Thesis advisor Helle Neergaard
Growth Strategies in small businesses:
A case study of the development of
growth strategies in young, small businesses
Aarhus School of Business, Aarhus University
Denmark has a high number of start-ups compared to other countries in Europe, however, when the focus is on growth entrepreneurs, Denmark is still lagging behind. Many of the newly started businesses are not capable to create sustainable growth and one of the reasons might be the absence of a clear definition of goals and formulation of strategies.
Based on different studies linking the use of strategies and small firm growth, the interest is to explore how a selection of young, small firms in Denmark manage to incorporate growth strategies in their business activities and in this way increase our understanding about growth strategies in the small business context. The focus will be to study the nature and complexity of those strategies, the factors promoting the emergence of growth strategies and the direction and underlying logic of the growth strategies.
A qualitative approach was chosen in order to explore the growth strategies in young, small businesses and increase our understanding about the phenomenon. A multiple case study comprising of four firms was carried, in which semi-structured interviews and other type of secondary sources of data provided the necessary information to conduct the analysis.
It was found that the studied firms make actively use of strategies, often combining the planning and emergent approach of strategy formulation. These firms made use of formal planning and pre-decision analysis combined with a high level of flexibility to adapt to changing conditions or new opportunities. This means that strategies do not need to be rigid plans that point to pre-determined course of actions, but they can also be flexible working documents allowing entrepreneurial firms to explode their opportunity seeking behavior and, at the same time, seek sustainable sources of advantage.
Furthermore, it was possible to identify how different factors affected the emergence of growth strategies. Due to the small size of the firms, they were not only highly dependent on their external environment to formulate strategies, but also on their access to financial, human and social resources. Internal factors such as the entrepreneurial orientation of the firm and the owner-manager’s attitude towards growth were also found to be responsible for affecting the emergence of their growth strategies.
Lastly, the growth strategies of the firms, which by nature are strategies at the corporate level of the firms, were directed towards product development and market development. Here an interesting finding was that this pattern was often combined with a high level of cooperation with external entities that enabled the firm to achieve their ambitious goals. Young, small firms should therefore consider looking beyond their own capabilities and regard external cooperation as a strategic possibility to grow.
This assignment is the result of a study carried out in the spring 2009. Looking in retrospective, it was a hard journey with challenging and defeating moments. Writing this assignment was not an easy task, but it brings rewarding feelings when finally concluding it. Several people have made this journey pleasant by providing their support and clever words of wisdom.
I would like to express my gratitude to my supervisor Helle Neergaard for providing a guiding direction to this assignment.
I want to thank to the owner-managers Ole Thorn from AirManager, Niels Koldsø from Actua, Karin E. Nielsen from Bio2Com and Jonas H. Graversen from Cytoguide, who opened their doors to me and shared their precious time participating and providing valuable information to this study. Their contribution was warmly welcomed.
I also want to thank to Kurt B. Kristensen from Væksthus Midtjylland, for a pleasant discussion emphasizing the purpose of this assignment and providing help to seek contact with the studied firms.
And finally, a special thanks to Nicole Gallet for reading yet another of my works offering me her support and valued comments.
Århus, May 2009
Table of Contents INTRODUCTION.............................................................................................................................1 Background....................................................................................................................................1
Definition of Terms........................................................................................................................3
1.4.1. Young and Small Businesses.................................................................................................4
1.4.2. Entrepreneurship and Growth .............................................................................................4 1.4.3. Growth Measures.................................................................................................................5 1.4.4. Strategy................................................................................................................................5
The Planning vs. the Emergent Approach of Strategy Formation...............................................17
Small Business Growth and Emergence of Growth Strategies....................................................18
3.4.1. Entrepreneurial Orientation...............................................................................................19
3.4.2. Owner-manager’s attitude towards growth......................................................................21
DATA PRESENTATION .................................................................................................................28 AirManager (www.airmanager.dk) .............................................................................................28
4.1.1. Strategy Aspects.................................................................................................................28 4.1.2. Factors Affecting the Firm’s Growth and its Growth Strategies.........................................29
4.1.3. Growth Strategies...............................................................................................................30 Actua (www.actua.dk).................................................................................................................31
4.2.1. Strategy Aspects.................................................................................................................31
4.1.2. Factors Affecting the Firm’s Growth and its Growth Strategies.........................................31
4.3.1. Strategy Aspects.................................................................................................................33
4.3.2. Factors Affecting the Firm’s Growth and its Growth Strategies.........................................34
4.3.3. Growth Strategies...............................................................................................................34 Cytoguide (www.cytoguide.dk)...................................................................................................35 4.4.1. Strategy Aspects.................................................................................................................35
4.4.2. Factors Affecting the Firm’s Growth and its Growth Strategies.........................................36
4.4.3. Growth Strategies...............................................................................................................37 CROSS-CASE ANALYSIS................................................................................................................38 Strategy from the Small Business Perspective.............................................................................38
Factors Affecting the Emergence of Growth Strategies...............................................................39
This chapter will provide the reader with an introduction to the topic and the purpose of this assignment. It will also present the central questions that the study will be based upon, followed by a delimitation paragraph and key term definitions. Lastly, it will describe how this assignment is organized to further facilitate the reading.
Entrepreneurial activity has a very central role for economic development (Delmar, 2000). By stimulating growth and innovation, entrepreneurial activity contributes to the creation of new products, production methods, technologies, which challenge existing businesses models, creates jobs and contributes to the general welfare of a society (Iværksætterindeks, 2008).
Denmark has developed a serial of factors fostering the development of entrepreneurial businesses, for instance by creating business incubators, free advising from experts in the starting phase, relatively easy access to capital, simple and quick procedures to open a company, and more.
The importance of entrepreneurs for the economic development is indeed recognized in Denmark and the government has sat itself the goal that in 2015, Denmark will be among countries with the highest number of new started businesses (Iværksætterindeks, 2008).
However, in spite of the high numbers of start-ups, Denmark is still lagging behind when the focus is on growth entrepreneurs (Iværksætterindeks, 2008). Thus, many of the entrepreneurial start-ups are not capable to create sustainable growth, in many cases closing down. The reason behind is perhaps the absence of a clear definition of goals and business strategy as entrepreneurs can often find themselves in a busy operational everyday placing less emphasis on ambitious long-term goals and strategies.
Strategy plays an important role in a business’ management process, as it helps a business to set a direction and to formulate the way they want to achieve their goals (Gibcus & Kemp, 2003). However, earlier research indicates that small and medium sized enterprises (SMEs) pay little attention to strategy formulation and strategy in general (see Ireland, R. et al, 2003). Furthermore, much of the existing strategy literature puts great emphasis on larger businesses, and there is no clear theoretical framework capable of explaining and guiding the strategic management for small businesses (Gilinsky et al., 2001).
The lack of research effort concerning growth strategies in small businesses may be justified with a limited interest in small firms, law availability of economic data, and the belief that small businesses employ little strategy or simply do not aim for growth (i.e. Davidsson, 1991 and Oakey, 1993). And still, researchers have revealed from time to time, the positive linkage between the use of strategies in small businesses and performance (see Miller C. & Cardinal L., 1994; Bracker & Pearson, 1986; Sanford, 1982; Fletcher & Harris, 2002). Their results confirm the relevance of the subject and the need to further develop this field of study and develop tools that will provide small firms with guidance and direction for development of strategies.
This thesis project takes a closer look at this phenomenon in order to gain a better understanding of how growth strategies are developed by young, small businesses. It is hoped to find a trend in today’s growth strategies in small businesses, which can be used to design a model that can simplify and give us a better overview of how young, small Danish businesses can go about growth strategies.
Working strategically starts with setting goals, and this process of goal setting can be very beneficial to the organization as well. Latham and Lee (1986) found that 97% of goal-setting studies indicated that individuals performed better when they set themselves clear and challenging goals instead of doing ‘one’s best’ or not having goals at all. Having some goals, the more structured planning aspect can take place, giving birth to what can be called strategies. According to Ansoff (1991), also planning produces better performance than does trial and error learning. Those findings seem very intuitive, but where do we start and what are the steps that bring us to the rewarding strategy world?
This problem statement will center on the need to increase our understanding on how sustainable growth strategies can be developed in young, small businesses.
Bhide (2003), states that small businesses do not use strategy the same way as bigger businesses. Consequently, we firstly need to clarify what constitutes a growth strategy in a small business context, and what is the degree of structure, complexity and formality of such strategies. For instance, a small company might make use of some sort of strategies without being aware of that. This brings us to the first research question:
What is a strategy in a small business context?
The second research question focuses on the context that enables the firm to pursue growth strategies.
By understanding the enabling context associated with growth, managers can size opportunities and select the growth strategy that best fits the firm.
Under what conditions does a growth strategy emerge?
The final research question will provide clarity on the existing practices by revealing the direction and underlying logic of the growth strategies selected by the studied firms. Based on an analysis of the different practices, the growth strategies will be condensed into a simple model, showing a description of the findings. The developed model might also be used for guidance as which strategy to follow.
What is the direction and underlying logic of the growth strategies?
The author acknowledges the high complexity of studying small businesses, as it is a non-homogeneous group and variations in industry sector, country, ownership, etc contribute to additional challenges.
In an attempt to narrow the complexity, the focus of this study will be placed only on Danish businesses. By doing so, we can increase our understanding on how young, small business in Denmark incorporate growth strategies into their business activities and use this to eventually promote an increased use of growth strategies among small business in Denmark. Additionally, a study of only Danish businesses will avoid cultural biases.
Furthermore, this assignment will only focus on entrepreneurial businesses with a similar degree of innovativeness. This is because a study of similar firms will provide further clarity. Besides, the interest will be placed on firms where the owner-managers are highly educated.
And finally, this study will be based on the subjective point of view of the owner-manager of each firm. Additional interviews with other representatives of the firms could provide more details and reliable answers. However, such interviews will not be conducted due to lack of time.
Definition of Terms
In the following, I will attempt to clarify what is meant in this assignment when referring to small businesses, entrepreneurship and the measures of growth and strategy that will be taken for this study. Because of the weight of these concepts, an extensive review and an analysis of the literature will be presented in chapter three.
Young and Small Businesses
In order to study how small businesses formulate growth strategies, it is necessary to firstly clarify what is considered to be a small business. During my literature review, it was not possible to find a general definition of a small business. As a result, the definitions varied according to different geographical locations, industries and other variables (i.e. Storey, 1994 and Deakins & Freel, 2003).
Deakins & Freel (2003) define small businesses by the number of employees, by having a small market share or when the owners manage them in a personalized way. Deakins & Freel add that the definitions from the European Commission (EC) are also accepted. Here, the SMEs are classified by their number of employees, turnover or balance sheet total and categorized into medium-sized, small and micro (see figure 1.1). Taking the definition of the EC, the primary focus of this assignment is on the small and micro enterprises, with less than 50 employees and €10 million turnover.
Figure 1.1: SME classification
Source: European Commission, 2003
Apart of being small, the businesses under study have to be young. By young, it is meant nearly newly started companies, of less than three years of existence. This is to investigate the nature and complexity of the growth strategies in a very early stage of a business’ lifecycle.
Entrepreneurship and Growth
According to Shane and Venkataraman (2000), entrepreneurship is an activity that involves the discovery, evaluation and exploitation of an opportunity that in turn adds new products and services to the market. Thus, a basic premise of this assignment is that entrepreneurship is a process.
Adding to Shane and Venkataraman’s definition is the view of the renowned economist Schumpeter (1934) who calls this process of turning an ‘invention’ into an ‘innovation’, as creative destruction, and sets entrepreneurship as responsible for the dynamism of industries and the long run economic growth. Throughout history, there has been a tendency in entrepreneurial research and practice to emphasize company growth as the ultimate measure for entrepreneurial success. Among other researchers, Delmar (2006) and Wiklund (1998) use growth in empirical studies as the dependent variable of the performance of young, small companies. Thus, growth has very central role when talking about entrepreneurship, and in many cases this measure has been seen as the very essence of entrepreneurship (Stevenson & Gumpert, 1991; Cole, 1949).
