HIGH GROWTH SMES: EXPLANATORY FACTORS

Investigaciones Europeas de Dirección y Economía de la Empresa Vol. 6, N" 2,2000, pp. 39-56
HIGH GROWTH SMES: EXPLANATORY FACTORS
Julien, P.A.! Université du Québec a Trois-Riviéres
SUMMARY
Data from Québec and abroad show that high growth SMEs have a job creation impact beyond their percentage weighting in the economy. It is therefore easy to understand the growing interest in these firms, and the reasons why decision-makers and researchers are trying to identify the factors for their success.
A case study based on two questionnaires and one long interview with the owner- managers of 52 high growth SMEs was designed to help identify these factors. Beyond the growth of the sector itself, our results show that success depends on the firms- capacity to manage change and reorganize their own shared management practices. First, the organization of these firms is particularly complex, decentralized, participative and learning in nature. Second, their management is experienced and cornmunicative, both internaIly and externaIly, and its main tasks are to provide consistency through flexible planning and the sharing of a dynamic culture, and to seek out new business opportunities. Third, the firms have a very strong market orientation, partly for exporting. This orientation is generaIly proactive or active, and is based on a strategy of differentiation through proximity to customers and general innovation in responding to their specific needs. Fourth, the firms often make use of resources in the environment incIuding prívate and public con- suItants, which are used fairly systematicaIly, and they also maintain special contacts with educational institutions and R&D centres.
KEYWORDS: High growth SMES; GazeIles; Change Management; Success factors; Obstacles to growth; Business contacts.
INTRODUCTION
The first phase of an intemational study using data from eight countries (Germany, Canada (Québec), Spain, France, Italy, the Netherlands, Sweden and Greece), under the direction of the OECD Small and Medium-Sized Enterprise Task Force (1998), showed that high-growth small manufacturing firms' accounted for approximately 8% of all businesses but were responsible for more than 40% of new job creation by active firms during the period studied. It is why some researchers referred to these firrns as gazelles (Birch, 1997). It is therefore particularly interesting to understand their characteristics and the reasons underlying their high growth. Several researchers have worked on this question in the past, including Kirchhoff and Phillips in 1988, who studied the impact of these firrns on employment in the United States, and Hills and Narayana in 1989, who studied their characteristics and success factors. In 1991, McCann also exarnined the growth paths of some such firrns.
Recently, however, this type of research has become more popular, although most researchers have confined their interest to certain aspects of high growth - growth stages, for example (Mitra and Pingali, 1999), or the high growth of certain firrns shortly after start-up (Rosa and Scott ,1999). To our knowledge, however, no work has yet been done on a set of variables including the type oí entrepreneur behind high-growth SMEs, the organízatíon and practices of such firrns, and their outside relations with the market and the resources provided by the environment. This was what we tried to do in this research, using a case study method that differs considerably from the general survey method used in the intemational study, but provides a better understanding of the complex phenomenon of the high growth SME.
Julien, P.A.
Section 1 of the paper discusses the methodology, and section 2 presents the general results of the research. In section 3, we identify the variables that best explain the high growth rates observed, and the conc1usion reviews the most noteworthy points of the analysis.
THE METHODOLOGY
The second phase of the intemational study used a questionnaire mailed to a random sample, designed to obtain a range of information on the growth path of the firms, the majar factors underlying that path, the development of relations with national and intemational markets, the importance and impact of alliances and other forms of growth-promoting partnerships, the main developmental elements of the firm and of its skills, and the impact on growth of interventions by public authorities. In addition to this basic information, we decided to examine the growth phenomenon in more depth in order to discuss the variables identified and include others related to the personality and dynamism of the entrepreneur and the environmental factors favourable or unfavourable to growth. To do this, we used the case study method, which ensured, first, that the right person was answering the questions and that we could react to his or her questions by providing additional details, and second, that a certain number of open questions were asked in order to obtain unexpected information in the course of the interview, as described by Yin (1989) and Huberman and Miles (1991).
Three types of tools, inc1uding two questionnaires, were used for the research. The first questionnaire contained questions to be answered by management alone, concerning factual elements such as the age of the firm, the number and type of employees, location, the type of products and services offered, the technologies used, and so on. In all, there were a total of 36 relatively closed and detailed questions, including five ordinals. The second questionnaire contained more open questions and was completed in the course of an interview. It examined the main characteristics of the owner-manager (experience, training, interest in various tasks, etc.), the owner-managerOs personal goals and intentions, the origins of the firm and its management, and the firmOs success factors. This second questionnaire was followed by a long interview lasting approximately two hours, and by a tour of the firmo The interview was based on a grid of functional activities and management practices, inc1uding the general strategy and functional strategies, the firmOs history, managementOs motivations, the type of organization and participation level, and the factors favourable or unfavourable to growth.
The completed questionnaires were analyzed using SAS software to obtain a range of descriptive data, and statistical tests were carried out in order to identify the most discriminant variables. For the semi-open questions, we also took into account the order of importance ascribed by respondents.
The interviews were analyzed in three stages. First, a summary sheet was produced for each firm, based on the interview recordings, and variables were then compiled and grouped under different headings. Variables not previously ranked by respondents were then placed in order of importance, according to whether they promoted or limited growth. The ranking was then used for other statistical analyses.
