Stages of SME Growth – Term Paper

The firm at this initial stage is mainly focused towards acquiring clients and customers and production of as many products as possible. The founder is the main supervisor and manager the main source of finance for the unstructured organizational business. The firm only has limited market coverage with limited distribution channels and experiences lots of financial constraints (Scott and Bruce, 1987).

Scott and Bruce (1987) further expounds on three types of crises that correspond to growth at this stage for SMEs. Firstly, growth in this stage will demand more concentration to profitability of the firm rather than to establishing the firm in the market. Secondly, the firm gets too much administrative loads as there is increased activity. These loads require the implementation of a more formal administrative approach of which the manager may lack skills of implementing or may opt to ignore with the hopes that it will cease in demand. Thirdly, the manager may be strained in terms of the time that is required for him/her to attend to crucial matter due to the heightened activities the firm is dealing with. This certainly calls for a more structured administration. According to Beck, Demirguc-Kunt and Levine (2005), a structured administration helps relieve the stress of firm activities since it is a good means of spreading/ distributing activities to the members of staff which leads to a form of specialization.  

In this second growth stage, the SMEs are mainly characterized by incorporation of new survival tactics so as to source more funds to expand production and improve quality of production e.g. from bank loans (short-loans to be specific), overdrafts and personal sources. The firms at this stage are more susceptible to competition from new-entry-firms following the initials firm success. Furthermore, the firms are characterized by an increased market size and also broader distribution channels so as to serve this wider market (Headd and Kirchhoff, 2009).

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Scott and Bruce (1987) mention over-trading as the first crisis that is associated with this stage. When the firm attains big margins of returns, it may be overwhelmed and venture into more sales in an un-controllable manner. There is need of the firm to control the resulting growth rate otherwise, the firm will fold. The second crisis arises due to the demands of new management system in line with a need for delegation due to more customers and thus new markets which would require closer supervision. Thirdly, the firm will experience increased competition which may call for an adoption of a new financing strategy so as to improve on the skills and equipment necessary to maintain a competitive basis for the firm. Fourthly, the firm will experience a strong need for a financial manager and a cost control personnel due to the increased price competition (Kwarteng and Li, 2015). All these crises threaten the management system of the firm and if not addressed duly the firm will fold.

In this stage, the firm has developed enough financial capability to curb most of the initial competitors. The profits are large but are often ploughed back into financing of the firms projects. The accounting system at this stage is formal and the administrative system has been divided into functional management. The firm further aims at developing formal research programs aimed at understanding the new market systems and developing better strategies to tackle oncoming difficulties. The firm may however be susceptible to liquidity to the increased profits (Kwarteng and Li, 2015). To avoid overtrading, the firm employs diversification strategies.

At this stage, the firm is vulnerable to collapsing due to two major crises (Scott and Bruce, 1987). Firstly, it encounters very stiff competition from larger firms and immediate measures are required to remain competitive. Secondly, the firm experiences market expansion crisis in order to meet the financial demands the growth exerts on the firm. This may also entail the need for expanding production. The crisis will arise since there will be a difficulty of the founding entrepreneur accepting the idea of a professional management system rather than an entrepreneurial system. A decentralized management will have to be established so as to ensure proper co-ordination and control of the diverse scope of the firm.    

At this stage, the firm’s operations are highly formal and management is completely decentralized. The firm has increased its scope and ability to attract larger financial sources from banks loans (long-term) and notably, the firm is able to offer high value dividends to most of its clients and customers which acts as a very crucial source of funds and also a means of creating organizational identity with the customers and making it competitive (Berger, 2008).

 The professionals’ system of management ‘steals’ power from the founder entrepreneur resulting to the first crisis associated with this growth stage. The entrepreneur feels a kind of insecurity which may push him/her to reaching out to retain his former power status. This may lead to the collapse of the firm if an understanding is not arrived at. A second crisis for this stage is the increased market differentiation due to enlarged scope and competition of the firm. The firm now requires focusing on the varying external factors especially those concerning the customers’ demands so as to maintain a customer-conducive but competitive environment (Scott and Bruce, 1987).   

Scott and Bruce (1987) describe this as the ultimate stage for the growth of an enterprise. It is important to note that even at this stage the SME is at the brink of breaking the boundaries of being an SME; it is still growing though the growth is limited in terms of available opportunities. Major emphasis is put towards productivity and marketing so as to hold up in the stiff competition breeding from economies of scale.

According to Scott and Bruce (1987), the major crisis associated with this stage is that the entrepreneur (founder) is faced with the need to find a successor of the firm as he/she has headed it for a long period. This is so because there crops a need for ‘rejuvenation’ of the management of the firm. However, as is expected, the entrepreneur is not readily willing to hand over the firm; he has built from scratch and sacrificed much for it to reach maturity.      

The Greiner model is all about the growth of organizations based on the assumption that firms grow and at the same time expand year in year out in the course of their existence (, 2016). It is safe to say that the Scott and Bruce model, on the other hand, considers that the firm can easily collapse (since it incorporates fold aspect) in its model diagram and also considers that the firms may stagnate at some point if they do not respond appropriately to the crises experienced during growth (Churchill and Lewis, 2016).

‘The theory of growth of the firm’ by Edith Penrose as quoted in the journal by Lockett and Wild (2013) conveys the message that growth of a firm is purely dependent on the entrepreneurial ability of the owner of that firm.  This theory closely relates to what Scott and Bruce deliver in their model. In the five stages of growth, the model illustrates that the firm has open choices on how to respond to the growing business now that it is becoming more complex. The firm can choose to sell or limit the growth through the earlier expounded steps. In other words, the ambitions, abilities, objectives and the disposition of the entrepreneur to delegate are the key determinants of the growth of the firm. On the other hand, the Greiner model mostly concentrates on the external factors of the business as the main determiners of the growth of a firm (, 2016). The Greiner’s model is consequently less inclined to agreeing with the theory of growth of the firm.

In a nut shell, the Greiner growth model is a strong strategic analysis tool for growing firms as it is the case with the Scott and Bruce model. However the Scott and Bruce model outdoes the Greiner model since it gives a more detailed analysis into the crisis involved with each growth stage. But this does not mean Greiner model is inferior, in fact, as mentioned earlier, Scott and Bruce model was developed after a close analysis of the Greiner’s model no wonder the similarities in the models. In other words, the Scott and Bruce model can be termed as a detailed version of the Greiner growth model.