Researchers employ a wide variation of growth variables when measuring the size of a firm. Some of the most common ways to measure a firm’s size are according to its revenue, profits, human and physical capital (Barkham et al., 1996).
This assignment will consider revenue as one of the growth indicators, firstly because revenue is a relatively good indicator of size (see section 1.4.1.) and consequently, also growth. Secondly, revenue is considered as a precise measure of the competitiveness of a firm in a market, a reason why firms also tend to use it as an indicator of their own performance. And lastly, according to Barkham et al. (1996) any analysis of firm’s growth should be based at least on changes in revenue.
However, the drawbacks of this measure are that sales can be sensitive to currency exchange rates and to inflation. It might also occur that assets and number of employees grow before any sale growth will occur. Therefore employee growth will also be considered as a growth indicator. Having these two popular growth indicators, one can reduce different bias, and provide richer information. As Weinzimmer et al., 1998 claim, multiple indicators provide better information than single indicators. Growth figures in terms of revenue and employees will be collected from the year 2007 and 2008 when possible.
Hammonds (2001) defines strategy as a deliberate choice to be different. He claims that only by making choices, trade-offs, and leading with direction and continuity, a company can become unique and create sustainable competitive advantage.
Nevertheless, strategy is a complex word to allocate it one definition. Mintzberg (2003) talks about the five Ps when defining strategy: strategy as a plan, ploy, pattern, position and perspective. He argues that each definition competes or rather complement each other adding important elements to our understanding of the field – an in depth discussion will follow in chapter three.
When discussing about strategy in this assignment, it will be in accordance with Mintzberg’s definition, putting an emphasis on strategy as a plan and strategy as a pattern.
Introduction and problem statement
Frame of reference
Chapter one presented an introduction to the topic, followed by the three central research questions, a delimitation section and important term definitions.
Chapter two explains and discusses the methodology and research approaches that are selected in order to achieve the goal of this study. Here, it will also be explained how the cases are selected and the quality criteria for this research.
Chapter three provides the frame of reference needed to create a solid foundation for this study. Relevant theories within strategic entrepreneurship, approaches of strategy formation, strategy typologies and small firm growth will be analysed and discussed.
Chapter four summarizes and present the information obtained for the studied firms. The information will be organized and structured according to the three research questions and frame of reference.
Chapter five brings together the empirical findings and the theoretical framework in an analysis. Here, the cases will be compared to each other and analysed on the basis of the presented concepts from chapter three.
Chapter six is the concluding chapter that starts with a short overview of the purpose of this thesis, followed by a summary of the results. Two final sections explain the contribution of this study and suggestions for further research.
This chapter will present a discussion about how the central problem will be approached and the methods chosen in order to carry out the study. The chapter will start by explaining the research purpose and approach that match this study best. Subsequently, a review of the selection of cases and analysis methods will follow. And lastly, a short section will discuss the quality of research.
Existing research about growth strategies in small businesses appears to be very scarce and there is a limited understanding about how young, entrepreneurial businesses work strategically. The factors behind the emergence of growth strategies and their process of development are still unexplored areas in the strategic management school (Deakins & Freel, 1998). Furthermore, because of the complexity of the topic, there is a need to condense long research papers into models that can give overview and ease the applicability of the findings into real life practices.
Yin (2004) classifies the research purpose of a study into three categories: exploratory, descriptive and explanatory.
Exploratory research is conducted especially during the initial stage of a research; when the problem is not yet recognized, or the available information is not complete. In that case, an exploratory research helps the researcher clarify and understand the problem by collecting as much information as possible about a precise problem (Zikmund, 2003; Yin, 2003).
Descriptive research is instead used to find the answer of who, what, where and how. Besides, it is a prerequisite to have a clear understanding of the problem under study, to proceed with the collection of data (Saunders et al., 2003).
When the intention is to identify causal relationships among variables, one can conduct an explanatory research (Zikmund, 2000). Yin (2004) claims that an explanatory research could also be used when the objective of the study is to explain specific procedures from different perspectives or situations with a given set of events.
The aim of this project is to reveal the actual practice in a selection of young, small firms when dealing with growth strategies by studying their pattern of decisions and actions. The result of the study will be reduced into simple models that can show the actual practice and, at the same, time provide some guidelines or inspiration to small firms when approaching growth strategies. One could say that the research purpose is partially exploratory as it attempts to explore and gain more insights about the problem, especially because there is a lack of literature in this area. However, the study is also descriptive as the objective is to answer how small firms can develop sustainable growth strategies, by describing how selected small firms currently deal with growth strategies.
Qualitative research discovers and develops the new, instead of testing what is already known (Flick, 2006). This method does so, by demonstrating different perspectives of the problem, starting from the subjective and social meanings related to it (ibid). Thus, the subjectivity of those being studied and of the researcher becomes central in the research process. Besides, the researcher becomes a tool in collecting data and has the flexibility to make adjustments in the research process in order to gain better understanding of the data (Lee, 1999).
This assignment addresses elements, which are not only soft, but also hard to indentify and even to quantify. Besides, in order to answer the research questions, it is needed to discover and gain insights about the subjective meanings that arise in the mind of entrepreneurs when developing growth strategies. Consequently, a suitable way to collect this kind of data is through interpretations of interviews, and analyzing discussions about how a small business arrives to a choice of strategy.
In the table below, three different research approaches within qualitative research are highlighted. These differ in their theoretical assumptions, objectives of research and in the methods they apply (Flick, 2006). According to Lüders and Reichertz (1986) in Flick (2006), the first approach highlights the viewpoint of the subject. The second approach attempts to describe the processes in the production of existing situations, and the last approach, is distinguished by the analysis of deep structures that generate action and meaning. This assignment will employ the first approach, which focuses on the approaches to subjective viewpoints, by making use of, for instance, semi-structured interviews.
1)Approaches to subjective viewpoints
2)Description of the making of social situations
3)Hermeneutic analysis of underlying structures
Methods of data collection
Methods of interpretation
Analysis of documents
Fields of application
Analysis of everyday knowledge
Analysis of life worlds and organizations
Figure 2.1: Research Perspectives in Qualitative Research
Source: Flick (2006)
Yin (2003) presents some guidelines that help determine which research strategy, within the social science, is more appropriate for the problem statement in question. The research strategies include: experiment, survey, archival analysis, history, and case study. And one alternative is chosen based on: 1) the form of the research, 2) the requirement of control over behavioural events, and 3) whether there is focus on contemporary events. The table below illustrates the different alternatives based on the conditions to be fulfilled.
The goal is to gain a comprehensive view of the phenomena under study with detailed information about the strategies adopted. Thus, this assignment concentrates in answering how small firms adopt sustainable growth strategies, a question that is not subject to behavioural events but deals with contemporary, present-day events. Besides, the author of this study has no influence over the way in which the participants of the study adopted the particular strategies. As a result, case study is chosen as the research strategy of this study.
Case studies are among the most popular ways to carry out qualitative research. This type of study is generally defined as a study of one or a limited number of people, institutions, social communities or organizations. The case is then described in detail and the problem is analyzed from different dimensions. In this way, a case study enables the researcher to obtain rich contextual descriptions and observe the particular problem in depth (Saunders et al, 2003).
There are two ways to conduct a case study, by analyzing a single case or multiple cases. Yin (2003) mentions that a single case study is suitable when the case is critical, extreme or revelatory. Multiple case studies, on the other side, are not dependent on one unique case and because they are based on diversified cases, it is considered that the pattern matching (validity) and robustness of the results are enhanced compared to a single case study (ibid). The downside of a multiple case study might be a lack of depth, and the fact that they are more time consuming and expensive to conduct (Neergaard, 2007 and Flick, 2006).
For this assignment, a multiple case study is chosen because it will be incomplete to study only one firm and its growth strategy/strategies. It is needed to study a selection of cases in order to get a more broad perspective of the actual practice of small firms, and also to provide more robust and valid information concerning growth strategies in small firms.
With respect to the generalization of findings, the qualitative approach presents different quality standards than the ones in the quantitative approach. Whereas in the latest, the question of sampling is mostly a numeric problem, the qualitative approach focus on what each case represents. Although numerical generalizations are the most common ones, it is also possible to generalize the findings of a study based on few cases (Neergaard, 2007). Many qualitative studies attempt to develop new insights and theories, and what is important here, is the quality of the sampling decisions on which the generalizations depend, apart from a solid theoretical background (Flick, 2006). Consequently, it is relevant to select representative cases and focus on the quality of the cases and not the quantity.
The ambition of this study is however not to generalize the findings to the whole population of small, Danish companies, but instead to provide insights and eventual guidelines or inspiration for small, Danish companies in their early encounter with growth strategies. It is though of utmost importance to select cases that can grant relevant and insightful inputs to answer the central question of this project. Therefore, the next section is dedicated to review different techniques of case selection, and give an outline of the requisites for case selection in this study.
Researchers within the field of research methods recommend making use of sampling techniques as to reduce the amount of data needed. In this way, one can collect the data by considering data from a subgroup instead of all possible cases (Saunders et al., 2003). Scholars outline different strategies for how to proceed when selecting empirical material and cases. Patton (2002) for instance, contrasts random sampling with purposive sampling, arguing that purposive sampling will best enable the researcher to meet her objectives by using certain judgment to select the cases. This sample technique is often used when working with very small samples, as one can then select the cases that are particularly informative.
Patton (2002) gives us several suggestions for case selection, such as: extreme cases, typical cases, maximal variation cases, intense cases, criterion cases, sensitive cases, convenient cases and more. According to the purpose of the research, generalization ambitions and the resources available, one can choose the best-suited technique.
To best answer the central question of this assignment, one could choose extreme cases as to illustrate the current practice of Danish businesses, which successfully make use of growth strategies in a very early stage of their life cycle. By choosing and analyzing particularly successful examples, one can be in a better position to use the growth strategies studied during the research to describe how exemplary business do it, and provide some guidelines to small businesses that can be susceptible to use growth strategies. Nevertheless, due to different access barriers, I have decided to use the selection strategy, criterion, meaning that I will select those cases that meet certain criteria.
Thus, the selected cases will have to fulfil the following conditions:
1) Experience with growth strategy: The selected cases need to have some experience with growth strategy (either formal or informal)
2) Age: There is a certain restriction about the age of the enterprise, which is set to under 3 years of existence. The reason behind is the interest in knowing how almost newly started businesses begin to deal with strategies.
3) Size: As discussed in chapter 1, the focus is on micro and small enterprises with an annual turnover of < €10 million according to the EC definition. This is because it is there where the entrepreneur spirit is best caught, and therefore interesting to observe the combination of entrepreneurship and strategies, in spite of the apparent difficulties to combine the two approaches.
4) High educated vs. low-educated entrepreneurs: Due to the resource constrains set forth, and the chosen technique for case selection, I will concentrate in the study of enterprises where the entrepreneurs are high educated. This decision is taken on the basis of a small unstructured interview with Kurt B. Kristensen from Væksthus Midtjylland (see appendix A), who suggests to concentrate my study in highly educated entrepreneurs as they might already be used to work structured and conduct written plans. Consequently, if I direct my search to innovative companies such as within the area of biotechnology, there will be more chances to find entrepreneurs who are making use of strategies. This is not to say that companies with low-educated entrepreneurs do not work strategically, but it is only considered that they might keep a little distance to what involves paper work and written plans. However, having the needed time and experience, it would be ideally to include this group of entrepreneurs, as to obtain a more broad picture of the different types of strategies used within the population of young, small businesses in Denmark.
