Causes of High-growth of Small- and Mid-cap Companies in the DACH Countries

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(1)CRACOW UNIVERSITY OF ECONOMICS FACULTY OF ECONOMICS AND INTERNATIONAL RELATIONS DEPARTMENT OF FOREIGN TRADE. Robert K. Gruenwald Master in Accounting and Finance Bachelor in Business Administration PhD Dissertation:. Causes of High-Growth of Small- and Mid-Cap Companies in the DACH Countries. Field of Knowledge: Obszar wiedzy: Field of Science: Dziedzina nauki: Scientific Discipline Dyscyplina naukowa:. Social Sciences nauki społeczne Economic Sciences nauki ekonomiczne Economics ekonomia. SCIENTIFIC SUPERVISOR: PROF. UEK DR HAB. KRZYSZTOF WACH. KRAKÓW 2016.

(2) Abstract The main objective of the doctoral dissertation is the identification, diagnosis and analysis of casual relationships between various input factors and high-growth as the output factor to find correlations within a multitude of possible factors over a longer time period (20032013), based a sample of small-cap, mid-cap and large-cap companies with a size in which individual anomalies in the data set are irrelevant. This empirical research examines differences and causal effects to explain the phenomenon of high-growth. It is assumed that high-growth companies grow not due to ‘external’ strategies (growth) such as internationalization, M&A, specialization or financial leveraging, but as a result of organic growth into firm-specific assets and operational efficiency. High-growth companies invest more in R&D, intangible assets and property, plant and equipment rather than in M&A, purchase of intangible assets and the acquisition of other external resources. High-growth companies use more efficiently their assets and their capital. They show a higher operational efficiency and a higher return on invested capital. Chapter 1 presents the essence of firm growth theories and high-growth companies research. This chapter provides a typology of firm growth, discusses models and measures of firm growth and research designs in the field of firm growth research. It is concluded that many study uses only a few selected quantitative metrics as dependent and independent variables. Chapter 2 discusses the different approaches of high-growth companies’ research. It is stated that the most studies in this field focus on SMEs whereas the main performance variable is revenue growth or employee growth. None of the studies discussed provide a well-defined model of causal relationships. Furthermore, it is state–in line with other researchers–that the essential issues of many studies are the operationalization of soft (qualitative) factors, the typically small database of many studies, the irrelevant performance measures and the overall weak results of these studies. From these results methodological implications are derived for Chapter 3 developing this study’s research design. Chapter 3 presents the methods of data collection and analysis, the definition and the relevance of the 35 variables used and the statistical analysis methods. The main methods are the multivariate regression analysis and the examination of group differences based on the T-Test. 2.

(3) Chapter 4 discusses the results of the statistical tests. Four different tests are conducted: (1) the analysis of the total sample of 588 companies, (2) the comparative analysis examining differences between the top-100 growth companies and the group of the bottom-100 companies, (3) the analysis of competitive strategies and their effect on firm growth among the total sample, (4) the analysis of effects in specialization on firm growth among the total sample and the top-100 growth companies group, and (5) the effect of internationalization on firm growth. Chapter 5 discusses the empirical results in comparisons with prior Research and the imitations of the study. The main result of this study is that–in descending order of effect size–the total assets growth, asset turnover growth, capital-intensity, PPE growth, R&D intensity, operating income growth and working capital growth are the determining variables for revenue growth with an explanatory power of 64%. Therefore, it is concluded that the steady buildup of internal resources aiming on the efficiency and the quality of operations and, thus, perhaps also product quality of existing products explains high firm growth with a high explanatory power. Other factors such as competitive advantage, factor intensity (specialization), M&A and internationalization do not explain firm growth. Based on these results a deterministic factor model of high growth is developed supporting the resource-based theory of firm growth which was not confirmed in this way through empirical research based on financials and further indicators derived from financial analysis research.. 3.

(4) Table of Contents Introduction ....................................................................................................................... 7 Chapter 1. The Essence of Firm Growth Theory and High-Growth Companies ...... 13 1.1. Firm Growth in Economics and Business Research ............................................... 13 1.2. Theoretical Modeling the Growth of the Firm ....................................................... 19 1.2.1. Stochastic Models ............................................................................................ 22 1.2.2. Resource-based Models of Firm Growth ......................................................... 24 1.2.3. Deterministic Models and Managerial Models................................................ 25 1.2.4. Corporate Lifecycle (CLC) Models of Firm Growth ...................................... 33 1.2.5. Evolutionary Models of Firm Growth ............................................................. 35 1.2.6. Learning Models of Firm Growth.................................................................... 36 1.2.7. Econophysic Models of Firm Growth ............................................................. 37 1.3. Measuring Growth of the Firm ............................................................................... 38 1.4. Concept and Measures of High-Growth Companies (HGCs) Research ................. 42 1.5 Problems and Research Gaps................................................................................... 46 Chapter 2. Identification of Success Factors of HGCs and their Dilemmas .............. 50 2.1. Definition and Nature of Success Factors .............................................................. 50 2.2. Review of Main Approaches Investigating Success Factors .................................. 53 2.2.1. Findings on Success Factors from High-Growth Companies Research with Focus on Employment Effects ................................................................................... 54 2.2.2. Findings on Success Factors from High-growth Small and Medium-sized Enterprises ................................................................................................................. 56 2.2.3. Findings on Success Factors among High-growth Medium-sized and Larger Enterprises ................................................................................................................. 59 2.3. Preliminary Conclusions ......................................................................................... 67 2.3.1 Results of Empirical Research .......................................................................... 67 2.3.2 Methodological Discussion .............................................................................. 70 2.3.3 Methodological Implications ............................................................................ 76 Chapter 3. Research Methodology ................................................................................. 80 4.

(5) 3.1 Research Question and Conceptual Model ............................................................. 81 3.2 Sampling, Data Collection, Research Methods and Research Design .................... 84 3.2.1 Sampling and Data Collection ........................................................................ 85 3.2.2 Data Preparation and Special Issues of Growth Rate Calculation .................... 89 3.2.3 Statistical Methods............................................................................................ 93 3.2.4 Research Hypotheses and Research Design ..................................................... 94 3.2.5 Variables ........................................................................................................... 95 3.3 Explanatory Notes Concerning the Selected Variables ........................................... 98 Chapter 4. Empirical Results ....................................................................................... 107 4.1 Analysis I (Total Sample) ...................................................................................... 107 4.1.1 Descriptive Statistics (Total Sample) ............................................................. 107 4.1.2 Bivariate Analysis (Total Sample) ................................................................. 110 4.1.3 Multiple Regression Analysis (Total Sample) ................................................ 115 4.1.4 Interpretation of Results ................................................................................. 118 4.2 Analysis II: Top-100 Growth Companies vs. Total Sample (Outperformer Group) .......................................................................................................................... 119 4.2.1 Outperformer Group Statistics........................................................................ 119 4.2.2 Bivariate Analysis Outperformer-Group ........................................................ 122 4.2.3 Multiple Regression Analysis Outperformer Group ...................................... 124 4.2.4 Outperformer Group vs. Total Sample: Interpretation of Results .................. 126 4.3 Analysis III: Competitive Strategy in Terms of Competitive Advantages (Total Sample) ........................................................................................................................ 128 4.4 Analysis IV: Specialization in Terms of Factor intensity (Groups vs. Total Sample) ........................................................................................................................ 132 4.5 Analysis V: Internationalization (Group vs. Total Sample) .................................. 135 Chapter 5. Discussion of Empirical Results ................................................................ 137 5.1. Main Findings and Their Meaning ....................................................................... 137 5.2. Comparisons with Prior Research ........................................................................ 141 5.3. Limitations of the Study ....................................................................................... 145 Conclusions..................................................................................................................... 147 Implications of Results ................................................................................................ 147 5.

