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The Sme Growth Strategies Economics Essay

This paper focuses on factors affecting the growth and performance of small and medium enterprises. The aim was to identify strategic factors differentiating young and long-lived growth SMEs. The empirical data consisted of 32 young (8 years or less) and 33 long-lived (20 years or more) growth SMEs. A comparison of the two groups of growth SMEs revealed strategic differences with important implications between young and long-lived SMEs. The results suggest that firm age does matter for SME growth strategies. The results increase our understanding of the factors affecting SME growth and performance in two different contexts.

Keywords: growth; performance; strategies; small and medium enterprises

INTRODUCTION

Firm growth is a central focus area in strategy, organizational and entrepreneurship research. Much research effort has been targeted particularly at investigating the factors affecting firm growth, but to date there is no comprehensive theory to explain which firms will grow or how they grow (e.g. Garnsey, 1996). It seems that not even very strong explanatory factors have been identified, though various explanatory approaches have been presented.

The research community largely shares the view that growth SMEs have a special importance in the economy (see e.g. Storey, 1994). During the last ten years, the research on firm growth has largely focused on high-growth SMEs. It is argued that a relatively small proportion of all small firms are responsible for the major part of the small firm contribution to net new jobs (Storey, 1994; Birch et al., 1993). These firms have been described as ‘gazelles’, ‘fliers’, ‘growers’ and ‘winners’, and the targeting of effort towards them has been described as ‘picking’, ‘stimulating’, or ‘backing’ winners (see e.g. Gibb, 1997; Freel, 1998; Beaver & Jennings, 1995).

More recently, the role of fast-growing small firms has been questioned, and the issue is known as the ‘mice vs. gazelles’ (Birch et al., 1993) or ‘flyers vs. trundlers’ (Storey, 1994) debate. In other words, the debate has focused on the question: which of these actually has the major impact on net employment (Davidsson & Delmar, 1998)? On the other hand, it has been recognized that attending exclusively to firm-level growth and jobs may be too narrow an approach. Firms, even very small and non-growing ones, can have different strategic roles or positions in the local economic system (Laukkanen 1999). Some are critical facilitators of other firms’ growth or of their very emergence, and thus are important for job creation at the local level.

In fact, previous research reveals that firm growth is a multidimensional phenomenon. There is substantial heterogeneity in a number of factors associated with firm growth and related research (Delmar et al., 2003). The most recent research on firm growth has increased our understanding of different growth patterns. As Delmar et al. (2003) have shown, firm growth patterns are related to the demographic characteristics of firms such as firm age.

SME growth is often closely associated with firm overall success and survival (e.g. Johannisson, 1993; Phillips & Kirchhoff, 1989). Growth has been used as a simple measure of success in business (e.g. Storey, 1994). Also, as Brush and Vanderwerf (1992) suggest, growth is the most appropriate indicator of the performance for surviving small firms. Moreover, growth is an important precondition for the achievement of other financial goals of business (de Geus, 1997: 53; Storey, 1994; Reynolds, 1993; Day, 1992: 128; Phillips & Kirchhoff, 1989). From the point of view of an SME, growth is usually a critical precondition for its longevity (Storey, 1994: 158). Phillips and Kirchhoff (1989) found that young firms that grow have twice the probability of survival as young non-growing firms. It has been also found that strong growth may reduce the firm’s profitability temporarily, but increase it in the long run (McDougall et al., 1994; cf. MacMillan & Day, 1987).

However, there are several conceptual and empirical challenges in the study of firm growth (see e.g. Davidsson & Wiklund, 2000; Delmar, 1997). Firm growth in general refers to increase in size. In research, firm growth has been operationalized in many ways and different measures have been used. This may be one reason for the contradictory results reported by previous studies (Weinzimmer et al., 1998: 235), though other explanations have also been presented (see Delmar et al., 2003; see also Davidsson & Wiklund, 2000).

The most frequently used measure for growth has been change in the firm’s turnover (e.g. Weinzimmer et al., 1998: 238; Hubbard & Bromiley, 1995; Hoy et al., 1992; Venkatraman & Ramanujam, 1986). Another typical measure for growth has been change in the number of employees. However, it has been found that these measures, which are frequently used in the SME context, are strongly intercorrelated (North & Smallbone, 1993; Storey et al., 1987). Such an intercorrelation may not exist among capital-intensive large companies.