5) Location: The cases will be Danish based firms, as to avoid cultural biases.
Data Collection Method
To achieve the aims of this research, it is necessary to get different small businesses to share their experience with growth strategies. In this case, the primary method for data collection chosen will be restricted to interviews. This method has the advantage that is time saving although the results might have a bias as they will be subject to the interviewees subjective viewpoints. Among several types of interviews, I have chosen to conduct semi-standardized interviews. This method assumes that the interviewee has a complex amount of knowledge about the topic under study (Flick, 2006). What makes this type of interview remarkably interesting is that it permits a certain degree of flexibility during the interview process, which is pertinent when the interview can take an unpredictable direction. In other words, the different entrepreneurs interviewed might come up with different directions of growth strategies, and therefore a different follow up for the particular strategy will be needed with the interest to learn more about that specific strategy. Besides, open-questions were used in the semi-structured interviews to encourage the interviewees’ freedom of expression in relations to strategy formulation and implementation. As a result, this interview method is more likely to expose the viewpoint of the interviewee, than in a more standardized interview type. This technique is needed to study the central problem due to the exploratory nature of this project, where a semi-open dialogue will only increase the opportunities for new insights.
To collect the needed data, it was conducted one person-to-person interview per case company, and the interviews covered topics such as the firm’s perception about strategies, the factors that affected the emerge of their growth strategies and the direction of those strategies (see appendix C for the interview guide).
Notes were taking during the interviews and several of them were also recorded to allow transcription and a more precise analysis. Complimenting the interviews, there were some secondary data such as news paper articles about the companies and their websites in order to obtain background information about the company in focus. This information along with the theoretical framework covered in chapter 3 grounded the analysis of the phenomenon of interest.
Qualitative research has been repeatedly subject for discussions about the value of this kind of research (Flick, 2006), giving birth to many suggestions for alternative quality criteria (see Yin, 2003; Healy & Perry, 2000; Guba & Lincoln, 1998). Although, according to Flick (2006), none of them solve the problem of adequate quality assessment.
In this assignment, it is chosen to follow the assessment criteria provided by Yin (2003).
Yin (2003) mentions four tests that have traditionally been used to assess the quality of empirical social research. The four tests consist of construct validity, internal validity, external validity and reliability.
Validity refers to whether researchers see what they think they see. To increase the construct validity, one can make use of different sources of evidence to achieve the so-called triangulation of results. This study will therefore use documentation and interviews in order to create a multiple source of evidence. Besides, the external observer can follow the chain of evidence from the initial problem statement to finally the conclusions of the case study (Yin, 2003).
Internal validity is mainly necessary when the study is about explaining causal relationships or specific processes. As this is not the case in this study, this validity test will be omitted.
The external validity in a qualitative study is enhanced when the findings can be generalized to other studies with similar settings (Yin, 2003). This test is problematic when performing singe case studies, as they offer poor basis for generalization. By conducting multiple case studies with use of multiple sources, this assignment will provide more information about the issue being studied and enhance its external validity.
Reliability refers to whether the findings and conclusions are the same when an investigator conducts the same case study over again (Saunders et al., 2000). A requisite is though that the previous investigator documents the procedures of her study and the reasoning made from raw data so the later investigator can follow exactly the same procedures (Yin, 2003). The idea to increase the reliability of the results is to minimize errors and biases of a study. Yin claims that by making the procedures of the study as operational as possible and conducting the research as if one was always being monitored, one could improve the reliability of the study.
Some scholars (i.e. Silverman, 2005 and Neergaard, 2007) have a concern about the above mentioned assessment criteria, as they are traditionally used in quantitative research, while qualitative research is treated as always in flux, and subject to constant change. Therefore it is problematic to assume any stable properties in qualitative research.
However, Yin (2003) recommends that by following a case study protocol in which research related material, and different data accumulated during the various stages of the study are collected, one can increase the reliability of the research. In this way, all the steps of the study are well documented to allow an eventual repetition of the research.
Frame of reference
This chapter has the goal to provide the needed theoretical framework in order to create a solid foundation for this study. Firstly, the relative new research area of strategic entrepreneurship will be presented and discussed, as its basic ideas and perspectives form the basis of this assignment. The next sections will review and discuss different perspectives about strategy, factors affecting a small firm’s growth strategies, and popular strategy typologies. These are central elements in this assignment and will be used to develop the case study and base the research interpretations on. Strategic Entrepreneurship
According to different authors young, small businesses are more effective in identifying opportunities compared to larger, well established firms (see Steffens et al., 2009; Ireland et al., 2003). Additionally, it is argued that young, small businesses are less effective in developing sustainable competitive advantages from those opportunities (Ireland et al., 2003). Hitt et al. (2001) claim that this occurs when entrepreneurs fail to think strategically, making it difficult to develop and sustain competitive advantages.
The concept of Strategic Entrepreneurship (SE) is a relatively new field of research, and due to its emerging nature, there are varied perspectives about its meaning and definition (see Kuratko & Audretsch, 2009). However, the basic logic behind this concept is that it fuses the domains of entrepreneurship and strategic management. Some scholars define SE as combining the opportunity seeking behaviour of entrepreneurship with the advantage seeking behaviour of strategic management(Ireland et al., 2003; Steffens et al., 2009 and Kuratko & Audretsch, 2009). In other words, SE is the identification and exploitation of opportunities, while at the same time creating and sustaining a competitive advantage. Different scholars claim that for wealth creation and growth, it is necessary to integrate the opportunity-seeking and advantage-seeking behaviour and neither alone is sufficient (McGrath & MacMillan, 2000; Amit & Zott, 2001 and Ireland et al., 2003).
This concept can be useful to both entrepreneurs who need strategic goals, and managers of established firms who need to think entrepreneurially.
Looking at SE from the entrepreneur’s perspective, and according to Dr. Frank Lasch in Kuratko & Audretsch (2009), SE is a discipline that starts when the entrepreneur leaves aside issues related to the emergence and short-term survival of the firm, and instead focuses on the development of strategy and market orientation. Research assistant Stephan Heblich defines SE as “a third way of doing business that falls between unsystematic trial and error and meticulous planning – being strategic” (Kuraktko & Audretsch, 2009: 14). Heblich believes that SE is a concept that focuses on strategies but keeps a high flexibility in dealing with unforeseen events and new opportunities as they rise. These elements are necessary in today’s business atmosphere, which is characterize by having a new competitive landscape with increasing risk and uncertainty, decreased ability to forecast, fluid industry boundaries, a new managerial mindset and structural forms (Bettis & Hitt, 1995).
This assignment basically adapts the concept of SE from the entrepreneur’s perspective, by looking at ways on how to adapt strategies in entrepreneurial businesses. This is because strategic thinking is necessary not only to exploit the capabilities and resources of the firm, but also to create sustainable sources of value. Furthermore, this way of thinking, also promotes the identification of a path that ensures that the workforce stay focused on the target.
The figure below captures the idea of SE from a growth-oriented perspective in a small, entrepreneurial firm. It depicts important elements that influence growth in the entrepreneurial firm (see section 3.4), and how those elements, together with strategic thinking and strategic management of resources, are channelled to the final objective, which in this case is wealth creation and growth.
Thus, in the entrepreneurial context, strategies are seen as the mediators to achieve predetermined goals.
Figure 3.1: Strategic Entrepreneurship from the entrepreneur’s perspective, when growth is the firm’s objective.
Source: The authors own creation based on Ireland et al. (2003) and Wiklund et al. (2009).
A clear strategy is important for smaller firms to further enhance their performance. Nevertheless, despite of the importance of strategies in small firms for better performance and growth, only little research has focused on this area. An extensive amount of the strategy literature is directed to large firms, leaving behind literature efforts on strategy in small, entrepreneurial firms. One of the reasons for this is the belief that smaller firms are too busy with operational problems and day-to-day events to devote some time to strategic thinking (Karami, 2007). However, it is usually argued that firms with a clear strategy outperform firms without one (Miller, C. C. and Cardinal, L. B., 1994). There are also studies about the ‘correct’ strategy of a firm depending on the company’s size. For instance, according to Pelham (1999), small companies following a differentiation strategy will have a better performance than when following a low cost strategy.
The word strategy comes originally from the Greek strategos, meaning the ‘art of the army general’ (Mintzberg et al., 2003). Today, it is possible to find numerous definitions of the word that shed light to this complex field. Given the diverse and evolving nature of strategy, it is difficult to construct a single definition as one risks excluding important views about strategy necessary to our understanding of what strategy is. Chandler (1962) refers to strategy as the long-term goals of an enterprise and the plan of action to allocate the necessary resources for carrying out those goals. Others hold that strategy and goals are separate concepts, and strategy is the meaning of attaining goals.
Mintzberg et al. (2003) define strategy as a process. Their presented definition is fivefold as they see strategy as plan, ploy, pattern, position and perspective.
Strategy as plan: According to this view, strategy is treated as a process starting with the long-term goal setting aspect and followed by formulation and implementation of plans. These plans can act as guidelines on how the firm should deal with different situations.
Strategy as ploy: A strategy can be a ploy, when its intention is not about expansion but more specifically a threat or maneuver to outwit a competitor. This definition focuses on the competitive aspects of strategic management.
Strategy as pattern: A strategy can also be a pattern of a stream of actions, patterns that emerge without preconception or purposeful planning, but show consistencies in the approaches taken to deal with situations.
Strategy as position: Strategy is a position when it seeks to locate the organization in its external environment. This definition of strategy looks outside the organization, and can be related to Porter’s definition that equals strategy with the creation of a unique and valuable position by choosing to perform activities differently than rivals do.
Strategy as perspective: Strategy as a perspective looks at the inside of the organization. According to Mintzberg et al. (2003), this definition of strategy corresponds to the personality of an individual, or as a collective mind in the organization, where individuals in the organization share a common thinking or behaviour.
Due to the context of this assignment, I will emphasize only two of the above views of strategy. These are strategy as a plan and strategy as a pattern. This is because it is assumed that small firms that make use of strategies either plan how to achieve their goals, or they simply show consistencies in how they approach situations in order to achieve their goal. A combination of the two views can also be possible.
The planning vs. the emergent approach of strategy formation
One can make parallels of the previously discussed contrasting views to the planning vs. the emergent approach of strategy formation, a notion introduced by Mintzberg & Waters in 1985. Deliberate strategies refer to the type of strategies that are planned and realized as intended, while emergent strategies are successful actions that show consistency, though not to confuse with chaos (Mintzberg & Waters, 1985).
Followers of the first approach are of the opinion that strategic decision-making takes place in discrete steps. Here, actions are analyzed and coordinated before implementation in order to call them strategies. De Wit & Meyer (1998) argue “A successful pattern of action that was not intended cannot be called a strategy, but should be seen for what it is – brilliant improvisation or just plain luck” (De Wit & Meyer, 1998:152).
The staged planning process involves the collection and analysis of critical data before decision-making (Armstrong, 1982). Furthermore, according to Fletcher & Harris (2002) this process is often characterized by holding meetings or events where strategic issues are discussed with other stakeholders, by setting objectives and reviewing performance against objectives. Many scholars have linked this planning approach, and more specifically the process of pre-decision analytical thinking with growth firms (Fletcher & Harris, 2002; Miller C. & Cardinal L., 1994; Bracker & Pearson, 1986; Ackelsberg & Arlow, 1985).
On the other side, the emergent approach says that strategies are actions that show consistency and emerge over time, rather than being planned at a particular point of time (Mintzberg & Waters, 1985). This type of approach is characterized by being open, flexible and responsive to what happens in the firm’s environment (Mintzberg & Waters, 1985). This approach has been specially advocated in innovative, entrepreneurial contexts, or where environments are unpredictable and unstable (Quinn, 1985; Mintzbeg & Waters, 1985). In those circumstances, planning is seen as not very useful and often even counterproductive.