(6) A Deterministic Factor Model of High-Growth Companies ....................................... 148 Recommendations for Future Research ....................................................................... 152 References ....................................................................................................................... 154 List of tables ................................................................................................................... 170 List of figures.................................................................................................................. 173 Appendices ..................................................................................................................... 174 Appendix I. List of the Sample’s Companies .............................................................. 174 Appendix II. Descriptive Statistics of the Total Sample ............................................. 180 Appendix III. Descriptive Statistics of the Outperformer Group ................................ 181 Appendix IV. Top-100 Growth Companies ................................................................ 182. 6.

(7) Introduction The reasons and sources of firm growth are a part of economic research since approximately 50 years. As a starting point the theory of firm growth can be identified which has challenged in 1950s the neo-classical research. Contrary to the neo-classical theory of the firm, the theory of firm growth views the company not only as a transformer of market-price signals into optimal cost structures. Instead, Penrose (1959) determines the firm as an autonomous entity which is not successful and growing due to optimal pricequantity adjustment but because of the development and the combination of firm-specific resources. Based on this view, business research has focused in the last 40 years also on the identification of success factors. The often-cited PIMS study (Profit Impact of Market Strategies) can be regarded as a pioneering study paving the way from theory to management practice in introducing the missing link between internal resources and market success in the form of the competitive advantage. Subsequent studies in the 1980s examined the reasons of excellence such as the “In Search of Excellence” (Peters & Waterman, 1982) increasing the popularity of success factors research in management practice. However, in the field of economics, the neo-classical approach has continued to challenge the idea that firm success factors can be determined and that firm growth is more than only a coincidence. The reason for the high interest in the causes of firm success in terms of business growth is self-explanatory. Entrepreneurial activity is always connected to the objective of success. Insofar, the benefit of firm growth and success factors research should be directly transformed into corporate practice. In this framework, this research aims on generating a factor model of firm growth. Consequently, the objective is to examine whether a factor model of firm growth can be generated from empirical data to answer the research question which is: Do high-growth companies differ from low- or non-growth companies in specific patterns in investment behavior and financing behavior? Therefore, this study examines a relatively large database with 588 stock-listed firms from Germany, Switzerland and. 7.

(8) Austria (DACH countries)1 within a relatively long observation period of ten years. Many studies, discussed in this study, examines smaller datasets including shorter observation periods. Furthermore, the average 10-years revenue of the total sample is equivalent of 60% of the German GDP (2015) whereas the sample is exposed to the same monetary and currency environment. Insofar, this study is viewed as representative for advanced western industrial economies while external effects such as different monetary policy or different business cycles can be excluded as intervening variables influencing firm growth. Consequently, the main objective of the research is the identification, diagnosis and analysis of casual relationships between various input factors and high-growth as the output factor to find correlations within a multitude of possible factors over a longer time period (2003-2013) among a total sample of small-cap, mid-cap and large-cap companies with a sample size of 588 companies in which individual anomalies in the data set are irrelevant. As the topic of this research indicates, the focus of this study is on small and mid-cap companies. The market capitalization (market cap) of a listed company indicates the total market value of the shares outstanding calculated as the share price multiplied with the number of shares outstanding. Every index provider has its own definition of large-cap, mid-cap, and small-cap companies included referring to specific indices so that a universal definition of small and mid-cap companies does not exist (Oetken, 2010, p. 41-43). The top-100 growth companies group (outperformer group) among the total sample, which is the main reference group to develop the deterministic factor model of high-growth companies includes the 100 companies with the total sample’s highest growth rates. Concerning the German companies, none of the companies of the outperformer group (s. Appendix IV) is included in the DAX30 which is the German large cap index. Only one German company of the top-100 growth group, Deutsche Wohnen, is included in the German MDAX which is the German mid-cap index, in which the company with the highest market capitalization is Airbus with a market cap of EUR 43bn (Finanzen.net, 2016a). All other German companies are included in several other second-line indices such as SDAX, TECHDAX or other General Standard segments including all other companies which have not the market size required to be listed in the DAX30. Concerning the Austrian companies included in the top-100 growth group (s. Appendix IV), it must be mentioned. 1. The DACH region consists of the German-language countries in Europe (Germany, Austria, and Switzerland).. 8.

(9) that two of them, OMV (market cap in 2016: EUR 8.2bn) and Andritz (market cap in 2016: EUR 4.6bn), are included in the ATX Prime Standard which is the Austrian large-cap index (Finanzen.net, 2016b). Yet, both companies do not reach the market capitalization of the largest mid-cap company in Germany. Insofar, the top-100 growth group was not adjusted for both companies. Concerning the Swiss companies, it can be stated that none of the Swiss companies included in the top-100 growth group is a member of the SMI which is the Swiss large-cap index. Therefore, it can be stated that all companies in the top-100 growth group representing the high-growth group of the total sample are small- or mid-cap companies based on the benchmark of the German mid-cap index MDAX. Within this main objective, the following detailed objectives were established: O1: The presentation and discussion on the research outcomes in the field of firm growth to identify different concepts and models of firm growth regarding their empirical evidence and the main variables and data analysis approaches applied (Chapter 1 and 2). O2: The selection of the variables and the data analysis approach in order to arise from the results of the preceding analysis of research fields. Furthermore, the method and the usefulness of financial analysis and the consequent conclusions for the research design (Chapter 3). O4: The comparative statistical analysis to determine relations between input factors and output factors to find correlations within a multitude of possible factors over a long-time period (Chapter 4). O5: The exploration of the empirical results and eliminating their limitations of the comparative statistical analysis with the objective to develop a multi-factor model to explain firm growth (Chapter 5 and 6).. The research hypotheses to be verified in this study are as follows: H1: High-growth companies grow not due to ‘external’ strategies (growth) such as internationalization, M&A, specialization or financial leveraging. Instead, it is assumed that high-growth is a result of organic growth from the development of firm-specific assets and operational efficiency.. 9.