Most studies of firm growth have focused on large companies or new venture, while the growth of established, long-lived SMEs seems to have attracted much less attention. In fact, many organizational life cycle models present growth as one stage of development in the organizational life cycle. On the other hand, it has been shown that most new jobs are created by existing, not new, SMEs (e.g. Davidsson et al., 1993; see also North et al., 1992). However, previous studies of SME performance have focused on the performance of new ventures rather than on existing SMEs and on the factors behind their longevity and growth (e.g. Tsai et al., 1991; Duchesneau & Gartner, 1990; Keeley & Roure, 1990).

This study takes a holistic and extensive approach to factors affecting SME growth and performance. Firm growth and performance are much affected by strategy, which involves choices along a number of dimensions and can be represented by a firm’s overall collection of individual business-related decisions and actions (Mintzberg, 1978; Miles & Snow, 1978). Though there is a variety of definitions of the term of strategy, it can accurately be conceptualized as a pattern of strategic variables, because the elements of strategy – the individual business-related decisions and actions – are interdependent and interactive (Galbraith & Schendel, 1983). It is argued that the identification of strategy patterns permits a more complete and accurate depiction of overall strategic behavior (see e.g. Hambrick, 1983; Robinson & Pearce, 1988).

Previous research has suggested that the paths to growth can differ systematically by firm-level factors such as firm age (Fisher and Reuber, 2003; Delmar & Davidsson, 1998). In fact, already in the late fifties Penrose (1959) presented the view that a firm’s growth pattern is dependent on its age, size, and industry affiliation (see Delmar et al., 2003; also Stinchcombe, 1965). As Delmar et al. (2003) suggest, it is probable that different growth patterns have different implications for management and possibly also for the long-term performance of the firm.

In this light it seems useful to compare young growth SMEs and long-lived growth SMEs and determine whether they differ in characteristics and strategies. The central research question is, how do young and long-lived growth SMEs differ in their strategic attributes? In other words, the aim of this paper is to investigate whether firm age plays a role in firm characteristics and strategies. The findings will increase our understanding of the factors associated with firm growth and performance in these two different contexts.

FACTORS AFFECTING SME GROWTH

Although there has been much interest in understanding small firm growth during the last ten years (e.g. Davidsson & Delmar, 1999; Delmar, 1997; Wiklund, 1998), there is still not much of a common body of well-founded knowledge about the causes, effects or processes of growth (Davidsson & Wiklund, 2000). Moreover, although several determinants of firm growth have been suggested, researchers have been unable to achieve a consensus regarding the factors leading to firm growth (Weinzimmer, 2000). Most of the research work in this area fails to provide convincing evidence of the determinants of small firm growth as a basis for informing policy makers (Gibb & Davies, 1990: 26). Attempts to build models for predicting the future growth of the firm, i.e. picking winners, have not been particularly successful. Moreover, as Spilling (2001) reminds us, the status of being a growth firm may be rather temporary.

Early studies of growth focused on large companies and their diversification strategies. However, small firms are not small big firms. In large companies the role of diversification, for example, may be significantly bigger than in the case of SMEs. Indeed, growth through diversification may be necessary for the growth of a large company (Kay, 1997).

The existing research on the growth and strategy of SMEs has focused mainly on new ventures (Olson & Bokor, 1995). There are few studies of the growth of established SMEs: one instance is Davidsson (1989), who studied the subsequent growth of an SME from the psychological point of view. Maybe the most comprehensive compilation of results of previous studies focusing on small firm growth is that presented by Storey (1994).

Several classifications of factors affecting firm growth have been presented. The general preconditions for growth have been suggested to be (1) entrepreneur’s growth orientation; (2) adequate firm resources for growth; and (3) the existence of the market opportunity for growth (cf. Davidsson, 1991).

