ENTREPRENEURSHIP AND SMALL FIRMS

DEAKINS AND FREEL

3RD EDITION

STUDENTS ON-LINE LEARNING RESOURCE MATERIAL

CHAPTER 10: ENTREPRENEURIAL AND GROWTH FIRMS

Introduction

This chapter examines the theories, concepts and issues in growing entrepreneurial

businesses. Some of the issues are closely related to those in Chapter 7 (innovation)

and Chapter 11 (internationalisation). For example, growing entrepreneurial firms may

be innovative and they are likely to be in global markets. Like other chapters in the

main text, therefore, this chapter should not be viewed in isolation to issues introduced

in other chapters, rather it integrates a number of concepts that have been introduced in

the earlier chapters including those on finance and entrepreneurial concepts.

This chapter has a strong theoretical under-pinning and it therefore examines the

application of theory to known empirical evidence on growth firms. There is a separate

case study available from the on-line learning resource material to complement this

chapter; Nichol McKay Ltd. It is recommended that you consider whether the

theoretical principles discussed in the chapter can be applied to the case study. Case

studies are, of course, unique, and the features of one case cannot be generalised to

others; but you should compare some of the features of the Nichol McKay case to

other cases that have been used; such as Aquamotive, Alternative Publishing and Ace

Cleaning. You should note the features and pattern of entrepreneurial growth can be

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different across these cases. A further reason for considering theories, concepts and

issues introduced in this chapter with material from other chapters in the main text.

Think Points 10.1: Suggested answers

1. How small is the proportion of new firms that may achieve significant
growth?

The main text suggests that the number of high growth firms is comparatively rare,

perhaps only about 4% according to Storey. If we relax some of the conditions and

just consider significant growth firms, this figure may rise to as much as 10%,

however, it can be seen that growth firms will remain a small minority from any

cohort of new start-ups. This is not surprising if we consider the official failure rate

for new firms which is around 30% of all new firms in the first year of trading and up

to 60% by the third year of trading. Thus from any cohort of new start-ups the

potential number of growth firms has significantly reduced after 3 years trading.

2. Why are policies to select growth firms attractive to policy-makers?

The performance of growth firms can make a significant difference to economic

development and hence are attractive for support by policy makers. Any public sector

business development support policy will be subject to evaluation against objectives

and targets of the policy. Such evaluations tend to be more favourable with policies

that select and support growth firms. It is easier to demonstrate a contribution to local

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employment and jobs created compared to other policies that may be concerned with

supporting the self-employed and lower growth businesses.

3. Is there any evidence to support Gibrats Law that growth will be

independent of firm size? Explain your answer?

The main text explains Gibrats Law of Proportionate Effect which suggests that

differences in firm growth are independent of firm size, so that we cannot predict

which firms will grow in any one industry. However, this is not confirmed by

empirical testing of such an hypothesis, rather there is

a general tendency for growth rates to be negatively correlated with size, although

growth rates may be more erratic in small firms compared to large firms.

4. Why do you think chance plays a large part in successful (or unsuccessful)

firm growth?

Do any of the case studies, discussed in this text, support the role of chance in

growth?

The empirical evidence suggests that only a small number of factors affect growth

consistently and significantly, but more importantly because of the lack of consistency

such effects cannot be predicted. Put simply, a given set of circumstances that caused

growth in one firm are very unlikely to be repeated for another.

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It is arguable that the Aquamotive case illustrates the issue of chance in growth. First

the identification of an opportunity when the entrepreneurs were concerned with

Mauchline Business Services, before Aquamotive developed. It is also possible to

argue that chance may affect fund raising opportunities and ability. The Alternative

Publishing again illustrates a window of opportunity to develop a design and

publishing bureau using the latest technology. A start-up with such technology made

most of the 'chance'.

If the Nichol Mckay case is examined, available also on the student's on-line learning

material, it was a combination of factors that led to growth. Chance plays a role in the

correct combination of factors being available at the right time. There will be an

element of chance in all entrepreneurial growth firms.

Think Points 10.2: Suggested answers

1. Compare Churchill and Lewis to Greiners model of firm growth:

Why are they characterised as life-cycle models?

How are they different?

