Why do dreams not always come true?

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Why do dreams not always come true?

The constant struggle of staying in business

Master Thesis

Student: Verdie van den Brink Number: 1682601

University: University of Groningen Master: Business Administration

Specialization: Small Business & Entrepreneurship Supervisor: E.P.M. Croonen

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Summary

Currently, lots of literature is available on small business life cycle models. Looking at this amount of literature two traditional paths can be distinguished. First, the path which is the most written about are the different ways companies can grow and evolve themselves through the small business life cycles. This is accompanied by theory devoted to (small) business growth and company performance. The second traditional path that is discussed frequently, especially during the current financial crises, is the failure and termination of companies. In other words, the companies’ life cycle has come to an end. However, these two traditional paths are not the only cycles companies can experience. This thesis focusses on a third path about companies which get stuck in the so called survival stage of the small business life cycle models. Companies which experience this survival stage muddles along through time but will never be successful that you read about them in the newspaper, but will also not decline or terminate. This research gap, companies which get stuck in the survival stage of the small business life cycle theories will be addressed during this master thesis and is formulated into the following research question:

What factors restrain the evolvement of small startup businesses so they remain in the survival stage of the business life cycle?

In order to find an answer to this research question a qualitative research study is conducted. Growth factors which influence the evolvement of small companies found in literature will be combined with the theory available on small businesses life cycle models. This enumeration of literature will be combined into a list of six (6) propositions which will be investigated on their validity and practicality through a case study. This case study will be conducted with the business plans available from The Soil Company (TSC). This business started in 2001 as a result of a project from the University of Groningen. The founder and current owner of The Soil Company (TSC) saw an opportunity and started the business which is specialized in the production of specialized spatial soil information.

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effect on the evolvement of the small business out of the survival stage, using a network in an appropriate way has a positive effect on the evolvement of the small business out of the survival stage, wrong decision making has a negative effect on the evolvement of the small business out of the survival stage and last but not least, any form of a crisis has a negative effect on the evolvement of the small business out of the survival stage.

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2.3.1 Resources ... 22 2.3.2 Environment ... 23 2.3.3 External fit ... 24 2.3.4 Network ... 25 3. Theoretical framework ... 27 3.1 Conceptual model ... 27 3.2 Research method ... 30 3.2.1 Research approach ... 30 3.2.2 Participant ... 31 3.2.3 Data collection ... 31 3.2.4 Data analysis ... 34 4. Findings ... 36

4.1 Unclear and shortsighted vision/planning ... 37

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4.3.3 Suppliers ... 46

4.4 Network ... 47

4.5 Wrong decision making ... 49

4.5.1 Blinded stage ... 50

4.5.2 Inaction stage ... 52

4.5.3 Faulty action stage ... 52

4.6 Crises ... 53

5. Conclusion ... 55

6.2 Recommendations for future research ... 56

6.3 Research limitations ... 56

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1. Introduction

Business life cycle models were the most frequent theoretical approach to understanding entrepreneurial business growth from 1962 to 2006 (Levie & Lichtenstein, 2010). To confirm this statement Levie & Lichtenstein (2010) did a literature review and made an analysis of 104 (!) business life cycle models. Unfortunately Levie & Lichtenstein (2010) had to conclude that there was no comprehensive business life cycle established yet. In their article they state that all the published literature showed no consensus on basic constructs of the approach, and no empirical confirmation of stages theory. In other words, the writers verify that a lot is written about small business life cycles, but not many researchers/writers actually test their models in practice.

When one looks at all the literature written about the small business life cycles two traditional stages can be distinguished. On the one hand there is a group of researchers which write about the growth factors which stimulate companies to evolve through their life cycles. From now called the growth stage. And on the other hand there is a group of researchers which write about the failure of companies. These are the companies who completed a full life cycle and were eventually terminated, voluntarily or by force. From now called the failure/termination stage.

1.1 Understanding the growth stage

When one looks through the huge amount of available literature about business growth and especially small business growth, one could state that a lot is written about this topic. An article that takes a real meta analytic view on small business growth is the article of Wiklund et al. (2009) in their article they discuss five topics that influence small business growth, namely: entrepreneurial characteristics, the environment, strategic fit, resources and growth attitude. Masurel et al. (2006) state that companies develop in different speeds and directions. Gregory et al. (2005) take a different point of view and state that the business development is mainly depending on the financial decisions the company makes. The article of Shaw (2006) focusses on the importance of small firm networking and Verdú-Jover et al. (2006) say that different forms of flexibility keep small business alive.

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models that is extensively discussed, the less bright perspective about failure and termination of companies.

1.2 Understanding the failure/termination stage

Philips & Kirchhoff (1989) already found out during an investigation from 1978–1984 that the survival rate of small businesses is 76% after two years and 48% after five years. Another investigation about company failure rates is the study from Head & Kirchhoff (2009). Their investigation started with 528 different businesses and after ten years only 171 remained. This represents a survival rate of only 31,8 %. Year 1 2 3 4 5 6 7 8 9 10 # of firms (x 1000) 538,1 402,5 343,4 302,8 270,9 244,1 221,4 202,3 185,8 171,6 Survival rate 100% 74,7% 63,7% 56,1% 50,2% 45,3% 41% 37,5% 34,3% 31,8%

Table number 1: Results of business survival of the Head & Kirchhof 2009 investigation

The data presented in the table above is confirmed by several other investigations in the past and more recently. As mentioned before, Philips & Kirchhoff (1989) but also Knaup and Piazza (2007) found survival rates of 66% after two years and 44% after being in business for five years. These articles all discuss the failure rates of companies and try to give explanations for these events. Dodge & Robbins (1992) explain the failure/termination of a company as follow. Obviously, small firms face different sets of internal and external environmental variables (called growth factors in this thesis) as they move from stage to stage. And these variables cause problems that must be solved if the momentum of the business is to be maintained (Dodge & Robbins, 1992). In other words, companies who are not able to solve their problems with the growth factors important for the company may face failure/termination of its existence.

