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1##111##1111#1#111i#i 140334197x SWP 6/90 GROWTH AND PERFORMANCE CONTRASTS BETWEEN TYPES OF SMALL FIRMS PROFESSOR SUE BIRLEY & DR PAUL WESTHEAD Cranfieid Entrepreneurship Research Centre Cranfied Schoo of Management Cranfied Institute of Technoogy Cranfied Bedford MK43 OAL (Te: 0234 751122) For presentation at the EIASM Third Workshop on Recent Entrepreneurship Research, to be hed at Durham Business Schoo, vember 1989 Copyright: Birey and Westhead

GROWTH AND PERFORMANCE CONTRASTS BETWEEN TYPES OF SMALL FIRMS Professor Sue Biriey and Dr. Pau Westhead (Cranfied Entrepreneurship Research Centre, Cranfieid Schoo of Management, Cranfied Institute of Technoogy, Cranfieid, Bedford, MK43 OAL TEL: 0234 751 122) INTRODUCTION Over the past ten years new and sma firm have been identified by most Western Governments as significant components of economic strategies for job and weath creation. impicit in these strategies has been the search for poicies which wi increase the suppy of new firms, and wi encourage estabished firms to grow. Yet significant growth is very much the exception, the majority firms spend the whoe of their economic ife within the sma firm sector. Nevertheess, it may take some time, and whist the utimate size may remain sma, firms do grow. O Farre and Hitchens (1988a) have provided the most recent anaysis of the Aternative Theories of Sma Firm Growth. They suggest that there are four main groups of theory the industria economics approach, the stochastic mode, stage modes, and the strategic management perspective. Each of these they find open to criticism, and concude that it may be easier to provide a critique of contemporary theories than to present a definitive new conceptua framework within which to study sma firm growth (O Farre and Hitchins, 1988a, p. 1379). We beieve that the key to this conundrum ies in the underying assumption, found most ceary in the stage modes, that growth is inear, aways foows both the same events, and the same sequence of events. The aim of this paper is to suggest a mutidimensiona approach to the understanding of the deveopment of the sma firm by providing empirica evidence as to the kaeidoscope of factors which describe firms of different sizes. PREVIOUS RESEARCH Previous studies have expored the reationship between the origins, persona characteristics (Khan, 1988; Westhead, 1988; Lafuente and Saas, 1989) and traits of ownermanagers (Hornaday and Aboud, 1971; Engand, 1975; Kets de Vries, 1977; Brockhaus, 1982) and sma business growth (Perry et a., 1988; Storey et a., 1987; Storey et a., 1989); the roe of the incubator organisation in

2 / the founding of growth orientated firms (Cooper, 1985); manageria characteristics and the financia performance of sma business (Hornaday and Wheatey, 1986; Fiey and Adag, 1988); the prediction of initia success in startup ventures (Stuart and Abetti, 1987); and the business strategies and performance eves of new ventures which operate in different industry ife cyce stages (Covin and Sevin, 1988). However, Mine and Thompson (1982) consider that the growth and deveopment of a sma business can be viewed, quite simpy, in terms of how quicky the ownermanager can adapt and earn from the experience of deaing with the two environments within which the firm does its business (Hjem et a., 1980). The interna consists of the resources of the firm itsef and incude, for exampe, the persona and eadership characteristics of the ownermanager (Gibb and Scott, 1985), the ownermanagers age and its effect on his attitudes to growth (Deeks, 1976), occupationa background, persona objectives, management stye and decisionmaking, the eve of the owners education and training, and persona vaues and attitudes. interna manageria factors infuencing growth aso incude the extent of the division of management abour and the proportion of highy quaified personne; the contro system and the extent to which panning is buit into it (Gibb and Scott, 1985); the human potentia of the organisation in terms of skis and fexibiity of the work force: the C financia situation of the company; the physica asset base of the company in terms of age and quaity of machinery and equipment; avaiabiity of management time for coping with change; and awareness of the wider macro environment and of the task environment. The &&na envirom incudes, for exampe, suppiers, buyers, the strength of competition, potentia entrants, interest rates, company taxation, degree of dependency upon a sma number of customers, extent of compexity and uncertainty in the market served, sectora trends, government poicies, trends in exchange rates, and socia, ega and poitica conditions. u The Interna Environment The OwnerManager: It is generay agreed that, for the sma business, the objectives of the firm are synonymous with those of the owner (C) Farre and Hitchins, 1988a, p.1373). Thus his vaue systems wi infuence whether a firm pursues the objective of growth or is content to pursue a surviva poicy. Indeed, one reason for firms wishing to stay sma is that the ownership and the

3 management reside in the same person and so future company goas are determined not ony by commercia considerations but aso by persona ifestyes. The probem with the studies which accept the thesis described above is that it automaticay incudes two basic assumptions. First, there is ony one individua invoved in the business or, if there is more than one, they a have the same concept of the business; and second, that a sma firms are run by their founders. Both of these assumptions are ceary invaid. Indeed, some firms do not begin to grow significanty unti second or third generations take contro (Caor and Bonamy, 1989). These may, however, be the exceptions. In their study of the financia performance of sma firms in New Engand, Begey and Boyd (1986, p.12) found that companies run by the founder grew more rapidy than those run by a successor, and ongevity of the business was negativey associated with growth rate oder companies grew more sowy than younger companies. Management: In any organisation, management coects and evauates ony a portion of the information concerning characteristics, processes, opportunities and constraints in both the interna task environment and the externa macro environment (O Farre and Hitchens, 988a). For the ownermanager, his abiity to manage the business wi be a function of the systems and structures which he creates as the business grows. However, in their study of 95 sma firms which had experienced a five year surge in growth, Fombrun and Way (1989, p.120) found that rapid growth may induce managers to design systems that may work at odds with each other. At the simpest eve, some writers have asserted that there is an association between ongrange panning and sma firm deveopment (Kuda, 1980). In a study of manufacturing firms in severa northeastern states of the USA CYNei et a., (1987, p.40) found the reationship between panning and performance were compex and that panning did not improve performance in a environments. Interestingy, they found that in the dynamic environments, anaysis depressed performance whist contro encouraged performance and that the panning function, then, is the ticket to the postentrepreneuria stage, but it is no guarantee of a strong performance in that stage (p.40). O Nei and his coeagues aso found that age, a surrogate for experience, had a positive effect on performance in dynamic environments. Bamberger (1983) has argued that we can assume that there is a positive reationship between the existence of a more or ess forma strategic panning system and the firm s