Storey (1994: 158) claims that there are three key influences on the growth rate of a small independent firm: (1) the background and access to resources of the entrepreneur(s); (2) the firm itself; and (3) the strategic decisions taken by the firm once it is trading. The most important factors associated with an entrepreneur are motivation, education, the firm having more than a single owner, and the firm having middle-aged business owners. The growth of the smallest and youngest firms is the most rapid. The location and industry sector also affect the growth. The most important strategic factors are shared ownership, an ability to identify market niches and introduce new products, and an ability to build an efficient management team. Storey argues that these three components need to be combined appropriately for growth to be achieved.

Gibb and Davies (1990: 16-17), on the other hand, have grouped the factors explaining growth into four types of approach (Gibb, 1997: 2-3; Pistrui et al., 1997; Poutziouris et al., 1999). These are: (1) personality-dominated approaches, which explore the impact of personality and capability on growth, including the entrepreneur’s personal goals and strategic business aspirations (e.g. Chell & Haworth, 1991; 1992); (2) firm development approaches, which seek to characterize the growth pattern of the firm across stages of development and the influence of factors affecting growth process (e.g. Scott & Bruce, 1987); (3) business management approaches, which pay attention to the importance of business skills and the role of functional management, planning, control and formal strategic orientation in terms of shaping the growth and performance of the firm in the marketplace (e.g. Bamberger, 1989; 1983); and (4) sectoral and broader market-led approaches which focus largely on the identification of growth constraints and opportunities relating to small firm growth in the context of regional development or the development of specific industrial sectors such as high-technology small firms (e.g. Smallbone et al., 1993).

The entrepreneur and growth intention

The behavior of entrepreneurs is strongly affected by intentions (e.g. Krueger & Carsrud, 1993: 315; Bird, 1988: 442). The firm’s strategic behavior and subsequent growth is understandable in the light of its growth intention. Therefore, firm growth is based not merely on chance, but on the management’s conscious decision making and choice. Naturally, the firm can grow even though it is not the management’s aim, but in such a case the growth is not planned and so may include more risks. Planning helps in managing growth.

In general, goals and objectives can be divided into two categories. On the one hand, there are final goals which are valuable as such. On the other hand, there are goals which have instrumental value for achieving some other goals. Growth can be regarded as the second most important goal of a firm, the most important one being firm survival, i.e. the continuity of the business. Moreover, growth is an important precondition for a firm’s longevity. Negative growth of an SME is often a sign of problems, while stagnation, i.e. a situation where growth has stopped, is usually indicative of problems that a firm will face in the future.

As a matter of fact, growth often has instrumental value. For new ventures, firm growth is needed to ensure an adequate production volume for profitable business. Growth can serve as an instrument for increasing profitability by enlargening the firm’s market-share. Other similar goals include securing the continuity of business in the conditions of growing demand or achieving economies of scale. Moreover, growth may bring the firm new business opportunities (cf. the corridor principle, Timmons 1999), and a larger size enhances its credibility in the market. Also, achieving a higher net value of the firm can be regarded as a motive for firm growth.

In SMEs, growth objectives are often bound up with the owner-manager’s personal goals (e.g. Jennings & Beaver, 1997), and so it is important that they support each other. Much has been written about the importance of the entrepreneur’s growth motivation (e.g. Perren, 2000; Davidsson, 1991; Miner, 1990). The close connection between an owner-manager and the firm is the dominant characteristic of small firms (Vesalainen, 1995: 18). Instead of profit maximization or growth, a firm’s primary goal may be the entrepreneur’s independence or self-realization (see e.g. Foley & Green, 1989). Moreover, there may be no adequate resources for growth, or the expected increase in business risks may limit a firm’s growth willingness. However, aversion to growth has been said to be the principal reason why most SMEs stagnate and decline (Clark et al., 2001).

In several typologies, entrepreneurs and firms are categorized by their business goals, so growth has been a widely used dimension in many typologies. There are two broad approaches in the studies of small firm success: (1) the business professionals’ model, and (2) the small business proprietors’ model (Bridge et al., 1998: 140-142). These two approaches can be identified in several typologies of entrepreneurs (e.g. Smith, 1967; Stanworth & Curran, 1976). According to the business professionals’ model, a successful firm is one that achieves its highest potential in terms of growth, market share, productivity, profitability, return on capital invested or other measures of the performance of the firm itself. In the small business proprietors’ model, the owner-managers’ main concern is whether the firm is providing them with the benefits they want from it. These benefits are often associated with a lifestyle and an income level to maintain it. In the latter model, firm success therefore means being able to reach a level of comfort rather than achieving the business’s maximum potential.

