Do we have the opportunity and
capability to grow?
A study on determinants of firm growth
Do we have the opportunity and capability to grow?
A study on determinants of firm growth
Business growth is often discussed by both academics as practitioners. There is, however, one problem when discussing business growth: measuring business growth. Currently no consensus has been reached on how to measure business growth. Therefore both practitioners and academics are not talking about the same thing when discussing business growth. This causes the research findings on business growth to become highly dispersed. Different factors lead to different types of business growth. In this research business growth is measured in terms of sales and employee growth. The reason is that these are the most commonly used measures in the academic literature reviewed here. According to that academic literature 23 factors are relevant for sales and/or employee growth. For nine of these variables, however, it remained unclear how they relate to business growth. To get a better in-depth understanding on how these variables relate to sales or employee growth a case study was conducted. During the case study data was collected through a survey answered by the management team, conducting in-depth interview with the managing director and collecting internal business documents. From the case study it appears that no distinction can be made between the different factors leading to either sales or employee growth. A new perspective has emerged where it seems that the different factors contribute to four aspects for generating business growth: (1) the capability to identify business opportunities, (2) the availability of business opportunities, (3) the capability to exploit business opportunities and finally (4) the actual exploitation of the business opportunities themselves.
During 2008 and 2009 many firms suffered from the economic crisis. For most firms sales started to decrease and costs needed to be reduced in order for firms to survive. However, some firms were still capable of generating business growth (Eurotemp, 2009). Generating growth in times of economic crisis is remarkably but generating business growth in general (i.e. also in times of economic welfare) contributes to a nation’s whole economy.
When discussing business growth there is one major problem namely how to measure business growth. Often both academics and practitioners are not talking about the same thing. The current research findings on business growth therefore became highly dispersed leading to wrong conclusions and assumptions. For years now academics have tried, and are still trying, to build a general model for business growth. Currently no general model has been found. This is caused by the fact that different factors lead to different forms of business growth (i.e. lead to different forms of depended variables) but since no consensus has been reached no general model for business growth could be constructed.
This thesis has been conducted in cooperation with IJsselvliet Organisatieadviseurs. First I would like to thank Arno de Vries for notifying me on this research opportunity. Without him I would have never found IJsselvliet and I probably would have never conducted this research. Furthermore I would therefore like to thank all my colleagues for their support and feedback. I would specially express my gratitude to Hidde van der Wal who has been my supervisor at IJsselvliet for his support, sharp feedback and fresh new perspectives when things got complicated.
I would furthermore like to thank my supervisor at the Rijksuniversiteit of Groningen, dr. Noseleit, for his support and feedback. I must admit that at the literature was very unclear and dispersed at sometimes, especially at the beginning it was difficult to find a solid starting point to start the research from. But the regular meetings gave me the confidence and motivation to keep on going.
I would also like to thank my friend Gydo, Lenneke and Claudia for their support and feedback. At last I thank family, especially my mother who often needed to listen to my research struggles regularly. It really helped me to structure my thoughts and write them down.
Table of content
1 Introduction 8
2 Literature review 11
2.1 Measuring business growth 12
2.2 Organisational characteristics 13 2.3 Innovation 14 2.4 Networking intensity 15 2.5 Human capital 16 2.6 Entrepreneurial characteristics 16 2.7 Finance 17 2.8 Strategy 18 2.9 Environment 19 2.10 Research model 19 3 Methodology 24 3.1 Research strategy 24
3.2 Case study design 24
3.3 Case study protocol 27
3.4 Processing research data 29
5 Discussion 39
5.1 Availability of business opportunities 41
5.2 Identifying business opportunities 42
5.3 Capability to exploit business opportunities 43 5.4 Actual exploitation of business opportunities 44
6 Conclusion 46
6.1 Conclusions 46
6.2 Limitations 48
7 References 50
8 Appendix 55
8.1 Measuring business growth 55
8.2 Survey (protocol) 56
8.3 Semi-structured interview (protocol) with HRM department 61 8.4 Semi-structured interview (protocol) with financial department 62
8.5 In-depth interview protocol 63
8.6 Tabular results survey, interview and strategic business plan (summary) 65
8.7 Measures 68
8.8 Three table overview of the 23 factors 71
8.9 Financial data 74
It is generally known that business growth has a positive influence on a nation’s economy (Beck and Demirguc-Kunt, 2006). Teruel and de Wit (2011) provide four reasons why business growth drives economic growth and change. First, high growth firms are highly flexible and change rapidly. This makes firms volatile, in turn causing the replacement effect where high growth new entrants replace incumbents. Secondly, high growth firms stimulate innovation, which has a positive influence on labour productivity. Thirdly, high growth firms have a significantly positive effect on employment, which is also argued by Mustar (2002), Moreno and Casillas (2007) and Morisson, Breen and Ali (2003). Finally fast growing firms act as role models and therefore cause followers (or imitators if you wish), which stimulate entrepreneurship. Some entrepreneurs are willing to grow because it could increase employee and management motivation through potential promotion. It also challenges employees and management, breaks current business routines, and it becomes easier to gain commitment to business goals. Entrepreneurs are often not willing to grow because of danger of losing control (Birley and Westhead, 1990; Coad, 2007; Leitch, Hill and Neergaard, 2010). Much research on business growth, however, is focussed on small and medium sized enterprises (SME’s) where there is a stronger emphasis on small sized enterprises (Simon, 1992; Sims and O’Regan, 2006). This stronger focus can be explained by the fact that most high growth performers, also known as gazelles (firms that generated on average more than > 20% growth in the last three years) (Jonker, 2010) are young and small organisations (Mustar, 2002). Problem definition
The aim of this research is to structure the literature on business growth as to create a better understanding of how certain factors relate to a specific form of business growth. First it is important to determine how business growth can be measured best. An extensive literature review will be conducted to see how other researchers have measured business growth. The most often used measure is than adopted in this research and functions as the depended variable. This is than followed by a more specific literature review to identify the factors that could influence most of specific type of business growth besides size and age (Li, 2011; EIM, 1998). However, as will be discussed in chapter 2, for some of the identified variables it remains unclear how they relate to business growth and therefore no hypothetical relationship could be determined. To answer “how” questions a case study is most suitable (Yin, 2009). Because the literature on business growth is highly dispersed unexpected research findings might appear. Therefore research flexibility to analyse certain phenomenon into more depth is important and thus a single case study is preferred. The research objective and question are therefore formulated as follows:
To understand how potential business growth variables are related to business growth. Research question
Which factors drive business growth and how are they related to sales and/or employee growth?