1.3 Understanding the survival stage

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Lewis, 1983). If the company stays in the survival stage for a long time, the firm more or less remains in a status quo, waiting for something that may never seems to happen. You will rarely read about them in the newspaper, but companies in the survival stage will also not decline or terminate. However less is written about the survival stage, it is important that we understand how companies enter this stage and even more important how they can move out of this stage. As Churchill and Lewis (1983) present in their article, during their research 20,5% of the companies they investigated were in the survival stage. So more knowledge about this phenomenon would be desirable in order to understand and support companies that have to deal with this process in the future.

As was explained in the previous section, companies who are not able to solve their problems with the growth factors important for the company may face failure/termination of its existence. So the growth factors seem to be important for the company to move on to the next stage of the small business life cycle model. This research gap in the small business life cycle theories will be addressed during this master thesis. Growth factors found in literature that influence the process of companies evolving from the survival stage of the small business life cycle will be tested on its validity and practicality through a case study. This process is called ‘Pattern matching’ by Yin (2003). In figure 1 three hypothetical small business life cycle trajectories are visualized, remember that there are almost an infinite other trajectories possible. Trajectory one presents the perspective of the growth theory available. Trajectory two presents the research gap that will be discussed during this master thesis and trajectory three presents the perspective of the failure and termination literature available.

Figure 1: Hypothetical visualization of the three discussed small business life cycle trajectories.

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The first part of the question represents the growth factors which will be reviewed through the use of a literature study. These growth factors make the difference between the growth and the failure/termination of a company. The last part of the question expresses the need to review the literature that is available on the small business life cycle models, in other words, which stages companies experience during their existence. The connection between the growth factors and the small business life cycle models will result in a coherent model in which the collaboration between these two topics will be shown. This is needed in order to understand how growth factors can restrain the businesses from evolving out of the survival stage.

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2. Literature review

As explained before, this thesis will start investigating what is already written about small business life cycle models and small business growth. During this literature review several factors which influence these processes will be introduced and discussed. In the introduction it was already mentioned that a lot of literature is available about the small business life cycle models and small business growth. The idea of combining small business growth factors and small business life cycle models into one thesis topic, namely the evolvement of small startup businesses out of the survival stage of the business life cycle is originated from two articles. The first article that is responsible for this thesis is the article of Levie & Lichtenstein (2010). The most eye-catching of this relatively young article is the fact that the researchers investigated 104 different business life cycle models. Based on this fact it may be said that the researchers know what factors are important for these kind of models. After reading this article the idea emerged to use it as the red line through this literature review. But also other properties of the article of Levie & Lichtenstein made it interesting to use. Other advantages of using this article are the fact that the researchers compared the models which they investigated and describe how a general business model works. This general business model design is the basis on which this literature review is made. Levie & Lichtenstein (2010) also traced back the origin of models which they investigated. This research revealed that many models (21) can be traced back to the business growth model of Greiner (1972). The rate of duplication and usage for the design of various other models made the Greiner model interesting for this review.

The second article which formed the basis of this master thesis is the article of Wiklund (2009). During a course of the master Small Business & Entrepreneurship the writer of this thesis got familiar with this article. With the work of Levie & Lichtenstein (2010) in mind this formed the idea of combining them into this investigation. The article of Wiklund (2009) is much appreciated because it takes a broad perspective on several factors which are responsible for the growth of companies. However the thorough explanation and discussion on the relevance of the five factors mentioned in his article, the writer of this thesis did not totally agreed with Wiklund (2009) and had to find additional articles to present a more complete research to the reader.

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on articles from the year 2000 and younger. The usage of a time window still gives lots of potential articles relevant for this research. After the time window the source of publication became a searching criterion. Articles published in scientific magazines like Entrepreneurship Theory and Practice, Small Business Economics, Journal of Small Business Venturing, International Small Business Journal, Journal of Small Business Management, were preferred if present in a search action. This choice was made because this ensures that the articles are checked and reach a certain level of scientific expertise, this ensures the trustworthiness and validity of this thesis. Other sources to find usable articles were the two articles on which this investigation is based on. From their references a better understanding and clarification could be gained. The last source of information is briefly mentioned before, during the master Small Business & Entrepreneurship several articles of different topics were extensively reviewed and discussed with professors and fellow students. During these discussions, many perspectives on articles were available which could contribute to this investigation and are therefore included.

2.1 What are small business life cycle models?

As could be read in the introduction, in this part of this thesis small business life cycle models will be investigated. There are many variants on the business life cycle models (Levie & Lichtenstein, 2010) but all these models can be lead back to a general concept of these models. As table 2 presents, there are four different stages which the business can pass through. There is the stage of conception and birth of the company, the growth stage, the decline stage and eventually the stage of death. The reason for this model to have four different stages is the following. Since there are many small business life cycle models, there is also a great variety in the amount of different stages these models contain. But all the different life cycle models contain the same sort of message in their stages, which can be let back to four essential different stages (Dodge & Robbins, 1992).

