Analysing and measuring business growth

Warwick Business School

12 October, 2011

Key learning objectives

Understand six different approaches to business growth Be able to compare and contrast these different approaches to business growth Begin to develop your own opinions on fastgrowth businesses

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Six approaches to business growth

1. 2. 3. 4. 5. 6.

Evolutionary approaches to growth Social network approaches to business growth Resource-based views and learning approaches Managerial approaches Economic approaches Stochastic approaches

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Do individual firms follow an organic pattern of development?

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Issues with stage theories

Closure rather than growth is the norm One-size-fits-all approach: heterogeneity in the business population Growth is unidirectional but reality is much more spotty Number of stages and crises? Importance of informal managerial interactions Intuitively appealing but little conceptual or empirical reliability

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Evolutionary approaches: population ecology

Tends to study demographic dynamics within firm populations (operationalised as sectors or industries). Focus tends to be on founding (business entry) and mortality (disbanding) not why (some) firms grow Legitimation, environmental resources (richness of inputs and demand for products/services) and competition between firms determines outcomes This shows three patterns in industries:

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Victorian Railways
No. of Companies Sanctioned 300 250 200 150 100 50 Capital Authorised (m)

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The population dynamics of automotives, tyres, television and penicillin

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Growth and population ecology

Firms may grow because they overcome the liability of newness (legitimation effects) and liability of smallness Entrants can also supplant existing players because they have new organizational routines that overcome the structural inertia of existing firms (theory assumes that most firms stick to the routines they developed when they were relatively new and as these routines age, they are less and less suited to the environment)

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Growth and population ecology

Growth firms are those that are have a superior fit with the environment and/or there is little competition in the resource environment Existing firms can seek to reconfigure their approach e.g. specialist (focus on a narrow niche) and generalist strategies (focus on wider niche) (web browser wars between Netscape Navigator/Firefox & Internet Explorer) Criticism is that it gives little weight to the activities of individuals/firms

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Social network approaches: Version 1 networks

Focus on individuals:
a set of actors (individuals or organizations) and a

set of linkages between the actors (Hoang and Antoncic, 2003: 168). Environmental resource and competition determines outcomes

Or on businesses:
a firms set of relationships with other organisations

(Perez and Sanchez, 2002: 261)

Growth associated with trust, the nature of relationships (strong and weak ties) and tacit knowledge

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Three network approaches

1.

Network magnitude (entrepreneur needs to network widely to grow) Network closure (entrepreneur relies on small number of strong ties)

2.

3.

Network position (entrepreneur acts as a gatekeeper between networks)

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Issues with networking

Difficult to measure association between networking and growth (definitional issues and hindsight bias) Trust is a two-way street: may not be beneficial Limited evidence to support influence of networking (non-linear association?) Networking is important but showing its influence has proved elusive

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Basis of cluster approach

Marshalls (1890) agglomeration thesis looks at the benefits of being located close to other businesses
Access to specialist pools of labour Saves on costs (e.g. lower transportation costs) Potential for knowledge spillover effects (know how

and know who)

Cluster analysis essentially based upon this but emphasises knowledge spillovers

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Cluster approach

Porter (2003) defines it as:

a geographically proximate group of

interconnected companies, suppliers, service providers and associated institutions in a particular field, linked by externalities of various types (p. 562).

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Boston life science cluster

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Evidence for clusters

Delgado, Porter and Stern (2010) suggest using US data that:

Strong clusters more likely to see stronger growth rates in

start ups Strong clusters enhance the employment in new small firms Strong clusters enhance employment growth of existing firms

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Martin and Sunleys (2003) critique

Not a new approach: just old wine in new bottles Vague and elastic definition Difficult to empirically verify Heterogeneity and idiosyncratic businesses and regions Hermetically sealed Economic not spillover effects are more important Represent a one-way bet

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3. Resource-based views and learning approaches to growth

RBV is based on Rumelts (1991) finding that what a business does is more important to its performance than external conditions Basis of approach:

Businesses as bundles of resources Resources are heterogeneous and idiosyncratic Resources are immobile Resources are path dependent

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RBV approach
Valuable, rare, imperfectly immobile and nonsubstitutable (VRIN attributes) Growing businesses have VRIN attributes Resources (physical resources) is important but more so is capabilities (being smart) Linked to dynamic capabilities (ability to reconfigure business) and absorptive capacity (ability and limits of learning)

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Issues with approach

Tautological How do businesses know they have the capabilities? How come researchers can work it out but not competitors? Assumes (continuous) returns to learning whereas growth is spotty Hindsight bias of entrepreneurs?

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4. Entrepreneurial management approaches

Trait-based approach Management style Intentions and entrepreneurial orientation

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Trait-based approach
Assumes that entrepreneurs have the right stuff in their psychological make up (e.g. risk behaviour, locus of control, tolerance of ambiguity) Has proved to be a bit of a dead end (Gartner, 1988) Stronger version is Shane et al (2010) who examined twins and found that 2 of the big 5 personality traits are associated with being self-employed (extraversion and openness to experience but not agreeableness, conscientiousness or emotional stability)

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Scott and Bruces (1987) managerial styles

Like stage models, appealing but conceptually and empirically weak

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Intentions
Some evidence that intentions are linked to growth (Hakim, 1989) Wiklund and Shepherd (2003) suggest that the relationship is likely to be indirect Rely on self-report measures Sufficient but not necessary condition?

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Entrepreneurial orientation (EO)

Focus on the orientation of business (e.g. innovation, risk taking, aggressiveness) Some evidence to support EO but not all factors equally supported People do business: wrong unit of analysis? Overall some evidence with this approach of an indirect impact on business growth

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5. Economic approaches
Wide variety of approaches from the simple (neo-classical) to evolutionary economics Shared interest with other approaches (e.g. learning, dynamic capabilities) Share, therefore, similar frailties Economic approaches still more likely to emphasise cost

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6. Stochastic approaches: Version 1 Jovanovic (1982)

Dont know entrepreneurial talent before entry but if have talent more likely to grow afterwards Random because high (low) talent individuals may get unlucky (lucky) draws Emphasis is on passive learning by entrepreneur of their talent May be modified to make them active learners (links to RBV)

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Stochastic approach: Version 2 lottery effects

Entrepreneurs are those with the winning ticket No good asking them they are faulty guides Growth isnt serially correlated Older and bigger businesses dont have stronger growth outcomes Coads (2007) review of growth studies show that they can explain only 15 per cent: other 85 per cent is random

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Conclusions
Spectrum of explanations from the more deterministic to the random Each have advantages and disadvantages Your task is to critically evaluate each of these approaches

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