Development of New SME Business Initiatives – Term Paper

These include all the factors outside the firm’s control bit which otherwise pose a direct effect on the growth or fall of a business. They can be further categorized as:

i. Bureaucracy – This refers to the structure of a business and its regulations so as to be the master controller of their activities (Kastrati, 2015). Bureaucracy, therefore, affects the business growth by mainly regulating the available incentives for business operations and also by being the main determinant factor of available innovations within the business (Faruq, Webb and Yi, 2013). Low incentives will improve growth since they will encourage setting up of new ventures, especially for an SME. Increased innovative opportunities, on the other hand, will result in the development of new business initiatives towards adopting these innovations which will consequently result in business growth (Wahab and Rahim, 2013).

ii. Corruption – It is a factor that has a negative correlation with business growth especially in the external market (den Nieuwenboer and Kaptein, 2007). Aidis and Mickiewicz, (2006) agree with this argument whereby in their study for Luthina’s economy growth resolve to the conclusion that corruption depicts a negative relationship to a firm’s growth. Further, corruption is seen as the main obstacle for SME businesses growth (Kastrati, 2015). To define corruption, Wang and You (2012) say that corruption is the selfish benefits of public personnel from government property. They further stress that corruption is the major source of business failure and the biggest retardation factor to business growth. Nevertheless, according to Cosenz and Noto (2014) and Mendoza, Lim and Lopez (2015) develop a contradicting view of the effect of corruption in both their researches. Their researches suggest that there exists a positive relationship between corruption and the growth of a firm. In this instance, Mendoza, Lim and Lopez suggest that corruption can be used by a firm as a means of acquiring information that is an impeccable to the firm’s growth. In which case the business, though posing an unhealthy competition to the other firms, will end up growing in size and market coverage. Cosenz and Noto have the same view as they base their argument on the fact that corruption is a good source of cost reduction for a customer by a firm, in which case the firm accepts a bribe from the customer so that they can offer cheaper services for the future better of the firm. In other words, the firm benefits from this bribe situation. Importantly, Cosenz and Noto (2014) also agree to the fact that these instances of corruption, on a bigger picture, affect the whole economic growth since they result to unfair and risky economic growth.

iii. Rule of law – Lack of transparency and regular fluctuations in the laws and regulations (legal environment) of a given government towards the business are major anti-growth contributors for businesses (Krasniqi 2007; (Bentzen, Madsen and Smith, 2011). Kastrati, 2015 also agrees with this finding and concludes that a firms growth is highly determined by the nature if the laws and regulations imposed by a country on the business sectors. In this case, non-transparent and fluctuating laws and regulations definitely cause a retarded growth of businesses.

These are the factors which mainly affect the internal being of a business or a firm. They are the major determining factors of the performance of a firm and they include:

i. Legal-status – This factor entails determining whether the firm is a corporation or independent, whether it has limited or unlimited liabilities or whether it has individual management or distributed management (Jamaluddin and Dickie, 2011).  Davidsson (2010) says that when management is distributed among many decision makers, more chances of taking risks are expected for the business thus more chances of business growth. On the other hand, firms under single management tend to be less exposed and tend to take lesser risks and therefore they have less chances of growth due to reduced profits. He further argues that limited liability firms tend to be more experienced and are thus susceptible to growth; however Xiao (2011) argue otherwise saying that those with unlimited liability are more pre-exposed to growth. Further, Eijdenberg, Paas and Masurel (2015) argue that corporations tend to grow at slower pace as compared to independent firms since the corporations require more steps of decision making than do independent firms.

ii. Age of firm – Krastrati (2015) claims that how long the firm has operated is considered a perfect determinant of the firm’s stability and consequently a good determinant of the firm’s growth. Yasuda (2005) carried a research on the firms present in japan and came to the conclusion that the age of the firm only determines the adaptability and stability of the firm and has a negative correlation with the firms’ growth. Another study by Dunne and Hughes agrees to this conclusion and also suggests that there exists a negative relationship between the growth of a firm and the age of the same (Dunne and Hughes, 2014). In general terms, the growth of a firm decreases as the age of the firm increases. 

iii. Size of firm – Krastrati (2015) argues that there is a negative relationship between the size of a firm and its growth. This is agreed to by the research by Mishra and Zachary (2013) where they found out that as the firm size decreases the growth of the same firm increases since the firm is more flexible to business environment changes especially if the firm is managed by one or a few individuals. Thus the bigger the firm the lesser the growth it is expected to experience.

iv. Region of firm – The location of firms (geographically) has been seen to affect growth of the firm in multiple studies positively, negatively or not at all. For instance a study of the UK firms gave a conclusion that the firms located in the rural areas had quicker growth rates than those in the urban areas (Sobri Minai and Lucky, 2011). On the other hand a Swedish firms study showed just the opposite, claiming that firms in the urban areas tend to grow at higher rates than do firms in the rural areas (Davidsson, 2010). Finally, a study by Mishra and Zachary, (2013) determines no visible relationship between firm growth and firm’s location. Their research is however based on the population density of the locations while there are many variables that affect and/or determine growth of firms in various locations.   

Many growth phases for business enterprises have been developed by researchers in a bid to explore the growth ‘steps’ that the enterprises undergo from the development to the maturity stages (Greiner, 1997; Scott and Bruce 1987). All these researches have striking differences as well as similarities. The major similarities are that they all base their phase development on consideration of factors such as cash (cost incurred by the firms), the customer relations with the firm (market variants), management policies in the firms, and the overall organization structure. Based on the thoroughness and similarity of the Greiner and the Scott & Bruce growth models, this study will consider and explore these two models in details and provide a critical comparison and review of the two models in section 2.3.3.3.

Greiner (1997) defines five phases that firms (such as SMEs) undergo during growth over a certain period of time. He argues that this firms experience: Evolutionary periods which refer to the periods through which the SME gains in terms of operations and size even in terms of age (time of operation) and thus in terms of experience in the market which is gradual and takes years for completion (LeBrasseur, Zanibbi and Zinger, 2003); and Revolutionary periods during which the firm undergoes upheavals and unavoidable turbulences as it adjusts to accommodate the accomplished growth. The five phases of growth can be illustrated by figure 2. Notably, the evolution stages are accompanied by the major managerial tactic used to attain growth and the revolution stages are accompanied by the major managerial constraints experienced during growth (Greiner, 1997). Also for SMEs, the evolutionary periods last for longer periods of time (years) than larger companies do and thus it takes them a long period to experience all the five stages/ phases enlisted (Rojsurakitti, 2015).

The first phase of growth (creativity) is characterized by an evolution stage mainly accompanied by market, product, technical and entrepreneurial orientation (Greiner, 1997). The firm is mostly in its early stages of development and thus introducing a new product in the market majorly employing informal communication with the main objective of exploiting the employees’ mental and physical energies for productions sake (Berger, 2008). The feedback from the market is the main tool for management. Here, allowances such as overtime, are the major tools for motivating the employees (Greiner, 1997).

The main revolution aspect in this phase is leadership crisis: informal communication cannot be good for production; there is need for increased number of employees, advanced methods of production, and need for improved accounting and record keeping for all the production processes. All these problems boil down to difficulties in management. The entrepreneur is strained and overstretched trying to accommodate all these overwhelming changes which require a new leadership crew which can bear and control all these difficulties (Greiner, 1997).     

  Figure 2: The growth stages of SMEs (Greiner, 1997, p 41)