1., growth. There is, however, by no means universa agreement that panning is either necessary or desirabe (Karger and Maik, 1975) Production: O Farre and Hitchins (1988b, p.400) argue that production issues (such as design, quaity contro, correct use of machinery) in sma manufacturing firms shoud be taken into account when considering competitiveness and sma firms growth because...getting production right is aways a necessary condition of growth in a firms. Other factors may aso be necessary conditions for companies in certain sectors such as: after saes service; customer iaison; seing; shortage of working capita and so on. However, afthough they may be necessary conditions, they are not sufficient. In their study of the competitive performance of sma manufacturing firms in Scotand and the MidWest of Ireand O Farre and Hitchins (1988b, p.409) aso considered the infuence of the comparative cost and quaity of the firms major physica assets buidings and machinery (in terms of age and the eve of introduction of computer numericaycontroed (CNC) machines). interestingy, Irish firms had a substantiay higher proportion of equipment ess than five years od, whist a higher percentage of Scottish firms had adopted CNC machines. However, there was no reationship between CNC machines per person and the quaity and price competitiveness of Scottish engineering companies. Externa Factors Product / Market Structure: in the case of firms engaged in cothing and knitwear O Farre and Hitchens (1988b) found that the most wmmon mechanism of growth in both Scotand and the Mid West of Ireand was by increasing saes to existing customers. They aso found that the poor quaity of the suppier base in the midwest of Ireand was a factor which affected growth strategies. The majority of firms in Ireand which purchased inputs ocay reported probems of quaity, design, deivery or some other dimension of suppy performance. Accepting that sma firms are generay dependent upon one or a few products Wison and Garb (1983) examined the extent and nature of dependence in the London Borough of Camden. Their anaysis highighted three findings. First, many of the sma firms studied were found to be dependent on a narrow range of industry or customer types. Second, dependence on a sma number of customers was not necessariy harmfu since it may refect a symbiotic reationship between

5 the sma and arge firm with mutua benefits to both buyer and seer. For exampe, by reducing the costs of marketing, dependence owers the genera overheads in the new sma firm thus reducing barriers to entry brought about by high unit costs and an absence of economies of scae. Third, Wison and Gorb (1983, p.22) found that the youngest sma firms were generay dependent on oca and regiona markets but that as they matured, they ost some of their dependence as their markets became more distant. Porter (1980, 1985) has argued that the fundamenta basis of aboveaverage performance in the ongrun is sustainabe competitive advantage. He identified five groups whose actions (or threats of action) may imit a firm s profitabiity: competitors, customers, suppiers, potentia competitors and suppiers of substitute products. Of particuar importance to sma firm growth he suggests are competitor strength and customer concentration. Whist competitor strength is expected to diminish new venture performance. Customer concentration may be a noninear infuence on performance with a medium vaue eading to the best resut. When concentration is high so is customers bargaining power. Low concentration impies a ack of power by customers but a startup with a imited saes force may have difficuty estabishing cose contact with its customer base. This eaves it vunerabe to ate entering competition from estabished firms. This view is supported in an empirica study of 34 investments in startup companies in the USA (Roure and Keeey, 1989, p.214) which showed that buyer concentration was a major factor expaining the success of technoogica startups. The eve of competition in market segments aso significanty infuenced sma firm growth with successfu startups targeting market segments which have a reativey ow eve of competition. Roure and Keeey do, however, suggest that firms in Europe have a greater tendency to have attacked market segments with a higher eve of competition. _ Location: Mason and Harrison (1985) concude that the oca environment may be an important infuence upon the prospects for sma firm growth and expansion, and the characteristics of the _ region in which sma firms are ocated wi have a significant impact on their reative performance (Hitchins and O Farre, 1987, 1988; O Farre and Hitchins, 1988b, Sweeney, 1987). This is not a view which is confined to the United Kingdom. Lorenzoni and Oranati (1988) stress the importance of consteations of firms and of a contrasting environmenta texture, factors which they concude have

