What Affects Small Business Growth? Part II: Management Experience

In my last post, I (Mina) started a series of posts reviewing the myriad of studies out there on what affects small business growth.  We saw that one critical thing that affects whether or not a small business grows is whether or not the owner aspires to grow (this might explain why billions of dollars poured into growing small businesses simply do not have much impact – most small business owners don’t want to grow).  In this post, let’s look at how much owners’ management experience and skills matter in growing his/her company.

In my previous life teaching and researching at a business school, we often told our students that even if their ultimate goals were to start their own businesses, they would benefit greatly from gaining management and business skills by working for someone else.   The research out there supports this view.  Yes, it is extremely tempting to glorify the high-school dropout who builds a revolutionary product prototype in her parents’ basement to turn it into a multi-billion dollar business without ever having worked for someone.  However, to the extent that such people exist, they are truly the exceptions.  In most cases, high-growth businesses are started and owned by people who have had sizeable experience in management prior to their current businesses.  Research shows that  even if the experience is not from the same industry as the current industry of the owners/founders, it has a significant and positive effect on the growth of small businesses.  What’s more, the important management qualities are not oriented towards control, monitoring, planning and day-to-day business operations but rather towards general leadership and vision.

In one study, researchers Nohria, Joyce, and Roberson examined 160 companies and their performance over a ten-year period, measuring growth by total return to shareholders.  “Winners,” or those that outperformed its peers in the industry through the study period, multiplied their shareholders investments by 945%, while “losers” produced only 62% in total returns.  The researchers found that among the key differences between the winners and losers was that the CEOs of the winners were able to build a strong organization culture and institutionalize a fast, flexible and flat structure while the CEOs of the losers were not.

The differences in growth among minority business owners and white business owners also highlight the significance of management and business skills.  In explaining why minority business owners achieve lower growth in their ventures than their white counterparts, researchers Fairlie and Robb pointed to their relative lack of experience in their families’ businesses prior to starting and running their own.  Analyzing nearly 40,000 small businesses, they showed that average sales among white-owned firms were nearly four times larger than average sales for Black-owned firms (median sales among white-owned firms were twice as large as those for Black-owned firms).  More white firms had employees (21.4 percent compared with 11.3 percent) and among those that had employees, white-owned firms hired three times as many as black-owned firms.  The researchers attributed a substantial portion of this difference to the lack of family business experience among black business owners compared to white owners, claiming that experience in family businesses offer an opportunity to gain general management skills which then affects the ability of business owners to grow their companies.  For all owners, sales were approximately 40 percent higher if the business owner had experience working with self-employed family members before starting their own businesses.

Management skills and experience can have an indirect effect on growth as well. 

In a study of 156 small and medium-sized firms, Sadler-Smith and his colleagues found that leadership behaviors such as managing culture and vision was positively associated with what they call “entrepreneurial style” (innovation/creativity and risk-taking) which was positively associated with high growth (defined in this study as greater than 30% sales growth in the past five years).  Management behaviors that emphasized planning, control, monitoring and evaluation were negatively associated with entrepreneurial style.

Finally, researchers Wiklund & Shepherd showed in a study of 326 small business CEOS that management experience, experience working at a rapid-growth organization and start-up experience magnify the positive effect of growth aspirations on actual growth.  

-Mina

Coming up next: Experience in industry, education and business growth

Sources:

Fairlie, R. W. and A. M. Robb (2007). "Why are Black-owned businesses less successful than white-owned buinesses?  The role of families, inheritances, and business human capital." Journal of Labor Economics 25(2): 289-323.

Nohria, N., W. Joyce, et al. (2003). "What really works." Harvard Business Review July: 1-13.

Sadler-Smith, E., Y. Hampson, et al. (2003). "Managerial Behavior, Entrepreneurial Style, and Small Firm Performance." J Small Bus Manage Journal of Small Business Management 41(1): 47-67.

Wiklund, J. and D. Shepherd (2003). "Aspiring for, and Achieving Growth: The Moderating Role of Resources and Opportunities  *." Journal of Management Studies 40(8): 1919-1941.