The planning and emergent approach can also be combined, obtaining the advantages of the two worlds. According to the findings of Fletcher & Harris (2002) growth firms combine the formality of the planning process with the more flexible, emergent approach according to the situation they face.
The following figure illustrates the two contrasting approaches that will be used during the case study to classify the studied firm’s view about strategy, and how these companies integrate the two approaches as appropriate.
Figure 3.2: The planned and the emergent approach of strategy formation
Source: Author’s own creation based on Mintzberg & Waters (1985)
Small Business Growth and emergence of growth strategies
Different factors affect a small firm’s growth, and some circumstances are more likely to facilitate growth than others. An understanding of these factors is of particular relevance for growth-oriented small firms, as they can formulate strategies or act according to the conditions they face.
Reviews of the literature reveal that little is known about a small firm’s growth, making this phenomenon a particular attractive research area (Deakins & Freel, 1998). Davidson & Wiklund (2000) argue that the reason for the shortcomings of the field is that the literature is highly fragmented, and there is little connection between the different perspectives.
Davidsson (1989) argues that growth in small firms is affected by many factors. Some of these factors are external to the firm, and some are internal, but both affect the firm’s ability and willingness to grow.
Furthermore, the decision to adopt a particular strategy will also depend on the different factors affecting the firm’s growth (Roper, 1999). Understanding the factors that affect the growth in a small business will consequently provide insights in how growth strategies emerge.
Based on an empirical study of 413 firms, Wiklund et al. (2009) suggest a model of small business growth, in which they identify different variables affecting small business growth (see appendix B). However, to increase the overview and keep things simple, I have selected the model’s four main elements and plot them into a figure that contains the owner’s attitude towards growth, the entrepreneurial orientation of the firm, its environment and resources. The diamond in the middle of the figure represents the small firm growth, which gets bigger according to the degree (low, medium, high) of each element from the figure. This figure will be used during the case study to illustrate the different companies’ degree of each element. In the following, a discussion of each of the above elements will bring us closer to the background of a small business growth.
Figure: 3.3. Illustration of the factors affecting growth in small companies
Source: Author’s own creation based on Wiklund et al. (2009)
Entrepreneurial Orientation (EO)
Historically, scholars have recognized the value of entrepreneurship as one of the mayor engines of economic growth (see Schumpeter, 1934; Covin & Sleving, 1991). For both start-ups and existing firms entrepreneurship triggers business expansion, job creation, technological process and wealth.
Entrepreneurship scholars have conducted studies in different directions to describe alternate perspectives of entrepreneurship. One of those perspectives comes from Kuratko (2009) that describes entrepreneurship as:
”a dynamic process of vision, change, and creation. It requires an application of energy and passion towards the creation and implementation of new ideas and creative solutions. Essential ingredients include the willingness to take calculated risks, formulate an effective venture team, marshal the needed resources, build a solid business plan, and, ﬁnally, the vision to recognize opportunity where others see chaos, contradiction, and confusion” (Kuratko, 2009, p. 5).
The concept of entrepreneurial orientation, EO, has derived from entrepreneurship, and has specially been developed in the field of strategic management. EO refers to the firm’s strategic orientation concerning some entrepreneurial aspects of decision-making styles, practices and methods (Miller, 1983).
Lumpkin & Dess (1996) make a distinction between entrepreneurship and EO, by comparing them with the process and content perspective of strategic management. They argue that while entrepreneurship is concerned with the content, the basic entrepreneurial question of business entry, EO goes further by taking a look at the processes, methods and practices necessary for managers to act entrepreneurially (Lumpkin & Dess, 1996).
A firm with an EO is often described as one that engages in product-market innovation, takes risks in order to try the new and uncertain, and has a proactive attitude compared to its competitors (Miller, 1983; Lumpkin & Dess, 1996; Kuratko, 2009). According to different scholars, these three characteristics have a positive influence in financial performance and growth.
Schumpeter (1934) was the first to identify innovation as a key element in the entrepreneurial process.
The basic idea of innovativeness is to depart from the known and venture beyond existing technologies, practices and products (Kimberly, 1981). A firm is innovative, when it engages in new ideas or creative processes that may result in new products or technologies and new markets (Lumpkin &Dess, 1996).
These two categories may overlap each other, i.e. when high technological firms create products to markets with specific needs. Consequently, an innovative firm has a strong emphasis on product design, engineering, technical knowledge, but also market opportunities, advertising and promotion (Miller & Friesen, 1978; Maidique & Patch, 1982).
According to Miller (1983), another dimension of the entrepreneurial firm is its ability to be proactive. Even earlier, economic scholars (i.e. Schumpeter, 1934), recognized the importance of initiative in entrepreneurship. Proactiveness enables the firm to beat competitors by being the first to introduce new products, services, or technologies to the market. This gives the firm a first-mover advantage in which the firm can for instance charge higher prices, establish brand recognition and control the market by dominating distribution channels (Zahra & Covin, 1995). Proactiveness can emerge when there is asymmetric information in the markets, and the one who reacts to this advantage can capitalize on a market opportunity (Lumpkin & Dess, 1996). Thus, a proactive firm is one that pursues new opportunities by taking initiatives to anticipate and act on future needs.
One of the first to define entrepreneurship was the economist Cantillon, who equates the idea of entrepreneurship with visionaries that go into self-employment without an assurance of the profits, rather than work for someone else for wages (Cantillon, 1734 in Swedberg, 2000). For Cantillon, engaging in business (self-employment) in spite of the risk and uncertainty is the very distinguishing feature of entrepreneurship.
Thus, in order to follow the new and unknown, firms have to often adapt a risk-taking attitude by investing without being certain about the outcomes. Miller & Friesen’s (1978) refer to risk taking as the manager’s likelihood of borrowing heavily or making relatively large resource commitments with the interest of getting high returns. The returns of these investments may not always be successful. Although the short-term performance may vary as some projects fail, the general trend is that risk willingness generates more growth in the long run (Lengnick-Hall, 1992; Zahra & Covin, 1995; McGrath, 2001). Some scholars (i.e. Begley & Boyd, 1987) found that risk can be classified into individual and firm level risk and while certain individuals can be risk-averse, the same individuals may not show risk avoidance at the firm level.
Based on Miller’s (1983) view of EO, one way to reveal a firm’s risk taking attitude is by asking managers whether the firm is willing to engage in risky projects in order to achieve the firm’s objectives.
Owner-manager’s attitude towards growth
Most theories in the economic sciences take the assumption that the motivation of the owner-manager is profit-maximizing and growth (see Davidson 1989). Although the economic literature do not consider the differences in patterns of motivation among entrepreneurs, psychologists do recognize that people have different motivational patterns (see i.e. Maslow, 1943; Vroom, 1964 and McClelland, 1961).
The entrepreneurship literature suggests that the owner-manager’s growth motivation has a key role when examining firm growth. Many small businesses are just not willing to pursue growth, and thus the owner-manager’s attitude towards growth may set limits to the future growth of the business (Sexton & Bowman-Upton, 1991).
Deakins & Freel (2003) argue that people start their own firms with different motives other than to maximize their profits. Furthermore, they make a clear distinction between people that go into self-employment to pursue their own interests, and the ones that decide to start a small business with the desire to achieve growth and become a bigger firm. The first group may seek fulfilment of noneconomic personal goals, such as gaining personal independence, maintenance of same lifestyle as in the previous form of employment and/or developing ideas. The second group will be concerned with the expansion of the firm and will often go on to own more than one firm (ibid).
Other authors (i.e. Davidsson et al., 2002) claim that a positive growth attitude may emerge when the owner-manager manages the firm successfully through a growth period. Thus, a manager can acquire a positive growth attitude after a successful experience with growth.
Wiklund et al. (2003) argue that growth implies radical changes in the characteristics of a business, and the result of their research indicates that expectations of changed working conditions are the main concern for small businesses when considering growth. According to Wiklund et al. (2003) negative aspects of growth such as reduced employee well being, control loss, lower degree of independence in relation to external stakeholders, and poor ability to survive crises, out weight a motivation for growth. Nevertheless, the owner-managers who associate growth with new challenges, development of opportunities for staff and improved working atmosphere, have a positive attitude towards expanding their businesses.
Also, if owner-managers feel favourably disposed to perform the new tasks required from the firm growth, they will be more likely to pursue growth (Wiklund et al. 2003).
According to Naffziger et al. (1994), the owner-manager’s personal goals and attitudes have a big influence in the direction and strategic vision of the firm. Furthermore, different studies (see Davidson, 1989 and Miner et al., 1989) confirm a positive link between the owner’s attitude towards growth and the growth of a firm. This is because the owner-manager of a small business possesses a high degree of control of the business’ operations and is often the mayor responsible for the strategic decisions of the firm. Consequently, a positive growth attitude will result in better conditions to develop growth strategies in a small firm.
A small business is in a better position to explore new strategies and innovative projects when it possesses the necessary resources to do so. Different scholars identify three main types of resources necessary to develop and grow a firm (see Neergaard, et al., 2003; Wiklund et al., 2009). These are financial capital, social capital and human capital. Each has a specific role in a firm’s growth and represents a challenge for the firm when constrained (Cooper et al., 1994).
Financial capital: Alsos et al. (2006) found a positive relation between levels of financial capital that business founders achieve and the levels of business growth. They state that financial resources are the most basic and flexible type of resource that can be transformed into other resources, and represent a vital resource when the firm wants to achieve growth. According to Boeker (1989) the financing conditions of a firm in its very early stage of development can imprint the firm’s strategy, which may lead the young firm into a path-dependent competitive position. Firms that were not able to pursue desirable strategies may later find themselves unable to match those that could. Furthermore, financial capital can allow the firm to pursue more capital-intensive strategies that are also better protected from imitation (Cooper et al, 1994).
Cooper et al. (1994) also argue that this type of resource provides a buffer when the new and small businesses are in a process of experimentation in which new strategies and concepts are being tested. Here, the availability of financial capital helps the firm to overcome unfavourable outcomes and assume corrective actions. This buffer may in turn increase the firm’s willingness to pursue new opportunities and strategies.
According to Koeller and Lechler (2006) human capital refers to the owner-manager’s knowledge and qualifications that assist her in managing the business. However, other authors equate human capital to the sum of the resources of the workforce that assist in managing the firm. These human resources help to identify new opportunities and ways to more effectively grow the firm (Alvarez & Busenitz, 2001).
Human capital is an intangible asset in a firm, which has received an increasing research attention as it is considered a source of competitive advantage that is less easy to imitate compared to traditional sources such as technology, economies of scale and natural resources (Guthrie et al., 2009). The resource-based view of competitive advantage emphasizes the role of human capital to the extent that it is an inimitable and value-adding resource and is associated with positive organizational outcomes (Guthrie et al., 2009, Koch & McGrath, 1996). Pfeffer (1998) goes further arguing that human capital is decisive for the success of a firm in today’s marketplace.
From the resource perspective, social capital equals the value of the network connections of the firm (Borgatti & Forster, 2003). The most common type of entrepreneurial networks relates to the firm’s alliances with other entities (Freel & Harrison, 2008 and Powell et al., 1996).
The collaboration obtained from the network connections, involve developing new products, pooling complementary skills, accessing new markets, sharing risks and more (O’Donnell, 2004; Powell et al., 1996). Scholars agree that these alliances have without a doubt an active role in the growth of the firms (Havnes & Senneseth, 2001; Barringer & Greening, 1998). Lender (2003) argues that these networks can help the small firm to overcome the liabilities of being new and small, and create cooperative relationships that can be critical in the early development of the firm.