Firm development

In firm development approaches, firms are seen as temporal phenomena which are born, grow, mature, decline and die. Firm growth is the basic dimension of the models of organizational life cycles (e.g. Greiner, 1972; 1998; Mintzberg, 1979; Churchill & Lewis, 1983; 1991; Miller & Friesen, 1983b; Scott & Bruce, 1987). Numerous models of organizational life cycles have been presented, e.g. a three stage model (Smith et al., 1985), four stage models (Quinn & Cameron, 1983; Kazanjian, 1988), five stage models (Greiner, 1972; Galbraith, 1982; Churchill & Lewis, 1983; Scott & Bruce, 1987), and a seven stage model (Flamholtz, 1986). These multistage models use a diverse array of characteristics to explain organizational growth and development. Organizational life cycle models is one application of the configurational approach in describing the stages of life cycles and the transformation from one stage to another (Mintzberg et al., 1998).

Common to these growth pattern models is the claim that changes in an organization follow a pattern characterized by discrete stages of development (Dodge et al., 1994). Typical of these patterns are the sequence of events that show how things change over time, a hierarchical progression that is not easily reversed, and a composite of a broad range of organizational activities and structures. Organizational life cycle models are important in understanding the differences in success factors of the firm between the stages of the life cycle.

However, organizational life cycle models have been criticized because of their extreme simplification of reality: in some cases not all stages of development are found, some stages of development may occur several times, the stages of development may occur in an irregular order, and there is a lack of empirical evidence to support the theories (e.g. Gibb & Davies, 1990; Bridge et al., 1998: 105; Eggers et al., 1994; Birley & Westhead, 1990; Miller & Friesen, 1983a; Vinnell & Hamilton, 1999; cf. Dodge et al., 1994). In addition, on the basis of the results of their study of high-growth firms, Willard et al. (1992) concluded that “the applicability of conventional wisdom regarding the leadership crisis in rapid growth entrepreneurial firms may no longer be valid, if, in fact, it ever was”.

Despite the critiques of organizational life cycle models, strategic management and entrepreneurship research has demonstrated life cycle theory to be one of the most powerful tools for understanding and predicting venture performance. According to Greiner (1972; 1998), for example, a firm’s failure to adapt to a series of crises caused by growth is one of the principal causes of firm failure.

Growth strategies

Several growth strategies related to business management approaches have been presented in the literature. Managing growth is a major strategic issue for a growing firm (see e.g. Arbaugh & Camp, 2000). Strategy is the most important determinant of firm growth (Weinzimmer, 2000). Among high-growth firms, Dsouza (1990) identified three primary strategic clusters: (1) build strategy, i.e. emphasis on vertical integration; (2) expand strategy, i.e. emphasis on resource allocation and product differentiation; and (3) maintain strategy, i.e. emphasis on market dominance and/or efficiency. Thompson (2001: 563-565) presents four growth strategies: (1) organic growth; (2) acquisition; (3) strategic alliance; and (4) joint venture.

On the other hand, when looking at the product/market strategy, four options can be seen: (1) market penetration; (2) new product development; (3) new market development; and (4) moving into new markets with new products (Burns, 1989: 47). However, there is a lack of agreement in empirical findings concerning product- and market-based strategies. While Sandberg and Hofer (1987) argue that product-based strategies work better than focused strategies, Cooper (1993) claim that focused strategies outperform differentiated product strategies (Pistrui et al., 1997). Perry (1986/87) investigated growth strategies for an established small firm, and concluded that the most appropriate growth strategies are niche strategies, i.e. market development and product development strategies, in that order. However, it seems that most empirical studies focus on new venture strategies. Studies of competitive strategies related to firm growth have been carried out in the new venture context by McDougall and Robinson (1990), McDougall et al. (1992), Carter et al. (1994), and Ostgaard and Birley (1995), among others.

