H200603 An Ambition to Grow A multidisciplinary perspective on the antecedents of growth ambitions R. Hakkert R.G.M. Kemp Zoetermeer, June, 2006 This report is published under the SCALES-initiative (SCientific AnaLysis of Entrepreneurship and SMEs), as part of the 'SMEs and Entrepreneurship programme' financed by the Netherlands Ministry of Eco- nomic Affairs. Most recent EIM reports and much more on SMEs and Entrepreneurship can be found at: www.eim.nl/smes-and-entrepreneurship. This research report is based on the Master Thesis of R. Hakkert at the University of Groningen. We would like to thank Prof. Dr. P.S. Zwart and Dr. C.H.M. Lutz for their detailed comments and suggestions, which led to substantial improvements. The responsibility for the contents of this report lies with EIM bv. Quoting numbers or text in papers, essays and books is permitted only when the source is clearly mentioned. No part of this publication may be copied and/or published in any form or by any means, or stored in a retrieval system, without the prior written permission of EIM bv. EIM bv does not accept responsibility for printing errors and/or other imperfections. 2 Contents Executive summary 5 1 Introduction 7 1.1 Research Method 7 1.2 Structure of the Report 8 2 Growth of the Firm 9 2.1 What is Firm Growth 9 2.2 Description of Firm Growth 9 2.3 Conclusion 12 3 Economic Perspective on an Ambition to Grow 13 3.1 A Definition of a Decision 13 3.2 Expected Utility Theory 14 3.3 Bounded Rationality Theory 15 3.4 Prospect Theory 16 3.5 Reflection of an Economic Perspective on an Ambition to Grow 18 4 Psychological Perspective on an Ambition to Grow 19 4.1 Expectancy-Value Model of Attitude Theory 19 4.2 Theory of Reasoned Action 20 4.3 Theory of Planned Behavior 21 4.4 Reflection of a Psychological Perspective on an Ambition to Grow 22 5 What is an ambition to grow? 23 5.1 Defining an Ambition to Grow 23 5.2 A Typology of Small Business Owners towards the Ambition to Grow 27 5.3 Conclusion 28 6 Which factors influence the ambition to grow of a small business owner? 29 6.1 Theory of Planned Behavior and the Ambition to Grow 29 6.2 Personal Factors 33 6.3 Demographic Variables 36 6.4 Conclusion 37 7 Final Conclusion 39 References 41 3 Executive summary This report tries to gain insight in the willingness or ambition to grow of a small busi- ness owner. The main question of this report is therefore: Which factors influence the ambition to grow a business? Firm growth is a process where the firm changes from a small, informal, simple and an unstructured firm to a bigger, often more formal, complex and structured organization. Often a firm starts (very) small and needs to grow to a certain size to become economic viable (e.g. the minimum efficient scale). From that point onwards, the small business owner has the freedom to grow the business or not. Not every small business owner wants to grow. This can be caused by the reluctance to the changes that the role of the small business owner and firm undergo during the growth of the organization. To examine the ambition to grow an economic and a psychological perspective is given in this study. The economic decision theory builds on the concept of rationality. The small business owner calculates the expected utility of all alternatives/prospects by as- signing a utility or value to the consequences of the different alternatives of growth. In contrast, the bounded rationality theory takes the view that individuals satisfies rather than optimize their decision and that decision making can not be understood if there is not accounted for the limited ability of men to evaluate all alternatives and for the complexity and uncertainty of the growth situation. The bounded rationality theory and the prospect theory give a good description of the decision process. However, the deci- sion maker and their preferences are disregarded in the economic theory. The psychological perspective focuses on the person and their preferences. The models of Ajzen and Fishbein are based on the one-dimensional view where the cognition, af- fection and conation are causally linked, the theory of reasoned action. The small busi- ness owner has certain believes of performing firm growth. These beliefs are evaluated and form an attitude towards conducting firm growth. Besides this attitude, the per- son’s perception of what the social environment thinks about performing a particular behavior is included, the so called social norm. The attitude and the social norm to- wards growth are linked to the intention to grow the firm. To further develop the the- ory of reasoned action, the concept of behavioral control is added (the theory of planned behavior). The perceived behavioral control is the degree in which the small business owner thinks he can control growth. The attitude, social norm and the per- ceived behavioral control towards conducting growth can explain and predict the inten- tion to grow. In this research report a growth ambition typology is developed on the basis of the eco- nomic, psychological and the life-cycle perspective. There are 4 types of small business owners distinguished: the ‘must grower’, the ‘proactive grower’, the ‘reactive grower’ and the ‘non-grower’. Until the small business firm is economic viable the firm must grow. The small business owner is therefore categorized as a ‘must grower’. When the firm is economic viable the small business owner has the choice to grow. The proactive grower searches actively for growth by looking for new opportunities while the reactive grower is more passive and needs an external stimulus to grow. The non-grower does not want to grow the business because growth interferes with the preferences of the small business owner. To explain the growth ambitions of a business owner, a conceptual framework is devel- oped that addresses the factors that influence the growth ambition (see figure 1). The antecedents towards the growth ambition are based on the theory of planned behavior. These are supplemented by personal and demographic variables addressed in the em- pirical literature. The personality traits that are addressed are