Entrepreneur's Handbook
PREPARING FOR THE GROWTH PROCESS
In this section, definitions of growth and factors affecting growth will be explained. The factors affecting growth vary according to each company, sector and entrepreneur and are specific to each company. However, in this section, the factors claimed to affect growth will be explained most prominently in the relevant literature.
1.1. Growth definitions
Growth, in general terms, refers to the changes in the size of the firm within a certain period of time. (Dobbs & Hamilton, 2007). These changes express an increase in the firm in terms of quantity or quality as there is growth. Change in size can occur in two ways. In this type of growth, also called organic growth, the company grows in its internal activities. For example, activities such as increasing the number of products, developing existing products with new technologies and opening to new markets are the growth in the company's internal activities. In other words, the firm can grow with the increase of its sales, number of employees, assets, products and / or customers. Another type of growth is that a company grows from outside by cooperating with other companies, and this type of growth is called external growth. This type of growth is also called growth through mergers. (Wiklund, 1998).
1.2. Growth reasons
It is stated in the relevant literature that there are many factors affecting growth. In this section, the factors affecting the growth of new and small businesses will be tried to be explained.
1.2.1. Features of the Entrepreneur
Since the newly established businesses are seen as an extension of their founders and all activities depend on the founder, the characteristics of the person establishing the business are vital. When compared to large enterprises, it is obvious that founders of small businesses, especially newly established small businesses, have a great influence on determining the direction of the company. Every activity in the newly established business is directly affected by the characteristics of the founder. The activities of the business are blocked or developed in line with the founder's educational background, experience and socio-economic background. (Miller and Toulouse, 1986; Yu, 2001). When the characteristics of the entrepreneur that cause growth are examined, the network that the entrepreneur has and can reach is an important factor in the growth of the business. As emphasized in Chapter 9 of the book, a network can also be defined as a group of people, communication networks or business networks who exchange information for professional or social purposes. With this network, business can provide a better performance by increasing knowledge, finance, production and customer knowledge and capacity. ( Lee and Tsang, 2001). Having entrepreneurial experience in the family is also considered an important factor for the small business to be successful. Entrepreneurial parents or relatives create a role model for the founder and especially provide commercial knowledge. Children of entrepreneurs learn the critical factors in running a business more easily, and starting a business is seen as a more natural career option for them (Papadaki and Chami, 2002). The work experience of the enterprise also contributes to the growth of new businesses. The work experience of the entrepreneur can be examined under 3 main headings: business establishment experience, management experience and sector experience. Management experience is the general management experience of the founder, regardless of the company type and sector. Industry experience is also the knowledge of the sector in which the newly established business operates (Lee & Tsang, 2001). Since the founders with industry experience have critical information such as the products, technological status, customers and suppliers of that sector, it is assumed that these founders will manage their newly established business in a way that will perform better. Since this experience will also enable the founder to establish relationships with sector actors such as customers and suppliers, in other words, it is predicted to have a positive reflection on the company performance, as it will enable it to create a network. (Barringer, Jones and Neubaum, 2005;). Entrepreneurship experience is also the experience of the companies that the company owner has established in the past. It can be assumed that this experience will reflect positively on the performance of the newly established enterprise in terms of predicting risks and taking measures against them (Welter, 2001). It is argued that the education level will reflect positively on the newly established business in terms of showing the development of the ability to need, search and reach information (Papadaki and Chami, 2002). Having received sectoral and / or management skills training in addition to formal training will also have a positive reflection on the growth of the company. In addition, the fact that the company was founded by a team rather than a single person and that it has partners positively affects its growth. As the number of partners increases, the knowledge, skills, network capacity and financial resources brought to the business also increase. Naturally, it will be possible to find faster and healthier solutions to the problems faced by the new business (Lee & Tsang, 2001;). It is claimed that the age of the entrepreneur also affects the firm performance. However, there are contradictory statements on this subject. While some researchers emphasize that younger entrepreneurs are more successful because they are more motivated, courageous and proactive (Miller & Toulouse, 1986), others claim that older entrepreneurs are more successful due to the experience that comes with age (Welter, 2001). In addition to these, the most important feature of the entrepreneur in the growth of new and small businesses is the motivation for the growth of the company. If the founder does not have a desire for the growth of the company, it is unlikely that the company will grow even if all conditions are favorable. (Wiklund and Shepherd, 2003).