• How can business growth be measured? • What factors drive business growth?
• How are the theoretical variables related to employee or sales growth?
minutes, surveys and interviews), and an interview with head of finance and HRM to determine the firm growth. Finally an in-depth interview with the managing director is constructed and held to clarify preliminary research results and research some unexpected findings into more depth.
2 Literature review
…There is no single blueprint for achieving business growth… (Mustar, 2002, p.7)
This chapter presents the results of other research performed on business growth. However it should be noted that the aim of this research is not to develop a general comprehensive model for business growth (i.e. a model that includes all potential factors for generating business growth that can be used by any random business). At this point it seems that this is an impossible quest because the literature is too dispersed, which is a result of both academics and practitioners measuring and defining business growth in different ways (Leitch, Hill, and Neergaard, 2010).
2.1 Measuring business growth
2.2 Organisational characteristics
In this first category four variables are discussed namely size, age, legal form and internationalisation that all have their own unique impact on business growth.
Young and small organisations grow faster compared to larger firms, which is an often-encountered statement in the academic literature on business growth (Davidsson, Kirchoff, Hatemi and Gustavsson, 2002; Morone and Testa, 2008; Davidsson, 1991; Coad, 2007). On the contrary it is more difficult for larger and older firms to generate growth. One explanation for this phenomenon might be that as the firm matures it becomes less flexible and efficient and therefore the firm becomes slow at adapting to its environment (Coad, 2007; Mustar, 2002; Moreno and Casillas, 2007). In other words, as a firm matures it becomes inert. Inertia is caused by firms striving for reliability (i.e. produce a constant level of quality output) and accountability (i.e. firms capability of explaining their resource allocation). These two factors are dependant upon the reproducibility of the firm organisational structure day in day out, true operational routines. But these same routines make employees reluctant to change and therefore decrease the firm’s capability to adapt to its environment (Hannan and Freeman, 1984; Sims and O’Regan, 2006). A second explanation might be the “newness-growth phenomenon” where firms strive to gain legitimacy and reach their minimum efficiency scale as fast as possible in order to survive. This motivation for survival increases the firm’s growth rate after its initial birth stage (Davidsson et al., 2002; Morone and Testa, 2008).
Firm growth is depended upon identifying and exploiting business opportunities. However exploiting opportunities could be limited by an entrepreneur’s degree of personal liability for the firm’s actions, which is determined by the firm’s legal form (Davidsson et al., 2002; Coad, 2007). In other words the firm’s legal form influences the entrepreneur’s risk taking behaviour when choosing to exploit a business opportunity. For example a legal form where the entrepreneur is not personally held accountable for the firm’s actions makes the entrepreneur willing to exploit more risky business opportunities (i.e. projects with a low chance of success but with possible high returns on investment) whereas entrepreneurs who are personally accountable are more reluctant to exploiting such risky business opportunities (Wiklund, Patzelt and Shepherd, 2009).
markets that resemble the firm’s current market. This is because the firm’s current business strategy has a large probability of fitting in the new environment. Furthermore the entrepreneur should be motivated to succeed in the new foreign markets and the firm should possess the necessary financial resources. A disadvantage of internationalisation is that when a firm possesses international subsidiaries it becomes more liable to economic crisis. This might be caused by a local international economic crisis that impacts the firm’s international subsidiary that also has its effect on the organisation as a whole (Davidsson et al., 2002).
chooses to lower its product prices. Finally marketing involves both the management of ideas (i.e. developing, creating and maintaining ideas) and improving sales through better targeting and promotional activities (Morone and Testa, 2008). It is impossible for a firm to have an equally distributed focus on the innovation forms described above. The firm focus depends on the firm strategy. For example firms that follow a differentiation strategy (i.e. a strategy where firms try to differentiate themselves from their competitors through products and/or services) are more likely to focus on product innovations. Whereas firms that follow a cost leadership strategy (i.e. a strategy where the firm focus on low product prices) are more likely to focus on process innovations (Mustar, 2002). However firms need to keep in mind that innovation is not a guarantee for business growth. Some innovations might succeed whereas other might fail for different reasons. Though in the long run innovation does seem to pay off (Coad, 2007). Concluding that firms who invest in innovation have a greater probability of generating growth.
2.4 Networking intensity
by attracting new members and reconfigurations of the network or business to meet changing market needs (Moreno and Casillas, 2007).
2.5 Human capital
Before any firm can exploit a business opportunity it must be capable of identifying a business opportunity. Human capital aspects, existing of employee’s education, experience and skills, play a key role here. It appeared that the human capital aspects of the firm’s management have the greatest influence on business growth with respect to lower level other employees. This is because management eventually decides whether a business opportunity is exploited or not.
The more educated the firm’s management is, the greater the firm’s probability of identifying business opportunities (Teruel and de Witt, 2011; Birley and Weasthead, 1990; Mustar, 2002; Coad, 2007; Mustar, 2002). Firms that posses highly educated management are also more entrepreneurial oriented (Shane and Venkataraman, 2002) and therefore develop innovations to exploit the identified business opportunities (Roper, 1997). Thus these firms have a large probability of generating business growth. From the literature it remained unclear how experience is related to business growth (Danis, et al., 2010). However it might be logical that the more experienced a manager or employee is in performing certain tasks, the more skilled he or she is and thus better able to perform certain tasks.
