i
FACTORS ASSOCIATED WITH GROWTH CHANGES IN
“GAZELLES”
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ETIENNE ST-JEAN
Management Department
Université Laval
Canada
E-mail: etienne.st-jean.1@ulaval.ca
PIERRE-ANDRE JULIEN
INRPME
Université du Québec à Trois-Rivières
Canada
E-mail: Pierre-Andre.Julien@uqtr.ca
and
JOSÉE AUDET
Management Department
Université Laval
Canada
E-mail: josee.audet@fsa.ulaval.ca
ABSTRACT: The goal of this paper is to identify the factors that precede and may cause sudden
changes in the pace of growth of high-growth SMEs or gazelles. A retrospective longitudinal
case study of seven high growth SMEs that had undergone a total of 14 sudden shifts in growth
reveals that a number of events caused the changes of pace. Some were triggered by the
entrepreneur’s decisions while others resulted from events beyond his/her control.
Management’s motivation for growth was an important element and this motivation changed
over time, being influenced by both success and problems associated with actual growth. The
success of growth strategies also appears to depend on the firm’s proximity to its client base and
its ability to obtain the information required for sound decision-making. Lastly, the availability
of tangible and intangible resources was found essential in allowing the company to seize growth
opportunities and proximity to the business milieu may help accessing these resources.
KEYWORDS: high growth; rapid growth; gazelles; small business; small and medium-sized
enterprises; SMEs; entrepreneur; small business owner-manager; discontinuity; growth rate;
growth slowdowns; growth spurts; sudden shifts; longitudinal study.
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St-Jean, É., P.A. Julien, et J. Audet (2008), “Factors associated with growth changes in ‘gazelles’”, Journal of
Enterprising Culture, vol. 16, no. 2, p. 161-188.
Electronic version of an article published as Journal of Enterprising Culture, Vol. 16, no. 2, 2008, 161-188. https://doi.org/10.1142/S0218495808000089 © copyright World Scientific Publishing Company https://www.worldscientific.com/
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INTRODUCTION
In recent years, high growth firms, commonly known as gazelles, a term coined by Birch (1987),
to oppose to mice (for slow growth or stagnated small enterprises) and elephants (for large
enterprises), have attracted attention from many small business researchers and case workers.
Although gazelles account for between 2% and 10% of small and medium-sized firms, in most
industrialized countries they generate more than 40% of all new jobs in surviving companies
(Parsley and Dreessen, 2003). Recent research has also shown that they play a significant role in
regional restructuring and regional dynamism (Frederick, 2004; Julien, 2007).
However, most of gazelles do not all follow an unbroken or linear growth path. Research has
shown that growth rates speed up, slow down or undergo more radical changes (Garnsey and
Heffernan, 2005). Over a long period, growth is usually discontinuous, with a high growth spurt
being followed by a period of decline or stabilization, and vice-versa (Smallbone et al., 1995;
Kemp et al., 2001). Surprisingly, the vast majority of researchers have not commented on the
see-saw nature of growth in gazelles. Yet, a better understanding of the causes underlying these
variations would be extremely useful, for example in helping these company leaders to better
negotiate the ensuing periods of upheaval, which are often difficult for the company.
This paper examines the following research question: Which events precede and may cause
sudden changes in the pace of growth of a gazelle? To answer it, we will begin by reviewing the
literature that directly or indirectly examines changes in small business growth rates, before
presenting the methodology used for the study, presenting the results and discussing their
implications.
REVIEW OF THE LITERATURE ON SMALL BUSINESS GROWTH
There has been no direct research into the causes of growth rate changes in high growth SMEs.
For a literature review, the subject must therefore be addressed from another angle. For
example, there has been a lot of discussion about business growth in general. The causes of
general growth may well apply to gazelles, and could help to structure the theoretical framework
of our study. Accordingly, the literature reviewed for the research includes papers on general
business growth as well as growth in gazelles. We will begin by presenting the studies in which
growth is a dependent variable, highlighting their main growth determinants, before going on to
look at studies in which growth is an independent variable. The purpose of this phase is to
identify the main elements of the growth process and build the conceptual framework for the
research.
