S PEAKING UP : S TORIES OF GROWTH IN SMALL &
MEDIUM ENTERPRISES IN N EW Z EALAND
by Claire Massey, Alan Cameron, Jo Cheyne, Candice Harris, Kate Lewis, David Tweed, Catherine Wallace, Virginia Warriner
New Zealand Centre for Small & Medium Enterprise Research Massey University
2004
Contents
Preface ... 1
Introduction ... 3
How the research was carried out... 5
A framework for the research ... 5
The participants ... 7
The interview ... 7
What the research revealed... 9
Firm development ... 9
Firm transitions ...11
Growth...13
Succession ...14
Work & life choices...14
External assistance...15
Conclusions ...17
Preface
As university researchers our job is to uncover new knowledge – preferably the sort of new knowledge that other people will find useful. These ‘others’ may include researchers, (who can build upon our work and answer the questions that still puzzle us), or policy makers and analysts in government agencies (who might be able to use our findings to help them develop more appropriate policy frameworks).
In some instances, those who read and use our research may include those who are in business themselves. These individuals are not usually the target of research publications, although they are the implicit target of everything that researchers in our field do.
Not only are these individuals the centre of everything we do – they make it possible. On behalf of the whole team, I would like to express my sincere thanks to all of those who allowed us to visit them and to disrupt their day’s work.
Their honest answers to our questions gave us an insight into growing a business in New Zealand and have provided us with the basis for what we hope will be a long- term project.
On behalf of the project team I would also like to thank the Academy of Business Research within the College of Business at Massey University which provided funding for this project, and to Kylie Shirtliff and Tanya Jurado for their contribution to the successful completion of the research.
Associate Professor Claire Massey
Project Leader & Director, New Zealand Centre for SME
Research
Introduction
Small and medium sized enterprises (SMEs) are an important element of the economies and societies of many countries around the world. This is also the case in New Zealand, where the business sector is made up of more than 300,000 enterprises1 (in addition to roughly 100,000 farms), most of which can be described as small or medium in size2. These enterprises are critical to the economy through the way in which they contribute to GDP, and they provide many of the goods and services that large enterprises depend upon. They also play an important part in local communities, through employment (some 60% of the work force is employed in the SME sector)3 and the way in which small, often locally- owned and operated firms supply goods and services to communities – engaging in economic activity that might not be commercially viable for large firms.
The scale and the variety of the contributions that SMEs make has been increasingly apparent in recent years, and in New Zealand, successive governments have become more and more interested in the way in which the contribution of the sector can be enhanced. This interest is demonstrated in a number of explicit ways, such as the appointment of a Minister for Small Business and the establishment of the Small Business Directorate within the Ministry of Economic Development and the Small Business Advisory Group.
At the same time, there are increasing moves from government departments and agencies that provide practical assistance to all New Zealand firms (e.g. New Zealand Trade & Enterprise) to develop programmes that match the needs of enterprises that are small in size or which are growing quickly. A further dynamic is the response from those parts of government that are becoming aware that SMEs face particular challenges that large firms do not. The work carried out by the Ministerial Panel on Business Compliance (which was established to try to make
1 Statistics New Zealand. (2003). Business Activity Statistics. Wellington, New Zealand: Statistics New Zealand. Retrieved September 22 2004 from the World Wide Web:
http://xtabs.stats.govt.nz/eng/TableViewer/Wdsview/dispviewp.asp?ReportName=
Business%20Statistics/Detailed%20industry%20by%20area&IF_Language=ENG
2 There is no official definition of an SME in New Zealand and commentators employ a range of definitions to refer to firms in different size groups. For the purpose of this research, Cameron and Massey’s 1999 definition is used, where a micro-enterprise is defined as an enterprise that employs fewer than 5 full-time equivalent staff (FTEs), a small enterprise employs 5-49 FTEs, a medium enterprise employs 50-99 FTEs and a large enterprise employs 100 or more:
Cameron, A., & Massey, C. (1999). Small and medium sized enterprises: A New Zealand perspective. Auckland, New Zealand: Addison Longman Wesley.