contributed to the growth of the sma firm sector in areas such Route 128 and Siicon Vaey in the USA and the Prato district in Itay. This growth is made possibe due to the avaiabiity of suppiers who thereby create an environmenta texture of opportunities not fuy characterisabe by a physica or a geographic boundary. A key assumption in the creation of outsider advisory organisations such as Enterprise Agencies, Deveopment Boards, the Scottish Deveopment Agency (SDA) in Scotand and the Wesh Deveopment Agency (WDA) in Waes is that they shoud be abe to pay a significant roe in improving the effectiveness of strategic panning in sma firms. O Farre and Hitchins (1988a, p.1378) suggest that this structuring of the externa environment in the periphera regions is based upon the view that sma firm growth may be constrained by the ower quantity and quaity of pubic and private services avaiabe. There is some evidence to support the view of a range of impediments to growth in periphera regions. For exampe * venture capita avaiabiity is more imited in periphera areas owing to the centraisation of the ending institutions and the distorted perception of risk by banks (Mason, 1987), c ower rates of economic growth and ower eves of income in periphera ocations inhibit the opportunities for sma firm expansion based upon oca and regiona markets (O Farre and Hitchins, 1988a, p.1378), sma firms in periphera regions suffer technica impediments to growth, as refected in the ower rates of innovation compared with simiar sized firms in core regions (Oakey et a, 1980), abour suppy bottenecks vary between regiona and subregiona markets (Hitchins and O Farre, 1987a), periphera economies dominated by arge firms may not provide an idea source of abour for sma firms. Skied personne recruited from such enterprises tend to be more narrowy speciaised, and to ack the fexibiity necessary for working in a sma firm environment (Hitchins and O Farreii, 1988a). 1, in periphera regions there is a restricted suppy of manageria and organisationa skis (Dei Monte and Giannoia, 1986, p.282) and the shortage of midde management staff have impeded the growth of some sma firms (Hitchins and O Fanei, 1988b),

7 firms in ess prosperous areas wi be more verticay integrated than those in deveoped regions and this ack of speciaisation reduces the competitiveness and the rate of growth of oca firms (De Monte and Giannoa, 1986, p.282). LIMITATIONS OF PREVIOUS RESEARCH The research outined above presents an apparenty coherent and comprehensive picture of the factors infuencing the growth of the sma firm. However, despite the fact that it is generay agreed that the pressures upon the firm are compex and interreated most of the studies discuss ony one or two aspect of the firm s profie. Moreover, amost a are based on firms in the manufacturing sector. Indeed, this assumption is so ceary buit into most research anayses that O Farre and Hitchens (1988a) do not even provide an appropriate caveat in their survey of the iterature. An even more surprising omission in most of the iterature is a compete absence of any discussion of an m measure of growth. Again, the studies have been unidimensiona, covering empoyment, profits, vaueadded, saes turnover, and assets, and in some cases the parameters have not been defined at a. Underying a these studies, however, is the assumption that performance and growth are not ony interinked, but one can be used as a surrogate for the other. This generay presumed correation between size and performance is certainy not supported in the iterature. The studies in which measures of sma firm performance are used are imited, mainy because the data is both difficut to obtain and notoriousy unreiabe. Moreover, and for the same reasons, there is very itte which reates performance to that of competing firms in the market. For exampe, recognising the inherent difficuties both of coecting accurate company data and comparative market data, O Nei et a (1987) simpy asked ownermanagers to rate their firm s performance reative to the previous five years using verba anchors such as worse, same or better. THIS RESEARCH Most of the iterature on the stages of growth of the firm attempt to describe a predictabe set of characteristics at each stage (Steimetz, 1969; Churchi and Lewis, 1983; Kimberey et a., 1980).

These researchers agree with Devine (1979), Tayor and Thrift (1982), and Fombrun and Way (1989, p.108) that this is too simpistic. It is more ikey that a firms do not go through a stages but rather that they go through different stages, at different times, in different sequences, and that the IQ&I set of inputs to the business wi shape and characterise the deveopment pattern. This research anaysed the strategic profie of a cross section of 249 sma firms in an attempt to reduce the data set to custers of firms with simiar characteristics, and to compare these characteristics with both size and performance. Data for the anaysis was derived from the Cranfied Sma Firms Data Base (CSFDB). Firms in the sampe are drawn from a wide variety of industries and ocations. They range in size from 1 to 181 empoyees, and from ess than f99,999 to over f10 miion saes turnover. In a, 113 firms were engaged in manufacturing activities (45.6%), 103 firms were service firms (41.5%), and a further 29 firms were engaged in construction (11.%). The average age of the surveyed firms was 26.6 years, and ranged from 1 year to 240 years. Fortyfive per cent of firms were estabished in the ast decade whist 16.8% were estabished more than fifty years ago. in terms of the ega entity of the independent sma firms, 80.6% were incorporated, 6.9% of firms were soe proprietorships, whist a further 12.1% were a partnership. In tota, 7,901 peope were empoyed in the 245 firms providing empoyment data and each firm empoyed on average 32 peope. A fu description of the data coection process, and of the sampe characteristics is found in Birey and Westhead (1988). In the absence of ongitudina data for the firms in the sampe, three measures of size are used as surrogates for presumed growth Saes Turnover, Trading Profit and Tota Number of Empoyees. Performance is measured by the ownermanagers scoring of his firm s profit performance against the market. Based upon the avaiabe iterature, preiminary hypotheses were constructed to identify those individua factors which correated significanty with size and performance, and to test the direction of the correation. The significant variabes were then subjected to custer anaysis in order to reduce the 222 firms to a sma number of mutuay excusive groups (Hair et a., 1979).

