Performance configurations over time : implications for growth and profit oriented strategies

Abstract

Strategic entrepreneurship can be described as simultaneous opportunity seeking and advantage seeking. Younger firms are generally more flexible and therefore enjoy 'discovery advantages', whereas established firms tend to be resource rich and more experienced and consequently enjoy 'exploitation advantages'. The resulting evolution of the two important performance dimensions 'growth' and 'profitability' by firm age is not well understood. In this paper we integrate several theoretical arguments concerning profit-growth relationships to develop a dynamic model of firm development which suggests different development pathways for young firms. This leads to several unidirectional, competing hypotheses that we examine by studying the profitability-growth configurations of approximately 3,500 small firms and how these configurations evolve over time. We find that for both young and old firms, a focus on achieving above-average profitability and then striving for growth is a more likely path towards achieving sustained above-average performance than is first pursuing strong growth in the hope of building profitability later. In line with our hypothesis we find that younger firms are over-represented as 'Stars' (high on both growth and profitability) and under-represented as 'Poor' (low on both growth and profitability). However, young firms in the 'Star' category are also less likely than their older counterparts to maintain that position. Furthermore, our results indicate that young firms are over-represented not only among 'Stars', but also among growth-orientated firms regardless of the level of profitability. The findings strongly caution against the blind pursuit of growth for young firms, in favor of a thoughtful analysis of how both growth and profitability might be developed by firms. The results also question whether simultaneous high performance in terms of growth and profitability among young firms usually reflects a successful entrepreneurial strategy. The results can also be interpreted as luck on the part of a sub-group of young firms who indiscriminately pursue growth opportunities with varying profit prospects, and in many cases the high growth-profit performance will be short lived.