The sample of 52 SMEs was drawn mainly from a list of 282 high growth firms from a statistical databank used in the first phase of the study. The firms were selected from seven regions of Québec, and were located in cities as well as in intermediary and peripheral areas. Of the firms that responded, 46 were in the manufacturing sector' and six were in the business
40 Investigaciones Europeas, Vol. 6, N° 2,2000, pp. 39-56
High Growth SMEs: Explanatory Factors
service sector". A list of firms by sector, together with variations in employees and turno ver, appears in the appendix.
The main characteristics of the respondent firms, as shown in part in Table 1, are as follows:
l. Average size (98 people, with a mínimum of 16 and a maximum of 531), about a third in each size category except for the largest, and a fairly complex structure in terms of functional task-sharing. The firms had an average of 6.7 managers, inc1uding 3.6 engineers, and a sales team of 5.9. They had an average of 6.3 office workers and 75 production employees. Obviously, the higher the number of employees, the more hierarchicallevels the firms hado The average was around three levels, but ten firms had five or more. The entrepreneurs had an average age of 47.
2. Difierent growth paths. The sample firms exhibited a variety of growth paths. For example, three firms had an average annual job growth rate in excess of 100%, and a further twelve had a rate in excess of 50%, plus one firm whose turno ver grew by more than 50%. A further 19 firms had a job growth rate of between 20% and 50%, leaving just 19 with arate below 20%. Three firms in this latter group had zero (or almost) job growth rates, but turno ver growth rates of around 20% per year. The table in the appendix also shows that 20 firms recorded turno ver growth rates far in excess of their job growth rates (1.75 to 3 times higher), whi1e the reverse was true for five firms (1.66 to more than 3 times higher). In addition, the job and tumover growth rates were more or less identical in 17 firms. In ten cases, the data were insufficient to make a comparison.
TABLE l. SOME CHARAcrERISTICS OF THE SAMPLE (49 FIRMs).
Variables Ownership Independent Subsidiary Head office
37 (76 %) 5 (lO %) 7 (14 %)
Size 11 to 50 emp. 51 to 100 emp. 101 to 200 emp. 201 and over 17 (35 %) 14 (29 %) 14 (29 %) 4 (8 %)
Number of hierarchical 2 levels or less 3 levels 4levels 5 levels or more
levels 12 (26 %) 11 (24 %) 16 (35 %) 10 (22 %)
Average age of ay. 46.8 years mino 30 years max. 55 years owner- manager
Managerial ay. 13.3 years mino 2 years max. 30 years senioritv
THE COMMON CHARACTERISTICS OF HIGH GROWTH SMES
In presenting the results that were common to a11 the firms, we wi11 begin with organizational practices, which appeared most frequently in our analyses. We will then examine the key role of the entrepreneur, and the firmsD relations with their markets, before going on to discuss the firmsD links with the various resources available in the environrnent. This section will end with a surnrnary of the main factors favourable and unfavourable to growth.
Investigaciones Europeas, Vol. 6, N° 2,2000, pp. 39-56 41
Julien, P.A.
Decentralized organizationaI practices
In the recent literature on high growth firms, studies by Sexton and Seale (1997) and Barringer, Jones and Lewis (1998) have shown that the active or proactive change control approach of high growth firms requires a complex, decentralized and responsible form of organization, since management is unable to do everything, as is often the case in smaller firms. This is consistent with the results of our study, since we found that most of the sample firms had a fairly large managerial staff from a range of disciplines who were involved in most of the important decisions, as well as employees who were involved in the development of their daily tasks.
A complex organization. Owner-managers and managerial staff in the sample firms were specialists in the administrative sciences (in 98% of cases). The most cornmon sectors (as rnight be expected) were accounting (in 90% of cases), marketing and/or finance (20%) and human resources (16%). Some 63% of the fmns also had one or more engineers. In all, nearly 90% of the fmns had at least two specialized managers (from different fields) in addition to the owner- manager, and 35% had four or more. The firms helped their specialists to improve by providing continuous training (for managers in 59% of the firms and for sales staff in 44% of the fmns).
The sample firms had up-to-date technology, including computerized management systems such as MRP 11or MFS in many cases. More than 54% described their technology as slightly more developed and effective than that of their competitors, in terms of both production and management. Total quality systems were also cornmon, and only 40% of the firms had no official quality control system. In all, 57% of respondents thought such systems gave them an advantage over their competitors.
An involved and informed organization. The research also showed that decisions were usually taken by consensus, after discussion with members of the management team (8,4 tasks out of 13, in 86% of firms). The CEO retained slightly more responsibility for tasks related to opportunity detection and analysis of threats to growth and delegated some of the tasks related to technology information gathering, staff supervision, customer need identification and product development, depending on the firmo The most cornmon decision-making procedure was rational analysis (in 52% of cases), i.e. following a costlbenefit analysis. However, 20% of firms used the trial-and-error method, and 12% said they relied on intuition.
Lastly, most of the respondent firms (80%) said they practised flexible strategic planning, either formally (56%) or informally (24%), covering a period of between 1 and 5 years. The strategic plan was prepared by a management committee (36%) and was revised and updated regularIy (in 52% of cases). The importance of some form of strategic planning in orienting change has been pointed out in the past by Steiner and Solem (1988) and Shrader et al. (1989). However, as Risseew and Masurel (1994) observed, it does not necessarily need to be formal.
A participatory organization. ManagementDs motivation was derived from participation in decisions and also from profit-sharing or stock ownership. Participation for other employee categories took the form of bonuses (52%), profit-sharing (20%) and stock ownership (12%). In 8% and 4% of cases respectively, managers and other employee categories participated directly in the firmDs profits. In all, three-quarters ofthe respondent firms offered some kind of financial participation to their managers and employees. The importance of such measures in supporting growth has already been emphasized by Sexton and Seale (1997).
