The Implications of Industry, Article Review Example

Abstract

The cardinal obsession of so much of Western economic thought is growth. And yet, some of the evidence suggests that bigger is not always better: in some situations, there are benefits to being smaller. In other cases, companies addicted to growth at any cost become dependent on risky behaviours fuelled by desperation. While the impact of industry- and market-specific factors on firm profitability and growth is widely recognized, correlating these factors with firm size to examine expectations and experiences of growth is a fertile vein of inquiry for better understanding the phenomenon of business growth.

Introduction: In the field of business, the question of firm profitability and growth is extremely important. Of course, industry characteristics, such as entry barriers and level of competition, will affect firm behaviour and growth outcomes. In this vein, it is expected that firm size will also affect competitiveness. But a bigger question remains: how do industry- and market-specific characteristics, coupled with firm size, influence firms’ expectations and experiences of growth? In seeking to relate these complex phenomena to each other and to firms’ expectations and experiences of growth, the purpose is to arrive at a better understanding of business owners’ own choice and latitude for change.

Body: A good place to begin the inquiry is with the study by Aterido, Hallward-Driemeier, and Pagés (2011), who analyzed four distinct dimensions of the business environment: “access to finance, the regulatory environment, corruption, and access to infrastructure” (p. 611). It is precisely this approach that makes this article relevant to my research: the article examines structural factors in the business environment, and compares them for firms of widely-differing sizes. Drawing on data from approximately 56,000 firms in 90 countries, including “85 developing countries and five high-income economies”, the authors analyzed firm-level performance and behaviour with a quantitative methodology (pp. 609, 615). They also differentiated between four size classes: micro firms, with “1-10 permanent employees”; small firms, with 11-50 employees; medium firms, with 51-200 employees, and large firms, with an excess of 200 employees (p. 617).

Aterido et al. (2011) found evidence for size-related trade-offs: micro firms, employing fewer than 10 people, and small firms, employing 10-49 people, proved to face disadvantages with regard to obtaining finance and benefiting from infrastructure, notably power (pp. 611-612). As a percentage of their total sales, they also paid more in bribes to avoid the regulatory scrutiny of the authorities, effectively paying for the privilege of evading the red tape of regulations (p. 612). However, while large firms benefited from better access to finance and to infrastructure, as well as with their ability to pay fewer bribes as a percentage of sales, they also experienced a trade-off: they spent more time “dealing with officials and red tape” (p. 612). More specifically, Aterido et al. (2011) found that firms’ access to finance grew positively with relation to their size, a pattern that held true for all within-country variation (p. 620). Medium and large firms also experienced a positive relation between employment growth and access to finance (p. 629). There was a peak for share of sales on credit, with the medium-sized firms (p. 620). The medium firms also experienced a peak in time spent dealing with regulations, presumably because larger firms had the benefit of economies of scale (p. 620). Another interesting finding was the bribery peak, which occurred with small firms (p. 620). The authors identified two potential factors at work here: compared with micro firms, small firms seem to have “relatively larger fixed payments or less recourse to avoid making payments” (p. 620). Small and medium firms were also hardest hit by power outages (p. 620). Two potential advantages for larger firms are alternative sources of energy, such as costly generators, and access to better locations with more dependable power (p. 620). The study also found the highest rates of growth amongst the micro firms, with above average growth; small and medium firms grew at below-average rates, and large firms, on average, had negative growth (p. 618).

This study suggests some intriguing things for my research: the findings of the authors seem to indicate size-related tradeoffs under at least some regulatory environments. These size-related tradeoffs suggest an interesting new direction for examining business growth: the benefits of growth and profitability, better access to infrastructure and finance, and reduced costs in bribes, weighed against more red tape. For some business owners, it may well not be worth it to grow beyond the status of a small or even micro-firm. The regulatory environment, and the size-related tradeoffs it produces, seems to exert very real effects on business-owners’ experiences, and is therefore of interest to any consideration of business growth.

