Conceptual Frameworks for the Determinants of Firm Growth - Coursework Example

Entrepreneurship Name Course Instructor Date ‘Small firm growth is the only measure of an entrepreneur’s success’. To what extent do you agree with this aphorism? Entrepreneurship Introduction Entrepreneurship refers to the willingness and ability to take risks to develop and organise a business venture to make profits. It requires the ability to recognise opportunities and develop the right skills, attitudes and initiatives to manage a business enterprise in a competitive and constantly changing environment. Growth is a key indicator of a well managed and thriving business enterprise. Entrepreneurial growth refers to the quantitative increase in terms of value addition, revenue generation and business expansion. It can also be defined qualitatively in terms of customer service and products, market positioning and customer goodwill Ferriani, Cattani and Baden-Fuller (2009, p. 1548). Although the factors that determine entrepreneurial growth have been studied extensively, there are disagreements whether success is the only measure of growth. This paper attempts to explain whether small firm growth is the only measure of an entrepreneur’s success. Conceptual Frameworks for the Determinants of Firm Growth Entrepreneurial activity implies discovery, evaluation and exploitation of opportunities to make economic gains. It involves creating and marketing of new products and services, development of new production processes or implementation of new strategies and markets for new products (Minniti & Moren 2010, p. 307). Entrepreneurial opportunities tend to be unexpected and unvalued situations with great economic potentials. In any market, opportunities for entrepreneurship are a result of market agents having differing perceptions on the utility of resources and how they should be converted to consumable products and services. Thus, successful entrepreneurship is merely the discovery of economic opportunities and mobilization of resources to spearhead an economic activity. Once an opportunity has been discovered, the entrepreneur must create the market. This means that the entrepreneur must obtain resources and convert them into an output that can satisfy specific needs in the market. The entrepreneur must also take further steps to protect his innovative ideas so as to attain competitive advantages and sustained firm growth. Research studies suggest a number of entrepreneurial and firm growth influences, grounded on a multitude of theoretical paradigms. As a starting point, firm growth which is the most important outcome of successful entrepreneurship is viewed as a result of strategies, firm specific resources and entrepreneur’s capabilities. Thus, current conceptual frameworks approaches for understanding entrepreneurship focus on the respective roles of the individual (entrepreneur), organizational and environmental determinants. i. Individual Determinants of Firm Growth The individual determinants approach states that the growth of a firm is dependent on the decisions made by the individual (entrepreneur). Studies indicate that the entrepreneur’s personality, personal competencies and growth motivation are important factors that determine firm growth. The need for achievement is perhaps the most important personality trait that influences firm growth. According to Deakins and Freel (2009, p. 43) entrepreneurs with a strong desire to excel are more likely to engage in behaviours and actions that will lead to better results. Ferriani, Cattani and Baden-Fuller (2009 p. 1545-1558) found a strong correlation between the need for achievement and entrepreneurial activity, a finding that was also confirmed by Allen (2009, p. 55). The need for achievement goes hand in hand with the entrepreneur’s individual competencies. This refers to the skills, knowledge and abilities required to perform a certain task and achieve desired outcomes. Entrepreneurs with specific competencies are more likely to be successful in growing their firms than those without the competencies. Risk taking propensity is another important personal trait with an impact on successful firm growth. Entrepreneurs can be viewed as individuals who identify opportunities, take risks and face uncertainties. Owners of small businesses, with low levels of risk averseness tend to be more ambitious in growing their firms. This implies that entrepreneur with a high propensity for taking risks do not fear to take appropriate measures to grow their firms. However, individuals have different perceptions of risks, which might have different effects on their risk taking behaviours and hence the success of their firms (Deakins & Freel, 2009, p. 42). Closely related to risk taking propensity is the concept of locus of control. This refers to the extent to which an individual beliefs that their personal characteristics or actions can affects outcomes. Individuals with internal locus of control believe that their actions can have greater outcomes, and are likely to invest in the growth of their firms. Generally, successful business owners tend to be strong in terms of the internal locus of control. They take decisive behaviours and actions to positively affect the growth of their firms. Thus, internal locus of control is a key motivation for starting a firm. Research has also identified extraversion and self efficacy as equally important personal traits with a direct impact on firm growth. Self efficacy refers to the entrepreneur’s ability to gather personal resources, competencies and skills in order to achieve a given task. Individuals with a higher self efficacy tend to put more efforts and time into their tasks, making plans and implementing strategies for optimal outcomes. This type of individual has a positive attitude and is receptive of criticisms and suggestions. On the other hand, extraversion is associated with the tendency to build personal relationships through active engagement with positive emotion, high energy levels and excitement. Allen (2009, p. 55) observed that extraversion is strongly related to the ability of an entrepreneur to develop and nurture social networks resulting in fruitful relationships with customers, suppliers and other