There might be a chance that firms have difficulties finding employees with favourable human capital aspects. In that case, employee training becomes relevant to develop the required employee (Rauch, Frese, and Utsch, 2005; Coad, 2007; Mustar, 2002). Training can be divided in into two groups 1) management training (involves motivation coaching, communication and delegation of authority training (Mustar, 2002)) and 2) workforce training. Where the former is more related to sales growth (Morone and Testa, 2008) , the latter is more related to employee growth (Rauch et al., 2005). Furthermore employee training contributes to more satisfied employees, which is important for generating business growth (Sims and O’Regan, 2006).
2.6 Entrepreneurial characteristics
the relational strength of motivation on growth is likely to vary (Delmar and Wiklund, 2008). Therefore being motivated is no guarantee of actual achieving business growth. Another factor that could mediate the relationship of motivation on business growth is past growth. If an entrepreneur experienced growth in the past he or she is likely to be more motivated to generate business growth again (Kolvereid 1992, Delmar and Wiklund, 2008). Besides motivation and willpower the ability to design a proper business strategy is also crucial. The strategy describes the firm’s long-term goals and how the firm tries to achieve these goals. Thus the firm strategy functions as a guideline in achieving growth that is communicated throughout the organisation. If the entrepreneur and management are not capable of designing a proper strategy motivation becomes irrelevant (Delmar and Wiklund, 2008; Davidsson, 1991). Motivation can also be linked with certain types of growth. For example entrepreneurs who are not motivated, started their business because they want to be independent, entrepreneurs who have sales growth aspirations want to create welfare for themselves whereas entrepreneurs motivated to generate both sales and employee growth have a high need for achievement (Kolvereid, 1992).
finance), family or friends (i.e. informal source of finance) for business investments. It depends on a firm’s specific situation whether a formal or informal source of financing is more appropriate. Rahaman (2010) states that when a firm is financially constrained (i.e. where the costs of external funding are higher than for internal funding) firms rely more on internal funding. When this constrain is alleviated, the firm is likely to switch to external forms of financing (e.g. banks and investors) to finance growth. However firms that switch to external financing are characterised as firms that grow sustainably (Ulrich and Arlow, 1980). Sustainable growth is defined as “The rate at which a company can sustain growth in revenue, earnings and assets over the long run without the use of new external equity. That is the firm can sustain the level of growth by relying solely on its retained earnings equity and the proportional debt financing that can accompany this increased equity without altering the firm’s debt to-equity ratio” (Ulrich and Arlow, 1980). For more detailed information on and how to calculate the sustainable growth ratio, see Ulrich and Arlow (1980, p29). Whether a firm is capable of growing at a sustainable rate, depends on a firm’s earned profits. Profits are influenced by the firm’s product margins but also the firm costs. Changing one of these factors increases a firm’s probability of having a sustainable growth rate (Ulrich and Arlow, 1980). Through networking, a firm can have better access to external finances that might alleviate financial constrains (Danis et al., 2010). Furthermore governmental institutions and can alleviate financial constrains by influencing interest rates (Beck and Demriguc-Kunt, 2006). This might explain why in some countries firms grow faster with respect to other less institutionally developed countries. But firms can also alleviate their own financial constraints through leasing or using the asset itself as collateral.
not define their markets too narrowly with regard to their core products (Wakabayashi, 2008) and who develop mission statements, which are communicated throughout the firm, have an increased probability of generating business growth (Sims and O’Regan, 2006).
Secondly, continuous entrepreneurship is defined as continues development of the firm (Davidsson, 1991; Wiklund, Patzelt and Shepherd, 2009). Entrepreneurship becomes more and more important as lifecycles shorten and future profits from current operations become uncertain (Wiklund, et al., 2009). Therefore firms need to constantly explore their markets for new business opportunities in order to grow the business. Firms that engage in continuous entrepreneurship are entrepreneurial firms defined as firms that are proactively exploring markets for business opportunities and gather the necessary resources to exploit these opportunities through innovations (Wiklund et al., 2009; Muster, 2002, Moreno and Casillas, 2007). As discussed earlier, innovation is no guarantee for business growth (Wiklund et al., 2009).
Without business opportunities it is nearly impossible for a firm to generate growth even though it possesses al the necessary favourable factors discussed above. The amount of business opportunities differs from sector to sector and therefore some firms can grow faster than others. For example, one researcher found that firms operating in the service sector (medium tech firms) grow faster than firms in the manufacturing sector (high tech firms) (Davidsson, Kirchoff Hatemi and Gustavsson, 2002; Wiklund, et al., 2009). The amount of business opportunities is determined by two factors. First the degree of environmental dynamism that relates to the degree of social, political and technological changes that could create windows of business opportunities. Secondly environmental hostility that could threaten a firm’s product demand (Kolvereid, 1992). Firms that operate in fast growing markets (markets that provide many business opportunities) often profit from market success and therefore have an increased probability of generating business growth versus firms operating in low growth markets (Wiklund et al., 2009; Davidsson, 1991; Coad, 2007).
2.10 Research model
table 1, 2 and 3. The figures in the tables represent regression coefficients that indicate whether the relationship is positive or negative. Squaring the regression coefficient (i.e. ) tells us the proportion of variance in the dependent variables (i.e. sales or employee growth) that can be explained by the independent variable (i.e. a factor that influences business growth)(Keller, 2008). For example the regression coefficient for “owner human capital” was 0.3 squaring the regression coefficient provides = 0,09. Thus 9% of the variance in employee growth can be explained by the factor “owner human capital”. For more information on how to calculate regression coefficient: see Keller (2008). Although the factors identified in this study have been derived from different articles, these regression coefficients merely give a rough indication on how the variables are related to business growth. For more detail on how these factors were measured, see appendix 8.7.
Although all authors measured business growth in terms of sale and/or employee growth, it was remarkable to see that not all authors made a clear distinction between some factors leading to either employee or sales growth. This is the case for nine of the 23 identified factors (see table 3): managerial experience, managerial education, motivation, networking intensity, external funding, market based strategies, entrepreneurial orientation, environmental hostility and environmental dynamism.