As opposed to the organic growth strategy, acquisitions are regarded rather as a large company growth strategy which can be either synergistic or nonsynergistic (Anslinger & Copeland, 1996). Forward or backward vertical integration means that the acquired firm is located at a different level of the value-addition chain, i.e. the acquired firm is a customer or supplier of the firm. In contrast, horizontal integration refers to a firm which is at the same level of value-addition, i.e. it is a competitor. Lateral integrations refer to unrelated businesses which represent a diversification strategy.

In addition to becoming bigger and thus acquiring greater market power, there might be several other reasons for acquisitions, e.g. acquiring synergies, industry restructuring, reduction of business risk, acquiring new knowledge and other necessary resources, overcoming barriers to entry, and entering new markets quickly (see Vermeulen & Barkema, 2001; Empson, 2000; Birkinshaw, 1999; Tetenbaum, 1999; Chatterjee, 1992). Despite the fact that growth through acquisitions is more typical of larger firms than smaller ones (see e.g. Davidsson & Delmar, 1998), it is one option for the growth of an SME. However, it seems that few studies focus on acquisitions made by small firms.

Also, one often neglected way of growing is by setting up new firms. Studies using a firm as the unit of analysis have not been able to identify growth through a portfolio of firms as one way of growing (see Scott & Rosa, 1996). However, it has been found that portfolio entrepreneurship appears to be more common than suspected, and that it is characteristic of entrepreneurs who own and manage growth firms (Pasanen, 2003b). Wiklund (1998: 239) concluded that growth through portfolios of firms does not seem to be an alternative to growing a single firm, but entrepreneurs leading rapidly growing firms tend more often to start subsidiaries and independent new firms and to grow these firms. Small business growth through geographic expansion is a challenging growth strategy, as during the course of opening a new geographical site an entrepreneur will be confronted with the task of managing an existing business and a start-up at the same time (Barringer & Greening, 1998).

Penrose (1959) proposed already in the late fifties that firm growth is constrained by the availability and quality of managerial resources. Many studies draw attention to the important role of an entrepreneurial team for firm growth (see Birley & Stockley, 2000). Also, in their study of technology-based ventures, Eisenhardt and Schoonhoven (1990) found an association between a strong management team and firm growth (see also Weinzimmer, 1997). In addition to the importance of favourable firm-internal conditions, the strategies should be in harmony with the environmental conditions. Different growth environments may require different business strategies for SMEs. For instance, Chaganti (1987) found that for small manufacturing firms, different growth environments required distinctly different strategies. Interestingly, this was contrary to the findings concerning large companies. It was concluded that strategic flexibility is a critical requirement for small firms (Chaganti, 1987).

Growth barriers

Sectoral and broader market-led approaches focus largely on the identification of growth constraints and opportunities. It has been found, for instance, that economic fluctuations strongly affect the growth probability of small firms (Kangasharju, 2000). Also, for firm growth, it seems that aiming at growing market niches is more important than taking market shares from competitors (Wiklund, 1998). However, growth can happen only if there are no growth barriers. Such barriers can be related to firm-internal and firm-external factors (see e.g. Barber et al., 1989; Smallbone & North, 1993a; Vaessen & Keeble, 1995; Jones-Evans, 1996; Vesper, 1990: 174-175; Hay & Kamshad, 1994).

The growth barriers characteristic of small firms in peripheral locations have been presented by Birley and Westhead (1990: 538). In the study carried out by the Cambridge Small Business Research Centre (1992), the most common growth barriers were related to factors on the macro level. The most important growth barriers were related to difficulties in obtaining finance and the price of money, the level of and decrease in demand (also Perren, 2000), and tightening competition (also Hay & Kamshad, 1994). Other growth barriers were caused by restrictions determined by authorities, problems in obtaining a skilled workforce, and the small number or lack of potential cooperation partners in the area. The firm-internal factors affecting unwillingness to grow include the entrepreneur’s fear of losing her or his autonomy, difficulties in fitting together personal and the firm’s goals, and weak managerial or marketing skills (see also MacNabb, 1995; Perren, 2000). These issues are particularly typical when an entrepreneur “transfers” from the role of entrepreneur to that of manager, or when the firm hires a new manager.

