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Business Growth: The entrepreneurs experience

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1 Business Growth: The entrepreneurs experience
Lecture 6: Entrepreneurship and Enterprise Zoe Dann

2 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

3 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?

4 How can we tell a business is growing?

5 Organisational Growth
Business growth Financial Growth Profitability, sales turnover Resources Performance Strategic Growth New products Strategic alliances Asset accumulation Direction Structural Growth Organisational Growth Use of assets Net assets Number of people (Source: Wickham, p.224)

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

7 A Gazelle Company: Facebook
Growth Rate per year = the rate of change of growth = slope of the growth curve Growth measure of current year - Growth measure of previous year x 100% Growth measure of previous year Generally speaking, the greater the growth rate the greater the strain on the organisation It fluctuates throughout the development of the business and will be more sensitive to changes than measuring growth per se

8 Distribution of firms by size
0.1% 0.6% 99.3% 95.4% Source: stats berr, 2008

9 Enterprise survival rates
Percentage of firms still trading after US UK Vat Reg’d 1 year 96 2 years 66 80 3 years 65 4 years 50 54 5 years 45 6 years + 40 Source: Headd (2003) and Office for National Statistics (2008)

10 Typology of Business Growth

11 Birches: Mice, Elephants and Gazelles
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) From a hundred firms - 4% of start up organisations will grow rapidly to employ 50% in ten years (Storey, 1987) From 360 firms 23% of firms grew over 11 years to employ 71% of personnel (Smallbone, 1999) According to Gray (1999) the proportion of owner-managed firms that see employment growth as an important goal:0% Thus, growth emerges as an “acquired taste”. Initial aspirations, in most of the cases do not predict growth. “Growth is not the answer to the founder’s initial aspirations, but the solution to the ‘problem’ of excess retained earnings”

12 Start ups: A taxonomy Life style firms: A foundation company
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)

13 Growth aspirations and performance
eg. Topclass ties eg. Used cars eg. Cycle world e.g. Chocolat Hotel, Facebook ‘Trundlers’ ‘Gazelles’ ‘Triers’ ‘Supergrowth’ firms passive shrinkers ‘Living dead’ negative growth no growth aspirations, some growth high growth deliberate Mature ‘Flyers’ ‘Life style firms’

14 A Social Enterprise Uses ‘engaged ethics’ buying cocoa beans from multiple growers The company’s sales have soared 226% a year from an annualised £533,000 in 2005 to £18.4m in 2008.

15 Can we model growth? Life Cycle Models

16 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

17 The small business life cycle
Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Inception Survival Growth Expansion Maturity Size From: Scott and Bruce (1987) Age of business Evolution Crisis

18 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 Important to business growth and personal life Entrepreneurs have to learn new behaviours and learn to think and act in radically different ways as a result of managing crises. ‘…these periods of tension provide the pressure, ideas and awareness that afford a platform for change and the introduction of new practices’ (Greiner,1972, p45)

19 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 Direction 3. Growth Delegation 4. Growth Co-ordination 5. Growth Collaboration Size of Firm Age of Firm From: Greiner (1972)

20 Churchill and Lewis model
Businesses experience common problems and challenges at similar stages of their development Each stage of growth is described through five variables: 􀂙 Management style 􀂙 Organization 􀂙 Extent of formal systems 􀂙 Major strategy 􀂙 Business and owner

21 Changing role of the entrepreneur
HIGH Owner’s ability to do People, planning and systems Owner’s ability to delegate LOW 1 Conception/ Existence 2 Survival 3 Growth/ Success 4 Expansion/ Takeoff 5 Maturity (Adapted from: Churchill and Lewis, 1983)

22 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?

23 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 ‘These studies, whilst interesting and thought provoking, possess 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, rather they 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

24 What factors influence small business growth?

25 Influences on Growth Strategy Entrepreneur Business Environment Firm
Micofactors are likely to play a greater part in the success and failure of business e.g. local superstore may wipe out local high street shops rather than the imposiition of macrolevel factors such as interest rates. Storey, 1994

26 Influences on Growth Economic Social Models Industry Technical
History Employment levels Education system Economic Social Taxation Role Models Models Interest rates Age Behaviour Gender Religion Family Experience Religion Attitude to risk Access to finance Technology Cycles Political economy Regulation Internet Industry Technical Sustainability Support/ training Political/ legal Digital

27 The End of the Cycle: Business Closure
Planned exit v forced Part of natural cycle of ‘business churn’ Closure routes sold on % approx Insolvent % approx. Reopened closed down (Source: SBRC, 2002) Entrepreneurial learning – continued as an entrepreneur, sought employment or retired Serial entrepreneurs, portfolio entrepreneurs

28 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

29 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’ 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

30 Appendices Churchill and Lewis

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


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