Dependent variable: employee growth Authors
Davidsson et al. (2002) Rauch et al. (2005) Wynarczyk and Watson (2005) Sarno (2008) Average
Firm age -0,319 -0,390 -0,410 -0,373 Firm size -0,071 -0,311 -0,119 -0,167 Sector 0,088 Legal form 0,073 Internationalisation -0,028 -0,028 Management training 0,230 0,230 Workforce training 0,230 0,230
Owner human capital (education, experience and
skills) 0,300 0,300
Internal finance 0,024 0,024
Dependent variable: sales growth Authors
Morone and Testa (2008) Tuan and Yoshi (2009) Wynarczyk and Watson (2005) Sarno (2008) Average
Firm age -0,102 -0,333 -0,291 -0,242
Firm size 0,041 -0,061 -0,117 -0,046
Private sector ownership 0,180 0,180
Dependent variable: unknown Author
Mohammed (2010) Davidson (1991) Danis et al. (2010) Delmar and Wiklund (2008) Sarno (2008) Wiklund et al. (2009) Average
Managerial experience 0,160 0,160
Managerial education 0,640 0,640
Motivation 0,135 0,135
Networking intensity 0,190 0,190
External finance 0,086 0,086
Market based strategies 0,140 0,140
…After all, man is, in his ordinary way, a very competent knower, and qualitative common sense knowing is not replaced by quantitative knowing. This is not to say that such common sense naturalistic observation is objective, dependable or unbiased. But it is all that we have. It is the only route to knowledge- noisy, fallible, and biased thought it be…. (Flyvbjerg, 2006,
3.1 Research strategy
In the first part of this research an exploratory literature review was conducted and based upon the results, a conceptual model for business growth emerged. However, no general model for business growth has emerged yet. Some researchers state that building a general model for business growth is nearly impossible to achieve for the following reasons. First there is no common accepted way of measuring business growth, which makes it difficult to develop such a model as different factors lead to different growth outcomes. Secondly the importance of growth factors varies over time and thus varies between firms depending upon their life cycle. With a general model is meant; a model that can be generalised over populations. Therefore the research performed in this field is quite dispersed, leading to the conclusion that the current body of knowledge has not matured yet, and that much research in this field is still needed. As motivated earlier for some variables it remained unclear how they are relate to a certain form of growth. For answering “how” questions, case study research is most suitable (Blumberg, Cooper and Schindler, 2005B; Flyvbjerg, 2006; Yin, 2009).
3.2 Case study design
Reliability and validity
Construct validity is guaranteed by collecting evidence from multiple sources (i.e. using the triangulation method). Other measures were also taken to increase the reliability of the research namely having case study results reviewed by a key respondent, having a clear description of how growth was measured, using measures that have already been validated by other researchers (Flyvjberg, 2006; Eisenhardt, 1989; Yin, 2009; Sims and O’Regan, 2006). External validity is important for the generalisation of the research results (Yin, 2009). Some researchers argue that case study results cannot be generalised because case study results are context specific. Therefore single case studies could not contribute to scientific development but can merely be used at the first stages of a research where hypothesis are built (Flyvjberg, 2006; Yin, 2009). However there is a distinction between survey research that aims for statistical generalisation (i.e. generalisation of the findings over population) and case study research aims for analytical generalisation (i.e. generalisation of the findings over theories) (Yin, 2009; Flyvjberg, 2006). Case selection strategy, which depends on the aim of the research, plays a crucial role in whether or not the case results can become generally applicable (Gerringe, 2007). Flyvjberg (2006) argues that the “critical case selection” is the best and effective way of conducting case study research with the aim of generalising the research results. A “critical case” is defined as a case that meets all the favourable conditions for the theory to be confirmed. As such the “falsification method” can be used, implying that the theory is most likely confirmed and if not, the theory is rejected and the results can be generalised over theories. For example if one claims all swans to be white, one needs just one black swan (one case) to disprove the whole theory (Flyvjberg, 2006). However the aim of this research is not testing hypothesis and to generalise the results, but to generate hypothesis. Also for this purpose critical cases can be very useful (Gerringe, 2007). The selection of cases in this research is discussed in more detail in the paragraph “case selection,” described later on.
Unit of analysis
The unit of analysis is basically the definition of a case (Yin, 2009). In this research the main goal is to develop hypothesis on how certain growth variables relate to a certain form of growth. Because most theories on business growth focuse on SME this research uses an MSE defined as having between 50 and 250 employees that have equal or less than ! 50 million or total balance sheet total of ! 43 million (European Commission, 2011).
As stated earlier the aim of this research is to develop a hypothetical model on how specific variables relate to either sales and/or employee growth. For generating such hypothesis an in-depth understanding is needed on how the different variables might relate to business growth and thus research flexibility is important. Based upon the current dispersed literature it is important to prepare for unexpected findings. When unexpected findings emerge the research must be flexible enough to analyse these findings into more depth and thus research flexibility is important. Conducting research where a large-scale dataset is collected threatens the research flexibility. Therefore this research focuses on a single case study for generating hypotheses on how the nine variables can be related to business growth. Case selection
selection criteria (as motivated earlier). Through this two-step case selection procedure a most likely case was selected.
3.3 Case study protocol
The case study protocol is a more detailed description of the data collection method used, thus increasing the reliability of case study (as motivated earlier). In this paragraph the following case study protocol elements are discussed: an overview of the research, the field procedure and case study questions (Yin, 2009).
The current literature on business growth is extensive however, there is no consensus on how to measure business growth and there is also no clear distinction on how specific variables relate to certain types of business growth. This makes the current literature on business growth highly dispersed. In this research, business growth is measured in terms of an increase in gross sales and number employee. Therefore the research aim is to draw hypothesis on how nine remaining variables (i.e. managerial experience, managerial education, motivation, networking intensity, external funding, market based strategies, entrepreneurial orientation, environmental hostility and environmental dynamism) are related to business growth.