(10) H2: High-growth companies show a significantly specific investment behavior. They invest in R&D, intangible assets and property, plant and equipment rather than in M&A, purchase of intangibles and other external resources. H3: High-growth companies show significantly distinct financing behavior. They prefer internal financing. H4: High-growth companies use more efficiently their assets and their capital. They show a higher operational efficiency and a higher return on invested capital.. The doctoral dissertation is divided into five chapters as well as the introduction and conclusions. Chapter 1 presents the essence of firm growth theories and high-growth companies research. This chapter provides a typology of firm growth, discusses models and measures of firm growth and research designs in the field of firm growth research. It is concluded that many study uses only a few selected quantitative metrics as dependent and independent variables. Regarding the models and theories of firm growth, it is determined that research and theory tends not to interpret firm growth as a random phenomenon or only driven by macro-economic or other external developments. It is stated that, even now, there is no unified theory of corporate growth. The conclusion is that future research in the field of firm growth should include not only a selected set of variables. Instead, future research should include variables reflecting not only the operational activities but the totality of firm activities such as investment behavior and financing behavior which is included in empirical research presented in Chapter 4. Furthermore, it is concluded that the existing data of listed companies provided by financial databases provide comparable quantitative data because listed companies are required to account on the bases of international standards such as Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standard (IFRS) so that highly comparable and objective data are available. Additionally, finance research provides many instruments to calculate qualitative data based on quantitative accounting data making obsolete to collect qualitative primary data through, for example, surveys which have always to deal with subjectivity issues resulting from development of the questionnaire and the fact that surveys are only measuring attitudes of the interviewees. Instead, it is concluded as a further requirement for this study that second-order financial indicators can be calculated reflecting the qualitative. 10.

(11) dimension of firm activities such as competitive advantage and specialization. These measures (variables) are discussed in detail in Chapter 3. Chapter 2 discusses the different approaches of high-growth companies’ research. It is stated that the most studies in this field focus on SMEs whereas the main performance variable is revenue growth or employee growth. None of the studies discussed provide a well-defined model of causal relationships. Furthermore, it is state–in line with other researchers–that the essential issues of many studies are the operationalization of soft (qualitative) factors, the typically small database of many studies, the irrelevant performance measures and the overall weak results of these studies. From these results methodological implications are derived for Chapter 3 developing this study’s research design. Chapter 3 presents the methods of data collection and analysis, the definition and the relevance of the 35 variables used and the statistical analysis methods. The main methods are the multivariate regression analysis and the examination of group differences based on the T-Test. Chapter 4 discusses the results of the statistical tests. Four different tests are conducted: (1) the analysis of the total sample of 588 companies, (2) the comparative analysis examining differences between the top-100 growth companies and the group of the bottom-100 companies, (3) the analysis of competitive strategies and their effect on firm growth among the total sample, (4) the analysis of effects in specialization on firm growth among the total sample and the top-100 growth companies group, and (5) the effect of internationalization on firm growth. Chapter 5 discusses the empirical results in comparisons with prior Research and the imitations of the study. The main result of this study is that–in descending order of effect size–the total assets growth, asset turnover growth, capital-intensity, PPE growth, R&D intensity, operating income growth and working capital growth are the determining variables for revenue growth with an explanatory power of 64%. Therefore, it is concluded that the steady buildup of internal resources aiming on the efficiency and the quality of operations and, thus, perhaps also product quality of existing products explains high firm growth with a high explanatory power. Other factors such as competitive advantage, factor intensity (specialization), M&A and internationalization do not explain firm growth. Therefore, the chapter Conclusion states that the findings of this study allow the conclusion that the resource-based theory of firm growth can be seen as a highly valid theory for the explanation of firm growth. The results of this research are summarized in 11.

(12) two deterministic factor models of high-growth companies. The first model is a model of quantitative high-growth explaining revenue growth and, thus, the expansion of firm size. The second model is a deterministic factor model of qualitative high growth explaining the operating income growth which indicates qualitative growth in relation to the firm’s profitability. The final conclusion is that quantitative and qualitative high-growth derive partially from the same growth sources. The difference is that qualitative growth requires not only R&D investment to develop and only internal resources but also the generation of intangible assets, i.e. that R&D investments generates not only operational excellence but also customer excellence. Furthermore, financial leveraging should be seen as an additional growth driver. While quantitative growth obviously has no need for external capital, the profitability of investments in the framework of qualitative growth may provide the opportunity for profits beyond costs of capital, which can be explained by higher margins generated by a price premium resulting from more advantaged products.. 12.

(13) Chapter 1. The Essence of Firm Growth Theory and HighGrowth Companies 1.1. Firm Growth in Economics and Business Research In the academic sense, an economy is the totality of all institutions, facilities and activities that serve to cover demand. Thus, an economy consists of four main institutions: (1) public households, (2) private households, (3) markets, and (4) firms (businesses). Public and private households as well as firms conduct economic activities such as manufacturing and the production, consumption and distribution of goods. These three institutions exchange goods and services internally or externally on the market. All institutions, however, are subjects of economic research and theory. While economics studies basically deal with all four institutions, business studies focus only on businesses whereas markets and private households are more focused on the framework for business activities but are not a main subject of business studies. Microeconomics, as a sub-branch of economics, focuses on firms but with a different perspective. The main differences among the perspectives of firm growth in economics and business studies approaches are identified as follows: (1) Economics studies focus on economic activity to explain the processes that determine production, distribution and consumption of goods and services in an economy. Economics thus examines the rational use of scarce goods. There are several factors associated with economics and the firm is only one of these factors. However, economics has its ‘own’ theory about the firm, which is the theory of the firm as part of economics and its market theory. As such, it is used to examine the pricing mechanism in an economy. This shapes content and methodology and describes the firm as a production function for converting inputs into salable outputs. The firm pursues, without compromising, the goal of profit maximization and, in a multi-period perspective, the objective of maximizing the firm’s total value and reacting promptly and optimally to given or changing market prices. As paradoxical as it may seem, the firm itself is not a subject of the microeconomic theory of the firm. Almost anything that makes a firm complex or an independent object of investigation is neglected by intention. Thus, the theory of 13.

(14) the firm in economics does not address the essence of companies or distinguish one company or a class of companies from others. The firm is only a production function and exists only if it produces with lower product costs in the market. Issues, such as why companies have common institutional features and why manifestations of features are different between companies, are not of interest or are not an object of discussion, such as different market strategies or corporate governance regimes and their effect on firm performance. The firm is only regarded as a production function that is a ‘price–quantity adjuster’. Depending on the demand and price signal, the firm alters the amount of produced goods and adapts its cost structure. And according to different market conditions, the profit maximization approach changes. (a) In a polypolistic market, in which there is perfect competition, sales growth and profit maximization take place through the accommodation of sales volume; the efficient market due to perfect competition leads to an equilibrium price, which cannot be influenced by a single firm. Thus, economies of scale and scope drive profit maximization. The higher the market share and, thus, the scale of production, the higher is the individual profit and growth opportunity for an individual firm. (b) In a monopolistic or quasi-monopolistic market, in which there is imperfect competition, sales growth and profit maximization takes place through price changes. The higher the price, the lower is market demand and, thus, sales growth; however, the higher is profit capability. Consequently, it can be stated that the microeconomic theory of the firm reduces management decisions-making to the question of the firm’s optimal response to given market conditions. Therefore, the microeconomic theory of the firm is not a basis for a research program and the formation of theories to consider firm behavior beyond price-quantity decisions and cost optimization, because, according to the microeconomic view, growth is a result of better cost, price and quantity adaptation whereas strategy or the selection of a market position is not a relevant topic. Hence, strategic decisions are ‘excommunicated’ by the microeconomic theory of the firm and growth results only from operational decisions.. 14.

