A Portfolio Approach to Modeling Firm Growth Patterns


Eric Craymer

Glenn S. Omura


presented at the 41st International Small Business Conference World Conference,

Stockholm, Sweden 1996




There are a number of SME growth models available. Typologies have been developed but none have explained a parsimonious method by which the most appropriate growth model may be selected to frame research or guide entrepreneurial decision making. The fact that each has been at least anecdotally supported suggestsA that each may be operative depending on certain situations.


This paper proposes a marketing activity based method to select an appropriate growth model from a portfolio of models.İ Thisİ portfolio approach uses the dimensions of change (continuous versus discontinuous) and effect of the change on organizational form (change in kind versus degree) as variables and predicts these variables to be the result of the firmís dominant growth strategy.İ



İİİİİİİİİİİ Researchers have long been investigating entrepreneurial firm growth and attempting to develop a model that would help them understand and predict the changes that a firm undergoes as a result of successful business operations.İ Understanding how and why firms grow is important to facilitating the growth of new and low growth firms.İ This topic is of greater importance than ever before.İ To an increasing extent, newly developing national and regional economies are relying on the growth potential provided by embryonic firms that have yet to face the challenges that accompany growth.İ In addition, more mature economies owe their growth from the success of products and technologies that are created by recently formed and growing companies.İ It is in these growing firms that the majority of the new employment and wealth of the next century will be created.

İİİİİİİİİİİ Unfortunately, in spite of the large number of investigations into growth, no single model by which to conduct research or upon which to base organizational decisions has arisen as the dominant paradigm.İ This lack of agreement extends to discussions of growth model typologies (including Hofer and Charan, 1983; Starbuck, 1965).İ Proponents of each growth model stresses the attributes and characteristics of their model but they do not typically suggest under what circumstances one would expect to see their model work best, with the apparent assumption that their model is a universally appropriate explanation of small firm entrepreneurial growth.İ While there is much annecdotal evidence that could be used to justify each model, any scholar can critique any of the models and justifiably argue that a model x cannot explain the growth pattern of firm y.İİ While each proposed growth model seems internally valid, different circumstances can render them externally invalid.İ At this point of literature development, a contingency explanation of growth model appropriateness would seem most productive. Unfortunately, the review discussions of growth model types have model evaluations as their theme, not development of a macromodel to facilitate understanding of contingent firm growth patterns.İ Inİ addition, while there is much in the literature that suggests growth differences by industry or industry type (Hrebniak and Snow, 1980; Covin and Slevin, 1989; Buskirk, et. al, 1994), the typology discussions do not include that possibility.İ

İİİİİİİİİİİ Given the importance of new and growing firms to all economies, having a method which would allow a researcher or decision maker to determine what type of growth a firm is currently in and which, if any, change in growth patterns to expect would be valuable.İ Ideally, the method would be based on readily observable and discrete behaviors that would allow analysis using the smallest number of variables possible.İ The purpose of this paper is to propose such a method.

Growth Models

İİİİİİİİİİİ Of the various typologies one that seems to be the most inclusive and explicit is that of Hofer and Charan (1983).İ The authors discuss the attributes and characteristics of four growth model types.İ Their typology was specifically built in an effort to include the other major types of typologies proposed by other researchers.İ Their four major types of growth models are life cycle models, stage models, evolution models, and transitional models.İ Rather than repeat their work we will merely summarize their discussion.İ

İİİİİİİİİİİ Firms in a life cycle model follow a pattern of growth directly analogous to a biological life cycle, progressing fromİ birth to death with a number of changes along the way.İ While not displaying the time consistency of biological organisms, the firm is seen as progressing through a sequential series of maturational improvements that are part of a continuous improvement resulting in a gradually refined version of the original form.İ Each step must be accomplished in order to progress to the next and there is no deviation in the linked sequences of their direction.İ The last cycle is death to which all organizations must eventually succumb.

