analysing and measuring business growth

8/3/2019 Analysing and Measuring Business Growth

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Warwick Business School

Analysing and measuring

business growth

12 October, 2011


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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 fast-

growth businesses


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Six approaches to business growth

1. Evolutionary approaches to growth

2. Social network approaches to business growth

3. Resource-based views and learning approaches

4. Managerial approaches

5. Economic approaches

6. 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 morespotty

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

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100

150

200

250

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No. of Companies Sanctioned 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 becausethey 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 asthese 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 approache.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 aset of linkages between the actors (Hoang andAntoncic, 2003: 168). Environmental resource andcompetition determines outcomes

Or on businesses:

a firms set of relationships with other organisations(Perez and Sanchez, 2002: 261)

Growth associated with trust, the nature ofrelationships (strong and weak ties) and tacitknowledge


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Three network approaches

1. Network magnitude (entrepreneur needs to

network widely to grow)

2. Network closure (entrepreneur relies on smallnumber of strong ties)

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 USdata that:

Strong clusters more likely to see stronger growth rates instart ups

Strong clusters enhance the employment in new small firms

Strong clusters enhance employment growth of existingfirms


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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 andregions

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 non-

substitutable (VRIN attributes)

Growing businesses have VRIN attributes

Resources (physical resources) is important but moreso is capabilities (being smart)

Linked to dynamic capabilities (ability to reconfigure

business) and absorptive capacity (ability and limitsof 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

analysing and measuring business growth

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