Asiseh, Bolotova, Devadoss, Foltz, and Haggerty (2009) evaluated factors influencing the growth of food manufacturing companies, which they classified according to size: small (fewer than 20 employees) establishments versus medium-large (more than 20 employees) (p. 2). Food-manufacturing industries are particularly of interest because they are classified into “supply-oriented, demand-oriented and footloose industries” (p. 1). Supply-oriented industries depend on reducing their input costs; accordingly, they are established in rural areas with the aforementioned commodities of agricultural products and cheap labour (p. 1). By contrast, demand-oriented industries focus on reducing output costs, establishing themselves in the metropolitan and urban areas that serve as their markets, while “footloose” industries produce many products and do not prioritize either input or output costs (p. 1). The authors employed a quantitative methodology, utilizing U.S. Economic Census data to evaluate the success of the food manufacturing industries (p. 2).

Most of what Asiseh et al. (2009) found was expected: growth was positively related to increasing market value for agricultural products, and rising population (p. 4). Growth was also negatively correlated with poverty, again as expected (p. 4). However, increases in labour quality, measured in terms of the percentage of the population “with at least a high-school degree”, were negatively correlated with growth, which ran counter to the authors’ expectations (pp. 3-4). An interesting finding was that agricultural production produced more marked growth in the number of small establishments than medium-large establishments (p. 5). Rising per capita incomes also promoted the growth of medium-large establishments, but negatively affected small establishments’ growth (p. 5). However, small establishments benefited from increased labour costs, growing in number, while medium-large establishments were negatively impacted, possibly because owners of small establishments were also employees (p. 6). Easily the most intriguing finding was that when small establishments were numerous, this contributed to further growth for small establishments at the expense of medium-large ones (p. 6). The truly interesting thing about this study compared to Aterido et al. (2011) is that the size-related tradeoffs do not appear to be the product of the regulatory environment, or at least not directly. Rather, it appears that different economic forces, such as rising per capita incomes and rising labour costs, benefited medium-large and small firms, respectively. This points towards questions of economies of scale: are larger firms or smaller firms the more efficient? In this vein, the effect of the ‘critical mass’ of small establishments in promoting further growth in the number of small establishments is especially fascinating. A key question here is causality: is this pattern due to regional competition, as Asiseh et al. (2009) hypothesize, or is it simply a response to some other factor favouring smaller establishments? If it is competition, this would suggest that highly fragmented, competitive markets dominated by similar firms will exhibit self-reinforcing tendencies.

This is a good segue into the findings of C. Tundui and H. Tundui (2012) concerning the strategies of Tanzanian female micro- and small-business entrepreneurs. Tanzanian women who are entrepreneurs face considerable barriers due to sexism and male privilege: they have few resources at their disposal, and they must brave both an unwelcoming business environment and socio-cultural stigmas (p. 143). Unsurprisingly, businesses owned by Tanzanian women consistently underperform their male-owned counterparts (p. 143). In response, Tanzanian women have adopted a number of strategies, such as developing multiple, diversified businesses, locating their businesses at home, and—in some cases—relying on microcredit (p. 144). Tundui and Tundui used a quantitative methodology, distributing a questionnaire to 221 Tanzanian women who had borrowed through a Tanzanian microfinance program, PRIDE Tanzania (p. 146). The authors found that women entrepreneurs who commingled business and household resources experienced greater profitability, as did those with multiple enterprises, validating these strategies (pp. 148-149).

The findings from Tundui and Tundui suggest the importance of diversification in the face of an adverse business environment: such businesses may have to be generalists, rather than specialists, merely to survive. Entrepreneurs with multiple businesses may struggle to accommodate them all, but the pay-off would appear to be greater versatility. By contrast, Ji-Yub, Jerayr, and Finkelstein (2011) studied firm growth and acquisition behaviour in major companies: specifically, the study aimed to find out whether firms that resorted to acquisitions in lieu of organic growth overpaid for such acquisitions, leading to a path-dependent reliance on acquisitions for growth (pp. 26-27). Ji-Yub et al. used a quantitative methodology, relying on data for 878 publicly-traded acquisitions, collected from the U.S. commercial banking sector from 1994 to 2005 (p. 37). Their key finding was that desperation, precipitated by poor growth—or at least, poorer growth than expected—can induce acquisition patterns characterized by high premiums (pp. 52-53). Worse, there is an element of path-dependence here, a vicious cycle: firms that resort to acquisitions to bolster flagging growth tend to become dependent, to the point that they pay escalating premiums (p. 53). Growth by acquisition, then, can become addictive, albeit due to exigency, and it can fatally limit a manager’s strategic vision (pp. 29-30). These concepts of desperation and path-dependence on acquisition are vital to any understanding of the factors that influence growth: the strategy described is maladaptive, but it tends to be self-reinforcing.