(15) (2) Management or business studies combine business functions such as procurement, production, finance, marketing, accountancy, etc. with economics. An essential part of business studies is management theory, which examines all processes associated with organizational leadership. Business studies is thus a theory of design, control and development of purposeful organizations. Management theory and other aspects of business studies seek a high practical relevance and uses research results and experiences of various disciplines. Business studies, respectively, business administration studies, has not developed an explicit theory of the firm. Rather, the sum of all its models and research results is an implicit theory of the firm without using the term. However, everything that can be described as a theory of the firm should view, from a formal point of view, the following characteristic: A theory of the firm, as a system of assumptions and statements, should relate mainly or entirely to the firm as a whole and not to singular characteristics of an individual company or groups (classes) of companies and not to individual operational parts or functions of companies such as marketing, management, etc. Regarding these requirements, business studies represent only a descriptive model of the firm, such that the firm is seen as a system of contracts in which mainly management or the entrepreneur allocates resources for the purpose of profit maximization. However, this is not even a model because the relationship of its elements is not defined in its effective strength or the like. Therefore, business studies provide not a research program with the general intention of explaining what all companies have in common or how they differ and why, but it is much more the empirical description of real companies and groups of companies and their differences. This includes the ultimate question of which measures and structural characteristics explain the companies’ success or failures due to structural differences or management decisions. Hence, firm growth in terms of business studies is mainly a result of entrepreneurial or management decisions and its dialectics with markets, which is not the market but a portfolio of target groups/product segments. Therefore, typical results of business studies research are management recommendations.. 15.

(16) (3) Recent interdisciplinary approaches to the theory of the firm, which is derived from economics but is related to business administration, deals with issues such as why companies exist, what different types of businesses exist, exploration of the limits of the company and its determinants, company objectives and corporate governance, influencing firm development other than management decisions. These approaches are often summarized with the terms managerial ecomomics or business economics. The focus is the application of economic concepts and economic analyses on the problems of formulating rational managerial decisions, which applies microeconomic analysis to businesses’ decision methods or other management units. Business or managerial economics is applied economics using quantitative methods and economic theory to analyze enterprises and factors determining the diversity of organizational structures and the relationships of enterprises with labor, product, capital and markets. Thus, this field of research applies the findings of economics for the sake of rational management decisions. However, the results of this study are therefore not management recommendations, but evidence concerning differences in the allocation of resources and their effects regarding growing and non-growing companies. However, the objective of managerial economics is to rationalize management decisions, which is not ‘giving management recommendations’. According to microeconomics theory, the optimal size of a company’s production capacity is reached at the point where the additional cost of an additional unit of output is equal to additional return, which is, in terms of accounting, the breakeven point. Thus, achieving the optimal size of the company would be simultaneously a rational limit for firm growth, beyond which activities initially generate risks out of investment failures in the framework of entering new product markets, internationalization, etc. Thus, firm growth would only be rational to a certain degree. Why should a company in a quasi-monopolistic market grow? Or why should a company in a polypolistic market outperform market growth in upward market cycles? Theoretically, it would apply that as long as a company can cover its costs, including capital costs, profitable growth is unnecessary. Thus, Coase (1937), one of the founders of theory of the firm, stated, “First, as a firm gets larger, there may be decreasing returns for the entrepreneur function, that is, the costs of organizing additional transactions within the firm will rise” (Coase, 1988/1937, p. 43). This statement is in line. 16.

(17) with the microeconomic assumption that marginal costs define a rational limit of firm growth (diseconomies of scale). Three institutional reasons can be cited for the rationality of growth: (1) investor interests, such as shareholders or owners, to maximize the return on capital employed, (2) competition, and (3) innovation. The first ‘rational’ reason is effective through incentives in the principal–agent relationship and is thus an internal issue of corporate governance. The second and third reasons are external. Competition and innovation prevent market equilibrium and thus the self-sufficient, non-growing firm. Alchian (1950), an early proponent of evolutionary thinking in economics, proposed that markets show an evolutionary dynamic independent of management activities. From this point of view, he concluded that successful managers are not necessarily those with the best strategies, but the luckiest, which means that firm growth is more a stochastic than a deterministic phenomenon. This raises a question regarding the meaning of the ‘visible’ and the ‘invisible hand’. Between Smith’s (1776 [2009]) ‘invisible hand’ (which is the market) and Chandler’s (1962) ‘visible hand’ (which is the management), is the firm. In this study, the black box is neither the firm (as is the case in economics) nor the market (as is the case in management-focused business studies). Here, two black boxes exist: (1) the market and (2) management. Thus, this study focuses on managerial results and thus does not examine management decisions and their effects or changes in the market and resulting effects on firm development. This study focuses only on changes in financial numbers of growing and non-growing companies to simply analyze statistical differences on the level of financials between two groups of firms. Therefore, this study follows, at least to a certain extent, Alchian’s assumption, “Success is based on results, not motivation […] Chance or luck is one method of achieving success” (Alchian, 1950, pp. 213–214). Lamarck, one of the first evolutionist, is often quoted with his answer to the question of where God is in his evolutionist view. He answered, “I have no need of this hypotheses” (e.g., Poser, 2001, p. 261). This study excludes two ‘gods’—the invisible hand of the market, which is the ‘thesis’ of deterministic and stochastic concepts and the visible hand of the manager, which is the ‘thesis’ of strategic management. Instead, here it assumes that firm growth is a result of at least both hands, but also of many other hands such as employees, owners and other stakeholders. Therefore, in this study, only the results of allocation decisions on business performance is measured. 17.

(18) This exclusion of both ‘hypotheses’ allows the examination of stochastic and the deterministic theses as the explanation for firm growth: (1) If the statistical analysis of the sample provides that growth companies show a significant and strong correlation with the growth of the total market or of their industries, then growth is sufficiently explained by microeconomics. However, the problem is that markets are difficult to distinguish and many companies are conducting business in several markets. Here, results may be ambiguous. (2) If the statistical analysis provides that growth companies show a significant and strong correlation with certain activities, such as strong investment in R&D, plants and equipment, or acquisitions, then it seems reasonable that the ‘visible hand’ has a certain effect on the firm’s development. (3) If there are any correlations between the change in measurable managerial results or market development and firm growth, then there is ‘no hand’, but only ‘luck’, which means that growth is only stochastic. Conclusions concerning the rationality of managerial activities may be then for the mentioned possible research results: (1) In case of alternative 1, the price signal is the main variable. Thus, microeconomic models are sufficient instruments for rational managerial decisions on the operational level. Owners and investors should focus on market signals and should monitor managerial efficiency on the level of cost efficiency, etc. Furthermore, corporate governance should incentivize cost efficiency, high margins and free cash flow. (2) In case of alternative 2, positioning is relevant and business studies offer possible, but not truly rational instruments for managerial decisions. Owners and investors should focus on managerial strategy abilities such as finding profitable positioning in the market, industry knowledge, the ability for business reengineering, etc. (3) In case of alternative 3, investment is gambling. To reduce risk, the owner or investor should diversify the investment portfolio. In terms of corporate governance, the only task is to reduce risk while applying the business judgment 18.