Stage: Features: Conception &

Birth

- Opportunity recognition by entrepreneur - Making a plan (formal or informal) - Purchasing resources to start - Purchasing permits and legitimacy - Few customer orders and payments Growth - Turnover grows

- Possible growth of personnel - Increasing customer orders

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- Internal business structure changes - Reputation establishes

Decline - Decreasing customer orders - Decreasing turnover

- Possible downsizing in personnel - Facing facts is important

- Fast decision making is essential Death - Termination of all activities

Table 2: The four basic small business life cycle stages (Levie & Lichtenstein, 2010)

Despite the fact that the business life cycle models contain four different stages, this is not an assurance that all companies will experience all these stages. Quit often, companies go from the birth stage directly into the death stage (Jones, 2007). This can happen if the companies cannot find a good match between customers and/or resources and the company itself. Another possible trajectory would be for a business to go back and forward between stages. For example, an alternation between the growth and the decline stage. This trajectory is currently during the economic recession a very realistic trajectory. However not every business takes the same route through the small business life cycles the models are generally descriptive. But what does this mean? Tsang (1997) gives a good explanation of these two different meanings. Descriptive means: how does an organization learn? And prescriptive means: how should an organization learn? When we relate this back to the small business life cycle models, which describe how businesses age and develop. It seems justified stating that the models are descriptive. This assumption is confirmed by the fact that the models describe the difficulties the businesses can face in the different stages of the models, the models do not explain what should be done, they only analyze. Of course after these analyses, researchers and/or management can draw its conclusion about what needs to be done to avoid the difficulties that the models describe. This is also the main reason for using the small business life cycle models. One can use the knowledge and expertise implemented in the models to draw fast conclusions about the state and shape of the business, this is especially desired when the business is active in a dynamic environment.

2.1.1 Conception & Birth stage

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the company is officially born and is ready to go into action. But this sounds easier than it is and the entrepreneur could encounter several problems in this stage. Because as Obschonka et al. (2012) explain, business idea generation is not the only factor responsible for business success. Besides the business idea, the entrepreneur needs to have a plan how he/she wants to achieve the business idea. In the most opportunistic scenario, the entrepreneur already has a plan in which is described what the product will be, what customers are wished to be served and how it all will be financed. (For an example of a detailed overview of a good structured business plan, see the book of A. Osterwalder & Y. Pigneur: Business Model Generation.) Off course, having an explicit business plan is not obligatory when an entrepreneur wants to start a company but in most situations it is recommended. In the article of Stone & Brush (1996) is said that formal planning promotes external legitimacy. In other words, to gain external approval and resources written business plans are in most cases a necessity. But this does not mean that the writers encourage the use of written business plans in all situations. In fact, in certain conditions the use of a written business plan can also hold the company back. Examples of these conditions are the influences of multiple constituencies, the lack of direct control over resources and the small size of the companies (Stone & Brush, 1996). The main reason why entrepreneurs should design a business plan, or deliberately choose not to, is to let them think about the potential pitfalls for their company. This is important because starting companies are fragile because they (yet) not have a clear structure. Problems are dealt with on the moment and the vision of the company is very short sighted. Just a few customers have placed orders and the first payments are coming in. Expanding and survival are based on trial and error in the beginning but will gain more structure as time passes by (Jones, 2007). This process continues into the growth stage of the small business life cycle.

2.1.2 Growth Stage

‘In this stage, the business establishes itself through strong positive growth with a commercially feasible product and/or marketing approach. High levels of uncertainty exist, making it vital to monitor the marketplace and adapt initial strategies to major changes’ (Dodge & Robbins, 1992, page 29). So, if the recognized opportunity turned out to work for the entrepreneur and the first

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But gaining access to more resources and production assets is not the only important factor which influences the growth curve of small companies. When the production processes of a company changes also the organizational approach and structure companies have need to change and match the production process. Companies can struggle with this during their entire growth stage. A good model that typifies this struggle is used for many researches and other models namely the organizational business growth model designed by Greiner (1972). Many theorists believe that companies encounter several problems during their trajectory through the growth stage. These problems need to be managed in the appropriate way in order for the business to survive and keep on growing. As mentioned before, many theorists think that the model of Greiner (1972) is one of the best models that captures the phenomenon of small business growth and the problems these companies encounter. This is based on the fact that Greiner’s (1972) model was cited as a source for 21 models, more than any other source (Levie & Lichtenstein, 2010).

Figure 2: Greiner’s Organizational Business Growth Model (1972)

The processes and different phases in figure 2 are explained in table 3. In this table a brief description of each phase is made to express the most important points that typify these phases.

Evolution / Revolution: Description

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misinterpret signals from lower management layers.

Growth – Direction A new assigned top management team takes responsibility for directing the business’s strategy and lower-level managers assume key functional responsibilities.

Crisis – Autonomy The structure designed by top management and imposed on the organization centralizes decision making and limits the freedom to experiment, take risks and be internal entrepreneurs.

Growth – Delegation To solve the crisis of autonomy, businesses must delegate authority to lower-level managers in all functions and divisions.

Crisis – Control Top managers compete with lower-level managers for control over organizational resources.

Growth – Co-ordination A balance between centralized and decentralized control needs to be found.

Crisis – Red Tape Because of organizational bureaucracy the workload increases but organizational effectiveness does not increase evenly.

Growth – Collaboration Greater spontaneity in management decisions through the use of teams and the use of confrontation and interpersonal differences are emphasized. Summarized: going from a mechanistic to organic decision making structure.

Crisis - ??? Another future crisis or managerial problem has to be accounted for.

Table 3: Explanation of the Greiner (1972) organizational business growth model (Jones, 2007)

Unfortunately, for this research there are some disadvantages in using the model of Greiner (1972). Greiner (1972) developed this model for large organizations. Since this research is focusing on small and medium sized organizations there are assumptions in the model made which could misfit the size of the organizations used in this research. However, the problems mentioned in the model of Greiner (1972) can still be applicable for small and medium businesses. Especially the first three growth evolutions are recognizable in small and medium organizations and will be used further in this master thesis. But also the factors mentioned in the last evolution: Growth through co-ordination and growth through collaboration can be applicable when this research is going to look at the restraints that businesses face when growing out of the survival stage.

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profits (Wiklund & Shepherd, 2003). So it seems that organizational growth is not important in itself, but it is the side effect of other decisions made. This is confirmed by the huge amount of literature written about the motivational drive for business owners, some owners perceive success entirely different than others. A good example of this theory is explained in the article of Walker & Brown (2004). In their article they explain that when the community thinks about successful people these thoughts are associated with richness. But this is not true, according to their investigation there are lots of other factors which business owners and entrepreneurs find more important than business growth. In fact, non-financial factors were deemed more important than financial ones (Walker & Brown, 2004). Keeping this in mind is important when businesses are investigated, because the personal objectives of the small business owner may influence many decisions.