Five different steps structure this case study:
(1) The first step is to prepare semi-structured interviews with the head of finance and HRM to collect data on the actual achieved growth (see appendix 8.3 and 8.4). Some questions are prepared in advance like “what was the firm’s growth ratio in terms of sales and employees, over the last four years”. But also open questions like what factors influenced the firm’s growth, which could not be influenced by the firm’s management (e.g. price fluctuations). Through the elimination of these elements (i.e. control variables) only the actual achieved growth that could be controlled for is used for this research. Based upon these results it can be determined whether or not the firm indeed was a “most likely” case.
a 5-point Likert scale). First it measures the relevance of certain variables to the firm and secondly it measures how the firm perceives certain variables to be related to either employee or sales growth. The actual survey is included in appendix 8.2.
(3) The third step is a semi-structured in-depth interview is developed (see appendix 8.5). The questions are based upon preliminary survey results questions regarding sales and employee records.
(4) The fourth step compares the internal business documents with the preliminary research results to see how the firm actually organised and achieved growth in the last four years (Blumberg, Cooper and Schindler, 2005C). A four-year period is chosen because if a firm generates more than 20% growth over a three-year period, it can be characterised as a fast growing firm (i.e. a gazelle) Coad (2007). However a fourth year is needed to calculate the growth over a three-year period. The analysis of internal business documents functions as control measure that supplements the survey as the survey can easily be manipulated by the respondents (either positively or negatively) and thus create research bias. Getting the facts right is a major factor in doing good case study research (Gerring, 2007). The following business documents were collected and analysed.
o Business plan(s): to see whether the firm organised for growth and how they formulated their growth goals.
o Management team meeting minutes and agenda’s: to analyse whether the firm actually coordinated for growth and how they did it.
(5) As a fifth and final step the case study results are written and send to a key respondent (in this research the managing director of the firm) to review the results. Based upon this the case study results are revised making the overall research results more reliable.
Case study questions
The case study questions reflect the actual line of inquiry, but they are not similar to the survey and interview questions (Yin, 2009). The following three questions are formulated:
(2) To what degree are the identified variables (described above) relevant for the firm? (3) How do the management team and managing director relate a specific variable to
either employee or sales growth?
3.4 Processing research data
In this research several sources are used for collecting research data. As stated earlier research data is collected using a survey spread amongst the management team, in-depth interview, analysis of firm sales records and employee records and finally the analysis of the firm’s strategic business plans.
Because of the limited survey results (N=3) no statistical tests could be performed besides averages, mean and modus. However these results generated some blind spots for example where respondents filled in a three on a five-point scale. As motivated above based upon the preliminary results an in-depth interview was prepared where blind spots but also contradicting results were discussed. Together with an analysis of the strategic plans the striking results were summarised into a research result table (see appendix 8.6). The sales and employee records were translated into tables (see appendix 8.9 and 8.10) and charts (see figure 1 and 2) that show the sales and employee development between 2008 and 2010. This was important to see whether the selected case was an actual growing firm. All the data combined was than described in a case study description giving an overall impression of the firm and how the firm had organised for the different variables. The managerial minutes were not kept and other minutes with employees did not provided sufficient detailed information to function as a control measure. However the strategic business plans were sufficient. Because this research is explanatory the explanation building method, which is a special type of pattern matching was most suitable (Yin, 2009). The procedure is to build a theoretical concept and compare these with findings of a case study. The next step would be to adjust the theoretical concept and compare the revision to the facts of a second, third or more cases (Yin, 2009). This research is a first case study in a series of case studies.
…. It is no rocket science that we do, but it is how we organise the organisation in order to meet customer requirements…. (General manager Plastiek, 2011)
Before the case is discussed the selection procedure (as motivated earlier) is briefly summarised. Using the knowledge and experience of consultants at IJsselvliet, a preliminary organisation was chosen namely a large international manufacturer that produced maritime and offshore, rope, yarn, pure composite, fishing, engineered products and yachting materials with subsidiaries in America, Brazil, South Africa, Europe, Russia, and Indonesia. The organisation possess several independent firms and based upon a small exploratory interview with the managing director a high growth medium sized firm was selected. Within the firm a survey was sent to the management team existing of four managers from which three replied. Also empirical data on sales and employee growth was gathered to see whether the firm actual achieved business growth. Based upon the survey, employee and sales growth results an in-depth interview with general director was prepared and conducted to analyse some preliminary results into more depth. Furthermore the annual strategic plans of the firm were gathered that functioned as a control measure to see how the firm actual planned for growth. This chapter starts with a brief description of the firm. Than the analysis of the actual achieved business growth is presented, followed by a discussion of the variables for growth.
The firm selected for this research is (according to the managing director) the fastest growing firm within the whole parent organisation called here Manufacturer. For reasons of confidentiality the firm selected is from now one called “Plastiek”. Over the last three years Plastiek has had an average employee count of 55 and generated around ! 11 million in revenue.
that it was in the best interest of Plastiek to remain as independent as possible without too much interference from the headquarters. This was decided because management believed that independence meant firm flexibility as decisions can be made much faster.
Plastiek is specialised in manufacturing plastic sheets. The plastic sheets are manufactured in a variety of lengths, thicknesses, materials and colours. Plastiek offers these plastic sheets to a variety of markets namely livestock by pen partition and nonslip floors, cable industry by plastic cable protection sheets, automotive industry by car mats, sewer industry by renovation plastic sheets, playground industry by plastic sheets and the oil industry by plastic coupling parts to connect oil pipelines. More than half of the total revenue comes from the livestock (36,9%) and the cable protection industry (14,6%)(see also appendix 8.9). Most of the Plastiek’s produced plastics are moulded from recycled plastics that come from soda bottles and garbage bags. Based upon the customer’s specific requirements (e.g. material, size, thickness, colour and quantity) the plastic sheets are moulded. The main goal of Plastiek is to produce high qualitative plastics (where quality is defined as meeting customer needs) at high speed against low cost. At the heart of meeting customer needs lie three core competencies, first the creation of flexibility and reliability through technological easy to adapt manufacturing equipment namely the extruder. The extruder is a machine that melts the plastic and rolls the thick fluid plastic into plastic sheets. And finally the creation of production speed through efficiency. This is achieved through a constant review and development of the production process to keep costs and product prices low. This latter is crucial for Plastiek in order to remain competitive.