Other scholars distinguish intra-organizational networks as an important source for growth in a small business. This type of network denotes the relationship of the owner-manager with the rest of the management team. Scholars have found that partnerships can have a positive influence in the growth of a firm, as they can provide with capital, functional expertise and management experience (Eisenhardt & Schoonhoven, 1990; Perren & Grant, 2000).
Social capital obtained either through inter-organizational networks or intra-organizational networks have a central role in order to access important information, new opportunities and other type of resources necessary to achieve growth. Although social capital is a valuable resource to a firm, it is of utmost importance to integrate, develop and deploy these resources in order to successfully exploit its advantages.
The environment of a firm can also influence its growth opportunities, as a specific environment may severely constrain managerial choice (Pfeffer, 1976). According to Dyer & Ross (2008) the smaller the firm, the more likely the firm is affected by its environment. Managers must therefore perceive the nature and characteristics of the environment of the firm to align their strategies accordingly (Pelham, 1999; Mintzberg & Waters, 1985). Hambrick (1982) documents with his research the crucial role of environmental scanning and managerial perception in strategy planning. And from the resource-based view, theorists claim that successful implementation of strategies depends on the characteristics of the competitive environment (Murray, 1988; Phillips et al., 1983).
There are a number of studies looking at the environment from different perspectives, such as the effect of the firm’s industry, location, unionization of workers, market maturity and location on growth (Audretsch & Mahmood, 1994; Cooper et al., 1994 and Baldwin & Gellatly, 2003). Those studies confirm advantages for the firm in specific environments. However, an analysis of the different environment variables will be too complex. Instead, some scholars (i.e. Wiklund et al., 2009) suggest looking at the environment from the small business’ subjective perspective.
Wiklund et al. (2009) summarize these perspectives into three different dimensions in order to investigate the environment’s influence on firm growth. These are 1) dynamic environments, 2) hostile environments and 3) heterogeneous environments.
A dynamic environment is characterized by continuous demand change, volatility and certain turbulence (Pelham, 1999).According to Miller & Friesen (1982), customers have changing needs, and this type of environment creates good opportunities for the firm to create innovations, which in turn is associated with higher growth. According to the findings of different studies (i.e. Wiklund et al., 2009; Miller & Friesen, 1982) dynamism has a positive impact on growth for those firms that have an orientation to pursue new opportunities. The small firm, due to its high level of flexibility and ability to adapt, can come up with innovations and in this way create growth.
On the other hand, firms that are content with their existing operations might not be able to follow with changing demands, and will consequently be negatively affected by this type of environment.
According to Khandwalla (1977), hostile environments are risky, dominating and stressful. Covin & Sleving (1989) describe them as having intense competition and risky industry settings. In such environment, small firms with limited resources might have to think twice before taking a managerial decision as the cost resulting from a poor decision is higher than being in benign environments (Covin & Covin, 1990).
Nevertheless, firms with an opportunity seeking behaviour may benefit from this type of environment, by adapting an aggressive attitude and introducing innovative products (Mieller & Friesen, 1982). However, if the firm is not aggressive enough, this type of environment can limit its abilities to grow (see Moreno & Castilla, 2008).
Pelham (1999) delineate heterogeneous environments as being complex and with different segments of customers with different needs. Those different market segments need to be served according to their specific needs, and this fact, in turn, creates opportunities for small firms to find and create niche markets. Wiklund et al., (2009) argue that this type of environment might provide the small firm with growth opportunities if the firm is able to select a specific niche. Miller & Friesen (1982) argue that entrepreneurial firms which operate in this type of environments will become more differentiated due to their innovative ways to serve their specific niche. As a result this type of environment is also related to growth, as long as the firm is able to identify and exploit a niche in the segmented market.
As reviewed above, environment might not have a very direct relationship with growth, but if the firm has the right attitude, dynamic, hostile and heterogeneous environments are more likely to create certain felt pressures that can result in new opportunities for the small firms. Having an orientation towards growth, environmental challenges can thus function as strong facilitators for achieving those objectives. On the other hand, conservative firms with low degree of innovation and opportunity seeking behaviour will more likely operate in environments that are not very hostile or challenging. Miller & Friesen (1982) argue that firms in stable environments will adhere to existing products and practices making a rare need to rethink their strategy. Here, their products or services can be relatively undifferentiated because of the simple and unthreatening nature of their environment. As a result, the more unstable the environment, the more likely will the firm be to formulate strategies in order to survive and grow.
Growth Strategy Typologies
According to Doty and Glick (1994) a typology represents different ideal types with unique combinations of attributes that can be used to determine relevant outcomes. The central element in a typology is the set of ideal types or extreme. As Blalock expresses, typologies “provide an abstract model, so that deviation from the extreme or ideal type can be noted and explained” (Blalock, 1969: 32 in Doty and Glick, 1994). For instance Porter’s typology describes different business-level strategies as ideal types that organizations can follow in order to gain competitive advantage.
Thus, a typology’s value lies in translating complex situations into more simple descriptions that can explain an organization’s outcomes and form the basis for action. Therefore typologies, among other management tools, have become popular means to communicate management ideas (Knott, 2006). Nevertheless, the fact that typologies can simplify complex conditions comes at the expense of oversimplification and missing precision (Scott, 1981). This, in turn, limits the usage of typologies.
Different scholars have developed numerous strategy typologies from their studies on strategy. However, there is no consensus as to which of them are the most appropriate for influencing growth. Some studies (i.e. Baum et al., 2001) use the Porter (1980) typology, which distinguishes between cost leadership, differentiation and focus strategies at the business-level. Other authors (see Durand & Coeurderoy, 2001) use the Miller (1985) typology, which instead focuses on the strategies of differentiation in innovation and differentiation in marketing. At the same time, others working in the field of strategy and growth consider entrepreneurship itself as a strategy (Ireland et al., 2003 and Meyer & Heppard, 2000).
Nevertheless, Moreno & Castillas (2008) argue that the decision-making concerning growth is mainly located at the corporate level of a business, and the fact that the well-known typologies of Porter and Miller are business-level strategies, makes them not very appropriate when studying growth strategies. Furthermore, the focus of Porter’s typology is in obtaining competitive advantage that can bring above average levels of profitability to a business. Thus, Porter’s suggested strategies are more oriented towards profitability instead of growth.
A relevant typology, given the aim of this study, is the product-market model proposed by Ansoff (1965). This model embraces most of the aspects that different scholars consider as relevant growth strategies (see Moreno & Castilla, 2008; Smallbone et al., 1995; Keogh & Evans, 1998; Gibbons & O’Connor, 2005).
Ansoff’s (1965) model proposes different corporate-level strategies that aim towards the growth of the firm. This typology is concerned with the strategic decision that a firm faces, when considering in widening the range of products or entering new markets. Based on two dimensions, product and market, four strategies are formed as shown in the figure below.
arket penetration is a growth strategy based on increasing the firm’s existing share of products and markets. Market development strategy is when a firm responds to new market opportunities, by introducing existing products to new markets or customer groups. From this strategy, one can derive the concept of internationalization, which is recognized as a key area for growth. Product development is when firms develop new products or services for existing customers. In some industries this strategy is necessary in order to remain competitive and grow (Keogh & Evans, 1998). Diversification directs the organization towards introducing new products to new markets.
Mascarenas et al., (2002) claim that growth requires expanding what a firm is doing currently.
According to Watts et al. (1998) the most suitable growth strategic alternatives for a small firm are those concerning product development and market development. Smallbone et al. (1995) share the same view suggesting that high growth can best be achieved by identifying new markets for existing products or by developing new products or services for existing customers. In this way SMEs can evolve from having an established core activity into more complex businesses (ibid).
After a review of some popular strategy typologies concerning the growth of a firm, I found that the best-suited one is Ansoff’s (1965) product-market matrix and particularly the product development and market development strategies. This model will be taken as a point of direction during the case study. At the same time, I will keep a certain flexibility that will allow adding or modifying the named strategies to ones more suitable according to the results of the case study.
The aim of this chapter is to present the empirical data that was collected from the selected firms. The case study consists of four cases, and for each case I will present the background of the firm, the firm’s view towards strategy, the different factors affecting its growth strategies, and lastly, the direction of the growth strategies employed by the firm. Appendix C shows an overview of the interview questions, which structure was developed based on the concepts discussed in chapter 3.
Air Manager (www.airmanager.dk)
Air Manager was established in October 2006 and belongs to the green-tech industry producing technology to clean the air. This Danish company has five founders and shareholders. All of them close to 60 years and with a background in finance, banking and retail sector. Air Manager operates from its head office in Kolind, Denmark, wherefrom it sells to the rest of the country, and works on the commercialization of the idea in Norway, Germany, Poland and the Baltic countries.
For the moment, AirManager deals with a standard plug and play range of products developed and produced by one of the founders, David, in England. The product is only sold B2B, and contains both the physical product (equipment to clean the air) and a five years service contract.
The number of employees in 2007 was five full-time and seven on a commission basis. By 2008, these number increased to five full-time and seven on a commission basis. The total revenue made in 2007 was about one million, and in 2008 was about the same. The firm falls under the category of micro firms according to the definition of the EU, and according to the growth measures, AirManager has only experienced growth in the number of employees
In order to gain the following data from the company, I conducted a personal interview with AirManager’s senior partner Ole Thorn. He has a long career within the finance and banking sector, and now his function in Air Manager Nordic is to represent and open new markets internationally.
According to the interviewee, strategies are the means to achieve their goals or objectives. Additionally, strategies are taken seriously in this small company. They are discussed and approved in the annual general meeting, then they are written down and followed up during the year.
However, the action plans or strategies developed by AirManager are not very specific and work only as broad guidelines leaving place to changes according to the situations they face.
The headline of these strategies is to ‘marry’ big global players who are already market leading and well-known by everybody to enter new market niches and develop their products further (although only within the CFF-technology).
Factors affecting Air Manager’s growth and its growth strategies
Entrepreneurial Orientation: AirManager is characterized by having a strong entrepreneurial orientation due to its emphasis on innovation and development of new products within the patented CCF-technology. Knowing the high potential of this technology, a small engineering team dedicates efforts in the products technical development in order to adapt them to their different market segments. The firm is also characterized by being proactive, as their unique technology allows them to have a first mover advantage in the field of air cleaning technology. Although they are still in the developing phase and early commercialization of the products, Air Manager Nordic has an inclination for high-risk projects, meaning projects with chances of very high returns.
Owner-managers’ attitude: The interviewee does not express any personal goal with the firm, such as position in society, independency, control or self-fulfilment. The personal benefit named during the interview is the high standard of living in financial terms after they sell the company. The owner’s objective is to increase the market value of the company to 500 million DKK and increase their market share to 50% within the next five years. From this, one can conclude that the owner-managers have a very strong attitude towards growth.
Firm’s resources: Ole considers the company’s financial capital as limited. Due to the age and small size of the company, it is still living ‘at the edge of bankruptcy’, as expressed by the interviewee.
Until now, the shares of the company have been hold by the five founders/partners. Although the Danish company is looking for funding now, they regard the idea with certain scepticism, a matter of cost and benefit. Ole remarks, ‘The longer we can hold it within our own control, the better we will get paid at the end of the day.’ With regards to the human capital, Ole feels that they have a very enthusiastic and visionary team, which skills compliment each others. However, they could use more white-collar workers with competences within business, administration, management and especially sales to represent AirManager’s products.
The third kind of capital, social capital, is highly valued in the small firm. AirManager is aware that to reach their ambitious goals they need to accelerate the processes by outsourcing and entering into joint ventures with the biggest players already established. Thus, AirManager puts great efforts in networking in order to get involved and negotiate with those big companies.