(19) rule to avoid extraordinary risks beside operational business risks. Corporate governance should focus on internal audits, compliance systems and risk management.. 1.2. Theoretical Modeling the Growth of the Firm Corporate growth or business growth, as a research field, is still a relatively young, and definitions of growth vary within business economics research. An analysis of previous works on this subject shows there is no universal definition; however, a number of individual provisions of the term exists. Most authors define corporate growth (business growth) against the background of the respective objective of their studies, their examination subjects and the methodology used. Therefore, the understanding of growth typically is given by types of observed growth and their operationalization. Wach (2012) identifies 46 different growth dimensions (see Table 1).. Table 1: Typology of the Categories of Firm Growth Classificational Criteria. Types of Growth – quantitative growth. Character of quantifiability. – qualitative growth – short-term growth. Length of appearance. – long-term growth Permanence of the growth process. – saltatory growth – continuous growth – sustainable growth. Dynamics of the growth process. – evolutionary growth – revolutionary growth. Intensity of the growth process. *. – weak growth – intensive growth – high-growth – hyper-growth. Source of determinants of the growth process. –endogennic growth –exogennic growth. Subjective form of realization. – organic growth – non-organic growth – network growth – mixed growth. Nature of the changes introduced. – innovative growth – restructurizational growth. 19.

(20) Horizon of changes introduced. – adaptational growth – anticipational growth. Geographical expansion. – local growth – regional growth – supraregional growth – domestic growth – international growth. Level of hierarchization. – bottom-up growth – top-down growth. Financial expenditures incurred. – investment growth – non-investment growth. Environmental influence. – sustainable growth – insustainable growth. Area of appearance. – financial growth – structural growth – organizational growth – strategic growth. Growth metaphors. – evolutionary growth – dialectic growth – trialectic growth – teleological growth – chaordic growth (describing growth as a mix of chaos and order). Source: (Wach, 2012, p. 27). Therefore, it is not surprising that a growing number of different competing approaches to the study of high-growth companies exists. Dobbs & Hamilton (2007) propose a classification of growth theories and models that distinguishes among (1) stochastic, (2) descriptive, (3) evolutionary, (4) learning, and (5) deterministic models and theories of the growth of the firm. Wach (2012) outlines eight different approaches toward modeling firm growth, by extending the five above-mentioned concepts of three more, namely: (1) resource-based view, (2) managerial approach, and (3) econophysic approach (see Table 2). A theoretical model is designed to explain an entire situation or behavior, with the objective of eventually predicting a research object’s behavior. However, a theoretical model is based on theories rather than on data analyses. The term model is understood here as a simplistic representation of a process or relationship among various factors. Essential functions of a model are reduction and abstraction. Reduction indicates the omission of objective details for emphasizing significant factors. Reduction takes place by abstraction. 20.

(21) Abstraction intends to reduce the complexity of reality to identify significant factors that are important for the observed process or relationship. Factors are understood here as elements that are relevant for all observable cases and not only for empirically specific cases. Theory is understood here as a system of statements to describe and/or explain parts of reality and allow predictions about future events. A theory usually contains descriptive and explanatory (causal) statements on specific parts of reality to be described. In general, a theory is based on a model. However, modeling is not a mandatory requirement for a theory. Therefore, theoretical modeling is understood in the following as the process of identifying important features of a research project, defining variables and the relationship between variables, conducting random model testing, interpreting and validating the model and making improvements to the model. Regarding the research field firm growth, the following theoretical models, which are explained and discussed in the following subsections, are identified (see Table 2).. Table 2: Models of Firm Growth Approaches. Main Representatives. Stochastic Models. Gibrat (1931). (Econometric Approach). Mowery (1948) Evans (1987) Botazzi & Secchi (2003). Summarized Characteristics Growth depends on many factors, but none of them are dominant. They cannot be separated, but it can be statistically determined, which affects company development at the moment.. Reichenstein & Dahl (2004) Deterministic Models. Schumpeter (1934). (Mathematical Economics Approach). Schoeffler (1977) Buzzell & Gale (1989). Growth is a result of various internal and external factors. Determining factors are identifiable.. Barnes & Hershon, (1994) Davidsson et al. (2002) Davidsson & Klofsten (2003) Barringer & Jones (2004). Corporate Life Cycle (CLC) or Stages Models (Descriptive Models). Steinmetz (1969) Churchill & Lewis (1983) Scott & Bruce (1987) Greiner (1973; 1998) Dobbs & Hamilton (2007). Evolutionary Models. Alchian (1950). (Descriptive Models). Penrose (1959). Companies’ growth shows a life cycle pattern comparable to living organisms and social organizations. CLC models focus more on the internal, resource-based causes of growth in contrast to evolutionary models. Companies grow by adapting to competitors and the market environment.. 21.

(22) Jovanovic (1982) Probst (1987) Aldrich (1999) Vinnell & Hamilton (1999) Edelmann et al., (2005) Kaldasch (2012) Resource-based View (RBV). Penrose (1959), Wernerfelt (1984) Hamel & Prahalad, (1990). Learning Models. Senge (1990) Hamel & Prahalad, (1990) Deakings & Freel (1998). Company development depends on the configuration of internal resources and competences. Knowledge acquisition and a continuous learning process are prerequisites for growth.. Nooteboom (2000) Dalley & Hamilton (2000) Bessant et al. (2005) Phelps, Adams, & Bessant (2007) Managerial Models. Drucker (1954) Ansoff (1965) Porter (1980). Managerial models emphasize the impact of strategy selection and management decisions as causes for firm growth.. Mintzberg (1994) Econophysic Models. Aislabie (1992) Axtell (2001). Econophysic models are modelling enterprise development, using theories and mathematical models of the physical and analogies to detect patterns in firm growth.. Source: Own compilation based on Wach (2012, p. 44).. Except for the managerial models, stages models, resource-based and learning models of firm growth, stochastic and econophysic models are more or less theoretical and are generally based only on mathematical or logical considerations but not on extensive empirical testing or validation and do not included a qualitative factor.. 1.2.1. Stochastic Models Stochastic models (econometric approach) of ﬁrm growth, developed mainly in the ﬁeld of economics, suggest a large number of factors that affect or cause growth. Thus, the stochastic view on firm growth detects the absence of any dominant theory (McMahon, 1998). The conclusion is: There is no distinct factor that explains firm growth. In fact, many factors act together and randomly influence company sizes. However, some studies using the same basic assumption find contradictory evidence, such as studies by Evans (1987) 22.