4.2 Business growth
In this research, growth was measured in terms of an increase in gross sales and the number of employees, as motivated earlier. Therefore some general statistics about the firm growth between the year 2007 and 2010 are presented here.
employees remained relatively stabilised. The managing director stated that Plastiek first optimised its production processes to keep costs low after the crisis. Thus at first no new employees were hired. However as soon as Plastiek believed to have reached its maximum efficiency scale (i.e. they believed to have reached a point where its current resources could not be used more effectively with regard to its production) it started to hire new employees to increase production and cope with the increasing demand.
4.3 Human capital
The management team exists out of four male managers with an average age of 45. All managers are (according the Dutch scholarly system) highly educated. Meaning that they at least posses tertiary higher education namely an HBO degree (hoger beroepsonderwijs; literally, higher-level applied education). None of the management team (including the managing director) started the business before it got taken over by Manufacturer. But almost all managers have had relevant management experience of two years in a similar position and currently supervise around 13 employees.
The managing director states that human capital is an important aspect of the business. New employees but also managers are selected based upon their educational degree and relevant experience in technology. Plastiek believes that more and better-educated employees and management are better capable of looking for new business opportunities. However it depends on employees and management motivation if they actually act proactively in the interest of the firm. Especially management skills and educational levels are crucial for the identification of both internal (e.g. process improvements) and external (e.g. new technologies or shifting customer needs) business opportunities.
explained that the need for employee growth increases when the maximum efficiency scale is reached. The combination of Plastiek’s motivation and degree of human capital led to several recent management initiatives like investment in new modern flexible extruders (i.e. extruders that are easy to adjust and update with new modular components to serve a variety of customer needs). This gives Plastiek a competitive advantage, as it is capable of serving a variety of markets with respect to its competitors who mostly serve one market. Furthermore management decided to let employees work in more shifts, which gave the firm more production capacity without placing more burden on their employees. Also a market specialist was hired to analyse current underserved markets to search of new business opportunities. Besides management motivation and human capital aspects lower level employees are also important especially for the internal development and implementation of process innovations. According to Plastiek, lower level employees are also motivated for growth but have a different motive to grow. Managers for example, are motivated to generate growth to become challenged, whereas lower level employees are motivated to generate growth for reasons of job security. A remark made by the managing director “… the employee believes that as long as the firm generates enough revenue I can keep my job…”. This is an important finding as motivation for growth could be a multidimensional concept where different stakeholders have different motivations for generating business growth.
scenario would be having several subsidiaries investing in large risky projects and fail, which might threaten the survival of the whole organisation.
4.6 The market
4.6.1 Market dynamics
One key success factor of Plastiek’s sales growth is the continuous analysis of current and new markets through a SWOT analysis (strength, weakness, opportunity and threat analysis) with the aim of finding new business opportunities. Another factor is Plastiek’s determination to sticks to its core product (i.e. manufacturing plastic sheets) and constantly develop its competences (i.e. flexibility, reliability and efficiency) to meet customers (shifting) needs. Plastiek’s major customer requirements and demand are to a great extent influenced by governmental actions. Even though governmental actions do not appear very often, if they do then Plastiek’s customers are sometimes forced to update their inventory on a short notice. For example the Dutch government decided that the square feet for chicken housing needed to increase and thus farmers needed to adjust their current chicken housing before a certain deadline (PVE, 2011). Flexibility and production capacity are therefore important factors in the industry. However these governmental actions often carry a certain deadline and thus customer requirements and demand are relatively easy to predict. It is therefore important for the firm to stay close to the market to identify new external business opportunities as these could lead to an increase in gross sales. Concluding that the overall market is stable and products age slowly but if changes occur they can occur very quickly.
efficiency through process innovations (e.g. investment in new equipment and the redesign of the manufacturing layout) or decrease profit margins to keep product prices low.
In Plastiek’s, smaller markets competition takes place through differentiation of product quality where profit margins are higher. Thus these markets are perceived as more profitable. It is important here to meet customer needs with as little variance in production outputs as possible. Customer requirements are therefore less focused on price but more on product solutions. In other word: does the product solve the customer problem? Plastiek differentiates itself from its competitors through the possession of multiple flexible extruders (i.e. the manufacturing machine that fabricates the plastics) that give Plastiek the capability of serving a wider variety of customer needs.
Overall the competitor’s actions are also relatively easy to predict because the amount of competitors in the different markets are limited and it is therefore relatively ease to monitor them. Monitors takes place through customer visits and market exhibitions.
4.7 Market strategy
The main goal of Plastiek’s market strategy is focused on staying close to the market. Crucial in Plastiek’s market strategy is remaining flexible, reliable and as efficient as possible. These are reoccurring themes within Plastiek, logical because these are Plastiek’s core competencies. Especially production flexibility is important (as motivated above) as customer demand and requirements may suddenly change due to predictable governmental actions. These core competencies are to a great extent dependent upon Plastiek’s extruders. Thus these machines are crucial for the firm’s the firm’s survival.
neglected its marketing activities for several years and is still a profitable growing business. This is caused by Plastiek internal focus and constant analysis of the market for new business opportunities through. However to increase its marketing activities, Plastiek had recently hired a marketing consultancy firm to improve its marketing activities.
In total Plastiek management devotes 22,5% of its time to networking. For wich 18,5% is devoted to looking for new business contacts by visiting market exhibitions and around 81,5% of the time is devoted to maintaining current business contacts through company visits and phone calls. During these visits several things are discussed like the customers current business, problems and market activities but also their product satisfaction and competitor offers and actions. This provides Plastiek with valuable market information like current customers satisfaction and their needs and wishes but also feedback on Plastiek’s current operations. This information is then translated into new internal or external business opportunities. Besides having close relationships with customers Plastiek is also a member of a more formal network, which is its parent organisation Manufacturer. However it seems like Plastiek does not maximizes the exploitation of this network. The managing director confirms this but expects that resources like financials could potentially be exchanged. Plastiek does not exploit this network because it wants to remain as independent as possible. This independence gives Plastiek the operating flexibility to make fast decisions when needed.