Environment: Over the last 2 ½ years, AirManager has experienced a stable environment, with no price competition or aggressive competitors. However, they have also experienced increasingly growth opportunities in many different sectors, as for the last years there has been a big focus on pollution, ozone and CO2. AirManager’s technology can be applied in aereospace, cars, factories, and even private homes. Their market potential is huge, and they are aware that big companies are also putting a lot of resources to develop a comparable technology. Thus, they are awaiting a more dynamic environment, and therefore they are preparing the company with a solid engineering department that will keep innovating their products to adapt to coming changes and needs. This statement supports Miller & Friesen’s (1982) found that dynamic environments create felt pressures that result in growth opportunities.
4.1.3. Growth Strategies
Market Development: Until now, AirManager has serviced its customers in Denmark, however, AirManager wishes to expand its customer base to outside the country’s borders.
Nevertheless, because AirManager’s customers will be spread throughout great distances, AirManager will no longer be in capacity to serve their customers properly. For this reason, AirManager has entered into serious negotiations to enter into a joint venture agreement with ISS. This well-established company with international presence has a key role when developing AirManager’s market. ISS can cooperate with AirManager in the physical delivery, installation, service and when scraped, removal of the equipment. In this way, AirManager can get serviced their equipment everywhere and create a good reputation to AirManager’s products.
Furthermore, AirManager is about to enter a joint venture agreement with an aerospace company. Entering this market niche has great significance for AirManager.
Product Development: AirManager has a small engineering team that constantly suggest ways to improve their existing equipment and develop new products. For instance, AirManager’s joint venture agreement with the aerospace company requires slight changes in the equipment in order to install it in the flights. Besides, AirManager desires to establish very tight cooperation with universities and laboratories in order to continuously test the limits of their technology and to further develop new products within the CCF-technology.
Actua is a software development company established in December 2006 and located in a business incubator in Århus. Actua’s team create custom designed software on a project basis. They work either delivering a complete system solution or working with the costumer’s developing team as a sparring partner.
Actua has decided to center its activities on the emerging renewable energy sector. Especially those companies that move from a fossil based energy to renewable energy, as this transition requires changes in infrastructures and technologies. Actua can offer these companies technical, mathematical and algorithmic insight in order to overcome their challenges.
Three partners stand behind this concept. They all have a master degree in computer science and/or mathematics and professional experience in their fields.
Actua’s revenue in 2007 was 1.6 million DKK and in 2008 it increased to 4.5 million DKK. The number of employees in 2007 and 2008 was 3 and 7 respectively. These numbers indicate that Actua is in the category of micro business according to EU, and it is growing on both sales and employees.
The interview was conducted person-to-person with Actua’s managing partner Niels Koldsø, who is also an experienced coach and project manager.
Actua sees strategies as guidelines on how to reach their goals. Actua’s strategies are found in their website:
Maintain advanced skills within computer science and mathematics
Maintain and increase knowledge about the business needs within the energy market
Drive and participate in applied research projects
Participate in projects with major players in the European energy market
Respond to change and new insight
The team is aware of the need of clear guidelines on how to achieve their objectives, and therefore, they hold a monthly meeting where the three partners discuss strategic issues. The result of these meetings are written down and afterwards discussed with the rest of the team.
However, their strategies are broad, allowing some flexibility in how to approach them according to the situation they face. Thus, although Actua uses some form of planning procedure, there is still space for flexible initiatives.
Factors affecting Actua’s growth and its growth strategies
Entrepreneurial orientation: Actua is characterized by being innovative and proactive. Because the nature of their products is highly customized, they always strive to provide unique solutions. Furthermore, during the past 2 ½ years, they have participated in different projects creating technological springs. In the future they want to dedicate more time cooperating with big energy companies and universities to gain knowledge about the needs and problems their customers face and develop new software products. However Actua has a strong proclivity for low risk projects, meaning projects with normal and certain rates of return.
Owner’s attitude: For Actua’s three partners, the main goal with their business is to create a place with a team atmosphere and possibility for self-fulfilment. They put emphasis in creating a competent team with advanced skills within computer science and mathematics. Besides they focus on having a flat organization where tasks are rich in content and colleagues can work independently with creative, non-routinely tasks.
With regards to growth, the owners would like to grow as long as that does not interfere with the above personal goals.
Environment: Actua feels that their environment does not offer big threats of price competition or product innovation. However, the needs of Actua’s costumers vary according to the industry in which they operate, from windmill factories to energy distributors, where different methods and techniques are applied accordingly. Thus, Actua faces a heterogeneous environment with opportunities for new market niches with differentiated products that will in turn contribute to the growth of the firm.
Actua’s resources: Actua strives to maintain a competent team with a high level of skills in computer science and mathematics. For the moment, Actua’s team of seven people have completed tertiary education and possess professional experience working with other companies. In the near future, Actua is planning to create a board of directors with qualified business people, who can provide Actua with advises.
With regards to financial capital, Actua feels that the availability of capital during the past 2 years has been sufficient to their needs and satisfactory for the firm’s development. The interviewee expresses that different business angels have offered them financial capital. However, the team prioritizes independence, flexibility and agility to change plans or direction, something which would be hammered by entering those agreements.
Actua believes that they are active in networking, and they gain knowledge and insight when working in cooperation with universities and companies. They use these external networks to develop new software products, recruit employees and enter new markets
Product Development: Actua’s growth strategy directed to product development is called ‘50/25/25’, meaning that they wish that in the near future they can utilize 50% of their time performing advisory work to have a secure form for income, 25% of their time working in collaboration with big companies in developing new software products and 25% of their time with universities increasing their insight on how things can get done better and joining in projects to create technological springs.
Market Development: Actua does not see the country borders as a limitation for their market. One clear example of this is that the language of their website .dk, is only in English. Actua believes that a good software solution developed for a windmill factory in Denmark, can also be adapted and used by another windmill factory somewhere else in the world. For the moment, Actua is in contact with an English concern and a Swedish company that will make use of Actua’s services to develop software solutions. This is in accordance with Actua’s growth strategy that says that they want to collaborate with big energy companies in Europe in projects where they together can develop innovative solutions.
Apart from that, Actua is focusing on working together with companies with more traditional forms of energy. This is in order to enter this new market niche, but also to get more knowledge about the actual practices of those companies, something that is valuable when helping companies in the transition from traditional forms of energy to renewable energy.
Bio2Com was founded in July 2008 and operates from offices located in a business incubator in Århus.
This company’s main operations are based on commercial research, assistance and advice to health food companies. Bio2com also works in association with other industry specialists in a project-based network. The contacts represent senior experienced people from health and life science businesses.
Bio2Com’s revenue in 2008 was around 160.000 DKK. However the expected revenue for 2009 is one million DKK. The number of employees at the end of 2008 was two, and at the beginning of April this number had increased to five. Thus, Bio2Com is in the category of micro companies and experiencing growth.
The interview was conducted with executive director and founder Karin E. Nielsen, and administration manager Hannah R. Peters.
Bio2Com views strategy at the very tactical or operational level. Strategies are equated with tactics on how to perform specific tasks. Karin believes that as long as they are below 60 employees, they won’t find it necessary to define official strategies. Strategies rather emerge purely according to the situation. The nature of these strategies is very informal; they are not written down and neither followed up. When asked specifically whether she had considered longer-term strategies, Karin responded that their long-term strategy must be ‘to grow together with our customers, and in this way of course expand our market share. And the next step is to do some product innovation.’
4.3.2. Factors affecting Bio2Com’s growth and its growth strategies
Owner’s attitudes: Karin has a very clear goal with her business, and that is to ‘make a lot of money!’ She expresses that the only purpose of having a business is to make money. Personal goals such as creativity, self-fulfilment, stability and/or power are not regarded as relevant motives in running the business.
Karin is very positive about growth and it is very important for her that both the firm’s sales and the number of employees increase.
Entrepreneurial Orientation: Bio2Com and its team have a proclivity for medium-risk projects, favour innovation and product development and are willing to take the first step when bringing products/services to the market. Hannah comments about their latest creation called Nutriabase, which is a very unique ingredient database that did not exist in the market before. This database is now widely used by their customers. They expect to have more product innovations like this in the near future.
Firm’s resources: Bio2Com’s founder has a degree in international business and physiology and 25 years of practical experience within marketing activities in the health sector. The rest of the team has an international background and tertiary education within management, biotechnology and computer science. Furthermore, the company has 4 high-skilled external members in its board of directors. All these tell that the human resources in Bio2Com are well on top.
With regards to the financial aspect, Karin claims that they are looking for more capital for the moment. However, although money is not always easily acquirable, they don’t see it as a barrier to grow.
One of the main priorities of Bio2Com is to keep an intense networking activity. They feel they gain tremendously from their external networks as this provides the company with valuable contacts such as customers, investors and other companies with whom they can work together in projects.
Environment: According to Karin, the consultancy industry is quiet heterogeneous and customers approach consultancy firms for many different reasons. Especially now, Karin says, modern management is used to outsource many activities, and here is where Bio2Com comes in performing commercial research, different types of reports, and assisting firms with advises, new trends, and other type of information. However, Bio2Com focuses only on health food companies. Karin claims that even in this market niche, the firm experiences certain level of competition and changing demands. This is because Bio2Com’s customers are mostly global companies, meaning that Bio2Com also has to compete globally.
4.3.3. Growth strategies
Product Development: Bio2Com expects to create more products like the ingredient database Nutriafiles. Although, for the moment they don’t have plans on how and when to do it. All products are developed in-house and with no collaboration of any external network. Bio2Com’s working team has very different backgrounds and knowledge that complement each other. For instance the idea of creating the Nutriafiles database was coming from owner-manager Karin, developed with Subhashree, who has a degree in biotechnology and transformed into a database by Jeppe, with a master in computer science.
Besides, as Bio2Com’s core activity is their consultancy work, Karin feels that they are developing products through their costumers by advising their costumers on what products to bring to market and how to do it. Karin claims that in this way they can grow together with their customers.
Market Development: Bio2Com sees itself as a company born global, meaning that their marketplace is not limited by the country borders. This is expressed in their website as it is a .com and is presented only in English.
They go where their clients are, Karin claims, and their clients also operate in a global scale. Karin says that they work mainly through the Internet, and use Skype communication. The most important, Hanna says, is that there is clear communication, because by knowing what the client wants, Bio2Com can develop a product according to the client’s specification.
4.4. Cytoguide (www.cytoguide.dk) Cytoguide is a biotech company devoted to the development of drugs that target receptor-binding proteins. The combined drugs have, as a goal, to improve the treatments of diseases such as leukemia, infectious and autoimmune diseases. Three partners with medical degrees and extensive experience on the field established Cytoguide in October 2007 after Softnoseat granted 1.5 million DKK to the company. Cytoguide drives its operations from facilities in a business incubator in Århus.
In 2007 Cytoguide had one full-time worker and two part-time workers, and in 2008 they were six full-time employees in total. However, they have not had revenue yet as they are in a researching phase.
The interview was conducted with Jonas H. Graversen, one of the three founders of the company. Jonas has a PhD in Molecular Biology, has published more than 25 scientific papers and patents and was co-founder of Proteopharma.
Jonas views strategies like a flexible piece of working document that contains some plans and how each step of the plan affect each other. These plans are reviewed every 6th week with the board of directors. In these meetings, strategic issues are discussed and written down. After the board meetings, another type of meeting is hold where the rest of the employees get to know the results of the meetings and discuss how to operationalize the written plans. However, Jonas claims that these ‘plans’ are not followed all the time, as there is always something that needs to be modified. Therefore, although they handle strategies with certain formality, they also keep a high level of flexibility and continuous feedback to adapt the plans to the actual situation.
Factors affecting Cytoguide’s growth and its growth strategies
Owner’s attitude: Jonas expresses, in behalf of his partners, that the main motivation to have their own company is that it opens the possibility of self-fulfilment, of being able to make decisions yourself and live the team spirit that exists in a small company.