PRELIMINARY HYPOTHESES Age and Ownershp: L 1. Ownership Structure Firms with a diuted ownership structure, as refected by a arge number of sharehoders, wi be positivey associated with a high eve of growth and performance (SHAREHOLDERS). Firms without either current first generation majority owners (OWNERS) or current first generation senior executives (EXECUTIVES) wi be associated negativey with growth and performance. t Firms in which a arge number of origina founders who are sti partners or sharehoders (FOUNDERS) wi be positivey associated with high performance. 2. Age of the Business Mature firms (AGE) wi be more securey estabished and wi be positivey associated with eves of growth and performance (for a disenting view see Begey and Boyd, 1988, p.12). Management: 3. Manageria and Organisationa Structure Firms with a diverse range of manageria functions currenty operated (MAN) wi be positivey associated with sma firm performance. L Firms which have a high proportion of manageria functions which are the soe responsibiity of one person (SOLE) wi aso be positivey associated growth and performance. Firms with high eves of deegation of manageria functions to individuas (MANINDEX) wi be positivey associated with high performance. 4. Panning Firms which hod reguar and frequent board meetings and management meetings (PLANMAN) wi be positivey associated with size and performance. Firms which hod reguar and frequent meetings with their professiona advisors banker, accountant and awyer (PLANPROF) wi be positivey associated with size and performance. Firms which hod reguar and frequent meetings with their customers and suppiers (PLANBUS) wi be positivey associated with size and performance. 9

10 5. Management Training Firms in which management has undergone some form of management training (MANTRAIN) wi be positivey associated with growth and high performance. C 8. Financia Resource Base. Firms which have received financia investment from a arge number of sources (not incuding overdraft faciities from banks) (FINANCE) wi be positivey associated with size and performance. Producton: 7. Manufacturing Production Technoogy Manufacturing firms with nonmanua contro technoogy for the major manufactured product ines (PRODUCTION) wi be associated with high eves of growth and high performance. Firms with reativey mature pieces of production equipment (AGEPROD) wi be negativey reated to sma firm performance. Firms which use sophisticated technoogy in the contro of the administration base (CSADMIN) wi be positivey associated with size and performance. Positioning Industry and Location: L 8. Industria Structure The direction of reationship between the industry a firm is engaged varies tremendousy from one sector to another within any broad industria categories such as manufacturing and services (Chaganti, 1986). Consequenty, at this broad eve of anaysis the direction of association between the industry of the firm (INDUSTRY) and the eve of performance is ambiguous and remains uncear. 9. Location Firms ocated in the prosperous and buoyant markets of the south of Engand (the standard regions of East Angia, the South East and the South West) (LOCATION) wi be positivey associated with high rates of sma business growth and performance. n Firms which have taken advantage of Government training schemes (TRAINING) wi be negativey associated with size and performance.

11 Firms which have taken advantage of Government grants (GRANTS) wi be negativey associated with size and performance. c. Product / Market Profe: a. 10. Diversity of the Product Base Firms with a wide number of major product ines or major service groups (PRODUCT) wi be positivey associated with size and performance. Firms which have introduced a arge number of new major product ines or major service groups (NEWPRODUCT) during the previous year wi be positivey associated with size and performance. 11. Saes Revenue Dependency Firms with a high percentage of saes revenue accounted for by the major product ine or service group (REVENUE) wi be negativey associated with growth and performance. 12. Diversify and Location of the Customer and Suppier Base Firms with diverse customer bases (CUSTOMERS) and which have added significant numbers of new customers over the previous year (NEWCUSTOMERS) wi be positivey associated with size and petformance. Firms which purchase goods and services from a wide number of suppiers (SUPPLIERS) which are becoming more diverse and wider in scae (NEWSUPPLIERS) wi aso be associated positivey with high performance. Firms which are ess dependent on trends and business demands in immediate oca (within a radius of 20 mies from the businesses operationa premises) or regiona (between 20 and 100 mies) markets wi be positivey associated with sma firm growth. Therefore, firms which se the majority of their products and services in nationwide or overseas markets (DISTCUSTOMERS) wi be positivey reated to high performance and those firms not excusivey suppied by oca suppiers (DISTSUPPLIERS) wi aso be positivey associated with high performance. 4 L. 13. Diversity and Size of Competition Firms with a sma number of direct competitors (COMPETITION) wi be positivey associated with size and performance.

* The eve of growth and performance, and the empoyment size of the major competitor (SIZECOMP) can be either positive or negative. CORRELATION ANALYSIS In this section each of the variabes hypothesised to be associated with sma firm growth and high performance are tested using bivariate and mutivariate correation and regression anaysis. The objective of the anaysis is to seek guidance and to deimit the eve of importance of specified measurabe factors presumed to be associated with sma firm performance. Bvarate Correaton Anaysis Tabe 1 shows the Pearson ProductMoment correation coefficients between tota empoyment size (Y) and each of the 31 surrogate variabes. Fourteen of the surrogate variabes were associated with tota empoyment size at the 0.01 eve of significance and a further two (EXECUTIVES and CSADMIN) at the 0.05 eve of significance. Three variabes (OWNERS, EXECUTIVES and AGEPROD) were not in the direction hypothesised. The eight surrogate variabes found to be highy statisticay associated (at the 0 eve of significance) with the dependent variabe (Y) were SHAREHOLDERS, AGE, S MANTRAIN, AGEPROD, CUSTOMERS, NEWCUSTOMERS, SUPPLIERS and SIZECOMP. Tabe 2 shows that thirteen of the surrogate variabes were associated at the 0.01 eve of significance with the eve of saes for the ast financia year, and a further one (MAN) at the 0.05 eve * of significance. The eight surrogate variabes found to be highy statisticay associated (at the 0 eve of significance) with the dependent variabe (Y2) were AGE, AGEPROD, PLANMAN, MANTRAIN, LOCATION, CUSTOMERS, SUPPLIERS and SIZECOMP. The same three variabes as above were not in the direction hypothesised. A._ Tabe 3 indicates that nine surrogate variabes were associated with the third dependent performance measure eve of profitabiity for the ast financia year (Y3) at the 0.01 eve of A significance and a further five (SHAREHOLDERS, PLANPROF, NEWCUSTOMERS, SUPPLIERS and SIZECOMP) at the 0.05 eve of significance. The five surrogate variabes found to be highy statisticay associated (at the 0 eve of significance) with the dependent variabe (Y3) were