4.9 Continues entrepreneurship
Plastiek is continuously developing itself internally. Where efficiency, flexibility and reliability are important aspects. With regard to efficiency and flexibility Plastiek constantly searches for ways to improve the production process (i.e. process innovations) to increase production capacity without becoming too rigid. The managing director stated, “efficiency is important but to remain flexible, the employees need to be flexible, and making the firm too rigid might harm the employees willingness to cooperate”. Recent examples (as mentioned earlier) are the investment in a new extruder (manufacturing machine) but also a redesign of the manufacturing layout. Both result in producing more products at lower cost.
innovations) as business opportunities over new products (product innovations) that could be sold to current and new markets, this because products age slowly.
In this chapter the case study findings are analysed. As mentioned in chapter three a pattern matching technique is used namely explanation building. Table 4 and 5 provide a clear overview of the research findings.
General firm information
Plastiek Plastiek is an international plastic sheet manufacturer that possesses 51 employees and around !11 million in annual revenue. It operates in a variety of markets where customers can order a variety of plastic sheets according to their specific requirements.
Growth Over the last four years, Plastiek has generated an employee decrease of 0,27% (less than one employee). The decrease in the number of employees might be a result of the economic crisis between 2008-2009 where the firm also experienced a decrease in sales and therefore needed to lay off employees. But overall the firm was capable of generating an increase of 2,76% (! 299.000) in gross sales. Table 4
Factors that could lead to business growth
Human capital The management team is highly educated and has similar job experience at other firms. The average age is 45 all are male and supervise around 13 employees. The firm stated that human capital is important to identify both internal and external business opportunities.
Finance Sufficient financing is needed to finance the exploitation of business opportunities. Currently the firm is capable of financing all projects through past profits. However, the firm recognises that in the future external financing is needed from Manufacturer for relocation of the manufacturing plant to increase the firm’s production capacity. Market
Overall, the firm’s market is stable. Which is caused by the government who influences the firm’s customer needs and requirements. Because the market is stable the firm experiences limited amount of business opportunities and thus also explores other markets.
Competition The degree of competition varies per market served. In the high growth market it is more difficult to seize external business opportunities versus markets with a low degree of competition. Market strategy The firm’s market strategy is to create strategic fit (i.e. creating fit
with the firm’s environment). Flexibility, reliability and efficiency are crucial for the firm to stay close to the market and to adapt to market changes. Market changes are identified through a SWOT analysis that analyses both the firm’s internal and external business environment. To gather data for the SWOT analysis, company visits are held. Networking 22,5% of the total management time is devoted to networking where
18,5% is devoted to search for new clients and 81,5% is devoted to maintaining relations. Through networking intangible resources are exchanged in the like customer, market and competitor information. Although the firm underutilises its formal network, it does realise that through networks also tangible resources might be exchanged. Continue
The firm constantly tries to develop and improve itself. Therefore it constantly analysis its internal business for new processes and organisational innovations. It also explores the external business environment for changing costumer needs and new technological developments that could improve the business.
Based upon the literature review, the inference was made that each of the nine factors could be linked to either sales or employee growth. Unfortunately this research is not capable of making such a distinction. This was caused by the fact that the firm analysed in the research had never thought about achieving different forms of business growth by stimulating different factors. Thus they had never initiated and recorded projects where they focused on a set of factors leading to a specific form of growth.
Although this research is not capable of linking one factor to a form of growth, it is capable of explaining how the nine factors might relate to business growth. It seems that the nine factors contributes to four crucial aspects to achieve business growth:
(1) Availability of business opportunities: a firm’s internal and external business environment that to provide business opportunities for a firm to grow.
(2) Capability to identify business opportunities: a firm needs to have the capability of identifying business opportunities in its internal and external business environment that the firm can exploit.
(3) Availability of scarce resources: a firm needs possess or have access to certain scarce resources needed for exploiting business opportunities.
(4) Actual exploitation of business opportunities: all of the three above aspects can be in favour of a firm, however if it does not actual exploit business opportunities it is not capable of actual achieving business growth.
These four aspects are the backbone of the hypothetical model in figure 3, i.e. the red building blocks. In the following paragraph is discussed how these nine variables might relate to one of the four aspects and thus to business growth.
5.1 Availability of business opportunities
Opportunities need to be available in the internal and external business environment for a firm to generate business growth. From the literature review was inferred that the more dynamic a firm’s market is the more likely business opportunities emerge. This theory is confirmed in this case study where the firm’s market is relative stable and therefore experiences a limited amount of business opportunities. The firm therefore analyses other markets that could provide new business opportunities. This led to the following hypothesis:
5.2 Identifying business opportunities
From the case study appeared that the firm’s market strategy is important for identifying business opportunities. The firm studied states that its market strategy is to create strategic fit (i.e. to stay close to the firm’s business environment). To stay close to the market the firm needs to remain flexible, reliable and efficient adapt to changing market needs. Therefore the firm searches for new internal and external business opportunities in its current markets. This search increases the firm’s probability of finding new business opportunities, leading to the following hypothesis:
H2: Having a market strategy increases a firm’s probability of identifying business opportunities.
For performing the market analyses the firm uses a SWOT analyses. The customer network is used to collect the necessary data. This network provides the firm with the necessary information on market developments, customer satisfaction but also competitors actions. Therefore networking increase the probability of finding new business opportunities, leading to the following hypothesis:
H3: The more a firm invests in networking the more likely business opportunities are found. It appeared from the case study that performing a market analysis is likely influenced by the human capital of the firm’s management team (i.e. educational level and experience). The firm’s managing director stated that the human capital aspects of the management team makes the firm capable of performing successful market analyses that led to the identification of business opportunities. This leads to the following hypothesis:
H4: The identification of business opportunities is positively influenced by the human capital of a firm’s management.
analyses of its internal and external business environment. Leading to the following hypothesis:
H5: The more motivated a firm’s management is, the more likely a firm will analyse the internal and external business environment for business opportunities.
