Business Growth:The entrepreneurs experience

Lecture 6:Entrepreneurship and Enterprise

Zoe Dann

Learning outcomes

By the end of this lecture, you should be able to:• Understand the integrated nature of business

growth and how it is measured• Discuss and evaluate the use of models of the

small business growth process• Discuss some of the factors that impinge on

business growth

Key Questions

• How can we tell whether a business is growing?

• Do businesses need to grow?• What affects the growth of organisations?• How can we model growth and is it useful?

How can we tell a business is growing?

Business growthFinancial Growth

Strategic Growth

Structural Growth Organisational Growth

Resources Performance

Asset accumulation Direction

Use of assets

(Source: Wickham, p.224)

Net assets Number of people

New productsStrategic alliances

Profitability, sales turnover

What does a typical growth curve look like for a business?

Time

A Gazelle Company: Facebook

Distribution of firms by size

Large250+

Medium50-249

Small 0- 49

Micro 0-9

0.1%

0.6%

99.3%

95.4%

Source: stats berr, 2008

Enterprise survival rates

Percentage of firms still trading after

US UKVat Reg’d

1 year 96

2 years 66 80

3 years 65

4 years 50 54

5 years 45

6 years + 40Source: Headd (2003) and Office for National Statistics (2008)

Typology of Business Growth

Birches: Mice, Elephants and Gazelles

• Mice– Small, vulnerable, hardworking, little market influence power, quick to

change direction if needed, very few aspire to grow, maintain their profitability

• Elephants– Large, command respect, cannot change direction quickly, can

influence the market place and conditions, likely to be contracting in size

• Gazelles– Growth oriented with above average profitability, seek growth rather

than control, ultimately become large employers, agile, “at least 20% growth a year for 4 years”

Birch (1988)

Start ups: A taxonomy• Life style firms:

– privately owned and support owners– modest growth– Typically micro business

• A foundation company– Centered on research and development– Creates new industry or changes entire sector

• A high potential venture– Rapid growth, – Innovative products/services in a large market– Large investments

(Hisrich and Peter, 1995)

Growth aspirations and performance

‘Trundlers’

‘Gazelles’

‘Triers’

‘Supergrowth’firms

passiveshrinkers

‘Livingdead’

negativegrowth no growth growth

aspirations,some growth

high growth

deliberateshrinkers

Mature firms

‘Flyers’

eg. Topclass ties

eg. Used cars

eg.Cycle world

e.g. Chocolat Hotel,Facebook

‘Life style firms’

• A Social Enterprise• Uses ‘engaged ethics’ buying cocoa beans

from multiple growers• www.hotelchocolat.co.uk• The company’s sales have soared 226% a year

from an annualised £533,000 in 2005 to £18.4m in 2008.

Can we model growth?

Life Cycle Models

Principals of Life Cycles These theories suggest that small business growth

characterised by • a number of predictable, common, discrete and

consistent ‘stages’ or ‘phases’• sequential in nature and occur as a hierarchical

progression not easily reversed• tend to be ‘metamorphosis’ models (d’Amboise and

Muldowney, 1988)• ‘Crises’ are an important feature – periods of

relatively stable growth interspersed with periods of more rapid, discontinuous change

The small business life cycle

Size

Age of business

Evolution Crisis

Inception Survival Growth Expansion Maturity Stage 1 Stage 2 Stage 3 Stage 4 Stage 5

From: Scott and Bruce (1987)

What are crises?

• ‘growing pains’ (Steinmetz, 1969)• ‘developmental problems’ (Kazanjian, 1988)• ‘developmental ‘hurdles’ (Parks, 1977)• Consensus that different problems during

different stages of the growth process – sequential (Dodge and Robbins, 1992)

• Certain problems more dominant at certain times and sequential pattern to crises

Greiner Model : Evolutions and revolutions as organisations grow

1. Crisis of

Leadership

2. Crisis of

Autonomy

3. Crisis of

Control

4. Crisis of

Red Tape

5. Crisis of

?

1. Growth

through

Creativity

2. Growth

through

Direction

3. Growth

through

Delegation

4. Growth

through

Co-ordination

5. Growth

through

Collaboration

Size of Firm

Age of Firm

From: Greiner (1972)

Churchill and Lewis model

Changing role of the entrepreneurHIGH

LOW

1Conception/

Existence

2Survival

3Growth/Success

4Expansion/

Takeoff

5Maturity

Owner’s ability to do

People, planningand systems

Owner’s abilityto delegate

(Adapted from: Churchill and Lewis, 1983)

Greiner v Churchill & Lewis

• What similarities and differences can you see in the two models?

• Think about issues like linearity: is there any scope for backwards steps as firms in reality shrink and grow? Can steps be missed out, e.g. dot.coms can grow incredibly quickly?

• What about crisis issues such as a downturn in the market? What about firms that just never grow, or grow very slowly over a long period?

Criticism of models of growth• “Limited usefulness for the study of growth management

since they are built on the deterministic assumption that all firms grow linearly through a predictable series of preordained stages” (Merz et al, 1994).

• Empirical studies confirmed that growth stages not discrete and highly specific

• Stages are fluid and non-sequential, with developmental problems often overlapping between different stages

• ‘Grow or fail’ hypothesis criticised. • Small businesses often reach a plateau in their development

and can remain in one growth stage for prolonged period of time

What factors influence small business growth?

Influences on Growth

Entrepreneur Firm

Strategy

Business Environment Storey, 1994

Influences on Growth

26

AgeBehaviourGenderReligionFamilyExperience

Role Models

Support/ training

Economic

TechnicalPolitical/ legal

Religion

History

Industry

Social

Digital

TechnologyCycles

Political economy

Education systemEmployment

levels

ModelsTaxation

Interest rates

Internet

Sustainability

Access to finance

Regulation

Attitude to risk

The End of the Cycle:Business Closure

• Planned exit v forced• Part of natural cycle of ‘business churn’• Closure routes

– sold on 33% approx– Insolvent 20% approx.– Reopened – closed down

(Source: SBRC, 2002)

• Entrepreneurial learning – continued as an entrepreneur, sought employment or retired

• Serial entrepreneurs, portfolio entrepreneurs

Conclusions

• Variety of measures of growth – balanced score card needed

• No one single theory will adequately describe the growth patterns in small businesses (Smallbone, in Carter and Jones-Evans, 2006)

• Successful entrepreneurs need to be exceptional learners and adaptable to survive

Key References and Further Reading• Carter and Jones-Evans (2006) ‘Enterprise and Small Business’,

Chapter 6• Churchill and Lewis (1983), ‘The 5 stages of small business growth’,

Havard Business Review• Greiner, Larry E., (1972), ‘Evolution and Revolution as Organizations

Grow’, Harvard Business Review• The Wall Street Journal, (March 2008) ‘Facebook CEO Seeks Help as

Site Grows Up’ http://online.wsj.com/public/article/SB120465155439210627.html?mod=blog

• Storey, D (1994), ‘Understanding the Small Business Sector’, International Thomson Business Press, London

• Wired (09/06/07), How Mark Zuckerberg Turned Facebook Into the Web's Hottest Platform http://www.wired.com/techbiz/startups/news/2007/09/ff_facebook?currentPage=2

Appendices

Churchill and Lewis

Churchill, N.C & Lewis, V.L. (1983)