13. OWNERS, AGE, AGEPROD, MANTRAIN and CUSTOMERS. Six of the significant correations were not in the direction hypothesised. C Mutvarate Correation and Regression Anaysis In order to expore the mutivariate reationships between the performance measures and the surrogate variabes and to test hypotheses detaied in the research iterature the data was further subjected to mutipe correation and regression anaysis. This statistica technique aows the.. aton of each independent variabe with the performance indicator to be examined whie controing for the effects of the other independent variabes. The mutivariate regression equations presented beow were cacuated using the forward incusion method and the technique.&is by regressing the variabe with the highest zeroorder correation against the dependent variabe. A new independent variabe is added at each step in order that the nu hypothesis of no expanation can be rejected. The 0.05 eve of significance was the seected eve for the incusion of significant independent surrogate variabes. Reative profitabiity was not used in this anaysis since the categorica data was not sufficienty robust. Tota empoyment size of the sma firms (Y): Equation 1 beow is based on the fifteen surrogate variabes found to be statisticay associated with tota empoyment size at the 0.05 eve of significance in Tabe 1. The AGEPROD variabe has been omitted from Equation 1 and the foowing equations because over 54% of firms were engaged in nonmanufacturing activities. Equation 1 which contains the six independent surrogate variabes SUPPLIERS, CUSTOMERS DISTCUSTOMERS, AGE, MANTRAIN and NEWSUPPLIERS is statisticay significant and has a high adjusted R2 vaue of 0.49. It can be inferred from Equation 1 that firms which are mature in age, have diverse customer and suppier bases, customers in nationwide ocations, with the management having undertaken management training and with a imited propensity to acquire new suppiers wi record the highest rates of tota empoyment.

m: Tota Empoyment by Surrogate Variabes (A 15 significant variabes at p= 0.05) Y1=0.07 0.29 (SUPPLIERS) 0.20 (CUSTOMERS) 0.19 (DISTCUSTOMERS) (0.21) (3.<?) (4::) (3.8:) 0.01 (AGE) 0.42 (MANTRAIN) 0.31 (NEWSUPPLIERS) ey (2.9 (2.0:) Mutipe R= 0.72 Adjusted R2= 0.49 Standard Error of the Estimate= 0.74 n= 110 te: t.... For the equations the figures in brackets are Y vaues. Significant at the 0.05 eve of significance; Significant at the 0.01 eve of significance; and Significant at the 1 eve of significance. In order to cacuate a more refined mutipe regression equation ony those seven surrogate variabes found to be statisticay associated with (Y) at the 0 eve of significance were seected for incusion in Equation 2. This refined mode is based on 163 observations and has a arger standard error of 0.81 compared to 0.74 in Equation 1. Five independent surrogate variabes are stated in Equation 2 and they incude SUPPLIERS, AGE, SIZECOMP, CUSTOMERS and MAN. The equation is significant and it is has an adjusted R2 of 0.39. Again, it can.be inferred that mature firms, with diverse suppier and customer bases currenty operating a wide range of manageria functions and whose major competitor is arge in empoyment size wi record the highest eves of tota empoyment (Y)* 2: Tota Empoyment by Surrogate Variabes (7 variabes at p= 0) Y= 0.36 0.21 (SUPPLIERS) 0.08 (AGE) 0.12 (SIZECOMP) 0.13 (CUSTOMERS) (1.43) (33; 1 (4.I*?) (3.::) w33 0.04 (MAN) (2.37) Mutipe R= 0.64 Adjusted R2= 0.39 Standard Error of the Estimate= 0.81 n= 163 te: For the equations the figures in bfackek are Y vaues. Significant at the 0.05 eve of significance;.* Significant at the 0.01 eve of significance; and *. Significant at the 1 eve of significance. L 14

15 Leve of Saes: Equation 3 is based on the thirteen surrogate variabes found to be statisticay associated with eve of saes for the ast financia year (Y2) at the 0.05 eve of significance. This equation is statisticay significant, has a high adjusted R2 vaue of 0.46 and a standard error vaue of 0.60. It can be inferred from Equation 3 that mature firms with diverse customer and suppier bases, whose management has frequent management meetings and has undertaken management training with a arge empoyment sized major competitor wi record the highest eve of saes. 3: Leve of Saes by Surrogate Variabes (A 13 significant variabes at p= 0.05) Y2= 0.02 0.12 (SUPPLIERS) 0.39 (MANTRAIN) 0.12 (CUSTOMERS) (0.67) (2.1?) (3.0,:) wp, 0.05 (PLANMAN) (AGE) 0.06 (SIZECOMP) 12.y (2.4:) (2.q Mutipe R= 0.70 Adjusted R2= 0.46 Standard Error of the Estimate= 0.60 n= 111 te:..* For the equations the figures in brackets are Y vaues. Significant at the 0.05 eve of significance; and Significant at the 0.01 eve of significance. A more refined mode was cacuated based on the seven surrogate variabes found to be statisticay associated with the dependent variabe (Y2) at the 0 eve of significance. Equation 4 is based on 160 observations and it has a standard error of 0.65. The equation is statisticay significant has a sighty ower adjusted R2 vaue of 0.37 and the six independent variabes (SUPPLIERS, MANTRAIN, AGE, SIZECOMP, PLANMAN and LOCATION) are found to be positivey associated with the dependent variabe. It can be inferred from Equation 4 that mature firms ocated in southern markets with diverse suppier bases, very arge major competitors, whose management has undertaken management training, who hod frequent management meetings, and have a arge empoyment sized major competitor wi record the highest eves of saes.

