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Running head: LITERATURE REVIEW Literature review July 09, 2009 Literature Review Introduction Over the last twenty years, the researchers and policy-makers has focused considerable attention on growth SMEs due to a number of reasons. As claimed by Turok (1991, p. 29), there is a significant interest within the SMEs policy and research aimed to identify the characteristics that distinguish firms which grow from those that stand still or fail. This is thought important if more selective small firms policies are to be developed. Identifying distinctive features of more and less successful firms may also provide insights into the factors influencing small firm development and hence improve understanding of the growth process. Gibb & Davies (1989) clearly state that small firms undergo changes over the course of their life cycles. During the first three life cycles their productivity increases, while in the last stage, the level of labor productivity, along with the differentiation in labor force and diversification in sales, decreases correspondingly.
The vast majority of researchers agree that the effects of growth and development can be examined as interdependent, and the potential effects of growth can be predicted at least to a certain extent. These predictions are of vital importance to SMEs business strategy as an empirically validated and theoretically sound explanation of SME growth will serve as a conceptual framework for policy-making and future research concerning the phenomenon of business growth. The literary review provides insight and meaningful analysis of the first stage of the organizational life cycle models with an emphasis on the organic approach, especially that developed by Nigel Sykes; attempts to identify whether processes and objectives of a start-up company are aligned with the processes and objectives delineated in the organizational life cycle models and what lessons have been learned by establishing partners by providing a comprehensive review of the literature on the following topics: organizational life cycle (OLC) models including Penrose (biological analogy), new venture focus and priorities as stipulated in OLC models, the role of entrepreneurs in the new ventures (personality focus), considering various organic approaches to organizational growth. Definitions of Small Business Firms Small business firms account for over 90 % of all enterprises.
There are numerous policy and legal definitions of small business firms. According to Section 249 of the Companies Act 1985, the firm is considered small if it satisfied at least two of the following characteristics: not more than fifty employees, a turnover of not more than? 2. 8 million, and a balance sheet total of not more than? 1. 4 million. At the same time, according to the Act, a SME should comply with at least two of the following characteristics: a turnover of not more than? 11. 2 million, a balance sheet total of not more than? 5. 6 million, and not more than 250 employees. For statistical purpose, the following definition is used: micro firm comprises of 0 - 9 employees, small firm comprises of 0 - 49 employees (also including micro firm), and medium firm employs 50 - 249 employees. SMEs and Organizational Life Cycle Models The extensive research on SME, organizational life cycle models and scientific studies in related fields in business and economic literature can be found in works by Lindgren and Aislabie (1976), Brock and Evans (1986), Johns et al. (1989), Kelsey & Watson (1993), Reid (1993), etc. The most recent works concerning SMEs growth were written by Ofarrell & Hitchens (1988), Gibb and Davies (1990), and Holmes and Zimmer (1994), and others.
These works were mostly focused on SME and organizational life cycle, attempting to provide sound explanation of the dynamics of growth in small firms. Other numerous literature reviews and findings in relevant literature were aimed to examine and report empirical findings of SMEs growth; however, being quite broad in scope, there were general in nature and were not adhered to a specific explanatory comprehensive paradigm for growth or the specific perspective of a specific academic discipline. According to Ofarrell & Hitchens (1988) classification, business growth theories can be divided into four major categories. The first group includes predominantly static equilibrium SME growth theories originating from the field of industrial economics. These theories are almost neglecting the dynamics of SME growth and place more emphasis on the minimization of long-run unit costs and attainment of economies of scale. Most researchers agree that these theories are preoccupied with the importance of large business firms as the only stable outcome of business growth (Perry, 1982; Ofarrell & Hitchens, 1988).
While mentioning these models, it should be taken into consideration that Penrose's (1959) theories concerning the availability of managerial expertise and time, as well as its influence on SME business growth rate are considered the most important. The second category includes stochastic models of SME growth originating mostly in the field of economics. According to these theories, there is no specific dominant theory affecting SME growth, as there are too many factors having influence on it (Ofarrell & Hitchens, 1988, p. 1370). While mentioning these stochastic models, it should be noted that Gibrats (1931) law of proportionate impact, according to which firms business growth rates never depend on the size of the firm, is the most important one. In this context, Ofarrell & Hitchens (1988) adhere to Gibrats law specifically for manufacturing SMEs and advance the hypothesis that the variability of firm growth rate will decrease, while the firm size is increasing.
