What Affects Small Business Growth? Part III: Industry Experience and Education

It’s been a couple of weeks since I last wrote.  In my defense, a few things have happened in those two weeks:  I had a baby (the adorable and already charming Kai Yoo Whitmore), bought a new house, and had six family members come in for the holidays.  Oh, and I got pink eye somehow and couldn’t open my eye without massive amounts of pain and tears for several days.  Now that I am able to see again, I thought I would post another entry continuing on the topic of small business growth.

So far, we’ve seen research that showed that aspiration and intention are key in small business growth as are general management and leadership skills.  That is all well and good, but how about specific knowledge about your industry and product?  To what extent does that matter?  Relatedly, how about education?

Specific experience in same/closely related industry

Is industry experience important?

In their study comparing rapid- and slow-growth firms,  Barringer, Jones and Neubaum found that 76 percent of founders in the rapid-growth group (with an average compound annual growth rate of 167.29 over three years) and 1.55 percent over three years, respectively) had worked in the same or close related industry while only 24 percent of founders had similar experience in the slow-growth group (with an average compound annual growth rate of 1.55 percent over three years). In explaining how previous experience in the same industry affects growth, they suggested that in addition to knowledge, experience in the industry gives access to a network of contacts who can provide resources for the growth of the current firm.

Similarly highlighting the important of industry experience, Stam and Wennberg, in their a study of over 600 firms, found that the greater the industry experience of the founder, the greater the employment growth of the firm in the first six years of their lives.

Education

Will your years of education pay off in growing your business?

Barringer, Jones and Neubaum discovered that more founders of high-growth firms had a college education compared with founders of slow-growth firms.    Researchers Fairlie and Robb showed that compared with business owners who are high school drop-outs, college graduates have  25 percent higher sales. Owners who have completed graduate school have sales that are roughly 37 percent higher than college graduates.   Education can provide founders with technical skills relevant to their businesses while the process of getting educated in formal group settings can entrench the owners in networks that later prove to be useful in the growth of their ventures.

Education can have an indirect effect as well.  Wiklund & Shepherd show that education, like management experience, magnifies the positive effect of growth aspiration on actual growth. 

The moral of these studies:  Knowledge = growth.

-Mina

Coming up next: Financial and social capital and business growth

Sources:

Barringer, B. R., F. F. Jones, et al. (2005). "A quantitative content analysis of the characteristics of rapid-growth firms and their founders." Journal of business venturing. 20(5): 663.

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.

Stam, E. and K. Wennberg (2009). "The roles of R&D in new firm growth." SBU Small Business Economics 33(1): 77-89.

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.

collaborating and sharing: the power of we

2010 is coming to a close: Looking back now as the year 2010 is coming to a close, it’s quite amazing to see where I am, where my friends/family are, and society in general as a whole.  There’s no doubt that the general consensus is that 2010 was a year of epic change for many of us.  Epic: for many of my friends/family that moved to new cities to begin new lives, some closed the chapter on long relationships, and some began new chapters with new career changing moves.  Me?  I am sitting here, on a Monday, having just finished cooking all morning, plowing through my piles of books, and thinking about what I need to get done today so I can go to bed with a clear conscience – I need this clear conscience saying I added value to the world today.  I spend a lot of time analyzing and thinking.

Our world has changed.  The world has gone through some crazy changes.  Our irresponsible ways of hyper consumption have caused the collapse of our financial systems - because there is a price for everything. The world is stretching and working its muscles as we are being forced to change – and change very quickly.  No pain, no gain, right?  We have had a change of power in our government (US) – and more changes will come to bear as the old inefficient processes and systems undergo more scrutiny.  We’ve been shuffled into a new world of sharing, thanks to the world of technology and all that’s happened during start of the 21st century. 

The power of we:  Sharing.  Collaboration.  Co-working.  Collaboration.  Co-paying.  That’s where the past decade has taken us.  Isn’t it amazing?  Now, with the simple click of a button – I can reach out to thousands of people, some of whom I know very well, and some of whom I’ve never met. Thanks to technology, we have a system of trust happening between complete strangers.  We have a global community.  Flickr.  Yelp.  Twitter.  Facebook.  YouTube.  Foursquare.  It’s so simple.  We are connected.  We have moved from the individualistic culture focused on “me” (20th Century) to a collaborative one that understands the power of “we” (21st century).  There’s hope for us yet! 

Examples: The average consumer today is no longer the passive one just taking in like before – today, we are proactive, informed, and collaborative.  We trust the recommendation from a peer over the one that is produced by the system. 

• We bargain hunt and reuse/redistribute goods and services via communities like Craigslist.  Why pay $1,200 for the brandnew TV when I can get a working one for $500?  How about I trade you my season 1 of LOST for your season 1 of the Sopranos?  I’ll fix your iPhone if you help me setup my iTunes.
• We’re more collaborative.  Now you can land on the comfy couch of a complete stranger while couch-surfing your way through Europe (couchsurfing.org).  You have multiple designers working together to build witty tee shirts (Threadless.com).  You can work with a stranger who has the gardening skills to grow food in your extra plot of backyard space (landshare.com)
• We share products.  What if you could have all the benefits of a product without having to own the product outright?  I’m talking about a culture where access to this product is more valuable than actually owning it (Netflix.com, avelle.com, zipcar.com).  With Netflix, I don’t want a pile of DVDs, I want the movies.  I don’t want stuff – I want all of the needs and experiences that the stuff can give.

