Peacock (2000) argues that small business is different from large corporations by small size and rate of turnover and failure rate. According to Small Business Association, two-thirds of newly founded firms can survive within the first 2 years and only 44 percent are still in business after 4 years. Lowe et. al (1990) argues that failure ‘exists between failing and growing small firms.’ It can be perceived as there are 2 levels to develop small enterprises. The first prime aim is to make business survive in a short term, and the final objective is to keep it growing in the long run. Churchill and Lewis (1983) illustrate a 5-stages model to develop business: (1) existence; (2) survival; (3) success; (4) take-off; and (5) resource mature. Failure to address the key problems of each stage will hamper organisations from growing (Hill, Nancarrow and Wright, 2002).
This article aimsto explore the reasons of failure and non-growth and forces lead to survival and quickly growth. The structure of the essay is as follows. Firstly, I examine the understandings of small ventures’ ‘survival’ and ‘growth’. Secondly, I analyse the reasons behind businesses failure through reviewing theoretical and empirical findings. Finally, I discuss the forces lead to success and fast-growth of businesses.
Survival and failure
There is still no commonly accepted definition of ‘failure’. When referring to failure, researchers use different expressions such as exist, closure, and bankruptcy etc. However, to some extent exist and closure do not mean true failure, as some owner may turn attention to invest in other promising industries or some entrepreneurs close business for retirement, or avoiding excessive debt (Headd, 2003). Watson and Everett (1993) have outlined 5 dimensions of ‘failure’ in their survey of retail start-ups, including (1) discontinuance of ownership— businesses are sold to new entrepreneurship, (2) discontinuance of business, (3) bankruptcy, (4) preventing further losses, and (5) failed to “make a go of it”— low return. In this essay, I apply definition of ‘survival’ as continued business.
Growth and non-growth
Similarly, there is no consensus definition of growth and non-growth because the measurement of ‘growth’ varies according to different scholars (Barringer et al., 2005; Delmar et al., 2003; Delmar and Wiklund, 2008). Brush and VanderWerf (1992) claim that sales and employment change is a better measurement to assess business performance. While recent researchers tend to use productivity, profits and profit margins as parameters for business growth (Davidsson et al. 2005; Allinson et al. 2006).
Root causes of small and medium-sized businesses failure and non-growth
Empirical evidences suggest that nascent firms are more likely to fail (Storey and Wynarczyk, 1996). Further, previous studies show that a large proportion of small entreprises stagnate and only a small number of firms grow rapidly. Based on past studies, the underlying causes of small businesses failure and non-growth are generally characterised into 2 dimensions: endogenous and exogenous factors.
Endogenous factors, which are seen as the main causes of failure, consist of characteristics of the owner (Fredland and Morris, 1976; Hall and Young, 1991; Hall, 1992; Gaskill and Van Auken, 1993), inadequate finance (both on starting stage and continuous growth) and poor management (Watson and Everett, 1993). Williams (1975) took a sample of 5,456 failed owners to study the critical reasons. 82% respondents believed that endogenous factors count, while 18% owed to exogenous ones.
Characteristics of owners
Owners’ personal characteristics play a significant part (Kalleberg and Leicht, 1991), as they are responsible for all the business operation. The entrepreneurs are required to ‘make all the critical management decisions: finance, accounting, personnel, purchasing, processing or servicing, marketing, selling, without the aid of internal specialists and with specific knowledge in only one or two functional areas’ (Peacock, 2000). In other words, they should be hard worker, risk take, goal setter (Siropolis, 1997). Especially during the beginning stage of business, entrepreneurs must have confidence, a sense of urgency, superior conceptual ability, low need for status, and an objective approach to interpersonal relations (Welsh and White, 1981; Brockhaus and Horwitz, 1986). As a result, they will be able to perform successfully and avoid start-ups failure. Low education and limited managerial experience (Bates, 1990) would hamper business growth. And Davidsson (1991) argues that entrepreneurs’ experience is more important than education background for actual growth.
Evidences show that many small businesses’ failure due to ‘non-rational behaviour and decision making of the entrepreneur and/or owner-manager who does not obey the ‘rules’ of classical management theory’ (Jennings and Beaver, 1995). Bruderl, Preisendorfer and Ziegler (1992) state that entrepreneurial survival is connected with the productivity of the founder , which leads to higher profits. In other words, management efficiency helps to appeal more customers and investors. According to Dun and Bradstreet (1991), ‘Management incompetence of the business owner’ is the critical reason of business failure in the United States. In their survey of reasons for failure, more than half of respondents associate failure with poor management, which includes dimensions of ‘the owners’ inability to plan, analyse, control or satisfactorily direct the operation of the business'(Wiley, 2003). Hill, Nancarrow and Wright’s (2002) examination of 8 continued businesses shows that half of them fail to build effective structure because they only focus on pursuing rapid growth.
Lack of capital
Inadequate finance is a critical problem which may have a huge impact on the growth of the organisations and even pose threat to their survival. In William’s (1986) survey, 8% of 5,456 failed owners associate their failure with capital inefficiency. Respondents said it was hard for them to access to external fund. However, Titus (2003) argues that many entrepreneurs fail to make appropriate financial planning and lack of the awareness to prepare alternative sources preventing from crises.