Growth as a dependent variable
The role of the entrepreneur and his or her team
Entrepreneurs play a key role in the growth of their firms, since their often unstinting
commitment is a necessary (although not a sufficient) condition for growth (Davidsson, 1989;
Cooper and Artz, 1995; Hughes, 1998; Baum et al., 2001; Isaksen, 2005). The other
determinants of growth include the importance for the entrepreneur of creating or buying a
company as part of a team rather than individually (Barkham et al., 1996; White and Reynolds,
1996; Watson et al., 2003), having a higher-than-average level of education and experience
(Bosworth and Jacobs, 1989; Tan and Tay, 1995; Sapienza and Grimm, 1997), having
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experience of the sector (Barringer et al., 2005), being younger (Kaikkonen, 2006) and
delegating, selecting and retaining a strong management team (Hay, 1992; Gundry and Welsch,
1997). However, because what the entrepreneur “is” probably explains growth to a lesser extent
than what he or she “does” (Gartner, 1989; Barkham et al., 1996), the actions of the management
team, including the long term vision of what they want for their enterprise (Filion, 1991) or their
strategic decisions and the impacts of those decision on the firm’s resources and configurations,
must also be taken into account.
The importance of strategic decisions
As far as strategy is concerned, gazelles typically diversify their product supply in order to
preserve a strong competitive edge, although they never move far from their field of expertise
(Fombrun and Wally, 1989; Virtanen and Littunen, 2005). Diversification takes place within a
context where innovation plays a significant role (Johnson et al., 1997; Deeds et al., 2000;
Julien, 2001). In addition, the products they develop are usually perceived by customers as being
of good quality, allowing them to be sold at a price similar to or higher than their competitors’
products (Roper, 1997; Sexton and Seale, 1997). The need to export increases when the
company’s domestic market reaches maturity (Johnson et al., 1997). Growth derives from a
proactive strategy based on several different elements (Smallbone et al., 1995; O'Regan et al.,
2006) and from the ability to take over a niche thanks to an advantage held by the firm – for
example, a high level of technological sophistication (Storey, 1994). Innovation, risk-taking and
being proactive also have an impact on organic growth (Antoncic, 2006; McKelvie et al., 2006).
Lastly, proximity to a market, which allows clever information to be exchanged on market needs,
is said to be crucial for innovation (Barringer et al., 1998; Mäkinen and Selby, 2006).
The need for access to resources
High growth requires ever-increasing financial resources, for equipment acquisitions and new
market development. Several rounds of financing must therefore be planned, and the firm must
ensure that its funding sources are able to provide the additional money (Sexton and Seale,
1997). However, bank financing is not always easily available to high growth firms, especially
those that are innovative (Audretsch and Lehmann, 2004). This presents a challenge that can be
difficult to overcome, particularly if the owner-manager wants to retain control over the firm – a
behaviour linked to many high growth firms (Parker et al., 2005). To mitigate their financial
requirements, many gazelles offer bonuses or share equity to their employees, while relying on
intrinsic motivation as opposed to higher salaries as a means of motivation, allowing them to
retain more cash for their operations (Hambrick and Crozier, 1985; Barringer et al., 1998). From
the outset, it is crucial for these firms to hire good quality personnel. Gazelles therefore tend to
devote a lot of energy to employee recruitment and selection (Hambrick and Crozier, 1985;
Johnson et al., 1997). They sometimes obtain resources by developing strategic alliances that
provide free access to equipment and advice (Jarillo, 1989; Larson, 1991). Government
assistance can also be very useful in meeting the soaring financial needs of high growth
companies (Mustar, 2001; Frederick and Bygrave, 2004).
The need to reorganize
Gazelles must be capable of adjusting and reorganizing themselves in order to incorporate new
resources and support innovation (Julien, 2002). Self-adjustment also requires market proximity,
so that the firm is able to meet the specific needs of individual customers (Julien, 2001). In
addition, management must step away from everyday operations and concentrate instead on
organizational change and market development (Smallbone et al., 1995). One way of doing this
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is to delegate as many non-critical functions as possible to a qualified, diversified and
multidisciplinary management team (Siegel et al., 1993). The team’s job is to formalize routines
and manage minor changes, thus allowing the pace of growth to be sustained. A strong
organizational culture, teamwork, employee training and good internal communications are also
important (Barringer et al., 1998).
Changes in markets and competition
Elements internal to the firm partly explain firm growth, but the external environment can also
affect growth rates. According to some authors, the market can be a factor in firm growth, but in
a limited way, because to achieve higher growth than its competitors in its sector, the firm must
also implement a more competitive strategy (Hughes, 1998; O'Gorman, 2001). Industrial sectors
with a larger percentage of big businesses appear to have a negative impact on small business
growth (Penrose, 1959; Pelham, 2000). It is not only the presence of large competitors that acts
as an entry barrier for small firms, but also the presence of large buyers; if a large buyer does not
select a small firm as a supplier, this can halt the small firm’s growth (Hartley and Hutton, 1989).