Cytoguide takes some research from the University and turns it into something that is viable as a business idea. In that way, the team feels always challenged, but it becomes also a very rewarding activity when they see that they can actually make profit out of basic research, Jonas claims. Thus, the financial aspect is also a motivation aspect, but not as important as the personal benefits.
With respect to growth, Jonas feels that they would rather grow slowly but surely and not grow to grow, as he has seen many examples where biotech companies have had an explosive growth for a time but, when it slowed down, they had to fire many people destroying the team spirit and psychological contract between the people and the company. Here Jonas referred to the employee growth but, when looking at the growth of revenue, he claims that it is Cytoguide’s plan to develop their research platform in order to have a sooner and larger revenue.
Entrepreneurial Orientation: The operations of Cytoguide are basically entrepreneurial oriented in all senses. Firstly, Cytoguide explores opportunities and is willing to take high risks (high investments, high returns) when trying to discover and develop new drugs. They know that there is a chance of success for a new drug to go all the way through tests, but it is not always the case. Cytoguide is also a company that can be characterized by being highly innovative as their emphasis lies on discovering and developing new products constantly. They are proactive by nature, as their basic idea is to bring products to the market that have not been seen/commercialized before.
Firm’s resources: Jonas feels that the availability of financial capital has been fully satisfactory for the firm’s development. They have mayor investors that believe in their idea and buy shares in their company. In November 2008, Cytoguide had a financing round where they got 14 million DKK and they expect that this year’s financial round will provide the company with an even bigger amount. This money will allow them to work for two years more, and begin to test their products on humans.
Jonas claims they have the necessary human resources to develop the company. One of the three partners is a professor at the University of Århus, and the other partner is a doctor in the hospital of Århus, which means that they have contacts both from the academia and from the more practical world. Besides, Cytoguide’s investors come with ‘clever money’, which means that they also provide good advisors.
Environment: Cytoguide is settled in a very stable environment being an R&D company within the biotech industry. Here, they don’t have to follow changing customer needs and fight with competitors for market share, in the same ways as in other environments. Jonas claims that biotech companies are very scarce in Århus, and for that reason they are ‘protected’ in many ways by the political community. These biotech companies are also good at working together and sharing knowledge and latest practices. According to the conceptual framework of this assignment, one can argue that this simple and unthreatening environment does not affect positively the firm’s growth, as the firm will not feel pressure to create new business processes, etc.
Product Development: Cytoguide operations are based on product development, and the primary source of growth is by maturing and commercializing those products. Jonas describes Cytoguide as an ‘incubator of ideas’, where they focus on obtaining basic research from the Universities and transform them into commercial products. Thus, according to Jonas, their strategy handles issues such as how to ‘drive the projects forwards’ in order to develop the drugs. In order to discover, test and develop their drugs, they firstly need to have a solid net of inter-organizational networks, which is used in every phase of their projects. Firstly, they are highly dependent on the projects provided by the Universities in order to develop them further. However, the process of product development is quiet long, and Cytoguide is not able to develop the drug the whole way to the end-customers. Several phases, such as testing on animals and humans and other parts of their research work, are performed in collaboration with bigger biotech companies. The drugs are developed until Cytoguide believes the product is mature enough and then is sold to other biotech or pharmaceutical companies that have the facilities and knowledge to further develop the drugs.
Market Development: Cytoguide does not concentrate on expanding their market now, as it doesn’t have commercial products yet. However, Jonas claims that when they will have a new drug that is mature enough, they will sell it to a big biotech or pharmaceutical company that could be located in Europe, in the US or somewhere else, as their geographic marketplace is not limited by the country borders.
This chapter will present a cross-case analysis in which the four cases will be compared to each other and analysed on the basis of the frame of reference. The analysis will look at strategy development from three perspectives, its emergence, direction and use.
Strategy from the small business perspective
From the firm’s perspective, strategies are seen as ‘guidelines’ (Actua), ‘plans’ (Cytoguide), ‘tactics’ (Bio2Com) and ‘means’ (AirManager) on how to achieve goals or objectives. Their definition of strategy can be related to Mintzberg’s definition of strategy as plan. One could classify these views by the thoroughness of those plans, differing from broad ‘guidelines’ to the more detailed ‘tactics’.
In this case study, three out of the four studied firms recognized the need for dedicating time and incorporating strategies to their business activities. AirManager, Actua and Cytoguide made consciously use of the planning approach in strategy formation. These firms hold formal scheduled meetings with different stakeholders, set clear objectives and defined their strategies. The strategies are written down and followed up, modified and reviewed against objectives. However, this is done in different ways. AirManager reviews and discusses strategies once a year; Actua does it every month and Cytoguide every six weeks.
Both Actua and Cytoguide hold two levels of meetings, one with all the partners and another one with all the employees. However, although these firms advocate the planning approach, their strategies are so broad that there is a lot of space for flexibility and creativity for how to approach them. They all confess that, in practice, the emergent approach is present too.
On the other side, Bio2Com had a very different opinion about strategies. The owner-manager does not spend time writing down strategies, and fully supported the emergent approach. The strategies were in the head of the owner-manager and were communicated verbally to the rest of the workforce when appropriate.
The figure below summarizes the practiced approach to strategy formation in the different firms.
Figure 5.1.: Overview of the strategy approaches of the four studied firms.
As a result, one can state that the studied firms have their own clear perception about the term strategy, which appears to be in accordance with Mintzberg et al.’s (2003) definition of strategy as a plan. Nevertheless, the way that these four firms approach strategy formation in practice may differ from firm to firm in the degree of formality and time dedication. Actua, in one side, organizes a formal meeting every month to discuss strategic issues and another one to communicate them to the employees. Bio2Com, on the other side, keeps the strategies in the head of the owner-manager, which are communicated to the employees informally.
What is worth noticing is that these firms are all conscious about the value of strategies and that, in spite of their size and age, they do make use of strategies. Although the planning approach is favoured by three out of four firms, they all appreciate and made use of the emergent approach of strategy formation.
Factors affecting the emergence of growth strategies
The literature review in chapter 3 tells us that the owner’s attitude towards growth, entrepreneurial orientation, firm’s resources and environment are important elements affecting a small firm’s growth and the formulation of their growth strategies.
A small firm, having positive levels of these elements, will consequently most likely also develop (informal or formal) growth strategies.
As we can see below, the four studied firms have different levels of these elements that affect growth.
Figure 5.2.: Overview of the factors affecting the studied firms’ growth strategies
The owner’s attitude towards growth varies here from medium to high, meaning that the owners of the studied firms emphasize growth as an important goal with their firms. This positive attitude towards growth has a big influence in the development of growth strategies of the firm, as the owner-manager has a high degree of control when it comes to mayor decisions in the firm. For instance, the five owners of AirManager have also a very positive attitude towards growth and, their enthusiasm is spread to the rest of the company creating a team that is dedicated to grow. The main priority of Bio2Com’s founder is also to make her firm grow, and although Bio2Com’s strategies are emergent and not planned, the founder had a strong focus on making her company grow. Hence, if the owner-manager wants her firm to grow, she will most likely also find ways to achieve growth. This is in accordance with Wiklund et al. (2003) and Deakins & Freel (2003) that link the owner’s attitude towards growth and the future path of the business. The reason why Actua and Cytoguide have medium levels of this element is that they wish to achieve growth as long as that does not interfere with their personal goals and their team atmosphere. Both firms want to grow but prefer to do it ‘slowly but surely’. This conforms to Wiklund et al. (2003) that claims that if the owner does not feel favourably disposed from the firm growth; her attitude will also hammer the growth of a firm.
The entrepreneurial orientation of the four firms is generally high. Firstly, these firms are highly innovative: Cytoguide focusing on discovering and developing new drugs, Actua developing software to assist companies, AirManager developing and commercializing air cleaning equipment, and Bio2Com assisting other companies using in-house developed solutions. Secondly, these firms are also willing to take risks in order to follow the new and unknown, although some more than others. For instance Actua and Bio2Com prefer to take projects with low/medium risk and normal but certain rates of return. On the other hand, Cytoguide and AirManager are willing to run high risks, investing relatively a lot of money and efforts but also expecting high returns. And lastly, the four firms share a proactive attitude when they anticipate and pursue new opportunities. The four firms express their interest in developing products or practices that have not seen before in the market.
This description complies with several authors (i.e. Miller, 1983 and Lumpkin & Dess, 1996) when characterising a firm with an entrepreneurial orientation and, as reviewed previously, entrepreneurial orientation also affects positively a firm’s growth. Thus, the entrepreneurial orientation of the studied firms will mark their growth path, which in this case is a strong focus on product development.
The four studied firms have also necessary resources available in order for them to grow. The founders and the rest of the workforce of the four firms are high educated and have also extensive practical experience. This means that the human capital of the four firms is satisfactory. According to Alvarez & Busenitz (2001) this type of resource helps to identify new opportunities and ways to grow the firm.
The financial resources have also a key role in the firm’s growth. The four firms agree that they have had sufficient capital to develop their company, and until now, financial capital has not been seen as a limitation factor when it comes to the growth of the company. They all claim that, although financial capital is not always easily acquirable, it is very possible to get access to more financial capital through investors. However, some of the firms look at this idea with certain scepticism. AirManager’s owner claims that it is a question of cost and benefit, because bringing investors to the company can be costly at the end, on the other side, if they don’t bring investors soon, they might not be able to achieve their goals. Actua, on the other side, sees investors as hinders for flexibility and Actua prefers finding financial capital through other sources.
What the four firms favour the most is social capital, and they share the idea that it is a very important resource helping tremendously in the development of the firm. Here, the firms refer to the inter-organizational networks. Cytoguide for instance is highly dependent on their connection to the University as they use basic research from the University to further research and develop new drugs. Actua considers that it is highly important to understand the specific needs of their costumers, and therefore they use nearly 25% of their time working together with companies in projects to jointly develop new products or even technological springs. Bio2Com has used its networks to find costumers, investors, employees and more. AirManager networks are crucial when expanding to other markets, and their joint-venture with ISS will make possible for AirManager to sell their equipment in their targeted geographical areas confident that their costumers will be good serviced by this international and well-known company. Thus, the four firms’ belief that these three types of resources are very important to develop and grow their firms is in accordance with i.e. Neergaard et al., (2003) and Wiklund et al., (2007)
The fourth element affecting growth and consequently the growth strategies of the firm, is the environment. This element is seen from the small firm’s perspective and varies from stable to dynamic/heterogeneous/hostile. According to Miller & Friesen (1982), firms in stable environments do not see the necessity to rethink their strategy, and adhere to existing products and practices. Instead, they argue that dynamic/hostile/heterogeneous environments create ‘felt pressures’ that result in new opportunities for the firm. For instance, AirManager is preparing for a more dynamic environment with a solid engineering team that can keep up modifying, developing and testing the limits of their products. This is considered necessary for AirManager, as their competitors are big global players that are already investing heavily in technologies comparable to AirManager’s. On the other hand, Actua feels that their environment is heterogeneous, with costumers with very different kinds of needs. Therefore they have focused on companies working with renewable energy, but also here, their costumer’s needs vary greatly. Actua sees that though as an opportunity to enter different small market niches and get specialized within the different sectors from the windmill factories to the energy retailers. Cytoguide feels that their environment is quiet stable, they don’t feel pressures from competitors or changing costumer’s demands. This might be because Cytoguide is still in a research phase of the drugs and has not yet a commercial product. Lastly, Bio2Com feels a certain level of competition as most of their clients are global companies meaning that Bio2Com also has to compete globally. This results in Bio2Com efforts on offering high quality services to their clients and developing extra facilities such as the Nutriafiles.
