Business Strategies for Fast-Growth Small Firms

Storey reviewed and analyzed a dozen studies of “growing small firms” conducted during the late 1980s and 1990s to identify which specific elements of business strategy were most characteristic of a fast-growth small firm, with the criterion for growth generally being an increase in employment.  The researchers focused on thirteen elements and found that only the following four stood out as having a demonstrably strong positive relationship to growth: 

  • External equity ownership:  Entrepreneurs who shared equity ownership with external individuals and/or organizations were more likely to see their firms achieve rapid growth.  A number of small business owners are reluctant to share equity for fear of diluting their control and limit their external financing to short-term debt from banks and other financial institutions, strategies that limit the resources available as a foundation for growth and access to advice and contacts of outside investors.
  • Market positioning:  Faster growth was found among small firms who made a conscious choice to concentrate their efforts on specific niches or segments in which they were best positioned to leverage and exploit their core competencies and competitive advantage.  Generally such firms had an advantage with respect to quality and technological sophistication; however, Storey pointed out that it was difficult to identify a particular niche strategy that was most successful and that firms may position themselves in a number of different ways (i.e., quality, price etc.).
  • New product introduction:  Consistent with the importance of market positioning (i.e., identifying and exploiting a particular niche), the fastest growing firms tended to be those who were willing and able to introduce new products, preferably products that reflected some level of genuine, rather than “mundane”, innovation (i.e., products that were wholly new as opposed to products that were new to the firm but already well-known in the marketplace in which the firm was competing). 
  • Recruitment of non-founder managers: Entrepreneurs who were willing to recruit non-founder managers and delegate authority to those managers saw their businesses achieve more rapid rates of growth.  Expanding the management team and delegation was seen as necessary for entrepreneurs to cope with the increased complexity of decision making that accompanies growth and failure of the entrepreneur to reach out to others was likely to result in missed opportunities that would eventually stymie growth.  However, Storey noted that further research was needed on the best methods for selecting, motivating and retaining such individuals and creating a strong management team (e.g., what disciplinary or functional specializations are most necessary for growth; what are the preferred experiences and backgrounds; should management recruitment occur internally or externally and, if externally, from what types of firms).

Among the other elements of business strategy that were found to either not have a significant influence on growth or to have a negative relationship to growth were workforce training, management training, technological sophistication, use of “formal” strategic planning, state support, customer concentration (i.e., dependence on a single customer or a narrow customer case, the nature and/or intensity of competition, the collection and use of information and advice provided by private sector sources (i.e., attorneys, accountants, banks, consultants etc.) and the level of reliance on exporting activities.  Storey cautioned, however, that all of these elements were relevant to some aspect of the evolution of the firms that were part of the various studies.  For example, while workforce training did not appear to have an impact on the initial growth of firms, even among those who perceived their “skill base” as a competitive advantage, training become more important as firms successfully achieved their initial growth targets and sought to establish stability and continuity as larger companies.  Similarly, while the evidence was unclear to whether fast-growing firms were actually devising and implementing more sophisticated planning processes, it could be expected that once formal planning would increase as firm attained greater size and formality.   Finally, while there was no clear evidence that access to outside advice caused growth, the information from the studies confirmed that fast-growing firms were more likely to tap into information and experience available from private sector advisers.

Storey also reported the results of a survey conducted by the Cambridge Small Business Research Centre in the early 1990s that assessed constraints on the ability of fast-growth small firms to meet their business objectives.  According to that survey the biggest challenges were the availability and costs of finance for expansion and overdraft facilities and access to management and marketing/sales skills.  Overall growth of market demand and increasing competition, while problematic for small firms that were stable or in decline, demanded less attention from the leaders of fast-growth firms than the issues mentioned above.  Another survey showed that as fast-growth firms matured they began to change the mix of elements in their strategies.  For example, while initial growth may have come from introduction of new products, further expansion was often driven by building on the original product base by identifying new markets in which to exploit existing products.  Exporting also became a more important part of firm strategy as companies completed their initial growth phases.

Sources: D. Storey, Understanding the Small Business Sector (London: Chapman and Hall, 1994), 144-156; The State of British Enterprise: Growth, innovation and competitive advantage in small and medium sized firms (Cambridge: Small Business Research Centre, Department of Applied Economics, University of Cambridge, 1992); and D. Smallbone, D. North and R. Leigh, "Growth Characteristics of Mature Small and Medium Sized Manufacturing Enterprises" in M. Robertson, E. Chell and C. Mason (Eds.), Towards the 21st Century: the Challenge for Small Business (Manchester, UK: Nadamal Books, 1992).

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