4: Leve of Saes by Surrogate Variabes (7 variabes at p= 0) Y2 0.08 0.12 (SUPPLIERS) 0.31 (MANTRAIN) 0.01 (AGE) (0.31) (3.5:) (2.y (4Z?) 0.08 (SIZECEOMP) 0.03 (PLANMAN) 0.22 (LOCATION) (3.!?) (2.3!) wy Mutipe R= 0.63 Adjusted R2= 0.37 Standard Error of the Estimate= 0.65 n= 160 te:. * ** For the equations the figures in brackets are t vaues. Significant at the 0.05 eve of significance; Significant at the 0.01 eve of significance; and Significant at the 1 eve of significance. Leve of Proftabty: Equation 5 is based on the thirteen surrogate variabes found to be statisticay associated with the eve of profitabiity for the ast financia year (Y3) at the 0.05 eve of significance. This equation is statisticay significant, has an adjusted R2 vaue of 0.13 and a standard error vaue of 2.56. It can be inferred from Equation 5 that mature firms whose management has undertaken management training and who hod irreguar meetings with business contacts wi record the highest eve of profitabiity. 5: Leve of Profitabiity by Surrogate Variabes (A 13 significant variabes) Y3= 1.19 0.01 (AGE) 1.30 (MANTRAIN) 0.17 (PLANBUS) (1.22) (2.2!) (2.47) (2.3:) Muttipe R= 0.39 Adjusted R2= 0.13 Standard Error of the Estimate= 2.56 n= 110 te: For the equations the figures in bfackek are Y vaues.. Significant at the 0.05 eve of significance. A more refined mode was cacuated based on the eight surrogate variabes found to be statisticay associated with the dependent variabe (Y3) at the 0.01 eve of significance. Equation 6 is based on 153 observations and it has a standard error of 2.57. The equation is statisticay significant, 16

has a sighty higher adjusted R2 vaue of 0.14. In contrast, to Equation 5 ony two surrogate variabes were found to be associated with the dependent variabe, one positivey (AGE) and the other negativey (FINANCE). It can be inferred from Equation 5 that mature firms which have not obtained financia investment (not incuding bank overdrafts) wi record the highest eves of profitabiity. 6: Leve of Profitabiity by Surrogate Variabes (8 variabes at p= 0.01) Y3= 1.93 0.03 (AGE) 0.54 (FINANCE) (5.67) (451) (2.4:) Mutipe R= 0.39 Adjusted R2= 0.14 Standard Error of the Estimate= 2.57 n= 153 te:..t For the equations the figures in brackets are Y vaues. Significant at the 0.05 eve of significance; and Significant at the 1 eve of significance. DATA REDUCTION USING PRINCIPAL COMPONENTS ANALYSIS Whist the mutipe regression anaysis provides usefu insights into the combination of factors which contribute to size and performance, there remains an inherent assumption of inearity that a firms conform to the described patterns sequentiay. Therefore, an RMode Principa Components Anaysis (PCA) was used in order to produce new combinations of the origina data which coud then be used as independent and orthogona reference axes (or variabes) in a cassification of firm types using Custer Anaysis. The unrotated direct extraction of orthogona reference axes by PCA did not adequatey iuminate the interreationships between the coection of variabes. As a consequence, the reference axes were rotated in order to isoate more meaningfu dimensions. After varimax rotation, the first eeven components (out of a tota of thirtyone components) accounted for 65.7% of the tota variance (Tabe 4). The fina mode was found to be an appropriate factor anaytic mode as indicated by Bartett s test of sphericity, the KaiserMeyerOkin measure of smaping adequacy, the antiimage correation matrix, the test for samping adequacy and the test for communaity.

On the basis of the component oadings, the eeven components were given the foowing descriptive abes: Component 1 Component 2 Component 3 Component 4 Manufacturing firms with od manua product ines but sophisticated administration bases. Firms are in competition with a sma number of direct competitors and whose customers are in nationwide ocations. Firms with arge and increasingy diverse customer and suppier bases. Reativey mature firms with current majority owners and senior executives with no reationship to the origina founders and executives. Sma firms with frequent management meetings and frequent meetings with professiona advisers and business contacts with diverse suppier bases. The management team has received some form of management training and have introduced a diverse computerised administration base. Component 5 Component 6 Component 7 Component 8 Component 9 Firms with a arge proportion of manageria functions the soe responsibiity of one person and a high eve of deegation. Very mature sma firms with od manufacturing product ines which have few remaining origina founders who are sti partners or sharehoders. Firms have not received financia investment from externa sources. Firms with an increasingy diverse range of new as we as existing major product ines or major service groups and which have a sma proportion of saes revenue accounted by the major product or service ine. Firms with a arge number of competitors but the major competitor is arge in size. Customers are in nationwide ocations and suppiers are nonoca. Sma firms in the south with oca suppiers who have not appied for grants and training schemes. Component 10 Component 11 Concentrated ownership structure in firms with increasingy diverse suppier bases which have not appied for grants. Firms currenty operating a diverse range of manageria functions with nonmanua administration bases who are heaviy dependent on the saes revenue accounted for by the major product ine or service group. It is cear from this evidence that the inked trends isoated in the component structure do have meaningfu expression in terms of firm characteristics which stresses the need for a cassification of I firm Yypes.