1.2.2. Resources
Resources are assets owned by a business. It is possible to separate tangible resources as owned facilities, machinery, financial resources, etc., intangible resources as culture, knowledge, etc., and human resources into the number of employees owned, employees' abilities and motivations (Wheelen & Hunger, 2012). It is also important that these resources are valuable, rare, and inimitable. In addition, the firm must have the ability to manage these valuable, rare and inimitable resources to create value by combining opportunities and resources in the environment. (Barney, 1991; Chrisman, Bauerschmidt & Hofer, 1999). The more diverse the resources available to the company, the more successfully the company implements its strategic decisions. For example, access to financial, physical and human resources is important for companies that want to focus on innovation (Miller & Friesen, 1982). The strategy that the company will implement according to the resources it has and can reach will also differ. (Lumpkin & Dess, 2001).
Small and new businesses may experience difficulties in accessing resources due to reasons such as the recognition of being new and lack of power. Accessing the quality and proportion of resources required for all organizational processes and decisions is critical for the survival and growth of the firm (Chandler & Hanks, 1994, Gibb & Davies, 1990).
Financial resources are the capital owned by the firm and financial supports that can be accessed from outside. Even though the entrepreneur used the financial resources he had in the initial establishment phase, external resources are needed to grow. Banks, investors and the state are examples of external financial resources. Access to and taking advantage of these resources is also important in the growth of new businesses. Financial resources seriously affect the growth of the new business, as access to other resources can be achieved thanks to financial resources. (Lee, Lee & Pennings, 2001). Organizational resources also consist of information on management, finance, marketing, law and technical fields. Management resources are the knowledge of company management and growth. In new businesses, this knowledge may not be at the desired level, but growth is positively affected as long as the founder is aware of this and improves himself on this issue (Gibb & Davies, 1990). The company's ability to find and access resources is also a management resource and is important for the success of new businesses. The most important resources that the new business manager should reach can be listed as capital markets, distribution channels, labor market, suppliers and raw material market (Chrisman et al., 1999). Human resources can be defined as the sufficient quality and number of labor that the company has and can reach. In a newly established company, company employees contribute to the growth of the company by supporting the entrepreneur in achieving organizational goals (Chandler & Hanks, 1994). In addition, physical resources such as machinery and technology owned by the company are also important in the growth of companies. Researchers cite financial and human resources as the two effective sources of growth for new businesses among all resources. (Lee, Lee, & Pennings, 2001).
1.2.3. Geographical Location
The geographical location where the company is established and / or operates is also effective in the growth of the businesses. A location that provides easy access to suppliers and customers constitutes a positive situation for the growth of small businesses (Birley and Westhead, 1990). The number of customers in the region where the company operates is as important as their purchasing power. Since the low purchasing power indicates that the economic development of that region is also insufficient, it may pose an obstacle to the growth of the new business. Establishing small businesses in areas where they can easily reach their stakeholders will increase survival and growth opportunities. The technological development of the region is also an important factor for new businesses. In addition, it is important for the success of small businesses that the region has a sufficient number and quality of workforce. Especially in regions where large scale companies operate, it may be difficult for new businesses to reach the workforce they need. In such regions, qualified workforce may prefer to work in large enterprises (O'Farrell & Hitchens, 1988). However, in smaller regions, the newly established business may have difficulty finding subcontractors and may try to carry out every activity within the company. This can lead to a loss of expertise, one of the competitive weapons of being small (Birley & Westhead, 1990).
1.2.4. Sectoral Elements
The sector structure is particularly important for newly established small businesses. The opportunities and resources available in the industry will affect the performance of the startup business and therefore its survival (Chrisman et al., 1999). The sector structure includes market entry barriers, the number and power of customers and suppliers, cost structures, the level of product differentiation, and the order of the market (Baum, 1995). Gardenne (1998) claims that the factors that affect the success of new businesses differ in each sector. For example, factors related to cost and quality in the retail sector, factors related to employees in the service sector and competitors in the production sector affect the success of new businesses. Porter (1980, 1985) proposed a model for sector analysis. According to this model, these 5 elements in a sector should be considered and analyzed by companies. These 5 factors are ease of market entry, bargaining power of customers, bargaining power of suppliers, availability of substitute goods and intensity of competition between existing businesses. The most important of these factors for small and new businesses is the intensity of competition between existing businesses. If there are very strong competitors in the industry, the new business may find it difficult to survive. (Birley and Westhead, 1990).