DATA AND METHODS

This paper is based on data from a larger exploratory study of the factors affecting SME performance (Pasanen, 2003a). Empirical data were collected from 111 growing SMEs in Eastern Finland. The sample was split into quartiles, based on firm age. Lower and upper quartiles of firms were chosen for the final samples, in order to compare the firms in these quartiles with each other. The lower quartile consisted of 32 SMEs aged eight years or less (young firms), whereas the upper quartile consisted of 33 SMEs aged twenty years or more (long-lived firms). A growth firm was defined as a firm with actual growth in turnover during the past five years. Growth was measured as a change in turnover between two time points ignoring the regularity or irregularity of growth over time (see Delmar et al., 2003; Weinzimmer et al., 1998; Delmar, 1997). A mail questionnaire was directed to the CEOs of SMEs operating in the sectors of manufacturing, business services, and tourism. The response rate was 53.7 %.

Firms in the samples shared the following features: (1) size: SMEs, i.e. they employed fewer than 250 persons; (2) performance: growth firms, i.e. they had grown in terms of turnover during past years; (3) location: peripheral, i.e. outside major cities and not in core areas; (4) ownership: independent firms, not subsidiaries of other companies; and (5) industry sector: operated in the sectors of manufacturing, business services, and tourism. The age of young firms ranged from 2 to 8 years, the average being 5.5 years with standard deviation of 1.7 years. The age of long-lived firms ranged from 20 to 120 years, the average being 40.4 years with standard deviation of 24.9 years. Half of the long-lived firms were less than 35 years old.

A comparison of the two groups of SMEs was based on data referring to the characteristics of entrepreneurs and enterprises, their life cycles, the strategic choices made, the success factors of SMEs, and the nature of their environment (see Pasanen, 2003a). Several factors in these areas are associated with firm performance. The characteristics of entrepreneurs consist of variables relating to entrepreneurs’ education, experience and other demographic factors. Variables related to the characteristics of SMEs and their life cycles include the firm’s demographic characteristics and growth behavior indicators. For the strategic choices made by the firm, the focus was on innovativeness, internationalization, specialization and networking. These strategic choices include three important elements affecting SME performance: markets, products, and the way of doing business (Normann, 1976). Innovativeness refers to the products of the firm, internationalization to its markets, and specialization and networking to the way of doing business. The environment was approached by studying the characteristics of the customer, industry and location. The success factors of SMEs were presented as statements describing their importance in the firm’s competitive advantage.

In identifying the differences between young and long-lived SMEs, approximately 150 variables were tested using appropriate statistical tests, depending on the variable: the t test, non-parametric Mann-Whitney U test, or chi-square test. These tests were conducted to test the differences between the two groups for each of the individual variables. In some analyses, the U test was used instead of the t test due to the skewness of the data.

RESULTS

A number of differences in characteristics of the owner-managers and firms and their success factors were found between young and long-lived growth SMEs. Three variables related to the characteristics of the owner-managers showed statistically significant differences between the two groups of SMEs (Table 1). Almost all young firms were led by the founder(s) of the firm, whereas this was the case for only half of the long-lived SMEs. Among young SMEs, owner-managers had less experience and were younger than their counterparts in long-lived SMEs.

TABLE 1 Differences in characteristics of owner-managers between young and long-lived SMEs (p<.05)

Variables

Test

p value

Founder

2 = 6.705 (df = 1)

p = .010

Total length of experience as owner-manager

U test (z = -2.546)

p = .011

Age

U test (z = -2.459)

p = .014

Fourteen variables characterizing the SMEs showed statistically significant differences between young and long-lived SMEs (Table 2). Young firms had had more founders (means 3.3 vs. 2.1) and had more founders still involved in the firm at the time of the survey than long-lived SMEs had (means 2.9 vs. 1.1). Almost all young firms were founded by a team of owners, whereas half of the long-lived SMEs were founded by a single owner. Being a family firm was more typical of long-lived SMEs (58%) than of young firms (19%).

Long-lived SMEs were bigger in size than their younger counterparts: the average full-time personnel was 84 employees in long-lived SMEs and 21 in young firms. Moreover, the number of establishments was bigger in long-lived SMEs than in young firms, averaging 3.5 and 1.7, respectively. Acquisitions or mergers were more typical of long-lived SMEs (39%) than of young SMEs (13%).