widespread in entrepre- 5 neurship research but are not often explicitly linked towards the ambition to grow. Ca- pabilities and skill have an empirical ground but there is no consensus of the direction of the relation between these variables and the ambition to grow. For instance, it is not clear so far if the relation between gender and the ambition to grow is a direct relation- ship or if it is mediated by perceived behavioral control. The age of the small business owner is negatively related to the ambition to grow; only the underlying reasons vary. In the conceptual framework also the link between the ambition to grow and actual growth is given. It is assumed that the growth ambition determines the growth strategy of the small firm. The strategy has to fit with the opportunity and the resource or ability of the firm, which also play a moderating role in the relation between the ambition to grow and actual growth. figure 1 A conceptual framework concerning the ambition of firm growth 6 1 Introduction The small business owner1 plays a central role in a small business. He determines pre- dominantly the decisions and actions taken by the small business. It is thus plausible that the small business owner plays a main role in the decision towards growth. There- fore it is not surprising that the small business owner ambition towards growth plays a significant role in the explanation of firm growth according to the academic literature and EIM reports (Baum et al., 2001; Bellu and Sherman, 1995; Davidsson, 1991; Gibcus and Kemp, 2003; Kemp and Verhoeven, 2002; Kolvereid and Bullvåg, 1996; Miner et al., 1994; Mok and van den Tillaart, 1990; Philipsen and Kemp, 2003; Wiklund and Shepherd, 2003). In the mainstream economic literature the economic motive of the firm is taken for granted. While growth is associated with a high pay-off it is to be ex- pected that the majority of small business owners strive for growth. However, a study of Mosselman et al. (2002) shows that only 16 % of the small business owners in the Netherlands have growth as most important objective. For many business owners the growth of their business is not even an objective (Delmar, 1996; Gundry and Welsch, 2001; Storey, 1994). A more differentiated view in the arrival at the ambition to grow is therefore more appropriate. Relatively little research has been done towards the ambi- tion to grow of small business owners. Therefore EIM launched the project “Antece- dents of an ambition to grow” that have to shed a light on the ambition to grow. With insight in the ambition to grow policymakers maybe can influence or stimulate the am- bition to grow of a small business owner. With more growth oriented small business owners more businesses are likely to grow and that can have a positive impact on the job creation in an economy (Storey, 1994; Wiklund et al., 2003). The research method of this special paper is described in the following section and in section 1.2 the structure of the report is given. 1.1 Research Method The purpose of this research report is to gain insight in the ambition to grow of small business owners. The following question is answered: What is an ambition to grow and which factors influence an ambition to grow? The central question can be separated into six sub questions, namely: − What is firm growth? − What is the economic perspective on an ambition to grow? − What is the psychological perspective on an ambition to grow? − How can an ambition to grow be defined? − Can there be a typology established with regard to the ambition to grow of the small business owner? − Which factors influence the ambition to grow of a small business owner? 1 In this report the term small business owner is used instead of the term entrepreneur. This is done because a wide range of definitions of an entrepreneur is used in the literature and there is very little agreement about what is the correct definition. In contrast, the definition of a small business owner is clearer and is often stated as an individual who runs and owns an independent business (Moran, 1998). 7 The main question and the sub-questions are answered by means of a literature search. The literature search will be conducted by scanning the leading and most recent eco- nomic psychology, management and small business literature. The websites of relevant conferences are also regarded. 1.2 Structure of the Report The introduction and the research method were given in chapter 1. The ambition to grow is determined in an organizational context and the growth of the firm is the ob- ject of the ambition. The concept of firm growth is therefore described in chapter 2. A multidisciplinary perspective towards the ambition to grow is given. In chapter 3 an economic perspective on an ambition to grow is discussed. A psychological perspective on an ambition to grow is described in chapter 4. In chapter 5 a definition of the ambi- tion to grow is given and a typology of a small business owner regarding the ambition towards firm growth is established. In chapter 6 the factors that influence the ambition to grow of a small business owner are given. A conceptual framework is constructed and propositions are stated that can be tested in further studies. In chapter 7 a final conclusion is given that provides feedback on the main question. 8 2 Growth of the Firm An intention or a certain decision is dependent on the object where upon it is based. For instance, the variables that play a role in the decision to buy an ice cream or to grow the business are very different. Business growth is the object where upon the am- bition to grow is determined. In this chapter the concept of firm growth is first ad- dressed before we turn to the perspectives that relate to an ambition to grow described in chapter 3 and 4. Section 2.1 explains what firm growth actually is and section 2.2 gives a description of the growth process of the firm. A conclusion of this chapter is provided in section 2.3. 