strategic partners. This is crucial in increasing the effectiveness of firm growth. ii. Organizational Determinants of Firm Growth It has been reported that growth of a firm can be influenced by how efficient organizational resources such as finances, human capital and labour are organised to produce products that can meet specific market needs. These resources are organised through established structures, routines and practices and can have a great impact on firm growth. Empirical studies have identified several determinants of firm growth with regard to this dimension. These are: availability of specific resources; firm attributes; dynamic capabilities and organizational structures. Firm attribute refer to the size and age of a firm. A study by Deakins and Freel (2009, p. 32) found that the growth of a firm is directly related to its initial size and that younger firms tend to grow at a higher rate than firms that have existed for several years. Small and young firms are likely to grow faster because they have to achieve a certain level of efficiency in order to establish positions in the market (Minniti & Moren 2010, p. 308). Firm strategies refer to the positiveness, innovation and risk taking nature with which a firm is managed. Studies have shown that growth of a firm is influenced by how successful products and services are marketed. This implies that market orientation is a crucial firm strategy and can have profound impact on firm growth. Firms that implement market oriented strategies are able to identify and satisfy customer needs and preferences with ease. They are also likely to develop proactive systems for gathering market intelligence as well as develop the ability to coordinate production processes to respond to stakeholders concerns quickly (Ferriani, Cattani & Baden-Fuller, 2009, p. 1545). Consequently, market oriented strategies result in better satisfaction of customers, which in turn results in rapid customer satisfaction. Availability of firm specific resources has been found to be the most important organizational determinant of firm growth. According to DeFillippi and Spring (2004, p. 50-57), human capital and financial resources have the greatest impact on entrepreneurial growth. Financial sources are particularly important in supporting the production of products, and also in promoting the firm and its products. With sufficient financial resources, entrepreneurs can experiment with new business ideas, which will not only increase innovation potentials but also expand growth opportunities. Human capital represents the experience, skills and knowledge possessed by the firm. On an organizational level, human capitals are the employees who help the entrepreneur in achieving his business objectives. In terms of entrepreneurial growth, employees are considered the most important resource. The collective and individual skills and knowledge possessed by employees play a crucial role in the conversion of inputs to outputs and in building firm competitive advantages. Small and young firms are characterised by severe resource constraints. For such firms, finical and human resources are important determinants of business success. Organizational structure refers to the coordination of production mechanisms and distribution of tasks within an organization. Formalization, departmentalization and centralization are the most commonly agreed dimensions of organizational structure. Centralization refers to the extent to which decision making authority is delegated throughout an organization. Formalization defines the manner in which communication procedures, authority relationships, norms and rules have been defined in an organization. Along with coordination and standardization, formalization is used to optimise and control organization tasks. Departmentalization refers to the extent to which tasks are formally organised into functional units within an organization. Firms with a high degree of departmentalization and centralized structures perform well and are likely to achieve high growth regardless of their size or resources. In addition, those with centralised, hierarchical structures and highly skilled employees also tend to perform well in terms of entrepreneurial growth (DeFillippi & Spring 2004, p. 50-57). Dynamic capability refers to the ability to reallocate, reconfigure and recombine scarce firm resources to achieve desired objectives. To the firm, dynamic capabilities are the strategic routines aimed at developing new resources to achieve new resource combinations for increased firm growth and efficiency. According to James (2014, p. 41), dynamic capability is particularly important for small firms because they face stiff competition from large and well established firms. Through dynamic capabilities, small firms recognise opportunities and successfully exploit them and create more opportunities for sustained market participation. Research and development, and organizational learning are crucial aspects of dynamic capability with a major influence of entrepreneurial success. According to Allen (2009, p. 56) the two aspects help in knowledge creation, which serve as the bedrock of effective firm growth. iii. Social/Environmental Determinants of Firm Growth Studies have shown that nature of entrepreneurial environment and the society can have a major impact on firm growth. Generally, entrepreneurial environment varies along several dimensions such as munificence, heterogeneity, dynamism and hostility. Dynamic environments are predictable in terms of market trends. There are more opportunities for entrepreneurial growth in markets that exhibit dynamism in terms of politics, society, technology transfer and market participation Deakins and Freel (2009 p. 92). Munificence refers to the specific type of support obtained from a firm’s business environment. Munificent environments accord firms greater support, for example in terms of ready customers, and favourable regulatory requirements. Hostility refers to the extent to which a firm’s environment poses threats to the firms. Hostility can be in the form of stiff competition from other industry players. Heterogeneity refers to the complexity of the business environment in terms of the dispersion or concentration of