High Growtli SMEs: Explanatory Factors
Employee involvement. In addition to financial participation, most of the firrns (88%) gave their employees some forrn of responsibility, in some cases going so far as to involve them in decisions concerning changes in the firm, such as the purchase of new equipment (in 36% of cases) and the introduction of innovations.
The importance of communication. In all, 76% of owner-managers said they were very concemed about communications with staff, either formally (64%) at weekly or monthly meetings, or informally (56%).
Extensive continuous training, Generally speaking, staff training (in 88% of cases) was ongoing (72%) or provided immediately after hiring (48%). Employees received training mainly when they were hired (44%) or as the need arose (32%). Office staff were trained according to need (48%). In all, the training budget of sample firms accounted for 2.4% oftotal tumover, or between 5% and 7% of payroll.
Leadership helping the organization to satisfy its customersD needs
Consistency also comes from the entrepreneurDs leadership, which in tum is linked to the perception held by managers and employees of the entrepreneurDs level of competency and ability to moti vate staff to meet the challenge of change generated by high growth, as noted by Bath (1999) and the Deloitte and Touche study (1999).
Educated and experienced owner-managers. The owner-managers of the sample firms were better educated than average for SMEs, since 57% had university degrees and 22% had college diplomas. Just 17% were educated to high schoollevel only, andjust 4% to elementary schoollevel only. Their main speciality fields were management science (46% of the sample owner-managers had degrees in administration, finance or marketing) and engineering (25%). They were also experienced as owner-managers, and had led their firms for an average of 13 years. Some 59% had worked in the same sector before becorning owner-managers, and thus had an average of 23.6 years of experience.
More than two-thirds had taken some forrn of training in recent years, in fields such as (in decreasing order of importance) human resources management, exporting and management techniques. Training duration varied between 31 and 70 hours per year.
The factors that motivated the sample owner-managers were very interesting. In most cases, not unexpectedly, the main motivation was profit. However, doing a job 1 enjoy was ranked second, and the challenge (often shared) of managing a high growth firm was ranked third.
The main success factor was a motivated organization able to satisfy the needs of its customers. The other success factors mentioned by respondents, grouped by theme (as shown in Table 2), include factors related to customer relations, followed at some distance by the quality of general management, the importance of the personnel, and financial mariagement. These were by far the most important factors.
If we examine these main themes more closely, we see some significant differences. For example, the highest-ranked sub-factor is staff motivation, which was mentioned by 53% of
Julien, P.A.
firms and classified among the five most important factors by 33%. It is followed by three other factors, namely good customer service (mentioned by 45% and ranked in the first five by 20%), making profits (42% and 40%) and continuous product improvement or development to meet specific customer needs (32% and 27%).
T ABLE 2. THE MAIN SUCCESS FACTORS AND THEIR IMPORTANCE*.
Cost Management StaJI FinanciaI
Customers Products Environment reductions 25 % 29% managemen 35% 20% andmarket
10 % t27% 19 % Low-cost The owner- Staff Good Continuous Constant
distribution manager's motivation Making customer product increase in networks leadership 53% profits 42% service improvemen market share
16 % 37% 45% t32% 32%
Low-cost Agood Providing a Continuous production A shared morale Controlling better product Customer
factors culture 26% among costs 34% service than development quality 29 % 10% employees competitors 29 %29 % 32 %
Low-cost Strategic Low staff Availability Satisfying Excellent Quality internationalsupplies planning turnover 28 of capital customer's control 21 % competitive
8% 26% % 21% needs 29 % position 18%
Low-cost Ability to Competent Cash Brand The importance ofstaff take risks sales team management recognition market share8% 21% 21 % 21% 10% 10%
Coordination Highly Product Stability of between productive Economies diversity 8 tbe external functions employees ofscale 16% % environment
13% 16 % 5%
* The percentages show the average number of firrns mentioning each factor. The overall percentage for each main group (column headings) was calculated from the average of the sub-factors.
Two other factors also stand out, namely the owner-managers leadership (37%) and the sharing of an enterprise culture by all the firm's members (26%), which brings us back to staff motivation and hence to the strong organizational culture mentioned among others by Dyke et al. (1992) and by Kim and Mauborgne (1997).
Communicative leadership. The importance of staff motivation depends on the quality of leadership and of cornrnunications between the CEO and the staff. Table 2 also shows that leadership is ranked fourth as a success factor (out of 32). Leadership is based on a shared culture, inter-function coordination, a certain amount of planning and the ability to take risks.
A strategy of differentiation. The strategy introduced by management is essentially one of differentiation, and is usually either proactive or active in nature, although a quarter of them also added cost reduction elements, and a further third added radical differentiation elements through niche positioning (Table 3). Sandberg and Hoffer (1987) and Steiner and Solem (1988) had already shown the importance of this type of strategy in supporting strong performances by small firms.
Higb Growth SMEs: Explanatory Factors
Close proximity to the market
This brings us to the close relations maintained by high growth frnns with their markets. Proximity depends on five elements, namely (1) the type and (2) the form of their relations with customers, (3) the type of promotion, and (4) the ability to respond to the market through innovation, leading to (5) a fairly tight control over the market.
TABLE 3. PERCENTAGE OF FIRMS BY TYPE OF STRATEGY AND ENVIRONMENT-RELATED AcrIONS THROUGHOUT GROWTH.