5.3 Capability to exploit business opportunities
The third aspect is whether a firm is capable of exploiting business opportunities. One constrain experienced by the firm is their possession of a certain scarce resources namely finance. Without the necessary financing the firm is not capable of investing in certain business projects that could generate business growth. For example the firm studied expects that in their current market provides unidentified and unserved customers (i.e. a business opportunity). Because the current management has no time to perform an in-depth market analysis to identify these unserved customers, a market specialist was hired. The firm expects that new customers emerge and therefore demand increases. However production capacity constraints are expected in the near future, which threaten the firm’s capability of exploiting this business opportunity. In order to increase production the firm needs to relocate its manufacturing plant to a larger location and therefore large financial investments are needed. Without the necessary financials, to alleviate the production constrain, the firm is not capable of completely exploiting new business opportunities that increase the firm’s demand. Leading to the following hypothesis:
H6: Possession of sufficient finance positively influences capability to exploit business opportunities.
There is, however, a solution to financial constrain namely networking. The literature review already stated that through networking (in)tangible resources could be exchanged. Although the firm studied in this research did not use its network to alleviate their future financial constrain, it does recognise the benefits of (in)formal networks. Through their formal network with their mother organisation, the firm is capable of alleviating their future financial constrain. Leading to the following hypotheses:
5.4 Actual exploitation of business opportunities
Although a firm might operate in a market that provides business opportunities that the firm can exploit and it has he capability to identify and exploit these business opportunities is still no guarantee for business growth. Without exploitation of a business opportunity a firm might not generate business growth. The case studied shows that business opportunities are exploited through innovations. For example to serve new customers demand increase is expected thus production capacity needs to increase. A short-term solution has been to redesign the manufacturing plant and to led employees work in more shifts. And thus through innovations business opportunities are exploited. Leading to the following hypothesis:
H8: the higher the degree of firm innovativeness the more likely a firm exploits business opportunities through innovations.
However the actual exploitation of business opportunities also gives no guarantee of exploiting a business opportunity. It appeared that in markets where the degree of competition is high it is more difficult to keep current and attract customers versus markets where the degree of competition is low. And thus the firm’s competitiveness also plays a crucial role whether a business opportunity is really exploited. Leading to the final hypothesis:
H9: The higher the degree of competition the less business opportunities are likely to be exploited.
Based upon the above hypotheses it seems that continues entrepreneurship involves all four aspects and factors. Thus leading to the inference that continues entrepreneurship might not be a separate factor but might involve the whole process of identifying and exploiting business opportunities. Figure 3 visualises the above discussion.
This thesis aims at obtaining insight in the factors that cause firms to grow. Therefore a significant body of literature has been reviewed to define how business growth can be measured and what factors can lead to business growth. Furthermore, a case study was conducted because for some of the variables it remained unclear how they relate to business growth. Paragraph 6.1 presents the research conclusions, whereas 6.2 discusses the research limitations.
How can business growth be measured?
Unfortunately, the academic literature has not been able to provide a single definition of firm growth. Because several definitions are used in the literature, the research findings are hard to compare and dispersed. This might explain why no general model for business growth has emerged yet. During this research the different measures of business growth were recorded. It appeared from the literature review that business growth is most often measured in terms of number of employees and sales (in value). As such these measures are inferred to represent business growth the best and were thus adopted in this research.
Which factors drive business growth and how are they related to sales and/or employee growth of Dutch medium sized enterprises
• Human capital (in terms of the educational level and experience): is important for the management when performing market analysis and thus to identify potential business opportunities relevant for the firm.
• Motivation: determines whether the management actually explores the market to search for business opportunities.
• Market based strategy: a firm needs to create strategic fit with the business environment. That means it should focus on staying close to the business environment to identify market changes and adopt the firm accordingly. To achieve this a firm needs to analyse its external business environment for market changes. These changes can lead to new internal and/external business opportunities.
The third aspect is whether a firm has the capability to exploit business opportunities. From the nine variables only one can be linked to this aspect namely finance. Without the necessary financials a firm cannot invest in certain projects that have the purpose of exploiting business opportunities. Being financial constraint might thus threaten business growth, although having sufficient financials is no guarantee for growth. But investing more time in networking might alleviate financial constraints. This because through networks tangible resources like financials can be exchanged. For example the case studied in this research could exploit its formal network with its mother organisation in order to obtain external finance. Networking could also contribute to the identification of business opportunities because also intangible resources like market information could be exchanged. However without the actual exploitation of business opportunities, business growth is not achieved. This is the fourth and final aspect and covers the last two of the nine factors. The actual exploitation of business opportunities is dependent upon two factors:
• Innovation: is needed for a firm to actual exploit a business opportunity. From the case appeared that firm could possible serve more new customers in its current markets. To serve these new customers production capacity needs to increase. To solve this problem in the short term the firm made some process innovations like redesigning the manufacturing layout using more shifts.
The dependent variables can also be dependent upon each other
Another important finding is that in the case study the firm is more motivated to generate sales than employee growth, which also appeared from the literature review. However through the case study was discovered the firm is more motivated to generate sales growth than employee growth. The need for employee growth only increases when the current use of resources cannot be used more efficiently to cope with the current increasing demand and increasing need for production. Thus it appears that employee and sales growth are related and not independent of each other. But it also implies that the need to achieve sales or employee growth varies over time. This might provide an explanation why no general measure for business growth has been found as the importance of a dependent variable varies over time. If this finding is correct it might be questioned if consensus on a general measure for business growth will ever be reached.
This research stated from the start that the hypothetical model (figure 3) does not aim to be comprehensive, as this seems to be an impossible task because no consensus has been reached on how to measure business growth. Therefore this model might not be complete and more research is needed to identify factors that could lead to business growth. Furthermore this research has only focussed on those variables for which no distinction could be made between sales and employee growth. Therefore some identified factors were excluded from the case study, which might also be related to the four aspects identified in this study.