Exogenous factors are considered as minor causes of business failure. It is clear that factors like ‘government ‘red tapes’, legislation, interest rates, taxation and the state of economy’ would affect all ventures (Peacock, 2000). However, previous evidences illustrate that one third of small business failure owe to the exogenous factors. And these factors are more influential on small ventures than large firms which have fruitful resources to deal with (Peacock, 2000). Everett and Watson (1993) focus on the external risks attribute to business non-survival. The first is economy based risk. They noted that ‘there is little individual business owners can do to influence the economy in which they operate’. For example, Hall and Young (1991) demonstrate that high interest rate is correlated with entrepreneurs’ survival and growth. The second is industry based risk. Newly founded firms that were started in declining industries were more likely to fail (Merrifield 1987; Stuart and Abetti 1985). To a large extent new ventures’ possibility of survival is affected by industry structure because of the fast changes which require their quick response (Sandberg and Hofer, 1987). The third one is firm based risk due to the distinctive characteristics of business per se. As Carroll and Huo’s (1986) research on newspaper reveals, the likelihood of organisation survival is strongly related to institutional environment.
The determinants of achieving quick growth
High growth organisations encourage competition, increase employment and improve innovation (Autio and Acs, 2007). OECD defines ‘high growth’ firms ‘with average annualised growth in employees (turnover) greater than 20% a year, over a 3-year period, and with 10 employees at the beginning of the observation period’. Recognising the key drivers of business growth enables entrepreneurs to achieve that fast development (Bowker, 2006). Reviewing previous studies suggest that key growing determinants can also be categorized into internal and external variables.
Internal variables are the main drivers of fast-growing organisations. Among these determinants, strategy and human capital are widely accepted as being of great importance. Other factors such as financial capital inputs and risk and reporting are essential for high-growth of firms.
Theoretical literature suggests that ‘success strategies’ drive organisations achieving rapid growth (O’Gorman, 2001). That is to say, fast growing enterprises benefit from strategic planning and business plan. According to Shuman, Shaw and Sussman’s survey (1985), 72% CEO state that planning is a contributor for better decisions and leads to profit. And most CEO’s identify the planning helps them enhance the understanding of the market. Alongside great strategic planning and business plan, firms with competitive strategy have a higher probability to grow fast. Their unique and distinctive competences, approaching for niche market, will hamper imitators (Cooper, Willard and Woo, 1986). Previous findings show that small businesses grow quickly by adopting differentiated strategies (Porter, 1980), while newly founded organisations by implementing undifferentiated strategies tend to perform poorly (Sandberg, 1986).
Human capital of entrepreneurs is the key determinant of firm longevity (Bates, 1990) and business growth speed (Almus, 2002). Almus’ (2002) empirical evidence reveals that the higher human capital endowment, the more likely of firms grow at a rapid speed. Further, Colombo and Grilli’s (2005) study in new technology-based firms indicates that founders with prior entrepreneurial experience and higher level of education are more likely to be successful. It increases the chances of nascent firms’ survival and growth of surviving ventures. Kim and Mauborgne (1998) found the high growth entrepreneurs usually have greater strategic intentions, entrepreneurial intensity and greater willingness to precede for growing. They also state that these fast-growth oriented entrepreneurs are more likely to achieve fast growth in their business.
In terms of financial capital input, fast growing firms require a large amount of capital to support its sustainable growth. To achieve that aim, they need to adopt innovations for expanding production (Morck, Shaver and Yeung, 1996). Hӧlzl (2009) has recently found that fast-growing small enterprises with innovation success are characterised by high R&D investment. Therefore, it is critical to access to funds along the development of organisations (Morck, Shaver and Yeung, 1997). In terms of risk and reporting, it is critical for entrepreneurs to identify the potential risks in each stage of organisations’ development and create reporting system (Bowker, 2006). Alongside financial input and risk management, location is considered as a critical force for survival and rapid growth. For start-ups, a favourable geographic location means more customers and greater sales (Bruderl, Preisendorfer and Ziegler, 1992). Empirical evidence shows that the firm locates in rural areas is more likely growing because it is access to low rental and human resources cost (Almus, 2002).
There are a great deal of external variables contribute to the ventures’ chances for growth. In Davidsson’s (1991) literature review, he summarized these factors—‘industry structure and dynamics, and various characteristics of the geographic and economic environment, including access to key resources’. The same author claims that all dimensions of these variables are ‘indicators of opportunity for growth’. External environment is a critical force that is positively related with the appropriate adjustments to change (Smallbone, Leigh and North, 1995) and the willingness of founders to further expand their business (Hoxha and Capelleras, 2010). Porter (1980) states that high growth industry provides a greater opportunity for new ventures to achieve sales growth which is the key indicator of fast-growing firms. The performance of small enterprises in an economy is affected by industrial context which may encourage or hinder their growth (Storey, 1994).
Churchill and Lewis’ (1983) lifecycle model explicitly depicts the development process of small firms. At the beginning stage of business which is characterised by low survival rates, entrepreneurs need to recognise both endogenous and exogenous factors to avoid failure. Enter into later stages, small business owners should concentrate more on those internal and external variables and seek ways to achieve growth.
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