Owner-managers in long-lived SMEs were more satisfied with their firm’s success than those in young firms. On a scale of 1 (fully satisfied) to 4 (not at all satisfied), owner-managers in the long-lived SMEs had an average satisfaction of 1.7, whereas among young firms the average was 2.1. During their life cycle, more than half of the long-lived SMEs (55%) had at least once faced a situation where the firm’s existence, i.e. survival, had been threatened, while only one fifth of the young SMEs (22%) reported that their existence had been threatened.

Managerial know-how was considered to be higher in long-lived SMEs than in young firms. In long-lived SMEs, principles and practices of management had changed more than in young firms. Among young SMEs, almost all firms (91%) had stayed close to their original business, whereas among long-lived SMEs seven out of ten firms (70%) had stayed close to their original business.

There were also differences in products and customer structures between young and long-lived SMEs. The proportion of products with declining volume was higher in long-lived SMEs (6% of their products), whereas such products accounted for 2% of the young firms’ products. Among young firms, the cumulative proportion of turnover due to the five biggest customers was 59% of the firm’s total turnover, whereas in long-lived SMEs it was clearly lower, 41%.

TABLE 2 Differences in characteristics of firms between young and long-lived SMEs (p<.05)

Variables

Test

p value

No. of founders still involved in the firm

U test (z = -4.127)

p < .0005

No. of establishments

U test (z = -3.490)

p < .0005

No. of full-time personnel

U test (z = -3.513)

p < .0005

Family firm

2 = 10.347 (df = 1)

p = .001

No. of founders

U test (z = -3.188)

p = .001

Founder team

2 = 9.876 (df = 1)

p = .002

Proportion of products with declining volume

U test (z = -3.075)

p = .002

Threat to existence

2 = 7.326 (df = 1)

p = .007

Entrepreneur’s satisfaction with business success

U test (z = -2.637)

p = .008

Managerial know-how

U test (z = -2.648)

p = .008

Changes in principles and practices of management

U test (z = -2.431)

p = .015

Acquisitions and mergers

2 = 5.750 (df = 1)

p = .016

Cumulative proportion of turnover due to the five biggest customers

U test (z = -2.203)

p = .028

Staying close to the original business

2 = 4.447 (df = 1)

p = .035

A total of 55 variables formulated as verbal statements describing potential success factors were analyzed. The CEOs’ perceptions of their firms’ success factors were generally similar in young firms and in long-lived firms. Three variables, clear-cut identity of the firm, strong basic values of the firm and good knowledge of products/services, showed statistically significant differences between the two groups (Table 3). Long-lived SMEs valued all these three qualities of the firm more than did young firms.

TABLE 3 Differences in success factors between young and long-lived SMEs (p<.05)

Variables

Test

p value

Clear-cut identity of the firm

U test (z = -2.359)

p = .018

Strong basic values of the firm

U test (z = -2.228)

p = .026

Good knowledge of products/services

U test (z = -2.071)

p = .038

DISCUSSION

There are differences in the characteristics of owner-managers and firms and their success factors between young and long-lived SMEs. Although they have many more similarities, the differences indicate important factors that may differentiate the strategies of growth SMEs depending on firm age.

The findings related to the characteristics of the owner-managers were as expected: in young firms, owner-managers were younger and less experienced than those in long-lived firms. In several long-lived SMEs, the founders were no longer running the firm but the founder(s) may still have important role(s) in the firm. Previous research has revealed the critical role of the founder in making the decision to grow or not (Willard et al., 1992), and several studies have also pointed out the significant role of the founder in the firm – even after his or her death (Collins & Porras, 1994; Barringer et al., 2005).

One interesting finding was that young firms had had more founders and had more founders still involved in the firm at the time of the survey than long-lived firms, although most long-lived SMEs were family firm, whereas only a small fraction of young firms were family firms. The fact that almost all young firms were founded by a team of owners may reflect a growing trend: a preference for team entrepreneurship. On the other hand, the findings may indicate the decreasing popularity of family businesses. It also seems that the owners of team enterprises are mainly other than family members. Moreover, on the basis of previous analyses (Pasanen, 2003a), it was found that team enterprises and family businesses are very different, each having their own strategic posture. This may indicate that today most growth firms are set up by a group of experts, and in order to get profit, not for employing family members. If this is the case, it has also an important implication for regional economic development: supporting team-based enterprises may be an efficient strategy for fostering entrepreneurship and the creation of high-growth SMEs.

