The Small Business Challenge

A. Why Small Business is Important – More than half the people working in the United Sates—about 68 million out of 118 million—work for small firms.  Small businesses as a group account for most of the 600,000 or so new businesses created every year, as well as for most  business growth.

B. How Small Business Human Resource Management is Different – Managing human resources in small firms is different for four main reasons: size, priorities, informality, and the nature of the entrepreneur.

1. Size – The general guideline is that it’s not until a company reaches the 100-employee milestone that it can afford a human resource specialist.  However, even five- to six-employee organizations must recruit, select, train, compensate, and retain qualified staff.

2. Priorities – It is not just size but the realities of the entrepreneur’s situation that drive them to focus their time on non-HR issues.

3. Informality – Human resources management activities tend to be more informal in smaller firms.  Entrepreneurs must be able to react quickly to changes in competitive conditions.

4. The Entrepreneur – Entrepreneurs are people who create businesses under risky conditions, and starting new businesses from scratch is always risky.  Entrepreneurs therefore need to be highly dedicated and visionary.

5. Implications – The differences listed above result in potential implications. 1) Small business owners run the risk that their relatively rudimentary human resource practices will put them at a competitive disadvantage. 2) There is a lack of specialized HR expertise as compared with larger firms that have a full range of HR functions. 3) The smaller firm is probably not adequately addressing potential workplace litigation.  Most small business owners are well aware of the threat of employment-related litigation.  4) The small business owner may not be fully complying with compensation regulations and laws.  5) Duplication and paperwork leads to inefficiencies and data entry errors.  For small businesses, employee data often appears on multiple human resource management forms.

C. Why HRM is Important to Small Business – Entrepreneurs need all the advantages they can get, and for them, effective human resource management is a competitive necessity.  Small firms with effective HR practices perform  better than those with less effective practices.