5.3. Growth strategies
The theoretical framework to study the growth strategies of the four firms was based on Ansoff’s (1965) product-market typology. Two out of the four suggested strategies from Ansoff’s matrix were chosen: product development (new products to existing markets) and market development (existing products to new markets). This choice was based on the arguments of different authors (Mascarenas et al.,2002; Watts et al., 1998; Smallbone et al., 1995) that growth firms focus on expanding what they already do. Relating this to Ansoff’s matrix, Watts et al. (1998) and Smallbone et al. (1995) suggested product development and market development as the strategies that best characterized growth firms.
In the case of the four studied firms, product development was seen as an important area of focus when pursuing growth. A clear pattern emerges from the product development strategies followed by the studied firms. In the case of AirManager, Actua and Cytoguide, their strategy is based on a solid net of contacts and collaborations that work like a stepping stone in order to comply with their strategy. Thus, networking is seen as a key area of focus when developing new products. However, Bio2Com gives an example that product development can be done completely utilizing in-house resources.
From this, one can say that small businesses can choose to grow focusing on developing new products (or services), with external cooperation, making actively use of the firm’s networks, or it can also choose to develop new products with no external cooperation and utilizing in-house knowledge and capabilities.
Consequently, one can suggest that a small firm pursuing growth can choose a product development strategy combined with a solid base of networks. As Ole from AirManager said, it is a hard decision, because cooperation means usually that the gains have to be shared, and then it becomes a question of cost and benefit. But without cooperation they might not be able to reach their goals. Thus, networking or, more specifically, external cooperation is a key stepping stone in order comply with a product development strategy.
By looking at how the four firms approach the market development strategies, it is possible to see that these firms, in spite of their size and age, feel as a natural thing to look beyond regions and country borders. Although the four firms considered themselves having the world as their market place, two of them still wanted to enter different market segments other than geographical. Actua for instance, that focuses on renewable energy companies, plans to broaden this market niche by focusing on companies that work with more traditional forms of energy. Taking this step means a challenge for Actua, as it will require adopting different practices and acquiring specific knowledge within this new field. Actua can obtain these skills by working together with companies in this new market niche in projects where they jointly develop new products. AirManager focuses instead on entering new market segments such as b2c and aerospace industry. In order to do that, AirManager needs to enter in joint ventures with bigger well-established companies.
One can therefore say that firms today experience a born global phenomenon; however, some firms still pursue growth by expanding their market segments other than geographical. Here, we can also see that the firm may choose to do it by it-self, or through external alliances. Thus, we have market development with no external cooperation, and market development with external cooperation.
As a result, one can state that in order to achieve growth, small companies can pursue a product development or a market development strategy using in-house knowledge and abilities or in cooperation with external alliances such as:
Putting together these results, we obtain a matrix that shows the four studied firms’ growth strategies classified into product-market development, with and without external cooperation.
Figure 5.3.: Growth strategies pursued by the studied firms
The aim of this last chapter is to summarize and provide an overall conclusion regarding the findings of this study. The first section will discuss the findings connected to each of the three research questions. This will be followed by the contributions of this assignment with regard to the field of research, and a final section which describes possible directions for future research. Overview
The purpose of this thesis has been to study the development of growth strategies in young, small businesses. Three research questions were formulated in order to achieve this goal. Firstly, it was considered necessary to understand what a strategy is from the small business’ perspective. The second step was to get an insight in the factors affecting the emergence of growth strategies in small business, and lastly, the direction and underlying logic of those growth strategies. The theoretical framework provided relevant theories within definitions of strategies, factors affecting growth strategies and growth strategy typologies, in order to guide the case study. As a result the case study was conducted with three related perspectives. The first solely emphasized the small business’ definition of strategy and how strategies were used in practice. Here, the focus was on the nature of formality and flexibility of those strategies which was best described by the planning vs. emergent approach of strategy formation.
The second part of the study made use of relevant theories regarding key factors affecting the growth strategies of the small business. Those factors were the owner’s attitude towards growth, the entrepreneurial orientation of the firm, the firm’s environment and its resources.
The third part of the study focused on the growth strategies of the firms. Here the frame of direction was based on Ansoff’s (1965) product-market typology that looks at the corporate-level strategies in firms and, according to different scholars, was the best suited typology when studying growth firms.
The following three sections reviews each research question and connects it with the findings of each part of the study.
Research Question 1: What is a strategy from a small business’ perspective?
The case study revealed that firms had a clear perception of what a strategy was, and their definition could be related to Mintzberg’s definition of strategy as a plan to achieve pre-defined goals. However, the complexity, flexibility and formality of those ‘plans’ varied from firm to firm. In practice, three out of the four firms made use of planning and pre-decision analysis with different stakeholders. Some of the firms hold scheduled meetings and reviewed the strategies as often as once per month. However, for one firm, strategies in practice were something that emerged according to the situations they faced and their environment.
Consequently, from a small business’ perspective, one can say that strategies are plans to achieve the firm’s objectives and they are often used in practice through a combination of pre-decision analysis and emergent patterns. Flexibility has a key role when formulating strategies and therefore the formulated strategies may be very broad.
Research Question 2: What are the conditions in which growth strategies emerge?
The four main factors affecting a firm’s growth strategies were recognized by the four studied firms. Furthermore, it was possible for the firms to link those factors as being responsible for the emergence of their growth strategies.
The case study suggests that growth strategies emerge where:
- The owner-manager’s attitude towards growth is positive
- The firm possess a certain degree of entrepreneurial orientation
- The firm has the necessary financial, human and/or social resources
- The environment of the firm creates certain felt pressures resulting in new opportunities
Research Question 3: What is the direction and underlying logic of the growth strategies?
The findings suggested that the firms were making use of growth strategies directed to the development of new products and markets. Furthermore, after an analysis of the employed strategies, it was possible to state an important dimension that was present in those strategies. This dimension is related to the firm’s inter-organizational or external networks and constitutes collaboration with other entities in developing new products or markets.
Thus the resulting model provided a synthesis of the direction and logic of the growth strategies employed by the studied firms.
The topic of this assignment invites to different interesting paths and trains of thought to approach this field of study. In this study the focus is three related aspects in order to explore and increase our knowledge about growth strategies in young, small businesses.
The contribution of this assignment to the field of study is by far all embracing but it reveals interesting practices found in today’s young, small businesses. This assignment suggests that:
- Young, small firms see strategies as a valuable tool to achieve their goals, and do incorporate strategies in their business activities.
- The pre-decision analysis of strategy formulation is a prevalent method used in practice, although still leaving great space for flexibility. This finding is another proof that strategies can also be flexible and allow the firm to adapt in a changing environment, going against prejudices that the use of strategies binds the firm to follow a course of actions.
- The different factors affecting the emergence of growth strategies, showed that certain conditions were most likely to foster growth strategies than others.
- Growth strategies in small businesses can be characterised by being directed towards developing new products or markets.
- Inter-organizational cooperation has a key role when developing growth strategies. Firms should therefore consider looking beyond the firm’s own capabilities and knowledge and make use of their networks to create sustainable growth strategies.
This study offers some insights into growth strategies in small businesses based on a small selection of firms. However, the nature of growth strategies in small businesses is complex and multifaceted, and there is a substantial need to further investigate this area of study. Further research can be conducted in different directions by looking at more varied demographic variables, firms in specific environments, or having access to specific type of resources. For instance, the firms in the present study had high-educated owner-managers, and as a result, the phenomenon under study was seen from their perspective. Thus, the findings might not be applicable to firms with low-educated owners. It will therefore be adequate to indulge in further research to include this group of entrepreneurs as well. By doing so, the findings will provide a more diverse picture of growth strategies practiced by small businesses.
Furthermore, it might be appropriate to conduct further research on this topic that follows the studied firms over a period of time, making it possible to link the findings of this study to the growth outcomes of the firms. By following the firms over a longer period of time, it might also make it possible to study how the growth strategies are implemented successfully and recognize potential pitfalls for each strategy.
In all cases, this study supports the view that there is a need for greater research emphasis on the strategy processes in entrepreneurial firms and, most importantly, for finding ways to channel relevant findings to the small businesses. Only in this way, hard efforts can give productive outcomes contributing to the development of our economy.
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Appendix A. Unstructured interview with Kurt B. Kristensen, 4th of February, 2009
Kurt works in Væksthus Midtjylland as a business advisor helping companies to analyze their situation and environment in order to develop strategies or guidance.
We talked about my project idea, the practical relevance of the topic, and my need to find cases that I could study and use in my thesis.
My first concern during our talk was whether it will be relevant to study businesses that are in such an early stage in their life cycle and their use of strategies. Perhaps the actual practice would reveal that there was not even a need to concentrate in strategies in that stage, or maybe strategies is something that belongs to bigger businesses. Kurt took my worries away, saying that strategies are relevant in all stages of a business life cycle. Kurt argued that making use of strategies and long term planning can spare companies a lot of worries and bad surprises as they will work with direction and towards a common goal. He claimed that even newly started businesses should make use of strategies to put a point of direction, and not take too many side steps.
About my need to find relevant cases of micro/small businesses to base my study on, Kurt recommended me to focus on high educated entrepreneurs as they are people who are already used to put their ideas on paper, plan and work structured in projects. Many of those high educated entrepreneurs have great ideas and develop new innovative products, but they either don’t have the knowledge/interest or simply don’t realize the importance of working with strategies. Kurt argued that he has experienced that lower educated entrepreneurs do not find the meaning to write down their ideas on paper and follow structured plans, so it would be more difficult to firstly find lower educated entrepreneurs who already use strategies and secondly, use my results to convince them that they should use strategies for better performance. Due to the short deadline of the project, I decided to follow his advice and concentrate my work in the high educated entrepreneurs. They are also more likely to become aware of the need of strategies and incorporate them in their business activities.
Kurt provided me with the following contact information to seek small (innovative) companies that could be interested in collaborating in my project.
Viborg Dansk Jordbundsforskning (en del af Århus Universitet)
Agro Business Park – contact person: Lars, direktør
Århus Østjysk Innovation
- Område med små virksomheder
Appendix B. Model of small business growth, Wiklund et al. (2009)
Appendix C. Interview Guide
General information about the company:
Name of the company: _________________
Month and year of the firm start: _________
Total sales in 2008: ________
Total sales in 2007: ________
Number of employees at the end of 2008: ______
Number of employees at the beginning of 2007: ______
Is the firm managed by the owner/owners? __________
Strategy from the company’s perspective:
Could you describe what is your view towards strategies?
Does your company make use of strategies? If yes:
- do you hold meetings to discuss strategic issues?
- do you write down plans?
- do you set objectives?
- do you review strategies vs. objectives?
- how flexible are your strategies?
Development of the growth strategy:
In your opinion, how can the firm achieve growth?
Can you describe the growth strategies employed by the firm?
How does the company go about developing new products?
How does the company go about expanding its markets?
Factors affecting the emergence of growth strategies:
What is the main goal of the owner-manager with the firm? For instance, focus on survival of the firm, maintenance of lifestyle or achieve growth.
What is the attitude of the manager toward growth?
In your opinion, does the manager’s attitude toward growth affect the firm’s growth strategies? If yes, how?
To what extent can the firm be described as having an entrepreneurial orientation? That is, its proclivity for for risky projects, emphasis on innovation, and tendency to introduce products before competitors.
In your opinion, does the entrepreneurial orientation of the firm affect its growth strategies? If yes, how?
How can you characterize the environment of the firm in your particular industry, market or location?
For instance, dynamic: instability and continuously changing, hostile: high rivalry or decreased demand of the firm’s products, heterogeneous: different market segments with varied characteristics and needs or stabil
In your opinion, does this environment affect the growth strategies of the firm? If yes, how?
Do you believe the firm has the adequate internal resources to grow? Such as human capital, intra-organizational networks
Do you believe the firm has the adequate external resources to grow? Such as financial capital, inter-organizational networks
In your opinion, do internal and external resources affect the growth strategies of the firm? If yes, how?
If you have any additional comments, please share them with me