1.2.5. Organizational structure and systems
Organizational structure for businesses of all sizes and sizes can be defined as “the regulation of work flow, communication and authority relations in an organization” (Covin and Slevin 1991, p.17). The organizational structure focuses primarily on two dimensions: the first dimension is the division of labor, which is the distribution of job duties and activities, and the second dimension is the coordination mechanisms of the firm, the level of standardization and formalization (Meijaard, Brand, & Mosselman, 2005). The structure of an organization is important for strategy development and implementation, division of labor, coordination and integration of functions, and information flow. At the same time, organizational structure and systems affect the allocation of authority and responsibility, formalization and organizational complexity. Businesses have an entrepreneurial structure when they are first established. Entrepreneurial structure is a structure consisting of senior managers and employees with little formalization and expertise. Senior manager coordinates and controls all activities (Minztberg, 1979). After the company is established, the organizational structure needs to be improved with the recruitment of new employees. This leads to the determination of responsibilities among employees and the development of coordination mechanisms for the formation of the firm structure. In the small firm, this process is often based on unconscious and urgent decisions (Meijaard et al. 2005). The structure changes as the business grows. The most used organizational structure classification is organic and mechanical organizational structures proposed by Burns and Stalker (1961). Organic structures are characterized as open communication channels, flexible and easily adaptable structures in which free and informal decision-making authority is distributed throughout the organization. On the other hand, their mechanical structures emphasize tight control, formalization, structured communication channels, and a more hierarchical and inflexible structure (Miles, Covin, & Heeley, 2000). It is claimed by researchers that organic structures defined as lean and flexible positively affect firm growth (Siegel, Siegel, & Macmillan, 1993). While mechanical structures prevent innovative strategies, it is emphasized that enterprises with organic structures are more innovative (Miller & Friesen, 1982).
1.2.6. Strategy
Regardless of the size of the firm, the most important factor affecting the growth of businesses is the strategies implemented by the company (Porter, 1980). Miles et al. (2000, p.65) define strategy as the methods for a firm to achieve its goals and compete within the industry in which it operates. Porter's (1980) competitive strategies can be examined as a strategic option. In addition, the "Entrepreneurship Orientation" appears as strategic options for newly established businesses that lead to success.
As mentioned in detail in the previous section, Porter (1980) emphasizes that companies implement 3 strategies to gain competitive advantage. These strategies are called cost leadership, differentiation and focus. Cost leadership strategy is defined as the firm's production of its products and / or services at a lower cost compared to its competitors. In this strategy, the company does not ignore quality or innovation, but its focus is to produce at a lower cost than its competitors. The main focus of this strategy requires cost control and production activities to be designed on efficiency. With strict control mechanisms, the firm can gain high profits (Miller and Friesen, 1986). In the differentiation strategy, the company aims to provide its customers with products and / or services that are different and unique from competitors in terms of innovation, quality and / or design. This uniqueness allows the company to set prices above the industry average. The uniqueness of products / services can be achieved by creating a design or brand image, innovative technology and / or superior customer service. The main purpose of differentiation strategy is to create customer loyalty and in this way increase sales. Differentiation strategy requires focusing on research, development and marketing activities. Focusing strategies are to apply cost leadership or differentiation strategies to a specific region or customer base. It is a differentiation focus strategy recommended for start-ups. In other words, a strategy focused on a defined market that emphasizes innovation and / or high quality is more beneficial for a newly established business with limited resources. In addition, since the flexible and agile structure that is useful for the differentiation strategy is naturally found in new businesses, it will be easier for new businesses to implement this strategy. (Miller & Toulouse, 1986).
One of the more appropriate strategic approaches to the nature of new businesses can be shown as "Entrepreneurship Orientation". Entrepreneurship orientation is defined as the firm designing its processes, practices and decision-making activities to take advantage of market opportunities (Lumpkin & Dess, 1996). It is emphasized that a company with an entrepreneurial orientation makes product and market innovation, takes risky moves, and gets ahead of its competitors by making “proactive” innovations in its sector (Miller, 1983). Entrepreneurship orientation is generally explained by innovation, risk taking and being proactive (Covin & Slevin, 1998;). The innovation dimension is described by Lumpkin and Dess (1996, p. 142) as "A firm's tendency to enter and support new ideas, innovations, experiments and creative processes that can lead to new products, services or technological processes". Risk taking has always been associated with entrepreneurial behavior. Risk-taking has been defined by Miller and Friesen (1982) as managers' willingness to make large and risky resource commitments that can have high failure costs. Proactive behavior is about taking opportunities in the market. Proactive companies become market leaders by taking the initiative and seizing the opportunities in the market. By being opportunity-oriented, they affect the movements in the market and even create demand. The companies that make the first move in competitive markets are proactive companies. In addition to being opportunity-oriented, trial and error and exploration are requirements of being proactive (Lumpkin & Dess, 2001). Innovation and being proactive positively affect the performance of new businesses. In risk-taking behaviors, it has been revealed by researchers that risky decisions taken up to a certain level, which can be called calculated risk, positively affect the performance of the company, and decisions after this level harm. In summary, it can be said that innovation, being proactive and moderate-risky decisions positively affect the performance of new businesses.