2.1.3 Decline and Death Stage

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Figure 3: Organizational decline model of Weitzel & Jonsson (1989).

The reason this model is chosen to represent the decline and death stage is because it has a good connection with the model of Greiner (1972). The model of Greiner (1972) shows the upward slope of the growing business and the model of Weitzel & Jonsson (1989) starts at the conjunction point were the business starts to decline (constant dark line). According to the model of Greiner (1972) this point is never reached, but eventually every business has to deal with some sort of setback, minor or major. The combination of these two models gives a good and understandable overview to the reader (Jones, 2007). And makes clear that also in the decline stage, the business can take multiple trajectories through the small business life cycle. In the following table, the different stages are explained and also the possible actions (dotted lines) businesses can take to avoid entering the dissolution stage are discussed.

Stage/solution: Description

Stage 1 – Blinded Failure to anticipate or detect pressure, decline begins.

Solution – Good information The blinded stage can be ended by good information gathering and usage. Scanning and control actions are recommended. Stage 2 – Inaction Failure to decide on corrective action, decline becomes

noticeable.

Solution – Prompt action Major adaptions are necessary, inaction must be banned. The company needs restructured processes and decision making. Stage 3 – Faulty action Faulty decisions, faulty implementation of decisions.

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Stage 4 – Crisis Faulty-action stage and unforgiving environment, last chance for reversal. Given forgiving environment, slow erosion. Solution – Effective reorganization Institute a major reorganization and turnaround.

Revolutionary changes in structure, strategy, personnel, and ideology are necessary.

Stage 5 - Dissolution Crisis stage and unforgiving environment, rapid demise. Given forgiving environment, slow demise.

Solution – No choices From this point on, there is no way back and the business will face termination of all activities.

Table 4: Explanation of the organizational decline model of Weitzel & Jonsson (1989).

About the duration of each stage there is little one can predict. The duration is dependent on internal decision making actions and external influences. Some businesses can stay for years in a certain stage and then recover or eventually can still be faced with termination. This uncertainty about the timeframes is something which goes like a red line through the small business life cycle models because it is very dependent on a huge variety of internal and external factors.

2.1.3.1 Applicability of the decline and death stage

One could say that these last two stages of the small business life cycle model are not applicable to this research because they are not restraining factors in a way they are holding the company back from evolving but are breaking the company down. But the decline and death stage do in fact educate us about factors which can be important in investigating the reasons why businesses stay in the survival stage. In the decline stage several pitfalls are discussed which can jeopardize the existence of the organization. To use these factors for this research it is important that the stages of decline are looked at as if they were independent events. For example: stage 3, faulty action taking is something what can be a factor of decline. But it can also be an occurrence during the startup stage of the business. If the entrepreneur makes wrong decisions it can be that the decision forms a restraining factor on the growth of the business. So even if the model as a whole is not directly applicable for this research, indirectly, there are still lessons that can be learned from the model.

Summarized

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these four stages per stage several risk factors for the evolvement of the company were mentioned. In table 5 an overview is presented of the four stages and which risk factors they contained.

Stage: Reviewed risk factors: Birth Lack of planning

Unclear and shortsighted vision Growth Crisis of leadership

Crisis of Autonomy Crisis of Control Crisis of Red tape Decline Blinded stage

Inaction stage Faulty action stage Crisis stage

Death Dissolution stage

Table 5: Summary of the general four small business life cycle stages and their risk factors.

All the risk factors presented above will be used for the construction of the restraining factors of the conceptual model further on in this thesis. Only one exception should be noted, the dissolution stage of the organizational decline model of Weitzel & Jonsson (1989) is not included in the conceptual model. This was a deliberate choice because the dissolution stage is not an assumed restraining factor for the small businesses of growing out of the startup stage. The dissolution stage involves certain termination of all activities and cannot be reversed anymore when started.

2.2 Survival stage

Despite the extensiveness of the article of Levie & Lichtenstein (2010), according to Churchill & Lewis (1983) and Scott & Bruce (1987) they forget to include one important stage. The fifth important stage is the survival stage of the small business life cycle model. Churchill & Lewis (1983, page 4) describe the survival stage as follow: ‘In reaching this stage, the business has demonstrated that it is a

workable business entity. It has enough customers and satisfies them sufficiently with its products or services to keep them. The key problem thus shifts from mere existence to the relationship between revenues and expenses.’ According to Churchill and Lewis the small business growth model should be

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Figure 4: Business growth model according to Churchill and Lewis (1983).

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Figure 5: Small business growth model of Scott & Bruce (1987).

According to Scott and Bruce (1987) as a small company develops it moves through five growth stages, each with its own specific characteristics. The evolvement of the company from one stage to the next requires change, the problems of change can be minimized if managers are proactive rather than reactive. Knowledge of the factors which influence the problems of change can smooth the transaction between stages. The problems that companies experience during the evolvement of the company are represented in figure 5 with the dense waves between the inception and survival stage, and the growth and expansion stage. Off course it should be kept in mind that these problems also can occur when evolving between other stages and that companies can go back and forward between stages as was also earlier explained during the review of the model of Levie and Lichtenstein (2010).

Now that it is clear where the survival stage is located in the spectrum of small business life cycle models and that it is plagued with problems for the companies who are experience this stage. It is important to investigate which factors the company needs to identify and control in order to evolve itself out of the survival stage. These factors can be found in the growth literature and will be identified and reviewed in the next section of this thesis.