Long-lived SMEs had many characteristics that can be explained by their longer time of operation: bigger size in terms of the number of employees and the number of establishments. Many of them had grown through acquisitions and mergers, which was rare among young firms. Most young firms have no adequate resources to buy other businesses, but for long-lived firms it seems that acquisitions can be an important way to grow. In some cases the fact that a long-lived firm is still an SME and has not reached the scale of a large company may refer to limited organic growth opportunities in the markets, and so growing in a non-organic way, i.e. through acquisitions, may be the only way for the firm to grow in the same field. Growth through acquisitions is an important area to explore because research on the phenomenon is still scanty in the SME context (Delmar et al., 2003).

Without defining the concept of success, owner-managers in long-lived SMEs perceived their firm’s success to be better than did those in young SMEs. This may indicate that they consider the firm’s long-term survival equal to success or constituting a part of it. Moreover, compared with young SMEs, many long-lived SMEs reported that they had at least once faced a situation where the firm’s existence had been threatened. This provides more evidence for the conclusion that owner-managers think long term survival constitutes at least a part of firm success. This is an important point for researchers: success is an ambiguous concept and can be interpreted in several ways.

The bigger resources of long-lived SMEs may explain these firms’ higher managerial know-how. On the other hand, longer time of operation in a changing environment may explain the changes in principles and practices of management. The longer the time of operation, the higher the probability of changes in businesses. It seems that long-lived SMEs had been able to reduce their potential customer risk due to the small number of customers. Long-lived SMEs had also faced some drawbacks of ageing, e.g. they had a bigger proportion of products with falling sales volume than young SMEs, and so have to pay more attention to the management of declining products.

The three success factors that indicated differences between the two groups of growth SMEs were related to factors that develop over a long period of time. Firm identity, strong values and knowledge of products certainly takes time to develop. For this reason, it is understandable that long-lived SMEs valued these factors more than did their younger counterparts. Young firms, and young growth firms particularly, can be at the stage where organizational values and firm identity are just beginning to take shape.

Despite the differences found between the two groups of growth SMEs, there were also similarities with important implications. First of all, there were no differences in the indicators of the three strategic choices made by the firms: the firms’ international business, innovativeness, and interfirm cooperation. This suggests that both types of growth firms have a varied intensity of international business operations, innovation activies, and interfirm cooperation, but as groups the firms do not differ from each other in these aspects. Moreover, young and long-lived SMEs largely share their views about the importance of many success factors.

The results suggest, however, that firm age does matter for SME growth strategies. On the other hand, there are many more similarities than differences between young and long-lived growth SMEs. The most noteworthy differences were related to team-based and family-based firms, and non-organic growth strategies, i.e. growth through acquisitions. It seems that young growth firms were more vulnerable because of more concentrated customers, i.e. a smaller number of customers accounted for a higher proportion of the firm’s sales. On the other hand, long-lived SMEs need to manage products with declining sales volumes. Most of these firms had also been under threat during their life cycle, and had needed crisis management.

Several differences such as bigger firm size, higher managerial know-how, more changes in the practices of management, and more changes in business between the two groups of growth SMEs can be explained by the difference in the firms’ time of operation. Also, the bigger resources of long-lived SMEs may explain the higher managerial know-how and acquisitions, for example. Moreover, it seems that long-term performance does matter to entrepreneurs: those in firms that had been around for more time were more satisfied with their firm’s success than were entrepreneurs of firms with a shorter life cycle.

Finally, conceptualizing strategy as a pattern of strategic variables proved successful in studying differences in growth strategies. The results show that it is useful to study growth patterns, since they do differ between young and long-lived SMEs (cf. Delmar et al., 2003). Being aware of the factors affecting SME growth and performance helps in developing more successful strategies and in better understanding the strategic behavior of different firms. In future studies it would be interesting to compare, for example, the organic and non-organic growth strategies employed by SMEs.


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