İİİİİİİİİİİ The stages models see a firm as progressing through a set of developmental stages.İ Movement is dependent on a larger number of factors than time alone as is the case in the life cycle models.İ While there is a central tendency to move in a progressively advancing fashion, it is not an imperative and alternate patterns of movement are allowed.İ Change is abrupt, often disruptive, and results in a new organizational form.İ Each stage is seen as requiring a different set of skills or focuses and a firm must change its strategy and/or structure to properly meet the new demands of each stage.İ What worked in the past will work no longer and a firm must make the appropriate alterations in its form or suffer restricted performance.

İİİİİİİİİİİ The pattern of growth is discontinuous in evolutionary models, but unlike life cycle models, the change is accommodated by extending a given line of development until such time as it can no longer grow.İ At that point in time the organization must change its direction and its form.İ The change is continuous but results in an entirely new organizational form.İ To be continuous, the model insists on stages that are linked and of invariant sequence.İ Change is not time dependent but it does follow an invariant sequence.İ Included by the authors in this category are models that posit periods of calm punctuated by upheaval, such as the revolution model of Greiner (1972).İ

İİİİİİİİİİİ Transition models suggest a model of growth whereby organizations, in response to change within or without, must abruptly and disruptively change their method of operation by becoming an entirely different organization.İ It is upon these points of change that transition models specifically focus.İ Whether due to internalİ increase in size or shifting external conditions, once the firmís given set of responses and mechanisms are no longer effective it must transition to a new form that makes the appropriate alterations to renew its success.İ The structures and strategies that worked in the past must be tossed aside and new ones developed and integrated into the organization.İ Change then results in a new organizational form but this only occurs sporadically as an existing set of conditions and responses is no longer appropriate.

Proposed Typological Method

İİİİİİİİİİİ While Hofer and Charan do an exemplary job of describing the four types and of discussing one modelís operation in depth, their work does not readily provide a method of distinguishing which of the models would apply to a given firm under investigation or to suggest what model could be expected to perform better under a given set of conditions.İ A method is needed that can guide the researcher and manager to select the appropriate model to frame understanding of firm growth.İ It would use a minimal number of few variables and variables that would be readily available and empirically observable.

İİİİİİİİİİİ A logical place to begin determination of critical variables is to look at the nature of the growth phenomenon itself.İ Growth of an organization, by definition, considers change over time.İ Thus, a simple starting point is to consider change as a variable.İİ In the discussion of the four model types suggested by Hofer and Charan (1983), change seems to be discussed along two major dimensions, the type or mode of change and the result of the change on the organizational form.İ

İİİİİİİİİİİ The type of change they discuss appears to occur in one of two modes.İ One mode is the type of change which is continuous, that is, occurring in a steady and ongoing pace.İ This is the type of change one would expect to find as firms adapt to their environments to maintain fit and as they restructure to accommodate increases in size that accompanies growth. Meyer et al. (1990) discuss this incremental and adaptive change and contrast it with the discontinuous mode of change.İ Rather than a gradual adaptation, discontinuous change exhibits a distinct break with the past.İ Instead of helping the organization to continue to operate along a smooth line of development, it is often disruptive and destructive and is the type of change that calls for an entirely new direction for the firm.

İİİİİİİİİİİ A second area of divergence in the models seems to be the effect that the change has on the organizational form.İ Change requires a concomitant restructuring of the organization.İ If that restructuring results in a form that is an extension of the previously existing structure and strategy, it would seem to be a change in the degree of form.İ The original form continues to exist but in a modified and supposedly refined state.İ If the change is so drastic as to require a new form to accommodate it, then the change is one of kind rather than degree.İ This distinction is discussed by both Haire (1959) and díAmboise and Muldowney (1988) and would provide another dimension along which to differentiate the models as proposed by Hofer and Charanİİİİİİ (1983).

İİİİİİİİİİİ These two change dimensions distinguish among the models and it is possible to array them in a matrix with four quadrants (see Table 1).İİ Life cycle models propose that the change is continuous over time and results in a change in degree, a refinement of the previous form.İ Stage models suggest that change is of a discontinuous nature, occurring in response to new conditions and resulting in a new organizational form. Transition models operate in a manner similar to the stage models with change being discontinuous and resulting in a new form.İ Evolutionary models exhibit continuous change that results in new organizational forms over time.İ When arrayed in the matrix, these four models occupy three of the four quadrants.İ The lower left quadrant, calling for continuous change resulting in a new form, remains unfilled.İ Perhaps this is merely a form that does not occur or it is suggests a new model category is needed that was not considered in Hofer and Charan.



