Performance, Firm Size, and Management Problem Solving [*]

Growth in small businesses is rare. This study expands on Penrose's (1957) concept of managerial capacity and links it to firm growth. Growth is hypothesized to occur when a threshold of administrative or managerial acumen is attained by the management team. Empirical analysis is based on a random survey of 1,004 small and medium-sized Canadian businesses. The study found that: fewer than one quarter of the sampled businesses reported two consecutive years of revenue increases; growing firms tended to be younger companies while firms in decline were comparatively older; and the presence of a business plan was highly correlated with performance (yet only one-third of the firms formally planned). The findings are consistent with the theory that small firm growth is neither linear nor described well by biological paradigms. This study also investigated the problems that confront owners and managers at different stages in business development. It found that the severity of managerial problems varies by firm attr ibutes, including size. Problems of domestic demand, the availability of alternative sources of finance, a lack of financial expertise, and lack of information about financing options were particular problems for smaller (micro) operations. Female business owners were more likely to report lack of access to capital as a problem. From the early work of Birch (1979) to more recent work by Mend et al. (1997), longitudinal employment data consistently suggest that the growth of SMEs accounts for a disproportionate share of job creation in North America. Moreover, research also demonstrates that much job creation is attributable to a minority of firms that grow very quickly --the so-called (see, for example, Picot and Dupuy 1995). As a result, governments have sought to encourage small business growth, and researchers have sought to understand better the processes by which businesses develop. However, a dilemma confronts both policy-makers and researchers--although as many as one-half of the owners of new firms seek growth (Blatt 1993; Rosa and Hamilton 1994), gazelles comprise less than five percent of businesses. Research has, as yet, been unable to explain why some growth-oriented businesses fail to grow; nor has research arrived at consensus about what leads to substantive growth performance. This study seeks to add to our understanding of the growth process in small business by attempting to identify the types of problems and impediments owners and managers confront at different times during business development. It investigates the association of management problems with firm size using a sample of 1,004 small and medium-sized Canadian enterprises (henceforth referred to as SMEs). Results of the study are presented in four sections. First, background information from selected theories of SME growth are presented. These lead to the discussion of specific study propositions. Empirical methods and findings are then presented. The article closes with a discussion of results in which recommendations pertaining to future research are offered. Explanations of Small Firm Growth: The Literature The research literature proposing theoretical explanations of small firm growth can be categorized into four approaches. In this section, each approach is described, and important contributions of each are identified. Biological Models of Growth Small firm growth has been described as a staged process, one akin to biological evolution (Gartner 1985; Reynolds and Miller 1988; Reynolds, Storey, and Westhead 1994). Kazanjian (1988) contends that the SME lifecycle model describes the process of product and market change and corresponding changes in management. [1] Kazanjian suggests that firm growth occurs in stages at the level of the firm Kazanjian identifies the following generic sequence: (1) conception and development during which resources are acquired and technology developed; (2) commercialization, which involves production related to start-up; (3) growth, during which sales and market share are developed, which influences organizational arrangements; and (4) stability, which is characterized by profitability, internal control, and establishment of a base for future growth. …

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