Tvnes of strateaies % Position offirms with regard to the environment (in %) Proactive Proactive Active Reactive Proactive Reactive and and and active active reactive
Differentiation 44 25 % 13% 6% %
Differentiation and 25 13% 6% 6% costs % Differentiation and 31 6% 19 % 6% niche %
100 %
Special, regular and mostly direct contacts with customers. This differentiation strategy is explained by close proximity to the market, in many cases based on customized production and a direct cornrnunication system with clients (in 76% of cases). The close proximity of high growth firms to their markets has already been observed by Siegel, Siegel and MacMillan (1993).
Direct contact takes the form of direct market sales to consumers, retailers, institutions or manufacturing finns. Only one-third of the sample firms sold to or used wholesalers, as shown in Table 4.
T ABLE 4. TYPES OF MARKETS COVERED.
Types of Consurners Retail firrns Wholesalers I Manufacturing firrns I Institutions Irnarkets
N et % of firms 10 (20 %) 20 (41 %) 16 (33 %) I 29 (59 %) I 10 (20 %) I
Also, direct contact is illustrated by the fact that the sample firms tended to favour direct relations with a large percentage of their customers (in 80% of cases) even if they also used distributors, agents and representatives (Table 5).
TABLE5. MARKETINGMETHODS.
Directly by Directly and Andby Andby Andby And with Andinthe firrn
distributors trading cornrnercial representati other waysonlv ... azents subsidiaries ves 14 (29 %) 39 (80 %) 22 (45 %) 17(35%) 8 (16 %) 2 (4 %) 6 (12 %)
Some 36% of the sample finns carried out subcontracting for manufacturing customers, and among this group speciality subcontracting was slightly more commen than capacity subcontracting. A somewhat larger percentage subcontracted work out to other firms, and this group was divided fairly evenly between speciality subcontracting and capacity subcontracting.
Julien, P.A.
With regard to speciallinks with customers, 48% of the sample firms said they had an ongoing concern with product quality. They also had significant after-sales activities (in 48% of cases), more than 40% dealt directly with complaints, and 8% offered an assurance and warranty system.
Lastly, many of the sample firms exported - 80% to the United States, and 41 % out side North America - and an even larger percentage (84%) sold their products to the rest of Canada, as shown in Table 6. In all, 96% of the firms made sales outside Québec.
A significant research and development activity, Close customer relations were maintained among other things by product innovation, which 68% of the firms said they did on a fairly systematic basis. GeneralIy speaking, they officially spent 4.6% of their turnover on R&D, which is significantly more than the general SME average of less than 1% (Acs and Audretch, 1990; Bemard and Torre, 1994). The importance of R&D for high growth firms has also been discussed by Baldwin (1995) and by Ylinenpaa (1997).
To support their R&D, 68% of the sample firms carried out fairly formal technology watch activities to find ideas, compare their products with existing products and understand the development of new technologies and processes. Here, too, the extent of the technology watch was well above average (around 25%, as measured by Julien et al., 1999). They used a range of techniques for this purpose, including the distributorsD network.
Some firms did little or no R&D, and this was explained at least in part by a variety of factors. For example, the main customers of some SMEs were other firms, many of which were order-givers and did their own R&D. Other SMEs were involved in product improvement, as was probably the case for the capacity subcontracting SMEs, and yet others sold mainly to customers who demanded very little differentiation (Table 4). This was the case of the bakery firm in our sample.
The result ofthis direct contact was greater control over the market. Lastly, nearly 40% of firms said they controlled more than 40% of their markets, as shown in Table 6. This can be explained by the niche or interstice strategy discussed by Edith Penrose (1959).
TABLE 6. IMpORTANCE OF THE FlRM IN ITS MARKET (34 RESPONSES).
39 % and Between40 Between50 Between 60 More than less and49% and 59% and 69% 70%
18 (53%) 8 (24 %) 4 (12 %) 1(3 %) 3 (9 %)
Systematic use of additional resources from the environment
The fourth major characteristic of the sample firms is that they made much higher than average use of environmental resources to complement their own resources. They also did so more systematically and often through different types of partnerships. They used traditional business networks, but in a much more structured way than most SMEs, and they also used what Granoveter (1982) called weak-signal networks, whose specific goal is to promete or stimulate innovation.
Strong and rich relations with business networks. In the case of business networks, Table 7 shows that 36% of the sample firms had formal agreements with clients and 33% with
suppliers. This systematic cooperation through formal agreements even extended to competitors in 15% of cases. Similarly, 26% of the firms had agreements with other companies, often through formal and particularly effective alliances. Interestingly, many ofthe cooperative agreements concerned the sharing of advertising and transportation, followed closely by R&D, especially with customers and other companies.
TABLE 7. TYPES OF CONTACTS WITH BUSINESS NETWORKS AND MAIN PURPOSES OF THE CONTACTS.
Tvnes of contacts With customers With sunnlíers With comnetítors With other firms Formal partnershin 36 % 33 % 15% 26% The most important Advertising/marketi Purchase ofraw Transportation/distr Advertising/marketi shared goals of the ng.85% materials. 70% ibution 100% ng53%
agreements Transportationldistr Advertisinglmarketi Advertising/marketi R&D/technologie ibution 46% ng45 % ng 100 % 53 %
R&D/technologies Raw materials 40% 46% Transportation/distr
ibution 40%
Contacts with the enviranment also involved the use of alI kinds of services available in the immediate vicinity or at a distance (especially in the metropolitan city).Table 8 shows that the vast majority of the sample firms (80%) used more than three consultants, and 49% used six or more - a much higher percentage than among more traditional SMEs. This extensive use of outside consultants shows that high grawth firms need additional, flexible resources to meet the organizational and operational needs arising as a result of their fast growth. The significant need for outside resources in high growth SMEs has been identified by several researchers, including Dollinger and Ko1chin (1986), Kent (1994) and Reijnders and Verjallen (1996).