Trust.  I spent a great deal of time working with some researchers in the domain of trust/internet security and privacy – so all of this collaborate, sharing goodness requires trust.  Reputation is paramount – and is being created with every interaction you have in the world wide web. Reputation and social credit is the new currency of how products/services are being sold.  We’re headed towards a more sustainable system that makes the collective good the priority.

All Things Wishful: So as you know, the three of us (Arry, Mina, Michael) are working on a startup called All Things Wishful.  We hope to help the change the world a little bit through our product that helps communities collaborate and share.  We’re hitting beta now – so keep your eyes peeled! 

~Arry

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.

What Affects Small Business Growth? Part I: Ambitions, Aspirations, Intentions

Several months ago, I (Mina) wrote on controlled growth. In the next few entries, I’d like to talk about what affects growth in the first place. We have frequently been hearing the statistic that 70 percent of all new jobs are created by small businesses. But the fact is that the majority of the firms in the U.S. provide hardly any jobs. Many businesses do not ever have employees in their lifetimes, and even those that do have employees have only a few – 61 percent of employer firms have fewer than 4 employees. It turns out that only a handful of firms grow its employment by at least 15 percent per year – 6 percent of all businesses according to the National Commission on Entrepreneurship – and these few firms create the majority of new jobs.

If these few firms are so important to the economy, the question is: What affects whether or not a firm grows? What makes some firms the kind of rapid-growth firms that we count on to grow jobs while others fail, struggle or slowly grow at best? I recently took a look at about 30 scholarly studies on small business growth. The next few posts reflect what I found.

Ambitions and Aspirations

Of the many studies on what makes small businesses grow, one of the most consistent findings is the significant role of founder aspirations on the actual growth of their companies. Simply put, without ambition and the intention to grow, it won’t happen. However, when business owners do aspire to growth, these aspirations can have enormous impact on the future of their companies.

In a study of over 800 firms, researchers Delmar and Wiklund found that growth motivation at a given time point has a significant and positive effect on employment and revenue growth 3 and 4 years down the line. Another set of researchers, Stam and Wennberg, examining 647 firms over six years and testing numerous factors that might possibly affect growth (such as innovation, experience, industry) concluded that small business growth, especially in less technology-oriented industries, appear to be driven mainly by owner/founder ambitions.

Not only do growth aspirations matter, communicating this commitment can also make a difference. When researchers Barringer, Jones and Neubaum compared 50 rapid-growth firms and 50 slow-growth firms (with an average compound annual growth rate of 167.29 and 1.55 percent over three years, respectively), they discovered that the founders of the rapid-growth firms were more likely to articulate growth as a firm objective and to include growth in their written mission or vision. This result was consistent with earlier findings by Doorley and Donovan that 60% of the rapid-growth firms in their study had put their growth vision in writing, whereas only 15% of the slow-growth firms had done the same. In line with these two studies, in a 6-year longitudinal study of 229 small businesses, Baum and Locke found that the growth vision the entrepreneurs/CEOs communicated to their employees, the goals they set for growing the firm, and their faith in their abilities to growth the companies significantly affected the growth of the firms.

If growth ambitions are so important to actual growth, what affects such aspirations?

Delmar and Wiklund found that the older the CEO of the company, the lower the growth motivation and the slower the growth of the firm both in terms of employees and in terms of revenue. They also found that education affected growth similarly: CEOs with the longest education had the highest growth motivation. The lowest growth motivation was found in employed CEOS (those who did not start, inherit or buy the firm).

Reasons for starting a small business can affect growth aspirations as well. In a study of 170 businesses, Cassar found that those who cited financial success as the reason for starting a business showed greater intent to grow and that those who cited independence as the main reason for starting a business showed lower levels of growth intentions. Correspondingly, those who were motivated by financial success and had a high level of growth intention also showed higher actual sales and higher employment. Those who cited independence showed lower employment.

-Mina

Coming up next: Business owner background and business growth

Sources:
Barringer, B. R., F. F. Jones, et al. (2005). "A quantitative content analysis of the characteristics of rapid-growth firms and their founders." Journal of business venturing. 20(5): 663.

Baum, J. R. and E. A. Locke (2004). "The Relationship of Entrepreneurial Traits, Skill, and Motivation to Subsequent Venture Growth." JAP Journal of Applied Psychology 89(4): 587-598.

Cassar, G. (2007). "Money, money, money? A longitudinal investigation of entrepreneur career reasons, growth preferences and achieved growth." Entrep. Reg. Dev. Entrepreneurship and Regional Development 19(1): 89-107.

Delmar, F. and J. Wiklund (2008). "The Effect of Small Business Managers’ Growth Motivation on Firm Growth: A Longitudinal Study." Entrepreneurship Theory and Practice 32(3): 437-457.

Doorley, T. L. and J. M. Donovan (1999). Value-creating growth. San Francisco, Jossey-Bass.

Stam, E. and K. Wennberg (2009). "The roles of R&D in new firm growth." SBU Small Business Economics 33(1): 77-89.