A P-value that not exceed 0,05 explains a significant difference in the means of two groups (Huizingh, 2010). The personal characteristics age, gender and education, along with the organizational characteristics industry and size (measured in turnover), were tested towards the seven success criteria in order to see whether personal or organizational characteristics influence the way in which success is measured. Only the ANOVA tests with significant outcomes are summarized in Table 12. This table shows that age and turnover do influence the importance of success and the way success is measured.

Table 12.

Significant outcomes of the ANOVA tests

Age M* S. D. P-value Performance 0-40 4,39 0,65 0,001 41-60 4,53 0,55 > 60 4,02 0,87 Total 4,46 0,62 Turnover M* S. D. P-value Flexibility €0-500.000 4,71 0,77 0,007 €500.001-2.000.000 4,48 0,73 > €2.000.000 4,31 0,81 Total 4,54 0,79 Social Responsible €0-500.000 3,34 0,93 0,000 €500.001-2.000.000 3,96 0,83 > €2.000.000 4,10 0,68 Total 3,71 0,91 Table 11.

Significant outcomes of the Correlation tests

FTE People Employed Necessity of Income

r-value r-value r-value

Autonomy -0,22** Autonomy -0,230** Autonomy 0,164* Flexibility -0,25** Recognition -0,166* Flexibility 0,181**

Social

Responsibility 0,43** Flexibility -0,274** Performance 0,150* Stakeholder 0,39** Social

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Turnover M* S. D. P-value Stakeholder €0-500.000 4,63 0,84 0,000 €500.001-2.000.000 5,25 0,56 > €2.000.000 5,33 0,44 Total 4,99 0,75 Performance €0-500.000 4,30 0,68 0,003 €500.001-2.000.000 4,61 0,54 > €2.000.000 4,56 0,53 Total 4,45 0,62

Regression

The final test that was conducted was the multiple regression test. This test identifies linear relationships between one dependent variable and one (or more) independent variable(s) with more reliability then a correlation test. In a regression test, there are no distortions from other variables because all variables are included and tested together (Hair et al., 2007). The R² value indicates the percentage of variance that the model explains and the beta explains the strength of the relation, ranging from -1 to 1 (Hair et al., 2007). There are two conditions that must be met to ensure that the regression test is valid. The first is the sample size that should exceed 30 (Cooper and Schindler, 2006) which is right in this research. Second, variables need to be independent from each other (Wonnacott and Wonnacott, 1990). Independence can be tested in SPSS with the VIF (variance inflation factor). A VIF value that exceed 10 indicates multicolinearity (Hair et al., 2007).

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Table 13.

Significant outcomes of the Regression tests Dependent variable: R²

Sign. of

the model Coefficients Beta P-value

Autonomy 0,085 0,048 Necessity of income 0,159 0,059 People Employed -0,196 0,019

Autonomy 0,059 0,122 FTE -0,183 0,023

Flexibility 0,075 0,017 Turnover -0,210 0,004 Necessity of income 0,164 0,032

Flexibility 0,084 0,023 FTE -0,231 0,004

Flexibility 0,109 0,012 People Employed -0,231 0,005 Social Responsibility 0,165 0,000 Turnover 0,383 0,000 Social Responsibility 0,219 0,000 FTE 0,459 0,000 Social Responsibility 0,216 0,000 People Employed 0,425 0,000 Stakeholder 0,178 0,000 Turnover 0,394 0,000

Stakeholder 0,152 0,000 FTE 0,366 0,000

Stakeholder 0,153 0,001 People Employed 0,371 0,000 Performance criteria 0,067 0,030 Turnover 0,213 0,004 Performance criteria 0,060 0,111 FTE 0,198 0,014

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After giving the results of the descriptive and statistical tests, we will analyze the results and discuss the outcomes in this part of the paper. First, we will discuss the descriptive outcomes and next the results relating to significant relations between the personal and organizational characteristics from statistical tests. The statistical tests contain the correlation, the ANOVA and the regression tests. This part will end with a comparison between the results from this study and the outcomes of the study of Walker and Brown (2004).

5.1 Descriptives

Since August 2011, Orbis cannot provide email addresses and detailed company information anymore, due to privacy legislation. Descriptive information of the sample that was available in June 2011 was not longer available. This made the investigation of the representativeness difficult. The solution was found in data derived from CBS statistics and data of the Dutch chamber of commerce. Although, this solution is not optimal, it helps to say something about the sample compared to the general population of Dutch entrepreneurs.

With 87% of the sample being male and 13% being female, the women entrepreneur is underrepresented. According to the data of the chamber of commerce, 29% of the entrepreneurs are women (Kamer van Koophandel, 2010). The distribution of the different age categories is different than our sample: 32% under 41 years (survey: 15%), 54% from 41 till 60 years (survey: 75%) and 14% above 60 years (survey: 10%) (Kamer van Koophandel, 2010). This means that the sample in this study contains more people from the middle age category and less people from the youngest age category, the oldest age category is similar. The majority of respondents in this study have a high education level. This is comparable with the general level of entrepreneurs among entrepreneurs showing 69% have a high education level (Oudmaijer, 2006). In this study, most businesses belong to the service sector (74%) and least to agricultural sector (5%). Data from the chamber of commerce show that the biggest sector is indeed the service sector that contains 59% of all the businesses and that the agricultural sector contains 5% of the businesses (Kamer van Koophandel, 2010). The average turnover of Dutch businesses is €1.800.000 (CBS, 2011; Kamer van Koophandel, 2010) which is also comparable with the results of this study. Finally, the average number of employees in this research is 18. Data of the CBS (2011) and the chamber of commerce show that 79% of the businesses has a maximum of five employees. This means that this research contains more businesses with more employees compared to Dutch businesses.

The differences between the characteristics of the sample, compared to the general characteristics of small business in the Netherlands can be explained by

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differences in databases. There are differences in data from the Dutch chamber of commerce and the data that Orbis provide. The database of Orbis provides a lot more businesses than that actually are registered in the Netherlands according to the chamber of commerce (Kamer van Koophandel, 2010). Also in the percentages and characteristics of businesses there are difference. For example, Orbis contains relatively less smaller businesses than the data from the chamber of commerce. So the differences between the characteristics of the sample and the general characteristics of Dutch small businesses can be explained by the fact data from Orbis is not complete and 100% right. If data from Orbis was still available, more research could be done to these differences.

Use and importance of success criteria and constructs

In all analyses of the ranking of success criteria, performance criteria are ranked lower than most non-financial criteria. If we look at the use of success criteria, customer satisfaction is mostly used followed by reputation and personal satisfaction. The first financial criterion, profit, is ranked fourth. When looking at the importance of different success criteria, the first seven criteria are non-financial criteria. The first financial criterion (making money) is ranked on eighth place. When we take the use and importance together in seven constructs, the same tendency shows up. The top five are all non-financial constructs of success and the sixth place is the performance or financial construct to measure success. These findings would suggest that financial criteria are not relevant for small business owners in defining success of their company. This is, however, not true.

When measuring the use and importance of success criteria on a 6 point Likert scale, we assume that means above 4,0 are important. Looking to performance (financial) criteria in the descriptive analyses show means ranging from 4,45 up to 4,94. This implies that the performance criteria are important for small business owners and that they do measure success with performance criteria, however that some other, non-financial, criteria are more important. In this way we can agree that success criteria are a mixture of financial and non-financial success criteria and that non-financial criteria of success are used more frequent and non-financial criteria are more important.

5.2 Personal and organizational characteristics influencing success constructs