In this paper we consider the construction of narrative identity and particularly how managers of small businesses may construct new narrative identities within the activity of the action learning situation. We build on recent work to suggest that the "world" of managers can be explored through a consideration of Vygotsky's socio-cultural theory of learning and what he referred to as the zone of proximal development. We argue that for small business managers, a consideration of identity is fundamental to personal and business development and that this encompasses a consideration of present concerns and interests, existing capacities and understandings and skills to find solutions to problems faced. We base our propositions on the evidence that many small business managers feel the need to focus on operational activities, which prevents consideration of the long-term and of their personal development. Action learning should not be viewed merely as an opportunity to pose and find solutions to problems; more importantly it offers the possibility of considering which aspects of a learner's self-image are potentially blocking progress and change, to engage in identity work and to surface and take action upon those elements of one's current identity that prevent thoughtful action. The impact of the powerful image of the entrepreneur is also examined in two case studies of owner-manager identity construction in the action learning situation. We suggest that a re-theorization of action learning provides a basis for emphasising the identity-forming potential of sets and we also propose that action learning practitioners (set advisors) use Vygotsky's notions of socio-cultural practice and the zone of proximal development to encourage the re-narration of identities and particularly the development of a strong sense of self in the action learning situation.