TABLE 8. NUMBER OF OUTSIDE SPECIALlSTS, TYPE OF SPECIALTY AREA AND LEVEL OF SATISFACTION.
Number O Lto J 4 5 6 to 8 9and +
N and %of 4(8 %) 6 (12 %) 9 (18 %) 7 (14 %) 14 (27 %) Il (22%)firms
Professional PersonalTypes of Consulting Bankers Government associations acquaintance Scientific specialties firms advisors and business consultants
contacts s
N and % of 42 (82 %) 32 (63 %) 31(61%) 16 (31 %) 13 (25 %) 21 (41 %)firms
Levelof 4,04 3,9 3,8 3,7 4,2 4satisfaction *
* Scale: 1: dissatisfied; 2: fairly dissatisfied ; 3: satisfied; 4: fairly satisfied; 5: very satisfied.
The consultants most in demand were those from consulting firms, used by 82% of respondents. They were followed by bankers (63%), and then by government advisors, sometimes fram regional bodies. Satisfaction levels were relatively high (over 3.7 on a scale of 5), even for government advisors. The case of scientific consultants will be discussed below.
One of the important tasks of the business network and of the enviranment is to meet the funding needs of fast-growth firms that need to invest continually. Table 9 shows that nearly half of the sample had obtained government subsidies. However, in 12% of cases risk capital had been invested, and in 40% of cases the firms had obtained funds from informal or
Julien, P.A.
prívate sources, probably including some angel capital, in addition to the entrepreneursO own personal assets and equity capital.
T ABLE 9. SOURCES OF FuNDING (NUMBER AND PERCENTAGE OF FrRMS).
Stock Risk Financial Subsídies SDI Prívate Equity Personal market capital institutions funds capital assets 1 (2%) 6 (12%) 45 (92%) 22 (45%) 1 (2%) 21 (43%) 31 (63%) 23 (47%)
Extensive relations with weak signal networks to support innovation. Table 10 shows that relations such as these were particularly important to the sample firms, since 19% had formal agreements with the former and 13% had formal agreements with the latter. These percentages are much higher than the general SME average (OECD, 1993). As might have been expected, the relations are concerned mainly with staff training and R&D to support innovation.
Triggers for new directions and market development.
In addition to a complex and participatory organization, experíenced leadership, proximity to the market and extensive use of outside resources, there are a number of other factors that explain or promote growth. They are related to the economic situation, the development of markets and competition, various new opportunities for innovation, and chanceo They may be event-related (a new situation that occurs) or information-related (the firm hears of an opportunity).
T ABLE 10. TVPES OF BUSINESS CONTAcrS WlTH WEAK SIGNAL NETWORKS AND PuRPOSE OF CONTAcrS.
Tvpes of contacts Witb educational institutions With research centres Formal partnership (networking or 19% 13%cooperation)
Main shared goals Stafftraining 67; R&D/techno. 33% R&D/techno.63%; production 27%
According to the respondents (Table 11), the most frequent event-related factor underlying high growth was internal in nature, namely the arrival of a new manager. This factor was mentioned by three-quarters of respondents. Other important factors were external in nature, namely the fact of obtaining a major new customer (44% of cases), and market problems (38%). These last two factors were related to demand development and were completed by growth in the general demand and the decision to move onto the international market (31 %). Other factors mentioned frequently by respondents were the development of a new product (31 %), participation at major international trade fairs, a special request from a customer for a specific new product, and new customer requirements (25% of firms mentioned this latter element).
48 Investigaciones Europeas, Vol. 6, N° 2, 2000, pp. 39-56
TABLE 11. MAIN EVENT-RELATED ANO INFORMATION-RELATED GROWTHTRIGGERS.
EVENT -RELATED Distribution of INFORMATION-RELATED Distribution TRIGGERS firms TRIGGGERS of'flrms INTERNAL ENVIRONMENT INTERNAL ENVIRONMENT Internal decision Internal reorzanizatíon Arrival of a new manager 75 % Introduction of stratezic planning 6% Starting exporting 31 % InnovationJ information New product development 31 % Attendance at an international 25 %tradefair EXTERNAL ENVIRONMENT EXTERNAL ENVIRONMENT Market development Market development
Arrival of a major customer 44% Presence of a demand for a new 25 % nroduct
Competitor experiencing 38 % Innovationl informationproblems Growth in general demand 38 % Information on competitors 25 % New customer requirement 25 % Knowledge of a new procedure 19 % Special customer request for a 25 % Use of a specialized firm 6%nroduct
Only three information-related factors appeared to be important for the sample firrns, namely knowledge of a new product, specific information on the competition (mentioned by a quarter of the sample firms) and knowledge of a new procedure to manage the firm more effectively (19%).
It was more difficult to identify the importance of the obstacles to growth, since most of the firms studied had by definition not experienced any significant downsizing. However, some (15%) had encountered certain obstacles that had slowed down or halted their growth temporarily (at least ayear). Table 12 shows that human resource problems were the main cause of growth slowdown (62% of cases). Problems related to management (38%) and financial problems (38%) were ranked next by respondents.
T ABLE 12. OBSTACLES TO GROWTH.