2.3 What is small business growth theory?

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al. (2009) is much appreciated and is used as the red line for the small business growth literature review. The article of Wiklund et al. (2009) describe resources, the environment and the external fit of the company to be very important in order to optimize small business growth. But also entrepreneurial orientation and growth attitude are mentioned. For this research the factors resources, the environment and external fit are used. The other two factors, growth attitude and entrepreneurial orientation are not used because they are focusing too much on the decision making process of persons instead of companies. Since this investigation is focusing on the decisions made by the company as a whole and not of owner/founders as an individual the choice was made to exclude these two factors from further investigation. In the eyes of the researcher only one category is missing. This evenly important topic for this research will be the use of networking, nevertheless the saying goes like ‘it doesn’t matter what you know, but whom you know’. In the article of Shaw (2006) this is confirmed. He stresses that especially for small businesses who are resource constrained it is very important to make good use of their personal and professional network. These topics will be elaborated on more in the paragraphs below.

2.3.1 Resources

Resources are an economic or productive factor required to accomplish an activity, or as means to undertake an enterprise and achieve desired outcome (Jones, 2007). In most cases physical and human resources can be bought or need to be hired and thereby cost money. For this, the company needs financial resources to finance all the activities of the company. Lots of literature is devoted to the fact that small companies have a limited access to financial resources which limits their growth (Hartarska et al. 2006). This limited access to financial resources appears because small companies mostly do not have these financial resources themselves, they need to get these from external parties. Unfortunately, small companies face some difficulties in getting these financial resources. Small and entrepreneurial companies often face difficulties in explaining and proving their creditworthiness. Informational asymmetries between lenders and borrowers and incentive asymmetries between owners and managers are more pronounced in the case of small firms than with large ones (Scholtens, 1999). In other words, small and entrepreneurial companies find it much harder to get enough financial capital than large businesses do.

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also industry dependent, but in general specialists are rarer than paperboys. This also means that the more specialist requirements the job has, the more the business has to pay. But the availability of human resources is also economical dependent. During the current economic crisis, the unemployment rates go up, so there are more available labor forces, specialists or not.

2.3.2 Environment

As explained in the previous part, the company is dependent on its environment for the company to grow. For the resources, the economical conjecture is a huge factor that influences the availability of human resources. But economical influences are not the only external factor that the company has to deal with. Since the environment is a very broad term to use for the case study a specification had to be made. Jones (2007) makes a distinction between the specific environment and the general environment of a company. Since a case study is conducted in which only one company will be investigated the researcher wanted to focus on the specific environment of the company. This choice is made because the researcher thinks little can be said from the outcome of this investigation regarding the general environment since this research only covers one company. Jones (2007) specifies six specific environmental influences, customers, distributors, unions, competitors, suppliers and government. In this thesis the unions and governmental influences will not be discussed. The reason for this is that these factors cannot be influenced by the company itself. The influences of these external parties have to be taken for granted and the company can only react and adapt to them. On top of this, these influences are the same for all the companies in the same industry so competitive advantages cannot be made on these factors. The customers, suppliers, distributors and competition can be influenced by the company itself and are therefore more interesting and relevant to investigate in this thesis. Since the influence of distributors is closely linked to the use of the network of the company the choice is made to discuss the influence of distributors in the section of networking.

2.3.2.1 Customers

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which markets it delivers. This choice is not only customer dependent but also competitor dependent.

2.3.2.2 Competitors

These are external parties who pursue more or less the same goal as another company. That mutual goal is to reach the biggest competitive advantage in the market. A competitive advantage is the ability of one company to outperform another because it is able to create more value from the resources at their disposal (Jones, 2007). But there are several ways companies can compete with each other, or deliberately avoid each other. This can be done through different market positioning strategies. Because small and/or startup companies are discussed in this thesis, the dealing with large companies is very important. Lee et al (1999) presents three strategies which the small companies can incorporate. He distinguishes the free-riding strategy, the niching strategy and the strategic alliance. With the free-riding strategy, the small company lifts on the success the large company already accomplished in the market. It produces a similar product, also called imitation, and makes sure that it stays below the radar of the large company. The niching strategy takes another path, with this strategy the small company produces a substitute for the product of the large company. Because the small company serves a niche in the market, it is safe from the large companies, because they do not have any interest in the small market of the niche. If the small company wants to react aggressive towards the large companies it needs to make some sort of strategic alliance. In most cases, the small company cooperates with a large supplier to ensure itself of enough financial capital and production resources.

2.3.2.3 Suppliers

As mentioned before, suppliers can be very important for the small companies. In the case above a strategic alliance was important to deal with competition. But having good and reliable suppliers is also important to ensure the quality of produced goods of the small company. Suppliers contribute to the company by providing reliable raw materials and component parts that allow the company to reduce uncertainty in its technical or production operations and thus reduce production costs (Jones, 2007).

2.3.3 External fit

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function of the amount and intensity of forces that a business has to deal with. The complexity of the environment can reach from simple towards complex. The diversity and amount of different forces are determent for the complexity. The second is environmental dynamism, this is a function of the amount and speed with which the environmental forces change over time. This dynamic environment can reach from stable towards an unstable environment. The environment gets more dynamic when forces change more and faster, this makes the environment less predictable. The last is environmental richness, this is a function of the resources available to the business. The environmental richness can vary from rich towards poor. In rich environments resources are sufficiently available so there is little competition in obtaining them. For a company it is important to adapt to these sources of organizational uncertainty the best way possible. This importance is confirmed by Golan (2006) which says that regarding the available resources and cliental, the company will experience little to no success if it is not able to match these factors into a good process management solution. It seems important that the company is aware of the wishes of its environment and that it knows how to deal with these wishes. In the article of Golan (2006) several methods to approach the customer market of the company are explained. But these methods can also be implied towards other external parties. The company has to play this game in order to survive and preferably be better in this game as their competitors are. Is this way, the previously discussed, competitive advantage can be gained.