(23) and Reichenstein & Dahl (2004). Considered on the meta level, if growth is random, then managerial decisions are useless because their basic assumptions are that strategic behavior, respectively managerial decisions, are ineffective. If business success is more or less a question of fortune, then only piecemeal managerial engineering is the destiny of strategic management (managerial decision making) and entrepreneurship due to their being no basic rules, ‘one best way’ or ‘visible hands’ that exist. Additionally, such phenomena as serial entrepreneurship are non-existent. The general thesis of stochastic models of firm growth is that growth depends on many factors, but none of them are dominant, so that growth is more or less random. The main proponents of this view on firm growth are Gibrat (1931), Mowery (1948), Evans (1987), Botazzi and Secchi (2003), and Reichenstein and Dahl (2004). Gibrat (1931) investigated the statistical properties of the size distribution of firms. His main contribution to the stochastic approach is his so-called law of proportional effects, which is also called ‘Gibrat’s law’. This law states that the independence of firm size and growth is the starting point for succeeding investigations concerning firm growth dynamics. This law has often been used as null hypothesis to test whether firm growth can be described by other factors rather than just a simple random walk phenomenon (e.g., Evans, 1987; Geroski & Machin, 1993; Sutton, 1997; Dosi, 2005). Recent empirical evidence on the basis of firm level data from several European countries (e.g., Reichstein & Jensen; 2005; Bottazzi et al., 2002, Bottazzi et al., 2011; Duschl et al., 2011) as well as data on industry level (Bottazzi et al., 2001), show that the expectation of normal distributed growth rates must be rejected. Laitinen (1999), for example, examines finished firms and finds evidence that the smallest size class tends to grow rather fast, which contradicts Gibrat’s law (p. 47). This evidence is all the more relevant in the context of this study because the concept of high-growth companies is based on the fact that some firms grow significantly faster than others and share equal characteristics that distinguish them from other companies. Studies of large firms by Kumar (1985), Evans (1986), and Hall (1987) found that Gibrat’s law failed for several different measures of firm size so that firm growth decreased with firm size. Thus, it “can be the case that sometimes the growth is observed as stochastic, but it would seem that the underlying process is indeed deterministic, as there are profitmaximizing firms that act and make decisions” (Relander, 2011, p. 65). 23.

(24) 1.2.2. Resource-based Models of Firm Growth According to resource-based models, firm growth depends on the configuration of internal resources and competences such as the human capital of employees and the social capital of managers or entrepreneurs, physical capital in the form of plants, machines, etc., financial capital such as private equity or debt capital, and organizational capital in the form of incorporated knowledge of the company. Resource-based models are generally descriptive models, due to their not measuring any relationships between variables. Penrose (1959) defines growth as “increase in size or an improvement in quality because of a process of development” (Penrose, 1959, p. 1). She explains growth by a firm’s own internal activities and by opportunities, changes, and actions that are external to the firm (Penrose, 1959, p. 2). As a firm grows, it will require more inputs, such as physical and human resources, over the long-term to match increased demand for its products. Business studies attempt to change the conditions under which the firm operates in markets and must avoid both spare capacity and excess demand. Therefore, economics spends considerable time getting the resources supply in line with demand. A company is, according to the Penrose model, a portfolio of physical and intangible resources. The management of such a company can thus be equated with the management of a resource portfolio. An identical resource is not the same for any two companies (Penrose, 1959, p. 5). Differences between two companies therefore are based both on different resources; however, differences in various productive uses of identical resources exist (Penrose, 1959, p. 25). The company’s growth is created by previously unused resources being made productive or from company-specific use of resources. Management’s task is to exploit unused resources and to discover and integrate new resources, especially in the case of mergers and acquisitions (M&A) or the recombination of existing resources for new products and services (Penrose, 1959, pp. 85, 145). Although Penrose’s theory of firm growth gained only limited influence in mainstream economics (Petilis, 2010, p. 2), virtually all concepts of the resource-based view quote Penrose as their starting point. In the narrow sense, the intangible assets concept of Itami and Roehl (1987), the core competencies theory of Hamel and Prahalad (1990; 1994), the knowledge-based view of Spender (1994) and of Nonaka and Takeuchi (1995) are based on her approach.. 24.

(25) Figure 1. Penrose’s Resource-based Concept of Firm Growth Source: Own presentation based on Coad (2009, p. 110).. It can be summarized that Penrose paved the ground for managerial theories of firm growth. The neo-classical view of the firm is that a company’s growth depends mainly on market development in terms of the ‘invisible hand’. If it combines production factors effectively, a company can benefit from economies of scale and scope. Penrose, however, does not determine the market as invisible hand, but the managers as the ‘visible hands’, which influences the firm’s success by using the company’s resources efficiently and effectively (see Figure 1).. 1.2.3. Deterministic Models and Managerial Models According to deterministic models (mathematical economics approach), firm growth results from various external and internal factors. These determining factors are identifiable. The basic assumption of deterministic theories of growth is that determinants are identifiable and explain growth by multivariate techniques and cross-sectional data analysis (Barnes & Hershon, 1994; Davidsson & Klofsten, 2003; Barringer & Jones 2004; Davidsson et al. 2002. The number of deterministic studies has grown larger in recent times (Dobss & Hamilton, 2007, p. 299) and this may be thus seen as a ‘growing market’. The main proponents of this view on firm growth are Schumpeter (1934), Schoeffler (1977),. 25.

(26) Buzzell, Gale and Sultan, 1975), Barnes and Hershon, (1994), Davidsson et al. (2002), Davidsson and Klofsten (2003), and Barringer and Jones (2004). According to deterministic models, the firm with the highest market share in an industry has the lowest unit costs and thus the highest profitability (Buzzell, Gale & Sultan, 1975), due to the effects of the economies of scale. Thus, according to Porter (1980; 1991), the main bases of firm growth are cost advantages and positioning. Firms with subsequent ‘right’ strategic decisions concerning cost efficiency and positioning can survive, while others are forced to leave markets. ‘Right’ decisions in both strategic areas lead to profitable growth. Thus, firm size directly mirrors productivity differences that lead to larger market shares and the ‘right’ decisions for new high growth markets, to avoid decreasing returns to scale caused by downward sloping demand curves in mature markets, because a positive relationship between industry market growth ratios and profitability exists (Capon et al., 1990). Thus, deterministic models are in line with industrial economics and neoclassical theories, which define the main goal of the firm, which is maximizing profits or minimizing costs. The task of finding high growth markets, is in line with Schumpeter’s (1934) concept of the entrepreneur, who seeks and finds active business opportunities and thus leads the company to growth. Therefore, deterministic concepts and managerial models of firm growth are contradictory only at first sight, because deterministic does not mean that firm growth is determined on one hand by respective external factors of economic laws such as market growth rate. However, on the other hand, it is determined by the ‘right’ management or entrepreneurial decisions for the ‘right’ position in the market regarding profitability and market growth rates and by the consequent application of economic laws such as the economies of scale. Based on the deterministic concept of industrial economics, many management instruments were developed, such as the PIMS (profit impact of market share) concept, the Boston Consulting Group (BCG) matrix, Porter’s five force analysis, etc. All these concepts operationalize the basic concept of deterministic models and can be combined under the concept of market-based view (MBV). The occurrence of MBV, as the antipole to the resource-based view (RBV), can be explained by companies in the 1970s had to cope with shrinking demand. The 1970s marked the end of the long-term, post-war, upward cycle. Therefore, the focus gradually shifted to an interest in growth that is feasible even in 26.