Obstacles Obstacles Staff-related 62 % Manazement- related 38% Lack of qualified staff 31 % Lack of manazerial consistencv 38% Poor staff motivation 19 % Lack of skills and ex perience 23 % Internal and labour conflicts 12% Management exhausted by too much 12 %chanse Insufficient basic training 12% Financial problems 38 % Resistance to change 12 % Lack of cashflow 19 % Lack of accountability and involvement 12 % Problems with workinz capital 12 % Related to demand slowdown 19 % Lack of funds for R&D 4%
With regard to staff, the sample firms mentioned the lack of qualified technical personnel, especially for R&D and technical jobs (31 %). The problem was more pronounced for firms requiring highly specializcd people, and for those in isolated regions where the recruitment and retention of staff from other regions could be extremely difficult.
Julien, P.A.
With regard to the management team, some respondents mentioned exhaustion due to too much change, together with a lack of managerial skills and experience (23%). Others mentioned lack of time and difficulty either in keeping up with the firmOs development or in managing growth. This factor was discussed by Bosworth (1989).
Such obstacles may simply be psychological or perceived (Henrekson and Johansson, 1998), which brings us back to the core impact of entrepreneurs who believe in their own destiny or are spurred on by the presence of obstacles, telling everyone in the organization that obstacles are made to be overcome.
THE VARIABLES THAT BEST EXPLAIN HIGH GROWTH OR A FAST GROWTH PATH
These various characteristics, together with success factors and obstacles, were assessed (using statistical tests) according to speed of growth, i.e. from slow and continuous growth to very fast growth. The main results are set out below.
The more complex, younger, better trained and better organized a firm is, the faster it will grow. The more management tasks are shared (e.g. the more hierarchical the firm, with vice-presidents and departrnental managers), the more the firm will grow. Also, the younger the firm, the stronger its growth.
The other variables are less important, i.e. better general training for all staff, use of a . project-based production system and the ability to work as a system.
We also assessed the impact of technology on growth, even though, generally speaking, respondents did not consider their firms to be much more advanced technologically than their competitors. For this variable, only CAD technologies, computer-controlled management systems (eg. MRP 11) and use of the Internet (Internet, and Extranet), leading to electronic trading, emerged as being important.
An entrepreneur who is initially experienced, relatively new and seeking a challenge will promote growth. Sirnilarly, an entrepreneurial farnily background and the goals of making money and taking up a challenge will also promote growth.
A significant R&D budget. Under the heading of specific and direct relations with the market, the size of the R&D budget, whether formal or informal, is the variable with the greatest positive impact on growth.
Special relationships witn educational institutions and research centres (weak signal networks). The more formal these relationships (cooperation, networking, alliances, joint initiatives, research consortiums, etc.), and the more licences they generate, the more the firm will grow.
The variables have been summarized in Table 13. They appear in order of importance in column 2, and column three indicates the variables with the most positive impact on growth. A total of 49 variables in all were identified, and 16 of these were mentioned by more than 70% of the sample firms.
High Growtb SMEs: Explanatory Factors
The largest number of variables (la) considered to be particularly important fell under the heading of organization. They included complexity (high number of specialized managers, decentralization of decision-making with managers, operations with employees and the presence of an active board of directors) (mentioned respectively by 90%, 90%, 88% and 84% of the sample firms), the presence of up-to-date technologies based on the development of new technologies in the sector (90%), management based on strategic and operational planning (80% and 84%), frequent communications (76%), different forms of profit-sharing, especially for managers (75%), and lastly significant ongoing training (72%). Three of these variables and sub-variables were identified as being particularly favourable to growth, namely organizational complexity, continuous training to enable the complexity to be updated, and the presence of involved and specialized employees. Also of importance were the use of a computerized management and production control system (such as MRP TI), various other technologies including the capacity to use electronic trading and computer-aided design, and project-based production.
TABLE 13. DIFFERENT VARlABLES FOR HIGH GROWTH SMEs.
VARIABLES Percentage of firms Variable correlated mentioning this with higher growth variable
A deccntralized, orientcd and participatory organization Organizational complexity (more than one specialized manager) 90% +++ A computerized management control system ++ Up-to-dare technologies 90% A total quality control system 60% CAD, Internet, Extranet + Computerized stock control 48 % Project-based production cperation 39% + Decentralization (managers involved in major decisions) 86% Employees are involved and specializcd 88 "" + A board of directors that meets at least twice ayear 84 % Strong dlrection given by management Operutional planning 84% Some form of strategic planning 80% Participation (profit-sharing for managers) 75 % Frequent cornmunication with personnel 76% Continuous training (2.4% of tumover for all personnel) 72% + An experienced entreprcneur who is a good leader Experienced and educated management Relatively new and fairly young management Higher education 79% ++ 24 years of experience in (he sector Coruinuous training 68% EntrepreneuriaJ family background 67 % +++ Primary goals promoting the fmnOs success Motívate the staff (33 % primary factor) 53% Respond well 10 customerconcems (20 %) 45 % Primary personal goals Make a profit 42% ++ Take up a challenge 39% ++ Close proximity to the market Exports outside Québec and outside Canada 75 % Regular, direct and complex communications with customers 75 % + Product innovation (4.5% of tumover on R&D) 68 % +++ Relatively fonnaltechnology watch 68 % Organized promotion
.. 60% Significant llcontrolll ofthe market 40% Systemaüc use of outside resources from the environment Outside advice (atleast one outside consultant) 82 % At least 3 ourside consultants 80% At least 6 outside consultants 49 %
Government support 83 % + Use of scientific advisors (weak signals) 45 % Use of outside capital other than from banks 42 % Pannerships wiLh business networks 36% Partnerships with educational institutions and research centres 19% +
With regard to the entrepreneur, only one variable was emphasized by respondents, namely university training (79%). Four other variables emerged in the discriminant analysis as
Investigaciones Europeas, Vol. 6, N" 2,2000, pp. 39-56 51
Julien, P.A.