İOrganizational change

İis continuous

Organizational change

is discontinuous


Organizational form is changed in degree


Life Cycle Models



Evolution Models




Organizational form is changed in kind





Transition Models



Table 1


İİİİİİİİİİİ What type of growth would exhibit the characteristics of a constantly changing and adapting organization that alters its form to make that adaptation?İ In an article considering the adaptive processes of strategic decision making, Mintzberg (1973) discusses a mode of strategy making which exhibits just such a pattern of movement, the entrepreneurial mode.İ Indeed, it can be conjectured that in an effort to take advantage of opportunity, an entrepreneurial organization is willing constantly to make any adjustment to its strategy or structure to capitalize on a venture.İ Embryonic startups that are creating new technologies but have little idea as to what the final applications may be are constantly reevaluating their missions to target newly realized opportunities.İ As Mintzberg points out, the entrepreneurial firm often follows a path dictated by opportunity, willingly reversing or altering course if a new direction looks more profitable.İ This is the sort of movement and organizational change that could be expected of a firm in the empty quadrant, one experiencing continual change that results in a new organizational form.

İİİİİİİİİİİ In this manner, using the two dimensions of continuous or discontinuous change and the effect on the organizational form being a change in degree versus kind, it is possible to differentiate among what are now five models of organizational growth.İ As stated earlier, an ideal situation would be one in which a growth model type could be determined and change predicted on the basis of an easily observable behavior.İ While the above matrix requires evaluating growth model appropriateness on the basis of only two organizational dimensions, they are not dimensions which are intuitively discernible nor are they readily observable.

The More Observable Behavior

İİİİİİİİİİİ To achieve the stated objectives of accessibility and determinability, an activity-based criteria would seem to be called for.İ One area that considers growth and is often observable is that of the marketing activities of the firm.İ The elements of change for each model have been discussed but are there marketing behaviors which would lead to the different styles of change characteristic of the models?İ Specifically, what behavior would underlie and determine whether change would be continuous or discontinuous and whether the result would be a change of degree or kind?İ Perhaps it would be the activities that a firm undertakes to pursue its growth, the firmís dominant growth strategy and its associated tactics.

İİİİİİİİİİİ There are indeed distinct marketing behaviors that could lead to the differences listed.İ If a firm pursues growth through the attempt to capture more of an existing market, it is reasonable to expect that the movement or change would track the market as it moved.İ Assuming that the market undergoes no drastic alteration, the firm changes are likely to be to those that allow it to more finely match market demands.İ The firm is unlikely to change in organizational form.İ This would be the attributes of the northwest quadrant.İ

İİİİİİİİİİİ If the market is saturated, intensely competitive, and will not allow additional firm growth, the firm might pursue a strategy of developing new products or new markets.İ By introducing new products to their current market or current products to new markets, they make a break with their prior activity, that is a discontinuous change.İ Given that the new strategy is an extension either of current skills and knowledge of products or markets applied to a new area, it is reasonable to assume that the resultant effect in organizational form would be one of degree not of kind, an adjustment of current practices to that new area.İ These are the characteristics of the northeast quadrant.İ

İİİİİİİİİİİ Rather than expanding current strengths, if the firm pursues a breakthrough strategy by developing strengths in dramatically different markets (such as a Western firm establishing new distribution and marketing in an East Asian market) or with dramatically different technologies (such switching from mechanical to electronic machinery), the change would be on obvious break with the past, a discontinuous change.İ The organizational changes required to accomplish the drastically different new efforts would likely require a change in form.İ This situation would then result in discontinuous change and a change in organizational form, the characteristics of the southeast quadrant.