The third group of theories, as it is claimed by Ofarrell & Hitchens (1988, p. 1373), embraces a number of strategic management perspectives on SME growth, placing emphasis on the strategic dimension to achieve stable growth as well as the way in which SME owner reacts to personal and business environmental indicators. Therefore, these theories are mostly focused on identification of the SME owners strategies and policies concerning the development of SME and their subsequent transition into specific measures and actions aimed to foster business development and growth. While mentioning this group of theories, it is important to understand that, according to these strategic management perspectives, not all SME owners are capable or have desire to foster their business growth in terms of required expertise or resources. (Perry et al. , 1986; Stanworth & Curran, 1986; Ofarrell & Hitchens (1988); Davidsson, 1989; Birley & Westhead, 1990; Turok, 1991; Hay & Kamshad, 1994). The researchers claim that the owners are mostly involved with their comfortable survival, instead of business growth due to various reasons, such as personal wishes concerning desired life-style, or the desire to control the others (Davidsson, 1989; Oster young et al. , 1992; Holmes & Zimmer, 1994; Le Cornu et al. , 1996). Therefore, to most SME owners the prerogative to impose their own will and to make such personal choices is the most attractive concerning choosing SME ownership as an occupation (Stanworth & Curran, 1976; Gibb & Scott, 1985; Stanworth & Curran, 1986; Ofarrell & Hitchens, 1988; Birley & Westhead, 1990; Gibb & Davies, 1991; McMahon et al. , 1993; Petty & Bygrave, 1993).
Finally, the fourth group of theories treats SME growth as stages of development or series of phases through which business firms pass in an organizational life cycle. This theory is the most popular and the most accepted one among the researchers and policy-makers in attempt to explain SME growth. The organizational life cycle theories originate from the literature of economics (Marshall, 1890; Penrose, 1959; Rostov, 1960) and are rooted back to Steinmetz (1969). While examining organizational life cycle models, Kimberly & Miles (1980, p. ix) place emphasis on the cyclical nature of activity in SME, focusing attention on fact that firms undergo cyclical stages of development: Organizations are born, grow, and decline. Sometimes they reawaken, and sometimes they disappear This claim evokes biological metaphors for business firms that have become the source of controversy in the literature of sociology, economics and business (Penrose, 1952; Kimberly & Miles, 1980).
Indeed, along with the traditional approaches, there have been numerous attempts to examine SME growth using biological analogies and comparing business firms with the biological organisms whose processes are similar to those of the living organisms in nature. This type of analysis was faced by numerous doubts and debates (e. g. , the fact that conscious human decision and human motivation in no means can be compared to the process of growth), and Penrose also considered that biological analogies contribute little either to the theory of price or to the theory of growth and development of the firms (1952, p. 804). Penrose considered that these analogies were rather descriptive in its attempt to generalize than exact and precise. Penrose claimed that in case conscious imitation in pursuit of survival qualities is treated as valid, the biological analogy inevitably breaks down. SMEs then might undertake attempt rather not to adapt to a specific given environment, but to change this environment to suit their own needs.
For example, this might be achieved by startling innovation or through political pressure. The number of findings and reviews are found in business and economic literature focusing on SME growth based on organizational life cycle models. For example, D Amboise & Muldowney (1988), one of the most widely cited outline of life cycle models for SMEs, or a wide range of literature ranging from reports on empirical research in SME to form introduction s (Quinn & Cameron, 1983; Smith et al. , 1985; Dodge & Robbins, 1992; Hanks & Chandler, 1994). These works provide a comprehensive review of SME in terms of various organizational life-cycle models of SME growth, comprising of attempts to classify, identify or even develop (sometimes deductively, but in the vast majority of cases inductively) organizational life cycle models. Although not all works and reviews are comprehensive and precise, they still make important contribution into understanding of SME growth. The works written by Hanks (1990), Hanks & Chandler (1992), Hanks & Chandler (1994) and some others obviously stand out in the literature in the field of economics and business, as they offer the readers an outstanding attempts to systemize, and critically review almost all important research and findings focused on the organizational life cycle models, thus representing an attempt to examine organizational life cycle stages in empirical observation.
To a certain extent, these works embrace the most significant and worthwhile hypotheses, theories and findings in the area. Hanks et al. (1993, p. 6) provide a comprehensive review of 10 organizational life-cycle models and claim that the models proposed by Miller & Friesen (1984) and Quinn & Cameron (1983) are mostly summary models, developed to achieve some synthesis among competing life-cycle models. The researchers (Hanks et al. , 1993, p. 7) also identify growth or life cycle or development stage as a unique configuration of variables related to organization context or structure. Contextual dimensions taken into consideration by the researchers embrace firms age, size, growth rate, and challenges faced, while structural dimensions embrace structural form, centralization, formalization, vertical differentiation as well as number of organizational levels within the business firm. Using cluster analysis of cross-sectional data, Hank et al (1993) identify an organizational life-cycle model comprising of four development phases and two arrested development phases, describing it as follows: Start-up or egg stage (small and young business firms having simple organizational structures.
The business firm is relatively informal and highly centralized. There is close to little functional specialization, with product development as the focal priority. The average sales revenues growth makes up to 91 percent per year, while the average employment growth is approximately 30 percent per year) (Hank et al, 1993); Expansion stage (involves relatively larger and...
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