explanations of growth, namely the entrepreneurDs goals of making a profit and taking up a challenge (although these elements were mentioned by only 42%. and 39% of respondents respectively), a young and new management team, and an entrepreneurial family background. Another variable that ranked close to the 70% lower threshold selected as a criterion was continuous training for the owner-manager (mentioned by 68% of respondents).
Two other variables were also found to be important, namely motivating the personnel (53%) and responding to customer concerns (45%). This latter was linked to the special relationships the sample firms had with their markets.
The market proximity strategy can be explained by the firmsD special relationships with their customers, including their foreign customers (for 75% of the firms), and is reinforced by two other variables, namely direct and complex communications with customers (also for 75% of firms) and regular product innovation to respond to customer needs (68%). The importance of a relatively formal innovation procedure, measured by the extent of R&D expenditure, was also found to discriminate for growth. It is linked to the presence of a relatively formal technology watch, mentioned by 68% of firms.
Lastly, two variables related to environmental resources were found to be important, namely the use of outside consultants (in 90% of firms, and 82% of these used at least three consultants) and government support, especially for R&D and exporting. Consultants can generally be regarded as more specialized elements of business networks or strong signal networks. In the discriminant analysis, this variable was found to be particularly important where the consultants were scientific advisors or where ongoing relations were maintained with educational institutions or research centres (weak signal networks) able to provide new or pre- competitive information. In other words, the more the firms are able to form partnerships with educational institutions and research centres and the more government support they obtain, the faster they will grow.
These 17 variables, used to distinguish high growth firms from other SMEs, can be summarized in four general statements:
1. A complex, decentralized and participatory organization.
2. A dynamic and consistent direction given by management.
3. Differentiation based on innovation and exchanges of knowledge with customers.
4. Knowledge enriched by continuous training and preferential links with strong signal and weak signal networks in the environment.
CONCLUSION
We have no choice here but to come back to the innovative work ofEdith Penrose, who as early as 1959 found that the element which placed the most limits on growth was the capacity of the organization to control growth, i.e. to solve control and systematic reorganization problems by positioning all the staff in the right place at the right time, assessing the situation and making decisions quickly, etc., and to respond to unexpected situations generated by that growth.
52 Investigaciones Europeas, Vol. 6, N" 2, 2000, pp. 39-56
In addition, the organizationDs effectiveness depends on the use of outside consultants to complete the work of its managers and to provide support for new projects. This element indicates the firmsD ability to develop with outside contributions in addition to continuous training. In particular, given that innovation is a key element in supporting market development and hence responding continually to changes in customer needs, help from scientific advisors and ongoing relations with research centres are also important. The link between organizational complexity and innovation is consistent with the results of studies examining the variables favourable to innovation, as shown by Cohn and Turyn (1980) and more recently by Damanpour (1996). This link may be logical, in that innovation is basically a process of change, as is strong growth in a more general way.
This research has therefore allowed us to identify the best practices of high growth firms in meeting the needs of this complexity, which can be surnmarized as a systematic improvement of the organization to face continuous change and hence to manage disorder (Schmitt, 1999), and the use of complementary outside resources to satisfy particularly demanding markets. In other words, high growth firms must try, as far as possible, to:
1. Formalize routines, i.e. make employees responsible for everyday tasks through a range of relatively formal operational practices, computerized where possible;
2. Organize semi-routines internally by making managers and employee groups responsible for minor changes, and externally by organizing links with different resources to obtain rich information. This formalization and organization should make it possible to:
3. Free management so they can see change coming and hence manage the disorder produced by high growth, ñrst by directing the organization by means of flexible planning and by stimulating their troops through sharing challenges and developing an enterprise culture, and second by monitoring major customers and seeking out new customers, so as to be able to seize new opportunities and make important decisions supporting growth.
In other words, high growth SMES apply the principle of required variety in systemic analysis. Indeed, since such firms must develop quickIy in order to deal with the rapid changes in their markets, in terms of both number (increases in orders and often in the number of customers) and quality (rapidly changing responses according to needs and through innovation), they must systematicaIly reconfigure themselves by varying and increasing the quality and number of their resources, among other things by using outside resources. Internal resources, being decentralized and participatory, can respond to different demands without the continuous intervention of management - and in any case, management could not intervene continuously, due to the number of adjustments required. Since external resources are not caught up in the heat of the moment, they can be used to provide a more objective view in order to help the organization adapt to new needs. Lastly, the main task of management is to provide consistency. The result is an organization able to absorb market impulsions quickIy, by changing systematically in order to respond as fully as possible to a market that is also changing very quickIy.
In this respect, high growth SMEs are organizations in the true sense of the word, i.e. living organisms or open systems that adapt themselves and adjust systematically as they become involved in market changes through a process of operational closing (Verstraete, 1999), a term that refers to an organizationDs ability to intervene in change by changing itself, in a kind of double loop system, as explained by Argyris and Schon (1978).
Julien, P.A.