2.3.4 Network

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information. In this case actual goods will be traded. Like economic transactions, bartering-exchanges also sought to manage of manipulate network relationships to maximize or exploit access to resources they believed would accrue to them by engaging in bartering-exchanges only with those clients most likely to contribute to their resource base (Shaw, 2006).

Summarized

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3. Theoretical framework

3.1 Conceptual model

In chapter two the factors which restrain the small companies in evolving through the life cycle model and the small business growth factors were discussed. For the overview of the reader and for the understanding of the conceptual model, the factors will be summed up and their relation with the conceptual model will be showed.

In chapter 2.1 the small business life cycle model was discussed. The working and relevance of these models were explained and the following factors were distinguished to have influence of the model.

Stage: Reviewed risk factors: Factor in conceptual model: Conception &

Birth

Lack of planning

Unclear and shortsighted vision

Unclear and shortsighted Vision/planning

Growth Crisis of leadership Crisis of Autonomy Crisis of Control Crisis of Red tape

Crisis Crisis Crisis Crisis Decline Blinded stage

Inaction stage Faulty action stage Crisis stage

Wrong decision making Wrong decision making Wrong decision making Crisis

Death Dissolution stage

Table 6: Transformation of factors from literature to conceptual model.

In chapter 2.3 the factors which influence the growth of small businesses was discussed. The article of Wiklund (2009) and Shaw (2006) were founded as the most comprehensive and best fitted for this thesis. The following factors were distinguished to have influence on the growth of a small business.

Reviewed growth factors: Factor in conceptual model: Resources Physical resources

Financial resources Human resources

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28 Environment Customers Competitors Suppliers Stakeholders Stakeholders Stakeholders Strategic fit Strategic fit Stakeholders Network Personal network

Professional network

Network Network

Table 7: Transformation of factors from literature to conceptual model.

The two tables presented above were meant to help investigate the research question in this master thesis. In the introduction of this thesis the research gap was presented, the goal of this thesis was to investigate the factors which make companies to get stuck in the so called ‘survival stage’ of the small business life cycle models. To summarize and comprehend this process a research question was formulated:

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Figure 6: Conceptual model

Note that the conceptual framework serves several purposes: (1) identifying what factors will and will not be included in the study; (2) describing what relationships may be present based on logic, theory and/or experience; and (3) providing the researcher with the opportunity to gather general constructs into intellectual “bins” (Miles & Huberman, 1994).

To make sure that the reader and the researcher have a mutual understanding using the conceptual model, the model is expressed in propositions below:

1. An unclear and shortsighted vision/planning has a possible negative effect on the evolvement of a small business out of the survival stage.

2. Wrong decision making (a summary of three stages of the Weitzel & Jonsson model (1989), namely the blinded stage, the inaction stage and the faulty action stage) has a possible negative effect on the evolvement of a small business out of the survival stage.

3. If used in the appropriate way, a network has a possible positive effect on the evolvement of a small business out of the survival stage.

4. If used in the appropriate way, stakeholders can have a possible positive effect on the evolvement of a small business out of the survival stage.

5. If used in the appropriate way, resources have a possible positive effect on the evolvement of a small business out of the survival stage.

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3.2 Research method

3.2.1 Research approach

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31 3.2.2 Participant

As mentioned in the previous section, this research needs a case study which can provide the data needed to test the presented conceptual model. The Soil Company is such a company. This company started in 2001 as a result of a project from the University of Groningen. The founder and current owner of The Soil Company (TSC) saw an opportunity and started the business which is specialized in the production of specialized spatial soil information. To produce this information TSC has an innovative and specialized tool available: The Mole. “The Mole, a unique sensor developed at the

State University of Groningen, is our most powerful sensor. It is a very accurate top soil sensor that directly measures several soil properties, such as clay, loam, grain size and organic matter, on a quantitative base. The Mole therefore is the ideal sensor for several precision farming applications. The Soil Company combines The Mole with several other techniques such as electrical conductivity and penetration resistance. These systems have in common that data is always gathered on a

geo-referenced base.” The Soil Company website (2012). TSC uses this Mole mainly to produce ‘soil maps’

for agricultural purposes. When this innovative and potential controversial company started, their main focus and application for The Mole was to produce these ‘soil maps’ for farmers so they could use the information to determine with what, where and how much the farmers needed to take care of their lands in order to optimize the growing process of crops.

But what makes this business such a perfect case study for this research project? When TSC started in 2001 making soil maps for agricultural purposes was a very innovative idea. The idea could work, but the intended customer group (farmers) for this product is typified as a very conservative one (Business plan TSC, 2001). Therefore the market did not developed as TSC hoped for and lots of efforts were needed to gain customer confidence for this product. This process maintained itself for several years, TSC managed to get some customers with which it could survive and also other (industrial) markets were exploited on small scale to gain revenues. This lasted until the year 2007, in this year the entrepreneur thought about the available options he had with his company and he almost sold the company. Despite this hard period, the entrepreneur saw an opportunity and maintained his position in the company and sought for ways to continue with TSC. But the struggle for survival kept going until now. This continuous struggle for survival makes this company perfect as a case study for this research project, since the restraining factors for companies to grow out of the startup stage is investigated.

3.2.3 Data collection

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plan every year (2001-2011), in these plans he describes the choices made for the year to come. The reason for this continuous revision of business plans could to be the constant struggle to find financial resources for the operational activities of TSC. Another explanation for this could be that this way of working gives the company a clear vision and mission for the year in front of them and provide them with certain goals to achieve. Since this research is investigating the factors which make a business restrained in the survival stage, it is important to know what choices were made during the existence of TSC. Since all the business plans during the first eleven years of TSC are available, it is possible to indicate which decisions had an influence on the performance of TSC. Unfortunately not all the business plans are structured the same but a global structure is recognizable. In the table below is presented which topics are included in each business plan per year. ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 Summary X X Policy X X X X X X X X X X X Human Resources X X X X X X X Marketing X X X X X X X X X X X Organization X X X X X X X X X X X Production X X X X X X X Risks X X Finance X X X X X X X X X X

Table 8: topics discussed in each business plan.