(27) saturated markets, because growth was no longer only possible via the cost-efficient allocation of the company’s resources to varying demand. Accordingly, the focus of business and management research shifted from a resource-based view to a market-based view. It was no longer the most efficient combination of production factors to meet rising demand, but the creation of new or additional demand that grew in importance. The result was a new paradigm. The main research question was not why some companies grow and others do not, but how growth is still possible in weak or mature markets. Therefore, a growing interest in strategic management could be found, whereas operations management questions were placed in the background. The basis for the market-based view also emerged in the 1960s with the works of Drucker (1954) and Ansoff (1965). Drucker led the paradigm shift. According to him, businesses are not allocation resources to produce products. They produce ‘customers’. As Drucker puts: “There is only one valid definition of business purpose: to create a satisfied customer. The customer determines what the business is. Because it is the purpose to create a customer, any business enterprise has … only … two basic functions: marketing and innovation” (Drucker, 1954, p. 37). The idea, that the company ‘revolves not around itself’ and its resources, but ‘around the customer’ and the products for which customers are ready to pay was a ‘Copernican Revolution’, which was not necessary in ‘automatically’ growing markets supplying driven markets. The same goes also for Ansoff’s approach. He developed a notorious matrix model for growth strategies. The product–market matrix (also called the Ansoff matrix) is conceptualized as a strategic management tool. It is intended as a tool for planning growth for management that has opted for a growth strategy. Ansoff determines four ‘generic’ strategies: (1) market penetration, (2) market development, (3) diversification, and (4) product development (Ansoff, 1965, pp. 98–99). Ansoff’s product–market matrix was the first analytical framework for strategy selection and became the predominant strategic paradigm of the 1960s and 1970s, with the latter being modified by Kotler’s marketing matrix for growth companies (Kotler, 1999, p. 47). Until the 1990s, additional complementing approaches, based on the Ansoff matrix, occurred to support strategic decision-making in presenting possible firm growth paths (see Table 3). 27.

(28) Table 3. Growth Types According to Ansoff et al. (1965) Criterion. Type of Growth. Product–Market. -. Market penetration (known product known market),. Relationship. -. Product development (new product, known market),. -. Market development (new markets, known product). -. Diversification (new product, new market). -. Horizontal (range extension to similar products). -. Vertically (increasing the depth of range),. -. Concentric (diversification into new industry with similar products). -. Conglomerate (diversification into new industry with new products). -. External extension (acquisition of existing capacity),. -. Internal extension (additional capacity created by the company. Expansion Direction. Capacity Extension. itself) Reference Value. -. Quantity (e.g., sales increase),. -. Quality (e.g., improving performance). Source: Own compilation, based on Ansoff (1965, p. 132); Graumann (1994, p. 501); Schoppe et al. (1995, p. 23).. Generally, these concepts focus on management practice, i.e., they are not concerned with explaining growth, but with the question of managing growth, so that they are more occupied with the success of different strategies and not with the microeconomic reasons for a law of growth. The 1980s showed maybe the most advanced supplement of the Ansoff approach. The competitive advantage concept, introduced by Porter (1980), was a concept to develop growth strategies. Porter systemizes possible strategies that can track a company to gain competitive advantages and thus growth. Porter arranges competitive strategies by the possible strategic goal (‘What does the company do’) and by the company’s strategic advantage (‘How can the company achieve this goal’) and receives three basic so-called generic strategies (norm strategies): (1) cost leadership strategy, (2) differentiation strategy, and (3) niche strategy. 28.

(29) Porter’s generic strategies can be viewed in line with industrial economics, which postulates that a specific goal means that combinations appropriate to the market environment lead to a competitive advantage and is thus the basis of the core competency concept. The company’s combined skills and resources (core competencies) will enable the company to occupy a market position to realize a competitive advantage and thus growth (Hamel & Prahalad, 1990). Whereas the concept of core competencies is entirely based on the resource-based view, Porter must be located between both concepts. His approach includes both RBV and MBV. This becomes evident in his industry structure analysis. Porter’s “Five Forces Model” (5Fs) was developed as a tool for industry analysis in corporate planning and strategic decision-making. This model is also based on industrial economics. The basic idea of the model is that the attractiveness of and thus the growth possibilities in a market are determined mainly by the market structure. The market structure, in turn, influences the strategic behavior of firms, i.e., their competitive strategies, which in turn determines their market success. Therefore, the success of an enterprise depends, at least indirectly, on the market structure (Porter, 1980). However, concerning Penrose’s approach, Porter also pronounces the ‘visible hand’ of managers as determinant in explaining firm growth; however, on the other hand, it re-establishes the market as a force of its own. Porter must be seen, as mentioned, in the tradition of microeconomics. Industrial economics is a microeconomic approach that deals with the interaction between the market and companies. To explain the development of companies, the competitive process must be considered. Therefore, industrial economics uses microeconomic methods and concepts; however, it differs in focusing on partial analysis and incomplete competition. Industrial economics is concerned with market mechanisms, whereas markets are characterized by market concentration and market definitions/demarcations. This includes both functional requirements and requirements of competitive and innovation processes. This concept for explaining the development of markets and companies is based on a concept developed by Bain (1956; 1968). Bain investigates the development of different markets or sectors along three parameters: (1) the degree of supplier concentration, (2) the degree of product differentiation, and (3) the height of barriers to entry to the industry or market (Bain, 1956). Companies benefit from market development through (1) economies of scale, (2) absolute cost advantages, and (3) product differentiation (Bain, 1968). These factors can be found in Porter’s approach in a more developed form, as shown above. 29.

(30) The PIMS approach also has its roots in industrial economics and is the starting point for Porter’s competitive advantage research (Thomas & Gup, 2010 p. 23; Woywode, 2004, p. 16), for empirical ‘success factor research’ (Woywede, 2004, p. 17; Haenecke, 2002, p. 166), and has its origins in the 1960s at a time in which large-sized enterprises were dominant. The PIMS research project is based on database research, not on a model. The PIMS study is a cross-industry study to determine the influence of specific factors on the success of businesses. The origin of the study is based on a General Electric Group project, as an attempt to identify the activity of influencing variables on earnings and cash flow by using statistical methods. General Electric (GE) used a large amount of information from different industrial sectors to identify cross-industry determinants of earnings and cash flow (Neubauer, 1997, p. 437). The PIMS findings are mostly generated by surveying large enterprises in mature markets or in the corporate life cycle maturity stage (Thomas & Gup, 2010 p. 23; Woywode, 2004, p. 16) and considers the conquest of market shares in mass markets as strategy for growth. The market share paradigm, based on the economies of scale, is a key concept of strategic management until today (Ungson & Wong, 2008, pp. 481–482). The PIMS approach is based on the structure–conduct–performance paradigm (SCP) (Olderog, 2003, p. 82). Market structure and the conduct of the firm are linked in a feedback loop. The fit between both factors is the origin of the firm’s performance and is a result of management’s decisions and actions (Olderog, 2003, p. 81–82), not only because of a simple price–quantity adjustment loop, but in terms of the microeconomic models of firm growth. The main strategic objective is to gain a competitive advantage and thus a higher market share. Then, the effects of the economies of scale are the cause for outperforming the market in the sense of superior profitability. PIMS does not analyze companies, but SBU (strategic business units). An SBU is, by PIMS definition, a division, a product line, or profit center of an enterprise. As a measure of success, metrics such as ROS (return on sales), cash flow, and ROI (return on investment) are applied. To counteract the annual fluctuations in profitability ratios that often result from changing economic conditions or accounting practices, the average values of multi-year periods are used (Buzzell & Gale, 1989, p. 23). However, key questions of the PIMS program follow (Malik, 2008, p. 148–149):. 30.