The Churchill and Lewis (C&L) and the Greiner (G) models are both life-cycle

models because they essentially use historical time as a variable in the development of

the firm. Both posit a model following birth, early development and later stage

maturity, so are broadly in keeping, however there are some fundamental differences

between them. Both models are concerned with firm growth and have time and

previous historical development as the variable that explains growth. Both models

have stages of historical growth.

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An essential difference between C&L and G lies in the move from one stage to

another. In the case of G this can only be achieved after the solution of a specific

entrepreneurial or managerial crisis following a period of growth. Solution allows the

attainment of a higher plane of growth. In this sense, growth in the G model is seen as

discontinuous. The C&L model, however, has a more or less continuous growth curve

with relatively smooth transitions between the stages and no management crises.

The C&L model is also different from G, by proposing different growth paths,

dependent on decision-making after an early development stage. This allows for the

entrepreneurial preference of disengagement, perhaps by selling a controlling interest

in the firm, but an alternative path can be obtained by continued growth stage.

The different crises (G) and stages (C&L) are explained in the main text, but both

models utilise business owner v manager distinction to help explain the growth

pattern of an entrepreneurial firm. As the management function of the entrepreneur

changes so this requires different skills involving some form of problem solving,

whether a crisis or otherwise.

2. What are the three broad categories of characteristics in Storeys approach?

Storey suggest a tripartite model. Therefore the model has three main categories with
characteristics of each

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Category Characteristics
The entrepreneur Age, education, gender etc.
The firm Sector, age, legal form etc.
Strategy Marketing, HR, Buying etc

3. Can the characteristics approach explain firm growth?

The main text suggests that the characteristics approach, whilst having a lot to offer,

cannot explain firm growth, but the, nor can any other model. The reason is that

growth is a complex process and is likely to be affected by a host of factors at

particular points of time. Even isolating some significant factors for some firms may

not be replicable at other periods in time. This makes the problem of predicting firm

growth so intractable.

4. Do any of the case studies, given in this text, fit a life-cycle approach to

entrepreneurial growth?

It is possible to point development stages that may fit a life-cycle approach in some of

the cases used in the book. The Ace Cleaning case, for example, is an obvious

candidate for comparison to the Greiner model with the entrepreneur (Mary

Anderson) having to solve a management crisis. An examination of the Nichol-

McKay case on the student on-lien learning material also demonstrates a life-cycle

approach, but this case may be nearer to that of Churchill and Lewis pattern of more

continuous growth with a distinctive critical decision period before a spurt in growth.

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Think Points 10.3: Suggested answers

1. Why might finance be regarded as a barrier to entrepreneurial firm growth?

Access to finance can be a key to entrepreneurial growth. Expansion clearly requires

some outlay before growth may occur. This may involve investment in R&D, in

advertising, in a sales team or merely in equipment. The larger this outlay, the greater

that access to finance might be as a barrier. This could be illustrated with the

experience of the Aquamotive case. The entrepreneurs concerned need to raise capital

before the development of their fish feeding system. For a time, this was financed

through a bank overdraft, but eventually further capital was required, possibly through

venture finance. The R&D and development of a prototype exhausted internal

sources, requiring external equity for further development.

2. In Chapter 9, it was suggested that support agencies such as the Business

Links might attempt to target their support at entrepreneurial growth firms:

Why does evidence presented in this chapter suggest that this policy might be

unproductive?

The evidence presented in the main text does not support any modelling or predictive

measures of identifying growth firms. Although theoretically it is possible to develop

a 'model' of a growth firm and their main characteristics, there is little evidence to

support predictive modelling. In addition the chance models discussed in the main

text suggest are not supported by the empirical evidence. Picking growth firms by

random is as likely to be as successful as applying a predictive model.

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3. From the previous discussion in this chapter, and the illustration shown in

Figure 10.3, why might the legal ownership of an entrepreneurial firm be a

large barrier to growth?

Storey suggests that legal ownership is one the characteristics that can determine a

growth firm, with incorporation (limited companies) associated with growth. Figure

10.3, also illustrates that it is necessary to have the separation of ownership and

management control associated with incorporation to achieve growth. An obvious

reason is the need for equity or venture capital with growth firms, without limited

company status, such sources of finance are not attainable. In addition the formation

of a company allows the separation of the functions of ownership from management.

Managers are able to pursue the objectives of growth (nb this may be different from

objectives of shareholders, who are concerned with profits and value).