It should be noted that the topic on human resources is merged into the organization topic of the business plans. An explanation for this could be that during the years the amount of information that needed to be presented decreased over the years so the topic became too small to cover an entire independent chapter. Something which is remarkable is the fact that no review or so called ‘looking back’ topic is included in the business plans. The business plans solely focuses on the future and thereby makes use of data collected in the past but does not discuss this data independently. A reason for doing so could not be concluded from the documentation available.

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conducted by professors of the Rijksuniversiteit Groningen and the owner of TSC was used. Also several other written documents like the company’s website and an acquisition plan were used for this investigation, these documents were used by TSC for internal documentation of processes involving the company.

3.2.3.1 Unclear and shortsighted vision/planning

To investigate this concept only secondary data will be collected. Reason for this is that the risk of bias when using primary data is too high. This risk arises because primary data will be provided due to interviews with the owner/founder. It is likely that he thinks his own vision/planning is in order while perhaps there are some gaps that can be identified by an objective viewer.

To measure this concept the business plans will be analyzed on their topics included. From the previous table it became clear that not all the topics are covered each year. But not only the presence of topics was looked at, also the content was reviewed on its quality. During the investigation some interesting turns of events were noticed and are discussed in the following chapters.

3.2.3.2 Wrong decision making

Also the data collection to investigate the decision making of TSC will consist out of the business plans. The use of primary data for this concept contains the same risk as the previous factor. It is likely that the owner/founder does not recognize his own mistakes but an objective view might tell otherwise.

To measure this concept the sequel of business plans will be reviewed. From the business plans one can discuss the decisions made in a certain year by looking at the business plan from the year after. The course that was set out is adjusted or not and consequences are related to this. These consequences are reflected on the performance of TSC which will be the main measure for this concept.

3.2.3.3 Network

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To measure the influence of a network the data from the business plans was used. The amount of networking was measured (dealerships and developing partners) and the advantage TSC experiences from this networking were reviewed.

3.2.3.4 Stakeholders

Data needed to investigate the influence of stakeholders on TSC will be drawn from the business plans. In the business plans TSC explains choices made on the field of internal and several external stakeholders. The investigation will limit itself to the stakeholders which are mentioned chapter 2. The influence of stakeholders on TSC was measured by looking at the interaction TSC has with them. Since this investigation divided the topic stakeholders into three separate subtopics, customers, competitors and suppliers multiple ways of reviewing this data was used. Customers were measured by amount and turnover while competition was measured by relevance and amount of market share. The influence of suppliers was reviewed by availability and price.

3.2.3.5 Resources

The influence that resources had on TSC was investigated on the hand of data collected from secondary data. This means that the business plans available contain the information needed for this concept. Resources are measured on their availability, this is done by comparing the expected resources needed and the actual available resources.

3.2.3.6 Crises

Data needed to investigate the influence of crises on TSC will be investigated on several written documents. Through time, TSC had to deal with several crises. Written documentation of these events is available and was used in this research. The written documents contain the business plans, an acquisition plan and some other written data about these events used for internal purposes. Every event of a crisis TSC experienced was reviewed and its influence on the company is discussed.

3.2.4 Data analysis

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4. Findings

In this part of the thesis, the results of the data collection will be presented and will be compared and discussed against the propositions and literature review which was conducted earlier. Data found regarding the influences of the six concepts on the dependent factor is presented below per category and will be discussed on their feasibility. This enables us to conclude what factors restrain companies in their evolvement and make them stay in the survival stage of the business life cycle. What must be kept in mind is that the results used for this discussion were conducted out of several ways of secondary data. The most important way of data gathering was the use of business plans. That TSC had made every year (2001-2011), in these plans the company described the choices made for that year. But before this is done a brief description of TSC’s lifetime will be sketched in order to provide the reader with a good understanding of the case.

Description of TSC’s lifetime

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Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Financial

performance

-66.546 -126.403 -67.812 -45.356 N.A. N.A. -83,334 -20.432 -24.180 -22.140

Table 9: Financial performance of TSC expressed in results before taxes. Note: N.A. means not available.

As one can see, the years 2006 and 2007 are not accounted for. Unfortunately in the years 2006 and 2007 no results before taxes are presented in the business plan for these years. A possible explanation for this could be the crisis in which the company found itself in and the high level of uncertainty this brought along which made TSC decide not to present these results. This conclusion is made looking to TSC’s acquisition plan of 2007.

4.1 Unclear and shortsighted vision/planning

The fact that TSC has business plans available for over ten years makes clear that the company at least thought about their vision/mission and has a planning of some sort. But having business plans does not always ensure the quality of these plans.

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important for that year. For a more detailed list, see table 10 below. The fact that the aspect ‘risks’ is mentioned in the business plan shows that the entrepreneur also thinks of potential pitfalls for his company.

To prevent this chapter to become a long summary of all the business plans that TSC has published. A more structural way of analyzing the business plans was conducted. To test the amount of planning the entrepreneur did, a table of the discussed aspects in the business plans was made. See table 10.

‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 Summary X X Policy X X X X X X X X X X X Human Resources X X X X X X X Marketing X X X X X X X X X X X Organization X X X X X X X X X X X Production X X X X X X X Risks X X X Finance X X X X X X X X X X Total amount of X’s 8 8 7 6 6 5 6 4 4 4 4

Table 10: Aspects discussed in the business plans

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39 Year 2001 2002 2003 Discussed aspects - Customers - Product - Employees - Dealer network - Employees - Development technology - Development private equity - Finance

- Employees

- Development speed of company - Development of revenue

- Finance

Table 11: Discussed risk aspects in business plans

As one can see in table 11 and can be seen in the business plans of the first three years is that certain risks remain over the years. Three main risks can be recognized: development of the product/company, attracting qualified employees and financial risks. Since these risks are also recognized during our literature research these aspects will be discussed in the following concepts.