firms in the market. Shane (2013, p. 474)argues that small firms with focus on niche markets can easily find better growth opportunities in heterogeneous markets than in homogenous markets. Significance of Firm Growth and Motivations for Entrepreneurship There are debates regarding whether success is the only measure of firm growth. While there are many definitions of entrepreneurial success, they all point to the accomplishment of goals. Foo (2011, p. 377) has defined success as the growth of a firm by conducting business in a responsible manner and by making contributions to the stakeholders. Successful entrepreneur are excited by the prospect of growth. They show a strong drive to overcome obstacles and succeed even in areas where others have failed. They not only set challenging gaols for themselves but also sacrifice personal happiness to achieve the goals and attain steady firm growth. They go an extra mile to ensure that the interest and needs of all stakeholders are satisfied so that business growth objectives can be achieved. Thus, a firm that has achieved its gaols, no matter how small they are, can be said to have achieved success. Usually, the main goal of any new business is to attain growth by serving specific customer needs. Therefore, success is an important measure of firm growth. According to James (2014, p. 36), it is highly improbable that an individual can start a business enterprise without harbouring plans for growth. Entrepreneurial stakeholders refer to institutions, organizations and individuals that have an interest in the entrepreneurial activity. The actions of stakeholders can be conducive or inhibitive of firm growth. Regardless of industry or nature of business, entrepreneurial stakeholders may include government regulators, customers, competitors, creditors, suppliers, distributors, environmental lobby groups, and trade unions. Across the world, small firms are considered a major source of employment and are thus key economic players. In developing countries, small firms and entrepreneurial organizations are important determinants of economic growth. To the entrepreneur, the firm is a source of livelihood and provides a platform for excelling socially. These firms have the advantage of cheap labour, technological adaptability and flexibility of business operations. Hence, it is important for governments and the public to pay attention to the growth of enterprises and motivations for entrepreneurship (Salge & Vera 2009, p. 55-56). Generally, most stakeholders have positive expectations for firm growth and expect firms to act responsibly in the market and society. In effect, adherence to expected obligations as defined by the stakeholders is a key determinant of effective entrepreneurial activity and firm growth. Firms that maintain good relations with stakeholders in their industries experience rapid and sustained growth, which in turn creates unique strategic advantages. Besides satisfying the needs of stakeholders, entrepreneurs are motivated by the desire to make a difference in the world. According to Mark and Robert (2000, p. 82), entrepreneurs have an intrinsic motivation to make positive contributions in people’s lives. They derive personal meaning and gratification from building successful businesses and growing them to compete effectively in the market. It has also been established that entrepreneur are motivated by the desire to achieve personal growth and accomplishments. Despite the obvious challenges and risks, entrepreneurs enjoy their acomplsihmets no matter how small. They exhibit strong appetite for knowledge, which drives them into experimenting with new business ideas. The success creates intrinsic satisfaction, which maximises the social impact (Shane 2013, p. 473). Conclusion From the above discussion, it can be concluded that entrepreneurship is a multidimensional phenomenon and is not influenced by a single determinant. In the essay, the overriding determinants of firm growth have been evaluated critically from the organizational, social and individual perspectives. Notably, firm characteristics as well as the entrepreneur’s personality have the greatest impact on firm growth. Regardless of the impact of the various determinants of firm growth, success in an important measure. Successful entrepreneurship means more than starting a new business and growing it. It means the ability to mobilise resources and deploy them in such a manner as to have the greatest and sustained impact. Successful entrepreneurs are characterised by a strong inner drive to exploit opportunities and succeed in uncertain market environments. When success is achieved, growth is inevitable and therefore it can be said that success is an important measure of firm growth. References list Allen, K R 2009, New Venture Creation (6th Ed.), New York: South-Western Cengage Learning. Burns, P 2011. Entrepreneurship and small business: start-up, growth and maturity (3rd Ed.), Basingstoke: Palgrave Macmillan. Deakins, D & Freel, M 2009, Entrepreneurial activity, the economy and the importance of small firms, McGraw-Hill Education DeFillippi, R & Spring S 2004, ‘Project entrepreneurs for project-based enterprises: Extension or complement to project management competencies?’, Projects and Profits, vol. 4, no. 2, pp. 50-57. Ferriani S, Cattani G & Baden-Fuller C 2009, ‘The Relational Antecedents of Project-Entrepreneurship: Network Centrality, Team Composition and Project Performance’, Research Policy, vol. 38, no. 10, pp. 1545–1558. Foo, M 2011, ‘Emotions and entrepreneurial opportunity evaluation’, Entrepreneurship Theory and Practice, vol. 35, no. 2, pp. 375–393. James, W 2014, Your Small Business Adventure: Finding Your Niche and Growing a Successful Business, ALA/Huron Street Press. Mark, O & Robert, J 2000, Angel Investing. Boston: John Wiley & Sons. Minniti, M & Moren, L 2010, ‘Entrepreneurial types and economic growth’, Journal of Business Venturing, vol. 25, no. 3, pp. 305–314. Salge, T & Vera, A 2009, ‘Hospital innovativeness and organizational performance’, Health Care Management Review, vol. 34, no. 1, pp. 54–67. Shane, S 2013, ‘The genetics of entrepreneurial performance’, International Small Business Journal , vol. 31, no. 5, pp. : 473–495. Read More