(31) (1) What are the key strategic factors for profit potential of a company and how can they be measured? (2) How do these factors work together and how can they be influenced and used by the company? (3) What quantifiable effects do acquisitions have and what are quantifiable synergy effects? (4) How high must marketing, research, and development expenses be and what is their marginal benefit? (5) How high need be added value, vertical integration, productivity, and capital intensity per employee for the long-term, sustainable health of a company, and what is their marginal benefit? Data analyses findings are relatively modest. Additionally, critics of the PIMS approach charge that mainly successful industrial companies are included in the database data, while smaller companies and firms in the service sector are significantly under-represented (Homburg, 2000, p. 70). The main problem is that determinants were operationalized with different sub-variables. The influence of single external and internal factors remains unclear, whereas the impact of highly aggregated variables is weak (see Figure 2).. Figure 2. Structural Drivers Explaining Most of the Variation in Performance According to PIMS Findings Source: Malik (2008, p. 152).. 31.

(32) The PIMS conclusions are rather unsurprising, such as ‘high quality and high market share having the highest impact on the ROI’, or ‘high investment intensity under the conditions of weak market position (relative market share) having a highly negative impact on profitability and firm growth’. However, the PIMS program claims to identify 37 independent variables overall that explain, as a whole, about 80% of the ROI variance (Schoeffler, 1977, pp. 111–112). Relative market share is identified as the most important success factor. Additionally, relative market share, defined as relative to the market share of the three largest competitors explained 12% of the ROI variance (Luchs & Müller, 1985, p. 88). Market share has the strongest positive correlation with the ROI (Buzzell, Gale & Sultan, 1975, p. 98). A high market share does not include a high ROI; however, the chances of a high ROI increases with increasing market share (Neubauer, 1997, p. 442). Possible explanations for the relationship between market share and ROI provides the economies of scale and market power concept (Buzzell, Gale & Sultan, 1975, p. 98). Companies characterized by high market share have high manufacturing volumes, can use the advantage of scale with cost efficiency, and can thus increase ROI. A higher market share is also associated with greater market power and thus bargaining power, such as purchasing power, can be used (Homburg, 2000, p. 63). Product quality is identified as a second important success factor to explain firm growth (Buzzell & Gale, 1989, p. 7). The quality is not measured in absolute terms, but in relation to the competitors’ product quality, which is the relative quality. The relative product quality has a similarly high effect on ROI as the relative market share. A small- to medium-sized company market share, which has a negative effect on success and thus on growth, can be almost completely compensated by high relative quality (Zaepfel, 2000, p. 56). In summary, it can be stated that deterministic theories and management theories of firm growth are a synthesis of the microeconomic approach and the RBV. The interaction between market conditions and management’s resource allocation and strategy decisions determine firm growth, with market share and product quality as the key impacting variables (see Figure 3).. 32.

(33) Notes: on the left: Porter’s “Five Forces Model”; in the middle: Porter’s generic and Ansoff’s market strategies Figure 3. Causal Relationships According to Management Theories of Firm Growth Source: Own presentation based on Ansoff (1965) and Porter (1980).. 1.2.4. Corporate Lifecycle (CLC) Models of Firm Growth Corporate Lifecycle (CLC) models of firm growth are descriptive models. According to these, firm growth shows a life cycle pattern comparable to living organisms and social organizations. CLC models generally focus on internal, resource-based causes of growth in contrast to evolutionary models, which explains growth by an adaptation process of the firm in the context of its environment (i.e., competition, demand changes, etc.). The main proponents of this approach are Steinmetz (1969), Churchill and Lewis (1983), Scott and Bruce (1987), Greiner (1973; 1998), and Dobbs and Hamilton (2007). The CLC model proposes that companies progress through a predictable sequence of generally four stages of development: (1) start-up, (2) growth, (3) maturity, and (4) decline (Greiner, 1972; Churchill & Lewis, 1983; Scott & Bruce, 1987; Burns, 1996). Furthermore, Sihler et al. (2004) created a CLC model that interprets a company’s financial performance measured by profits, sales and cash flow (see Figure 4):. 33.

(34) Figure 4: Financial Performance in the Different Stages of CLC Sources: Compiled from Sihler et al. (2004, p. 4); Churchill & Lewis (1983).. The start-up stage is characterized by improvised management activities with no systems and routines (Greiner, 1972, pp. 7–8). The main focus is on increasing sales with a single, innovative service or product. On the other hand, business opportunities exceed resources and infrastructure (Ward, 2003, pp. 6–7), so that in the subsequent growth stage, the recruitment of more skilled staff and the establishment of control systems become the main management tasks to enlarge the organization’s capacities for future growth (Ward, 2003, p. 6–7). To finance growth, additional funds become necessary so that raising money is the main focus of the firm’s managing partners, or the owner, to close the financial gap (Berger, 2006, p. 2963). In the maturity stage, the key issue in the growth process is no longer survival, but rather consolidating profitability (Churchill, 1983, p. 38). The company can make use of managerial skills, size advantages, and amassed financial resources (Hall, 1995, p. 115) to support the growth process. If management fails in this stage to increase cost efficiency, competitive advantages, core competencies, etc., then sales and profits decrease and result in the company shutting down its operations (Ward, 2003, p. 15–16) if reengineering and turnaround measures fail. Through the complete CLC, resources are needed to foster growth. Particularly in the growth stage, the acquisition of financial resources are the key factor for further growth. This can take place by acquiring fresh equity capital or by obtaining higher profitability 34.

(35) (Jain/Kini, 1994, p. 460; Portisch, 2008, p. 441). Thus, CLC models of growth see business and managing as internal adaptations to growth challenges (Dobbs & Hamilton, 2007, p. 299). Some researchers, such as Bessant et al. (2005) and Phelps et al. (2007), criticized the lack of evidence for the existence of specific growth stages and its management consequences. Others validate stage growth theories positively (Miller & Friesen, 1984; Kazanjian, 1988). However, when summarizing the CLC model(s), it must be noted that these models, which are not more than descriptive models, do not explain growth causes. Their normative conclusion is that management must actively manage growth. Thus, CLC growth models see business and managing as internal adaptations to growth challenges (Dobbs & Hamilton, 2007, p. 299). Others validate stage-growth theories positively (Miller & Friesen, 1984; Kazanjian, 1988).. 1.2.5. Evolutionary Models of Firm Growth Evolutionary models are mainly descriptive models, although some recent studies apply an econometric approach and thus integrate neo-classic and an evolutionary views of a market (e.g., Kaldasch, 2012). According to Kaldasch (2012), the key idea of evolutionary models is that firms are the result of an evolutionary process in the context of supply and demand, which allows the calculation of size distribution of products and firms and provides thus an explanation of the size-variance relationship of growth rate distribution of products and firms. The main proponents of this concept of growth are Alchian (1950), Jovanovic (1982) Aldrich (1999), Vinnell and Hamilton (1999), and Edelmann et al. (2005). Whereas CLC models focus more on the internal, resource-based causes of growth, evolutionary models describe firm growth as a process of adaptation of the firm to competitors and market environment. According to evolutionary models, the dialectics of internal and external factors cause growth. Classic proponents of evolutionary models are Penrose (1959, 225 ff.) and Aldrich (1999). They do not determine a standard sequence of growth, because growth is caused by unique circumstances. However, others such as stage models and evolutionary models identify an adaptation process as a cause. Growth depends on managerial resources available and the fit with external factors (Vinnell & Hamilton, 1999; Edelmann et al., 2005).. 35.