İİİİİİİİİİİ Following the earlier discussion, a strategy of opportunism could result in the type of characteristics proposed for the southwest quadrant.İ The willingness of the firm to pursue opportunity wherever it was found would result in a continuous pattern of change, always shifting in the search for that opportunity.İ Given the flexible and organic form of the organization, these constant refocuses could be accommodated without a change in organizational form.İ Unfortunately, this same fluidity of strategy, tactics, and form would make the identification of the opportunist difficult.İ Depending on circumstances it might exhibit the pattern of any of the four quadrants.İ Because of this, there are no repetitive growth activities and the type of growthİ and change expected will still have to be determined at each point of time.İ For an opportunistic firm, successful typing will not eliminate the need to re-analyze the growth on an occurrence by occurrence basis.İ Once identified as an opportunist, however, it will be known that this sort of ongoing analysis will be necessary and thus the possibility of making the mistaken assumption that the change pattern will remain constant will be avoided.İ Arraying these dominant growth strategies with the activities associated with them along the same two dimensions discussed for the differentiation of growth model results in Table 2. It can be seen that the four quadrants can accommodate the marketing growth strategies.



Organization change

is continuous


Organization change

İis discontinuous


Organizational form is changed in degree



sowing and harvesting more market share in an existing product-market combination


expanding into nearby markets or related products, planting and growing


Organizational form is changed in kind



following opportunity regardless of its location


entering never before explored market and technology areas to find new opportunity

Table 2 : Change Matrix


İİİİİİİİİİİ The remaining step in developing a new method of framing entrepreneurial growth is to move from the marketing strategy to the associated marketing activities that would be both readily observable and easily interpreted.İİ The product-market growth strategies matrix ofİ Ansoff (1957) can be exploited.İ As can be seen in Table 3, the type of strategy prescribed by Ansoff is proposed to be a function of whether the product and or markets are existing or new.İ The resulting structure is not dissimilar to the earlier change matrix proposed in this paper.İ

İİİİİİİİİİİ The exception is that in Ansoffís matrix, the ìmarket developmentî of the southwest quadrant is the sort of activity the change matrix posits to co-exist with ìproduct developmentî in the northeast quadrant.İ By moving this product-market combination to that






Existing Product


New Product


Existing Market





Product Development

Market Development


New Market






Table 3: Ansoffís Growth Strategy Matrix


northeast quadrant and by replacing it with opportunism in the southwest quadrant, a new strategy matrix is formed which could roughly fit over the change matrix.İ With this alteration it is still possible to differentiate the strategies on the basis of whether they concern change in one area ( market or product development of the northeast quadrant), both areas ( new technology or process that leads to a new market-product combination), neither area (the market penetration of the northwest quadrant), or either one or two areas (opportunism of the southwest quadrant).

İİİİİİİİİİİ By defining firms according to this new method that joins a growth model typology to Ansoffís strategic growth matrix, it is possible to predict the mode of change an organization within a given quadrant will experience, the effect of the change on the firms organizational form, and the probable growth model in operation. The literature suggests that growth strategy may be contingent upon the type of industry a firm operates within (Hrebniak and Snow, 1980; Covin and Slevin, 1989; Buskirk, et. al, 1994).İ Based on the predicted type of change, strategies, and tactics, it is also possible to guess at which type of industry each of the four Quadrants would most likely operate within.İ Grouping all of the above information now available results in four major types of growth based on their dominant growth strategy posture.İ The four types and their predictable characteristics and behaviors are depicted in Table 4.

Implications and Summary

İİİİİİİİİİİ Utilizing the new matrix it will be possible to predict a number of important characteristics concerning the behavior, growth performance, and organizational change in a given organization.İ The method of differentiating firms is based on a readily observable and


Organizational change

is continuous


Organizational change

is discontinuous






Organizational form is changed in degree



Strategy: market penetration

Activities: standardization,İİİİİ cost control, heavy advertising/promotion

Typical Industry: mature, low tech

Model: Life Cycle


Strategy: expansion/ development

Activities: extending old strengths to new applications, combination of advertising/promotion and education/awareness

Typical Industry: developing, not mature, in differentiation stage

Model: Evolution





Organizational form is changed in kind



Strategy: entrepreneurial opportunism

Activities: environmental scanning, personal selling, ìme tooî lines

Typical Industry: on edge, high margin niches, high or low tech

Model: Opportunism


Strategy: diversification

Activities: new to company/ new to world product/ technology, heavy R&D, environmental projection, market education

Typical Industry: emerging, high tech, young

Model: Stage or Transitional


Table 4: New Growth Matrix and Predicted Characteristics


fairly understandable concept, the marketing activities of the firm.İ Specifically the model proposes that by identifying the firmís dominant growth strategy and concomitant behavioral tactics, it is possible to predict the nature of organizational change, the effect of the change on organizational form, and growth model type.

