It’s easy to show that size impacts profitability but, in practice, managers frequently can only make decisions that affect size in the medium to long term. In the short term they are highly constrained by their existing set-up, always limited by demand in the market place.

A container lorry.
[image by 28481k, some rights reserved]

All businesses have two types of cost: fixed costs (that do not vary with output) and variable costs (that increase as output increases). To illustrate with a simple example, suppose you had a heavy goods driving licence and wanted to run a trucking service. You buy a truck for £100,000 and you can use it for five years. Before you drive a kilometre, you have a fixed cost of £20,000 a year to pay for the basic equipment. Items such as annual insurance and road tax raise the fixed costs to £25,000. Leaving aside your salary, every kilometre you drive costs (say) £1 in diesel, servicing, tyres and so on. So you have fixed costs of £25,000 and variable costs of £1 per kilometre. In the short term you have to work within those constraints.

The size of your business is critical. If you can sell transport at £6 per kilometre travelled, you need to sell at least 5,000 kilometres to break even:

Suppose the physical limitations are that you can drive a maximum of 75,000 kilometres a year. You can see that your profitability will vary according to the amount of work you do. Below 5,000 kilometres a year, you have no salary and are making a loss. Between 5,001 and 75,000 kilometres a year, every extra kilometre adds £5 to your earnings (£6 price less £1 variable cost) so your earnings rise uniformly to £350,000.

However, the moment you increase your activity beyond 75,000 kilometres, you have to acquire a second truck and hire a driver, so profits would then decrease as size increases. You’re either too big or not big enough at that level of activity.

There is also the issue of whether there is enough business available so that you can expand without limit. Often this is not the case and, as you look to boost business, you have to reduce prices. In an ideal world you would maintain your basic price of £6 for some business and offer special deals to gain extra business. As long as you were getting more than £1 and you were already covering fixed costs, you should increase earnings. However, it is difficult to reduce price in a limited way and you may find that existing business moves down from £6 to perhaps £4, so your increase in size reduces the value of your sales while increasing your variable costs – you’ve got too big.

The effects of size can be both beneficial and damaging.

Size matters at the individual business unit level but it also matters in the multi-unit business. The effects of size can be both beneficial and damaging. On the positive side, a multi-unit business can spread its risks better. A costly, failed business initiative can wipe out a single unit business instantly, whereas a multi-unit business can more easily bear the risk of expansion. Also, a multi-unit business can afford to have in-house specialists who bring extra expertise to aspects of management of the business.

On the negative side, key decisions are usually made remotely from the business unit. Normally the group operates with business budgets that must be agreed the year before and then adhered to. This can build in inflexibility because there is usually resistance to departing from the budget to take advantage of an opportunity that presents itself. Equally, central management will be concerned at managing risk across the group, and may turn down an expansion possibility in one unit because it prefers to take a risk in another. The group will probably establish standard procedures that sometimes do not make sense at unit level.

The bigger a group is, the more remote central decision-makers are from front line businesses and so the more controls the group needs in place to monitor what is happening at the unit level. These added layers add costs and not profits, they cause delays in seizing opportunities and often end up making front line staff feel frustrated and unappreciated. Big can be stifling.

Find out more

Get to grips with the big business questions: visit The Open University Business School

Watch Evan Davis discuss the right size for companies

About the author

Professor Peter Walton is a member of the Accounting & Finance Unit at the Open University Business School. His research interests are in comparative international accounting and financial reporting in an international context.

Subscribe to Peter Walton's posts

 

Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

In 2005, whilst addressing an audience of Oxford Entrepreneurs, Sir Alan Sugar remarked that “there’s nothing stopping anybody in this country from doing exactly what I have done; it’s no secret that I started with absolutely nothing” and indeed looking at what we know of his life now, admittedly a bit more after the Money programme, we know that his life is the stuff of dreams. Many entrepreneurs want to be him and many others want to be like him, and yet many others despise him.

All of this makes up a good story, but to me they necessarily raise some important questions: how good of a role model is he when it comes to inspiring young, inexperienced entrepreneurs? Has he got traits that can be emulated or learned? Or indeed what lessons do his life, his achievements and failures provide for wannabe ‘Sugars’? Here, I take a closer look at the personal and business attributes that have made Sir Alan Sugar and ask whether these attributes befit the future generation of British entrepreneurs.

