Business Growth: The entrepreneurs experience

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. 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

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

9. Enterprise survival rates Source: Headd (2003) and Office for National Statistics (2008)

10. Typology of Business Growth

11. 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)

12. 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)

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

14. 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.

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. Crisis 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

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

19. 5. Crisis of ? 4. Crisis of Red Tape Sizeof Firm 3. Crisis of Control 5. Growth through Collaboration 2. Crisis of Autonomy 4. Growth through Co-ordination 1. Crisis of Leadership 3. Growth through Delegation 2. Growth through Direction 1. Growth through Creativity Age of Firm Greiner Model : Evolutions and revolutions as organisations grow From: Greiner (1972)

20. Churchill and Lewis model

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 5 Maturity 3 Growth/ Success 4 Expansion/ Takeoff 2 Survival (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

24. What factors influence small business growth?

25. Influences on Growth Business Environment Strategy Entrepreneur Firm Storey, 1994

26. Influences on Growth 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 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

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’ 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

30. Appendices Churchill and Lewis

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