Growth as an independent variable
Growth generates complexity
Growth models (e.g. Steinmetz (1969), Greiner (1972) or Churchill and Lewis (1983)) tend to
show that problems in the external environment tend to play a more significant role at the
beginning of the life cycle. They gradually give way to problems deriving from internal
behaviours or external changes (Dodge and Robbins, 1992), which can trigger severe growth
crises. A firm can avoid problems associated with organizational change if it is able to anticipate
or even plan the next steps in its development (Galbraith, 1982). Tension is a core element in
development stage models, due mainly to the structural changes required for the firm to perform
new tasks or attack new problems generated by growth (Kazanjian and Drazin, 1989; Mount et
al., 1993). In short, a firm must change if it is to continue to grow at the same pace (Barber et
al., 1989; Hay and Williamson, 1991). One of the most important problems encountered in high
growth phases is the difficulty of coordinating the new resources required to sustain the growth
(new executives, new employees or new equipment). This can affect productivity, among other
things, and may require additional cash flow (Garnsey and Heffernan, 2005). New executives
can disrupt the team’s stability and undermine the culture, thereby upsetting organizational
consistency (Hambrick and Crozier, 1985). New employees may sometimes not fit well into the
firm, and can disrupt routines, culture or even bring in an undesired trade union. Some
researchers have also found that higher levels of complexity in the firm can cause
communication problems, leading to conflicts and even causing key employees to leave. All
these factors have the potential to reverse a growth trend (Garnsey and Heffernan, 2005).
The conceptual framework
Some useful elements can be uncovered by treating high growth or general growth as a
dependent variable, although this approach has its limitations. One such limitation is the fact
that in most cases the analysis concentrates on a given time or period, meaning that there is no
way of understanding the cumulative and circumstantial growth process. Studies of this nature
must necessarily be longitudinal, to take the time factor into account. Approaches in which
growth is treated as an independent variable also have their limitations. They can highlight the
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changes undergone by high growth firms, but are too deterministic and do not really explain why
certain firms have irregular or see-saw growth.
The best approach would be a combination of the two, where growth is treated as a process,
although it should also be remembered that growth rate is influenced by certain determinants and
barriers, and a growing firm will eventually have to change in order to adjust. The literature
survey suggests the principal factors influencing firm growth, and these form the conceptual
framework of our research. We therefore hypothesize that a change in the pace of growth is
influenced by a set of interrelated phenomena that evolve together over time, and constitute the
main elements in the growth process.
METHODOLOGY
Because our research was exploratory in nature, we used a qualitative case study approach. The
data were collected longitudinally and retrospectively, since this seemed like the best way of
identifying causal theories as well as obtaining the most details and the highest level of precision
(Wall and Williams, 1970). The data were as remembered by the company leaders. To avoid
cognitive problems such as exaggeration, rationalization, “best light” presentation, simplification
and forgetfulness, we followed the suggestion of Wolfe and Jackson (1987) by setting widely
spaced time-series interviews, gathering data in 1997 and asking again the same questions, and
others, in 2004. Interview subjects were senior managers (at least one from each firm) who were
more involved due to their position, and hence better able to describe the process, as pointed out
by Glick et al. (1995).
Measuring growth
Growth was operationalized as growth in the firm’s turnover. To standardize the measurements
and be able to generalize our findings, only cases involving growth from organic development
were retained; in other words, growth resulting from fusions or acquisitions was excluded, since
it derives from a different process. The firms studied were small and medium-sized (SMEs) with
fewer than 250 employees and less than $30 million in turnover at the time the observation
period began. To be included in the sample, a firm had to have recorded an average annual
growth rate
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of 20% for at least four years. The selected firms also needed to have experienced a
radical change in their pace of growth during the period under observation, falling into one of the
following three categories:
1. Growth spurts were periods of at least two years of overall negative or zero growth,
followed by at least four years of growth at a rate of 20% or more;
2. Growth slowdowns were periods of at least four years of growth at a rate of 20% or more,
followed by at least two years of overall negative or zero growth;
3. Other growth spurts or slowdowns involved variations of roughly 20% between the
average growth rate for the four years preceding the change, and the average of the year in
which the change took place and the following three years.
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The formula used was GR
(n+1)
= (TO
(n+1)
-TO
(n)
)/TO
(n),
where GR is growth rate, TO is turnover and n is the
reference year.