2.1 What is Firm Growth Firm growth is a process where some attributes of the firm increase between two points in time. Delmar (1997) distinguishes three phases regarding firm growth. First, the en- trepreneur perceives a general shift in the demand from the customers. Second, the general shift in demand results in a rise in demand for the particular firm. Third, the or- ganization has to adapt to the new level of demand. In most cases the organization has to attract personnel and capital to increase their output. Growth is thus multidimen- sional in nature where different attributes (for example sales, personnel and capital) of the firm change during growth. In empirical literature the possible growth indicators for measuring growth are: assets, employment, market share, physical output, profit and sales (Ardishvili et al., 1998; Delmar, 1997). The most used growth indicators according to the study of Delmar (1997) are employment and sales. Delmar et al. (2003) distin- guishes two types of employment growth namely organic growth and acquisition growth. Organic growth is the growth in employees that the firm establishes through internal growth, mainly caused by sales growth. Acquisition growth is the growth in employees that is established through acquisition of other organizations. Organic growth is particular interesting for the government to track the job creation on a na- tional level for a certain period. Sales growth is important due to his high generality and is important for small business owners because it is seen as an indicator for perform- ance (Davidsson, 2000).1 2.2 Description of Firm Growth In this section we describe the process of firm growth. There are several theories that describe the growth of the firm. Wiklund (1998) describes in his thesis four perspectives that address firm growth: the resource-based view, the strategic adaptation, the moti- vation and the life-cycle perspective. The first three perspectives try to explain business growth and focus upon the variables that cause firm growth. On the contrary, the life- cycle perspective takes growth as the starting point and looks upon the changes that growth brings upon the business. The effects of growth to the organization and conse- quently the small business owner are the main concern of the life cycle perspective. In this section the focus is upon the object of firm growth and not on the variables that 1 For a detailed description of the issues regarding the measurement of growth see Davidsson (2000) and Delmar (1997). 9 cause firm growth. Therefore a description of firm growth is given based upon the life cycle perspective. In life cycle theory the development of the firm is a process in which firms go through several stages. These stages can be deterministic, that means that a firm has a certain path that it has to follow. Examples of such models are that of Greiner (1972) and Adizes (1979). These models have an implicit grow or fail assumption, which generally means that organizations follow the stated model or they fail and go out of business. In the model of Greiner (1972) the decision to grow is disregarded while it is implicitly as- sumed in the model of Adizes (1979; Snuif, 1995). Other models, such as those proposed by for instance Churchill and Lewis (1983) and Scott and Bruce (1987), have more paths that a firm can follow, so these models are more probabilistic in nature, and do not posses an implicit growth or fail assumption. In these two models, growth is partially established through the willingness to grow of the small business owner (Snuif, 1995). Risseeuw (2003) distinguished in the growth process the individual and the firm. Both have their own problems and limitations in the growth process. Greiner (1972) recog- nized that during the firm growth process the role of the manager has to change. The individual in combination with the organization is looked upon through the different stages that are distinguished. These stages are start, survival, growth, expansion and maturity. These stages are almost similar to those distinguished by Scott and Bruce (1987). Start In the beginning there is an individual with an idea. The individual decides to commer- cialize his idea by founding a business. The capital needed to start a business is usually small and the founder or family and friends are the main moneylenders. At first, every- thing is new to the small business owner, he is in control and responsible for the com- plete management of the firm. In this stage, the different tasks of the small business owner are: the administrative side of the business, comply with legislation, acquiring customers, suppliers and networks, and more domestically duties like cleaning and mak- ing coffee for visitors (Risseeuw, 2003). The organization is unstructured and simple bookkeeping helps the small business owner control the business. The small business owner has in general no employees in this stage. Goffee and Scase (1995) therefore characterize the small business owner as self-employed. Because there is little possibility to acquire additional capital it is very important that initial sales are made. When the firm doesn’t make these initial sales, it is not viable and it will eventually fold. Growth is therefore in this stage not an option but a prerequisite. Survival If the firm realizes initial sales, it has to find a way to survive. The company has to at- tract more customers to increase sales and to generate a positive cash flow. Due to the track record and the customers that the business has established, the bank becomes a possible moneylender. Relationships with customers, suppliers and networks become stronger and the owner and the organization develop some routines. The small business owner and the small business firm gain experience and learn. Often first personnel are employed in this stage. The employment of personnel changes the role of the small business owner; the self-employed become a craft employer (Goffee and Scase, 1995; Risseeuw, 2003). The small business owner becomes a primus inter pares, an example for personnel. The administrative burden becomes higher because of the legislation ac- companied with the employment of personnel. Planning and coordination becomes more important, tasks have to be divided and possible conflicts have to be resolved. The 10