Chapter 2: Defining and Measuring SME Failure/Success
INTRODUCTION How to adequately assess SME failure and success has long been a controversial issue because the type of data routinely available to assess the performance of large businesses has simply not been available for the SME sector. Cochran (1981) suggested that the lack of a reliable measure of failure was a major obstacle to understanding and alleviating the causes of small business failure and Scott and Lewis (1984, p.49) noted that ‘[o]ne practical implication of this is that ill-founded policy must necessarily follow’. Prior to looking more closely at some of the commonly used indicators of SME failure and success, this chapter will consider various attributes that might be considered when selecting a measure of performance for research or other purposes. Later in the chapter, I will discuss the likely failure rates that might be expected using the various performance measures suggested in the literature. This will enable readers, based on the performance indicator(s) they believe to be the most appropriate, to draw their own conclusions concerning the potential risks SME owners confront. 2.1 CRITERIA FOR SELECTING A MEASURE OF PERFORMANCE Prior to reviewing a number of alternative definitions of failure that have been used (or suggested) in the literature, it might be useful to consider some attributes that a definition should possess if it is to be useful in measuring and analysing business failure and success. In particular, the following attributes could be considered: objectivity/verifiability; relevance/ representational faithfulness; reliability/freedom from bias; and simplicity/ parsimony (Watson and...
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