Sugar at his best

He’s already the most talked about entrepreneur in Britain and his life story, as we have just seen in the Money Programme is well worn: Hackney-born and destined for a life of destitution he decided he could change his fate. Whilst still at school he boiled beetroots for the local greengrocer, made ginger beer to sell to his neighbours and bought photographic film, which he cut into camera-sized rolls and sold to friends. He had an instinct for a business opportunity and by the time he was 13, he was making more money than his Dad, a garment factory worker.

Later, his opportunistic flair lead him towards home computing and electricals, and made him very rich. He was a controversy-courting chairman of Tottenham Hotspur which he labels as a ‘waste of time’. His company, Amstrad, was sold to BSkyB for £125million. With his interests focused on construction, property (in Florida, Spain and Britain) and aviation, his personal wealth is now valued at around £790 million. Sir Alan is also known for his least talked about profile as a social entrepreneur. Through the Alan Sugar Foundation he gives generously to charity.

In 1993 he was the driving force behind the Excalibur Scholarship Scheme, recruiting 21 other UK companies to raise £1m to allow graduates from the old Eastern Bloc to study in Europe. In 1997, Gordon Brown asked him to join the ‘You can do it too’ scheme to promote the values of enterprise amongst alienated young people. He now devotes substantial time to the task.

Sir Alan, it seems, was born with flair to spot and act on opportunities. By being good at selling, spotting good opportunities and making key business decisions when it matters he is a self-made, big-time entrepreneur. Behind this façade, however, he is more known for his relentless energy, aggressive salesmanship, unabated self-belief, drive for new challenges and routinely sets himself new targets. Clearly these are qualities and characteristics of behaviour that are associated with entrepreneurial success and that appear frequently in studies of entrepreneurship. For example, persistence and perseverance, need for achievement, self-confidence, and self-belief is amongst the most frequently noted.

By being good at selling, spotting good opportunities and making key business decisions when it matters he is a self-made, big-time entrepreneur

A commonly quoted research study of new venture start-ups, that has stood the test of time over the past quarter-century, was conducted through the Massachusetts Institute of Technology by Jeffrey Timmons and colleagues. They identified fourteen important entrepreneurial characteristics of successful enterprise owners, which includes most of those identified in Sir Alan.

Nonetheless, Timmons admits that few entrepreneurs would possess all traits but felt that strengths in one might compensate for weaknesses in others. Many of these characteristics are self-explanatory (such as high personal drive and energy, self-confidence and setting clear goals) and some appear to be linked.

Whether these basic qualities are present from birth or develop over time still remains, however, an open question. Also, whether these qualities are unique to entrepreneurs, like Sir Alan, is also not clear but seems unlikely.

One point that is clear in looking at the life profile of Sir Alan is that entrepreneurship and entrepreneurial behaviour is quite diverse and is influenced so strongly by context that it is difficult to see how one personality could embrace all its facets, especially through all phases of the life cycle of one or more enterprises.

Either way, there seems to a strong indication that the decision to start an enterprise as a career choice is influenced by personal attitudes, attributes and behavioural preferences as well as background factors such as family, and social histories and traditions.

Just playing the game Sugar!

The Apprentice has certainly made Sir Alan a TV celebrity overnight, but is he acting out or is that the real him? What does any of this mean for him as an entrepreneur or businessman?

Surely, as is often the case with many celebrities, one would believe that Sir Alan Sugar's portrayal as Mr Grumpy on The Apprentice is an act. However, he denies it. In one of his interviews to the press about the show, he was quoted saying that “What you see on screen is me, there's no question of that, but it is the side of me the BBC chooses to show. There is more light-hearted banter, which hits the cutting-room floor because it doesn't put bums on seats. It's a one-way portrayal, not the whole of me.”

Altogether, Sir Alan takes his role on The Apprentice very seriously as he attempts to portray what to him is the real thrust of business life to date. He is a champion of entrepreneurship and the show attempts to teach those who are young and inexperienced about the basic errors in business, the key survival skills and why at times it is important that you get the simple thing done before you move to something more sophisticated. According to Sir Alan, the younger generation of business person has this fast-track-to-success aspiration, to leapfrog to getting an airline like Richard Branson, forgetting all the drudge work that can instantly cripple them.

Whatever the spotlight he is in, the media exposure has done wonders to the ‘Sir Alan’ brand. Not only has his business and products brands benefitted from free promotion but Sir Alan's increase in popularity has lead to him appearing in several television shows, including a special celebrity edition of Who Wants to be a Millionaire?

In 2005/6 he became the face of Premium Bonds on British television advertisements. He also appeared on Room 101 in 2005 and also on Friday Night with Jonathan Ross in April 2006 and The Apprentice won him a BAFTA in 2007.