İİİİİİİİİİİ This will be useful for diagnostics and for research.İ It could provide a managerially useful method, using readily accessible variables, by which to predict the type of change an


organization will experience, the type of alteration this change will cause in the organizational form, and the type of growth model in effect. Knowing the relevant growth model will allow it to develop the organization in the appropriate direction, make necessary and timely alterations in strategy and structure, develop contingency plans for probable growth problems, and anticipate at what point in time it might become necessary toİ execute them.İ The literature appropriate for the salient growth model should be referenced.İ

İİİİİİİİİİİ The new matrix could also thus provide the necessary framework for investigation into the progress of the firm and provide suggestions as to the linkages between determinant variables and their resulting effect on growth performance.İİ Once the growth model is known, it would be possible to hypothesize common problems the firm will experience, at what point in their development these problems might arise, and how to successfully overcome them.İİ Again, the literature appropriate for each model type should be reviewed.İİ Once the model type is known, further investigation into that specific pattern of growth can present useful information upon which to build hypotheses.

İİİİİİİİİİİ There are several concerns and limitations to the proposed method.İ First, the subject of organizational change is assumed but its underlying causal mechanism is not investigated.İ As pointed out by Kazanjian (1988), two common explanations for organizational change are the need of organizations to learn new skills and strategies when previously successful ones fail and the need of organizations to solve dominant sets of problems before they can progress to a new level.İ Either of these causes would be consistent with this paperís typology in that the amount of time available to learn new skills or solve dominant problem sets would be contingent on the continuity and the degree of change required.İ Also, in this study a contingency model for determiningİ type of organizational growth and change ( and related factors) is based on the strategic growth posture and marketing activities of the firm.İ There are other possible variables which mightİ activate or moderate that growth.İ The purpose of this paper was to provide a parsimonious method of determining growth type from a readilyİ observable behavior and so a fully specified model was sacrificed for ease of use.İ For the sake of simplicity and clarity this paper also assumed that a firm would only follow a single style of growth.İ In reality it is very possible that, while one model is dominant, more than one and even all may be in operation at the same time in a manner similar to that discussed by Buskirk, et al. (1994) when they consider the type of change and industry versus firm level of operation.İ Lastly, it is recognized that this paper extends thought only and it is hoped that other researchers at a later date might be able to empirically test and build evidence for that thought.

İİİİİİİİİİİ It seems almost certain that understanding firm growth will become more important due to two developments.İ First is the fact that a globally expanding economy will require the fuel of high growth to provide the increasing number of jobs, products, and standard of living this will call for.İ Secondly, reports indicate that the already fast rate of change in technology and markets are accelerating the growth process itself.İ Increasingly, the product life cycle is shortened and the need increases to jump into a market, exploit it, and move on to greener pastures, resulting in meteoric growth that lasts for a very short time.İ The dual pressures of the increased need for growth and the increasing change rate of the growth process will increase the need for a way to predict growth and its processes and to measure a firms ability to deal with it.İ

İİİİİİİİİİİ High growth businesses and rapidly changing markets and technology, are often the most interesting areas to research.İ Unfortunately, this area of the opportunist is theİ untractable.İ They are the least stable of the models and could, at any given time, exhibit the characteristics behavior of either of the other three growth types.İ It also means that rather than exhibiting a dominant pattern of developmental change and developing a management response to them, the entrepreneurial manager will have to be just as flexible as their organizations.İ These entrepreneurial firms that constantly moving their firms from one type of growth to another using whatever strategy will work, are the most fascinating to study and the ability to predict what mode they are currently in and the associated strategies, structures, and problem areas should be of great importance.


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