Discussion

The first proposition that was developed in this thesis stated that an unclear and shortsighted vision/planning has a possible negative effect on the evolvement of small business out of the survival stage. Whether this statement is true or false is hard to determine since TSC did had a thorough planning for several future years. But since the results of TSC were behind on planning it is difficult to determine if this is to blame on the vision/planning of the company or other factors in and/or outside the company. Also the reason why TSC makes a new business plan every year can be questioned. An explanation for this can be found in the article of Stone & Brush (1996) in their article it is said that formal planning promotes external validity. Since TSC is in a constant struggle to gain (external) financial resources it is important to gain external validity, the making of business plans can definitely contribute to this.

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4.2 Resources

The second proposition made during this thesis was that if used in the appropriate way, resources have a possible positive effect on the evolvement of small business out of the survival stage. To investigate this proposition the term resources was divided in three factors namely: physical resources, financial resources and human resources. TSC knew difficulties with at least two of these factors during time, the proposition together with the literature review and the results will be discussed separately below.

4.2.1 Physical resources

The physical resources that TSC needed for their core process were most the time available. From the business plans it becomes clear that the development of their product took a bit longer than anticipated at first. But this was calculated for since the entrepreneur saw the company as a development business, only after four years the company would change into a commercial business which would sell the product. This time schedule was more or less achieved and the company did sold their first products. But also other physical resources where provided for, the office that the company uses is sufficient and also the hardware suppliers that provide the attachment construction for the Mole on to the tractor know what they are doing and deliver the half semi-finished products in time.

Discussion

During the investigation it turned out the TSC had little to worry about their physical resources availability. The office that the company shared with Medusa worked well for the company, a collateral advantage of this collaboration is that the companies could share information directly and could work together on the development of the Mole. Also the semi-finished products that TSC needs to assemble the Mole were always available. This is partially because of the simplicity of the semi-finished products that are needed, but it does make that the company does not has to worry about it and can focus its attention elsewhere.

4.2.2 Financial resources

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years to find suitable partners. The development of the product of TSC also cost more than the entrepreneur counted on in his initial business plan. In the business plan for year five the entrepreneur realizes that change is needed, he makes three different financial scenarios. Again it becomes clear that the company needs more external financial resources. This need is caused by the fact that the sales results are less optimistic than the projections made earlier see table 12: Expected turnover at startup of TSC and yearly adjusted expected turnover. The entrepreneur calculated a break-even result in the year 2004, this calculation seemed too optimistic and was not realized in the near future. And even if the company could reach a break-even result, the company has to repay loans and the corresponding interest. The observation that financial resources are a problem that keeps coming back in all the business plans can be made. See table 9: Financial performance of TSC expressed in results before taxes and table 12: Expected turnover at startup of TSC and yearly adjusted expected turnover.

Year 2001 2002 2003 2004 2005 2006 2007

Expected turnover 50.000 120.000 540.750 1.442.750 3.687.750 8.138.750 16.560.750 Adjusted turnover N.A. 52.298 186.200 294.500 369.080 415.600 511.875

2008 2009 2010 2011

28.438.250 N.A. N.A. N.A. 251,750 245.940 326.500 368.000

Table 12: Expected turnover at startup of TSC and yearly adjusted expected turnover

Note: N.A. means not available. The years 2006 and 2007 are turnover predictions made in the business plan of 2005.

Discussion

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42 4.2.3 Human resources

Unfortunately, financial resources are not the only resource related problem. Briefly mentioned in the previous section is the problem of human resources. From year one TSC is in need of companions which can provide knowledge and stability to the company. Especially the needed knowledge seems to be a problem for this company. In the first few business plans the entrepreneur expresses the urge to contract an agronomist and a physicist. These people were needed before the financial crisis existed (2001 – 2003) and the labor market was tight. On top of this TSC demanded that these people were real all-rounders. In table 13 the tasks that an employee needs to fulfill are presented.

Entrepreneur Physicist Agronomist

Physics X Statistics X X Agronomy X ICT X X Business economics X Production/Logistics x X Marketing X x Agricultural X Project management X x x

Table 13: All-round capacity TSC demanded from its employees during the product development. (Source: Business plan TSC year 2001) Note: X = good understanding x = moderate understanding

After the product development stage TSC needed to expand and change the focus of her human resources. The focus from product knowledge shifted towards sales and service. In table 14 a forecast (made in 2001) of the amount of employees needed is presented.

2003 2004 2005 2006 2007 2008 Management 3 Production 1 1 Sales 1 1 1 2 1 Aftersales 1 1 ICT 1 1

Total amount of employees 5 7 8 12 14 15

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Unfortunately because of the inferior sales results the forecast made in 2001 turned out to be inaccurate. In the beginning of 2008 TSC employed four FTE’s from which one is the owner. A vacancy for a soil mapper/salesman exists but was not fulfilled so the owner kept on fulfilling these tasks.

Discussion

Unfortunately, the long search for the managing partners did not only affect the financial resources. Also the human resources suffered under this search. From year one TSC was in need of partners which could provide knowledge and stability to the company. In the first few business plans the entrepreneur expresses the urge to contract an agronomist and a physicist. Till these people were hired, the founder and owner of TSC had to fulfill these positions. But as Becker (1975) stresses, theory on human capital posits that individuals with specific or higher quality skills achieve higher performance in executing relevant tasks.

4.3 Stakeholders

Just like any other company also TSC has to deal with their stakeholders. In this research three different stakeholders were identified to be under investigation. From the business plans during the years it seems that TSC had to deal with several problems relating to their stakeholders approach and different stakeholder groups. In the three subsections below these problems will be presented and afterwards discussed.

4.3.1 Customers

Why do dreams not always come true?