You are fired! Sugar

Sugar's path to success has been all sweet, and certainly his rough and gruff character and attitude seems to provoke all kinds of critics and controversies, which he seems to thrive upon.

One of his most lamented controversies has been around his attitude to women and child care, and his grudge over flexitime work policies. Sir Alan Sugar questioning Katie Hopkins, one of the participants on The Apprentice, about her childcare arrangements annoyed many people. In his defence, however, in several interviews to journalists following this whole saga he explained that this was an issue taken out of context and extrapolated into headlines.

In fact, he avers that he shares great sympathy for women but firmly believes that some of the employment laws in this country are counter-productive. Accordingly, he argues that such laws prevent employers ask the real questions to women employees, like: where they live, whether they have children, have they made provision to have their children looked after. It gets blown out of proportion by the media. He similarly retains a contemptuous attitude towards business qualifications, such as MBAs and believes that the real learning is in doing the business.

Such attitudes have been perceived to be his negative traits by his peer entrepreneurs and businessmen. In fact a survey conducted by the Alliance and Leicester amongst entrepreneurs concluded that many see him as a bad business role model and many admitted that they have nothing new to learn from him. Such criticisms and controversies, however, do not seem to bother him much. In fact, as far as Sir Alan is concerned any publicity is good publicity.

When Sugar means business

Is Sir Alan a better entrepreneur or manager? He always claims that there is more to successful enterprise. To me, however, this statement is a bit incomplete. What is this ‘more’ that he refers to? Allegedly, I believe he is suggesting that being just a good entrepreneur or salesman in business is not enough. A successful business demands more skills and resources, albeit, the skills of a good manager. Let us explore this a bit.

Henry Mintzberg, a management guru has spent his academic career analysing and writing about the roles of managers in action. He believes that in doing his job, a manager performs the following roles: interpersonal roles – where the manager takes up roles as figurehead, leader, liaison and disseminator; informational roles – where the manager acts as a nerve centre, a disseminator and a spokesman from the organisation to the outside world; decisional roles – where the manager becomes a strategic decision maker and takes up roles such as being the entrepreneur, the disturbance handler, the resource allocator, and the negotiator.

Note that this expert suggests that being an entrepreneur is just one of the functional aspects of what a manager does amidst the great quantity of work that he does to sustain a successful organisation. Sir Alan’s ‘more’ suddenly seems to be making a bit more sense.

Sadly, in this discussion, we do not know enough about what Sir Alan really does to manage his businesses to analyse him according to Mintzberg’s theory. However, he does leave a trail of clues, thoughts and evidences which suggest that he believes in good management practices or at least on a set of managerial skills that work well within his organisational contexts. This facet of his skills very often gets hidden amidst his scruffy or controversial façade.

For instance, his blunt statements on the sort of people he doesn't like which open The Apprentice each week ("I don't like schmoozers, I don't like cheats" - and some choicer dislikes which push the programme back past the watershed) are not management textbooks' language, says very little about his verbal communication skills but make his expectations very clear to those under his authority.

He believes in a team culture. At various instances in The Apprentice he seems to disdain candidates who are not team players. He keeps telling his apprentices that without the help and support of other people, not only among their own team, but also in partnership with other businesses and business advisers, an entrepreneur is a loner and will not survive.

Yet he says the leap from lone-wolf businessman to becoming leader of a team – otherwise known as a manager – is one of the hardest but most important lessons an entrepreneur will ever learn. Sir Alan can also command loyalty. Witness his two long standing lieutenants and co-stars, Nick Hewer and Margaret Mountford. Some even say that he does listen and will respond positively to criticism, respecting those who offer it.

Sugar’s empire has so far been immune to the effects of the credit crunch and market downturn. He has an acute understanding of the liabilities of his business and managing the costs that can cripple his empire. In a recent interview, he was quoted saying: my wealth of experience one has gone through the valleys and mountains of these things before. The one we're in at the moment will bottom out and we'll rise again.

I've tailored my business to be immune from doom and gloom by not overstepping the mark…” These are just a few clues as to what Sir Alan’s ‘more’ means and we can keep exploring this forever but that’s not the point. The point is that there is more to successful enterprise!

Sugar's X Factor

So what are the stuffs that Sugar is made of? Deciphering his X factor is no easy task for anyone but we can certainly learn a lot in the process of doing so. His success in business seems to be characterised by a good masala, an intricate mixture of spices that makes up a good curry, of skills and attributes that have got him where he is. In essence he seems to have it all the hard-knuckled entrepreneurial personality, media savvyness, unwavered by critics and controversies and clear managerial acumen.