CLASSIFICATION INTO TYPES OF FIRMS The simpe description of component oadings is usefu in that it describes the pattern of each singe basic factor, but nothing other than intuitive cassification can be attempted. Therefore, in order to obtain a cassification of sma firm types based on interna as we as externa environmenta factors, Ward s Error Sum Of Squares Method of Custer Anaysis was used to group simiar firms (Ward, 1963). In this study Ward s method produces a grouping of reativey homogeneous firm types which have maximum betweengroup variance and minimum withingroup variance. A dendrogram was drawn to dispay each stage in the grouping process. At step 215, the grouping procedure was stopped with the 222 firms being reduced to ony eight firm types, and with a 83.63% oss of origina detai in return for an increased eve of generaity. In order to give a descriptive abe to each of the eight custers (or firm types ), the custer mean for each variabe was compared to the respective goba mean for that variabe (Tabe 5). Custer 1 Custer 2 Custer 3 Custer 4 Custer 5 This is the argest custer of 63 generay nonmanufacturing firms with diuted ownership structures which have a very diverse range of major product ines or major service groups. Firms are midde aged and have frequent management meetings but have received no finance from externa sources. Customers as we as suppiers are nonoca and the firms have a arge number of direct competitors. Firms in which manageria functions are highy deegated and management meetings are hed at quartery intervas. These generay northern firms have a sma number of sharehoders and for the manufacturing firms in the custer the contro technoogy in production ines is a manua one. This custer contains 31 firms. A custer of 29 service firms in which a very sma number of founders are sti partners or sharehoders. Management meetings and meetings with professionas are in frequent, a sma number of manageria functions are currenty operated, and the firms have sophisticated administration bases. Firms are in competition with a sma number of direct competitors and the major competitor is arge in size. Sma firms with highy diuted ownership structures and oca customers ocated in the the south. Management meetings are generay annua in frequency. This custer contains 36 firms. Tweve very mature firms with famiy succession current majority owners and senior executives who have undergone some form of management training. In the firms a arge number of manageria functions are operated but ony a sma proportion are the responsibiity of one person and consequenty these firms are associated with a ow eve of deegation. For the manufacturing firms in this custer they operate very od manua production ines but are associated with sophisticated administration bases. Firms have diverse suppier bases with customers as we as suppiers ocated in nationwide ocations. The firms have arge major competitors. 19

Custer 6 Custer 7 Custer 8 This is the second argest custer containing 48 very young manufacturing firms ocated in the north associated with young production ines. The firms have modest customer bases and have contacted ony a sma number of new customers over the past tweve months. Grants from centra or oca Government have been appied for. A singe mature service firm ocated in the north with the one origina founder being the current majority owner and senior executive. The firm has one major service group and it obtains a of its saes revenue from it. Moreover, the business has ess than 11 oca customers and has not made a new customers in the past tweve months. In contrast, the firm has over 50 suppiers ocated in regiona ocations. The firm faces competition from ess than 11 direct competitors. Loca or centra Government training schemes and grants have not been appied for. The firm currenty operates a wide range of manageria functions but ony a sma proportion are the responsibiity of one person. Management meetings and meetings with professionas and business advisers are hed frequenty and the firm has introduced computer technoogy in the administration base. The ownermanager has undergone some form of management training but has not received financia investment from externa sources. Two very young service firms ocated in the north with the origina ownermanager founders being the current first generation majority owners and senior executives. The businesses are associated with a very sma number of major service groups with the firms stating that the major service group accounted for a of their saes revenue. Firms in this custer have ess than 11 nationwide customers, the businesses are suppied by over 11 nonoca suppiers. The Iwo firms have not appied for training schemes or grants provided by oca or centra Government. Both the firms operate a sma number of manageria functions which generay are the responsibiity of one person. Management meetings and meetings with professionas and business contacts are infrequent in nature. One of the ownermanagers has received management training whie the other has not. Neither of the firms has received financia investment from externa sources. TYPES OF FIRMS AND PERFORMANCE DIFFERENCES The fina stage of the anaysis compared business size and performance between the identified types of sma firms. The aim was to test whether the crosssectiona anaysis presented any evidence to support the stages of deveopment theories. Did the custers fa into a ogica sequence when measured by size or performance? For exampe, was custer 6 characterised by very sma firms, custer 1 medium sized firms, and custer 5 arge firms? Further, were the three firms which remained isoated from the rest of the sampe the atypica high fyers? The data was first subjected to exporatory ChiSquared anayses. Custers 7 and 8 were excuded from anaysis in order to satisfy the assumptions of the technique. The use of the Chi Squared technique aso aowed the incusion of a further performance measure which it had not been possibe to use in previous anaysis since it was based upon ony three categorica scores respondents were asked to indicate whether they rated their business profit performance reative to