NOTES
(3)
Our thanks go to Mario Canier from the Université du Québec en Abitibi- Témiscamingue, Luc Désaulniers from the Université du Québee a Rimouski, Daniele Lue from the Éeole des Hautes Études Commerciales in Montréal, Yvon Martineau from INRS-Urbanisation and Jocelyne Gélinas from the Universitéé du Québec a Trois- Rivieres, who canied out the interviews, and Martin Morín, Stéphane Leblane and Michel Pérígny, who carried out the statistica! and content analyses. SMEs with between 20 and 500 employees whose workforce had at least doubled in recent years. In Québec, workforce size had increased 2.7 times between 1990 and 1996. Food: 3; plastic and rubber products: S; clothing: 1; furniture: 4; wood products: 2; metal products: 6; electrical, electronic and communications produets: S; transportation equipment: 4; machinery and equipment: S; ehemical and pharrnaceutical produets: 4; petroleum products: 1; miscellaneous: 6. Two engineeríng frnns, two computer firms, one accounting frnn and two trucking firms.
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Investigaciones Europeas, VoL 6, N° 2, 2000, pp. 39-56 55
Julien, P.A.
APPENDIX
AI'PENDIX l. SAMPLE FIRMS WITH EMPLOYMENT AND TuRNOVER VARIA TIONS FROM 1990 TO 1998.
Firm Annualjob Annual
number Maio products variatíon in turnover Type cf path Observations % variation in %
46 * Accounting services 341.6 Fast Acceleration from 1993 onwards 62 Software development 112.5 67.7 Continuous slow Large jump in t 996 (jobs)
64 (5 yrs)** AudiovisuaJ services 112.5 37.5 Continuous Jump in 95 (t.o.) and 96 (jobs) 25 ** Computer services 93.7 -3.5 Fast (jobs) Orop in t.o.
34 (4 yrs) Sawmill equipment 92.0 146.0 Very fast Mainly after 1995 17 Communications products 87.5 112.5 Continuous Merger in 1996 45 Electronic prod uets 81.3 Continuous slow Very regular 54 Metal structure products 78.4 67.0 Fast Irregular, slower after 1993 6 Transportation equipment 77.0 140.0 Very fast Slowdown after 1995 11 Institutional fumiture 70.9 70.9 Very fast Mainly after 1993 26 Transportation equipment 62.5 21 Cornmercial trailers 54.3 5 Plastic products 51.4 12.5 Very fast Turnaround after 1997 (jobs
36 *** Engineering finn 47.9 83.6 Continuous slow T.o. plunged in 1996 28 Plastic products 41.0 37.5 47 Safety equipment 40.9 24.7 Very fast 49 Pharmaceutical products 39.6 Very fast Mainly after 1992 23 Electronic products 37.5 66 Professional clothing 35.6 40.2 Continuous fast Acceleration in 1995 50 Metal moulds & matrices 34.4 Fast From 93, but drop in 94-96 13 Spring industry 33.4 26.0 Continuous fast SIight1y irregular 9 Rubber products 30.0 40.6 Fast After 1993 14 Bakery 30.0 28.6 Very fast From 1992 (jobs) 48 Paints and vamishes 28.6 Continuous slow Slight peak in 1992 3 Particleboard 28.1 31.2 Fast Acceleration after 1993 (jobs) 8 Games and toys 28.1 58.4 Continuous fast Tumaround in 1995-1996 10 Metal doors and windows 26.6 29.6 Very fast Jump between 1992 and 1993 59 Food products 26.4 20.3 Very fast (jobs) T.o. more stable 16 Fumishings 25.4 37.4 Continuous Jump between 1992 and 1993 33 Sawmill equipment 21.6 115.8 Continuous slow Slightly irregular 4 Sawmill equipment 21.0 42.5 Continuous fast Acceleration from 1995 onwards
29 Peat 20.0 41.6 ... 43 Metal moulds & matrices 18.6 29.8 Irregular Drop in 88-94, tumaround in 94-97
7 **** Trucking 16.0 25.0 Continuous Slight acceleration in 1993 1 Tilling cquipment 14.2 13.5 Continuous slow Slight acceleration in 1994
12 Wood fumiture 14.1 44.7 Continuous fast Acceleration in 1994 24 Sawmill and shingle plant 9.6 44.2
27* Accounting finn 9.6 15.8 15 Lubricating oils & greases 9.4 25.0 Continuous Slower after 1995 61 Plastic products 7.9 5.9 Continuous Jump in 1992 and slowdown in 95 35 Machine shop 8.4 15.2 Continuous slow Acceleration in 1994-96 51 Signs and displays 7.5 19.5 Continuous slow Peak in 1993 56 Glass products 6.7 Continuous Drop in 1995 63 Plastic sheets & pellets 2.7 10.9 Continuous (jobs) T.o. stable except in 1997 57 Phannaceutical products 5.3 14.6 Continuous Acceleration between 1983 and 1988 2 Machinery & equipment 4.6 18.7 Continuous Slight jump in 1996 (1.0.)
65 Food products 4.3 57.6 Fast Drop in 1992 58 Chemical fibres & wires 1.6 19.1 Irregular T.o. jumped between 95 and 98 22 Cupboards 0.4 6.7 Continuous slow Drop in 1992. 1.0. acceleration in 93
37 **4 yrs) Engineering finn 0.0 23.6 Irregular Merger in 1996, drop in 1997 32 Glass products 0.0 19.5 Irregular Temporary jump in 1997 30 Transportation equipment

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HIGH GROWTH SMES: EXPLANATORY FACTORS