Juntunen, Saraniemi, Halttu and Tähtinen (2010) undertook an empirically-grounded qualitative study of corporate brand-building, a seminal tactic for competitive growth; the study itself drew on interviews with a variety of companies (p. 120). The authors found that brand-building is undertaken in steps: in the pre-establishment stage, companies define their own corporate personalities, develop ideas, and plan out the structure (p. 122). They also begin to formulate strategy and build relationships with associates (p. 122). Here, the important thing is a sound business idea: the company needs to have a good business model, and it needs to have sound supporting structure (p. 123). In the next stage, early growth, branding accelerates, as the company begins to enact its strategy (pp. 123-125). A company reaches effective growth when it attains an established brand (p. 127). The lessons are inescapable: good strategy must be guided by a strong sense of what the company represents and how it will communicate that (p. 127).

But another dimension to competition is strategic collaboration. Yasamorn and Ussahawanitchakit (2010) analyzed this dimension in a quantitative survey study of 322 tourism business in Thailand, analyzing them in terms of compatible and mutually-beneficial competencies, and with reference to the volatility of competitive behaviour (p. 12). The authors found a positive association between a collaborative, “relationship” mindset, and cooperation based on sharing of knowledge and innovation, leading to beneficial effects for both parties (pp. 4, 15). Similarly, interorganizational learning was positively linked with “valuable knowledge competency… outstanding innovation creativity… business growth” and other competencies (p. 15). The cardinal point is that in an environment of cooperation, characterized by mutualism and complementarity, it is possible for businesses to get ahead by helping each other. But the key here is “strategic collaborative capability”: these arrangements work because the firms have something to offer each other, and they can all benefit by cultivating their shared resource, tourists (pp. 18-19).

Conclusion: Firm size appears to be an important factor in determining the kinds of trade-offs and pressures business-owners face in the quest for growth, and an important ground for my inquiries. Depending on the environment, marked trade-offs appear to be associated with smaller and larger size, and some evidence has been presented that growth may be driven by desperation, leading to unsound acquisition policies. Examining firm size is important, then, but so too is examining the characteristics of markets and the regulatory environments they operate in. What needs to be established is the degree to which larger or smaller size may be favoured, and under what circumstances. Finally, these findings are of social relevance, in that they demonstrate that the imperative for growth which dominates so much of Western economic thinking is perceived and experienced differently by different firms, of differing sizes and in differing industries.

References

Asiseh, F., Bolotova, Y., Devadoss, S., Foltz, J., & Haggerty, R. (2009). Factors explaining growth of small and medium-large food-manufacturing businesses in the United States. Journal Of Food Distribution Research, 40(1), 1-7.

Aterido, R., Hallward-Driemeier, M., & Pagés, C. (2011). Big constraints to small firms’ growth? Business environment and employment growth across firms. Economic Development & Cultural Change, 59(3), 609-647.

Ji-Yub, J. K., Jerayr, J. H., & Finkelstein, S. (2011). When firms are desperate to grow via acquisition: The effect of growth patterns and acquisition experience on acquisition premiums. Administrative Science Quarterly, 56(1), 26-60.

Juntunen, M., Saraniemi, S., Halttu, M., & Tähtinen, J. (2010). Corporate Brand Building In Different Stages of Small Business Growth. Journal Of Brand Management, 18(2), 115-133. doi:10.1057/bm.2010.34

Tundui, C., & Tundui, H. (2012). Survival, Growth Strategies and Performance of Women Owned Micro and Small Businesses in Tanzania. International Journal Of Business & Management, 7(8), 143-155. doi:10.5539/ijbm.v7n8p143

Yasamorn, N., & Ussahawanitchakit, P. (2011). Strategic Collaborative Capability, Business Growth, And Organizational Sustainability: Evidence From Tourism Businesses In Thailand. International Journal Of Business Strategy, 11(3), 1-27.