competition as good, about average, or poor. Whist these ratings are, ceary, subjective, their incusion adds to the overa pattern of resuts. Tabe 6 indicates that a arger proportion of firms in custers 1, 3 and 5 (22.6%, 25.0% and 25.0%, respectivey) had 50 or more tota empoyees. In contrast, firms in custer 4 had a greater tendency to be ess than 10 empoyees in size (33.3%), whist firms in custer 2 had a greater propensity to be between 10 and 25 empoyees in size (41.9%). With regard to the eve of saes for the ast financia year it can be inferred from Tabe 7 that a markedy arger proportion of firms in custers 1, 3 and 5 (40.0%, 44.4% and 70.0%, respectivey) had saes of f 1 miion or more compared to firms in custer 4 which had a tendency to have saes of ess than f250,ooo (38.9%). Firms in custers 2 (44.8%) and 6 (43.8%) generay had saes between f250,ooo and f999,999. In terms of the third performance measure it is apparent that the vast majority of firms in each of the custers had made a profit in the ast financia year (Tabe 8). However, Tabe 8 shows that a markedy arger proportion of firms in custers 2, 3 and 4 had made a profit (86.2%, 82.1% and 88.9%), whist firms in custers 1, 5 and 6 had a greater propensity to have made a oss (20.0%, 27.3% and 18.8%, respectivey). Finay, Tabe 9 indicates that the majority of firms (with the notabe exception of firms in custer 4) rated their businesses profit performance as being above average reative to competition with firms in custers 3, 5 and 6 in fact stating it was good (60.0%, 80.0% and 63.6%, respectivey). Conversey, a markedy arger proportion of firms in custer 4 (20.6%) stated their profit performance was poor reative to competition. The resuts detaied above have indicated that no statisticay significant differences were observed in any of the ChiSquared anayses conducted. There was no statistica reationship between custer membership and either size, or performance. However, scrutiny of the individua resuts does indicate the foowing patterns (uness stated, no particuar bias is evident). Custer 1 Fewer firms than expected with saes of ess than f250,ooo. Custer 2 Essentiay sma firms empoying between 10 and 50 peope and with saes between f250,ooo and fm. Custer 3 Firms in this group are poarised in size either empoying ess than 10 peope, and with saes of ess than f250,000, or empoying more than 50 peope and with saes of greater than f 1 m.

Custer 4 Predominanty very sma firms empoying ess than 10 peope, with saes of ess than f250,000, in profit, but rating their reative profit performance as average or poor., Custer 5 A arge percentage of firms with saes of more than fm, rating their reative profit performance as good. Custer 6 A arge percentage of firms with saes between f250,ooo and f m. Custer 7 A profitabe firm which rates its profit performance as good with ess than 26 empoyees and saes ess than f250,ooo. Custer 8 Two profitabe firms rating their profit performance as average, both firms have between 10 and 25 empoyees and saes between f250,ooo and f999,999. The above anayses present 119 evidence to support the theories that sma firms pass sequentiay through predefined stages of growth. However, the ChSquared test is not particuary powerfu, and so the two size measures were subjected to the more powerfu Anaysis of Variance test for differences between the mean vaues in each custer. significant differences were identified between the custers for saes revenue (/F/ = 0.824, d.f. = 5, Significance Leve = 0.790) or for tota empoyees (/F/ = 0.824, d.f. = 5, Significance Leve = 0.534). Therefore, it was not possibe to rank the custers in order of their size. SUMMARY AND CONCLUSIONS The aim of this paper has been to study the interreationships between a the factors in the strategic profie of a sampe of sma firms, and, by using crosssectiona anaysis, to attempt to identify any evidence to support the stages of growth theories. Three surrogates for comparative growth were used in the anaysis number of empoyees, saes turnover, and profitabiity. The anaysis foows five sequentia stages bivariate correation anaysis, mutivariate correation and regression anaysis, custer anaysis, chisquared anaysis, and, finay, anaysis of variance. The resuts from the bivariate correation anayses are remarkaby consistent (see Tabe 10). Thus, the size of the sma firms in the sampe measured in terms of both number of empoyees and saes revenue are characterised by ownership structure, age, and market positioning as refected in customer, suppier, and competitor bases. There is aso some indication that growing firms may deveop more compex management, as refected in the number of manageria functions and the frequency of management meetings. However, there is no evidence that this extends to the use of

23 outside advisors (PLANPROF, PLANBUS), or to the deveopment of a management structure through deegation (SOLE, MANINDEX). The resuts for profit are particuary interesting since many are counterintuitive. Whist market profie continues to be important, the more that ownership and management is divorced from the origina owners, the higher the profitabiity; and invovement with outside advisers or trainers, and the use of outside finance, is negativey reated to profitabiity! Subjecting the data to the more stringent technique of mutivariate regression anaysis reduces the number of variabes, but reinforces the overa concusion. In particuar, there is a marked absence of any reationship between the organisationa structura variabes and size, athough it is comforting to these authors that management training does appear to make some contribution to size and profitabiity! The mutipe regression anayses support the theory of a combination of factors contributing to the growth and deveopment of the firm, but they provide itte iumination as to the profie of the firms in the sampe, or the extent to which firms with a particuar combination of characteristics are ik& to grow or to be profitabe. Moreover, the inherent assumption of inearity impies that a sma firms foow the same pattern; that, since age is one of the predictive variabes, a firms must grow: and that firms adjust their rate of growth by adjusting, for exampe, their customer base. This assumption, found in much of the iterature, that a firms foow the same prescribed path and that the sma firm sector is essentiay homogeneous has been subjected to very itte empirica examination. The custer anaysis conducted in this study identified eight different types of sma firm characterised by interna variabes of ownership, management and product structure; and by externa variabes of product / market positioning. Unike the preiminary regression anayses this use of custer anaysis took account of the sma firm which experienced ony imited growth. For exampe, the manufacturing firms in custer 2 have highy deegated management structures and hod reguar management meetings suggesting reativey arge firms which have evoved through a number of growth stages. However, we find that they are amost certainy famiy (with a sma number of sharehoders) firms, and are primariy sma, empoying ess than 50 peope and with saes revenue of ess than f m. It woud have been extremey neat to find that, having identified eight custers of firms, three of which had potentia as the high fyers of the sampe, and our crosssectiona anaysis had