He is without doubt a born entrepreneur who trusts his finely tuned instincts and he has no time for nonsense business. In all, he takes pride in his self-belief that it takes one skill to spot an opportunity yet another to turn it into your advantage, a first lesson for any aspiring entrepreneur anywhere.

Courses

• Business Organisations and their Environments
• Investigating Entrepreneurial Opportunites

Take it further

• What  makes an entrepreneur
• You and your money
• Competitive advantage

In the first blog in this series I discussed the lamentable failure of Europe and the UK to develop start-up companies into large gorilla-sized organisations similar to American companies such as Microsoft, Intel, Apple, Oracle and Google. Apart from a few recent exceptions, such as Vodafone, Nokia and SAP, Europe and the UK have lagged far behind. A number of plausible reasons why UK and European technology companies have failed to become world-beaters on the same scale as their US counterparts have been forwarded and include:

• A lack of appropriate funding and tax arrangements
• The absence of a large homogeneous home market
• An inability to bring products rapidly to market
• A lack of entrepreneurial culture and spirit

Doug Richard.

The current UK scenario, however, is not all doom and doom as the Cambridge University technology cluster, famously known as Silicon Fen, starts to come of age after thirty years of development. According to Doug Richard, founder and chairman of Library House and former judge on Dragon’s Den:

“The Cambridge cluster has just tipped over and a period of explosive growth is ahead. It manages to attract a very large quantity of capital without variation”. 

Cambridge has already spawned a number of successful £1bn companies such as Arm, Autonomy and CSR radio. So do we have a Silicon Valley in the making or is this simply California dreaming? If Silicon Fen is to provide a lead role in nurturing the next generation of “gorillas” there are still a number of obstacles in its way. For example:

• There is a tendency for early stage entrepreneurs to exit their businesses through trade sales rather than undertaking a public flotation (this usually means selling-out to a larger US firm). According to Walter Herriot, head of St. John’s Innovation Centre in Cambridge: “If too many Cambridge companies are acquired by foreign companies the people and the intellectual property will disappear”.
• There is a tendency for European venture capital groups to invest smaller sums than their US rivals. The differential can  sometimes be as high as 50%.
• There is a failure of leading UK companies to invest in entrepreneurial start-ups. Cisco invests in start-up companies which benefit from the funding they receive whilst Cisco gains access to cutting-edge research.
• There has been a failure on the part of European stock exchanges to attract young companies. Neither the LSE nor AIM are considered to be as attractive as the Nasdaq where new listings are able to achieve higher valuations.

Another way of interpreting the superior growth trajectory of US start-up companies is the American business culture itself. Europeans do not lack technical expertise (and Silicon Fen is living proof of this) but does Europe have the same level of ambition and attitude to risk as the USA? According to David Wither, CEO and founder of UK technology company Sarantel:

“In the US, you know from the start you are on your own. Nobody is going to look after you – there is no healthcare or safety net. It breeds a competitiveness, which is part of the culture.” 

It might also be said that UK and European entrepreneurs are acting wisely by avoiding head-on competition with major organisations by adopting niche and complementary strategies, thereby avoiding conflict with larger rivals. This was a lesson that was learned by the pioneering UK personal computer companies such as Acorn, Sinclair and Apricot. Another interpretation is that by selling out early UK entrepreneurs are behaving in a totally rational manner. True serial entrepreneurs are good at starting and growing businesses but not well equipped to professionally manage them, so their early departure is not such a bad thing after all.

The problem is that they are not being acquired by other UK or European companies or as Walter Herriot, head of St. John’s Innovation Centre in Cambridge once commented: “I am slightly concerned that we are selling off the family silver”.

So should Europe be written off as a promising location for technology companies and is Silicon Fen really on hold until key obstacles are removed from the equation? 

Further reading

• 'Fen tries to be a valley' by Maija Pesola in the Financial Times on 16th Feb 2005
• 'The fertile soil of Silicon Fen' by Maija Pesola in the Financial Times on 9th Feb 2005
• 'Why progress requires ambition and risk' by Alan Cane in the Financial Times on 11th Feb 2005

About the author

Nigel Walton is an associate lecturer for the Open University and the University of Worcester, specialising in strategy, entrepreneurship and international marketing. He previously worked as a management consultant, primarily advising medium-sized companies with growth problems.

Subscribe to Nigel Walton's posts