3 Statistics New Zealand. (2003). Business Activity Statistics. Wellington, New Zealand: Statistics New Zealand. Retrieved September 22 2004 from the World Wide Web:
http://xtabs.stats.govt.nz/eng/TableViewer/Wdsview/dispviewp.asp?ReportName=
Business%20Statistics/Employment%20size%20groups%20for%20geographic%2 0units&IF_Language=ENG
some progress towards removing the barriers that prevent SMEs from growing) is an example of this approach.
These initiatives are encouraging, and the consultative style adopted by many of these groups (SBAG in particular) provides a mechanism for many of those who operate SMEs in New Zealand to have their opinions heard.
However, in order to quantify the extent of a problem across the sector as a whole, or to assess the intensity with which an issue is experienced by SMEs in general, formal research into specific issues is needed. This research is increasingly being carried out, and in the last decade a ‘body of knowledge’ about New Zealand SMEs has been established4. The findings of these research projects complement the data gathered through less formal mechanisms, and together present those interested in New Zealand SMEs with the best of all worlds – opportunities to hear from those with something to say about their experience of running a small or medium enterprise in New Zealand, and access to carefully designed and executed research which investigates particular questions within the context of the whole sector.
This report describes recent research into New Zealand SMEs, which was carried out by researchers from the New Zealand Centre for SME Research at Massey University in 2003. The purpose of this report is to provide a summary of the key messages that emerged from the research and to draw together some of these messages in a way that is useful for those who interact with small and medium enterprises in New Zealand.
However, our interest is not merely in helping policymakers: Ultimately our focus is on benefiting the owners of the firms that participated – and others like them.
4 This includes research undertaken by some government agencies as well as by university researchers. Some of the most important studies include:
Bollard, A. (1988). Small businesses in New Zealand. Wellington, New Zealand:
Allen & Unwin NZ in association with the Port Nicholson Press.
Cameron, A., & Massey, C. (1999). Small and medium sized enterprises: A New Zealand perspective. Auckland, New Zealand: Addison Longman Wesley.
Campbell-Hunt, C., Brocklesby, J., Chetty, S., Corbett, L., Davenport, S., Jones, D., & Walsh, P. (2000). World famous in New Zealand: How New Zealand's leading firms became world-class competitors. Auckland, New Zealand: Auckland University Press.
Enderwick, P., & Akoorie, M. (1996). Fast forward: New Zealand business in world markets. Auckland, New Zealand: Longman Paul.
Knuckey, S., Johnston, H., (Eds), with Campbell-Hunt, C., Carlaw, K., Corbett, L.,
& Massey, C. (2002). Firm foundations: A study of business practices and performance in New Zealand. Wellington, New Zealand: Ministry of Economic Development.
How the research was carried out
The study was carried out in 2003 by a team of eight researchers from the New Zealand Centre for SME Research at Massey University: Alan Cameron, Jo Cheyne, Candice Harris5, Kate Lewis, Claire Massey, David Tweed, Catherine Wallace and Virginia Warriner. All eight already had research experience with small and medium enterprises, and several of the researchers have published extensively on different facets of this sector.
This experience with other research projects meant that as a team we were knowledgeable about many of the issues facing SMEs and aware of the different approaches being taken by government agencies (both in New Zealand and internationally) to help these enterprises to develop. However, we were also aware of the gaps in our knowledge base, particularly about one of the most crucial topics of all: firm growth.
This awareness led to our interest in undertaking a study that would contribute to answering one of the pivotal questions facing those responsible for economic development in New Zealand today. What are the key ‘transitions’ (or decision points) that firms encounter as they attempt to grow? In the context of this overall aim, our specific focus was on providing answers to the following questions:
1. How does the experience of New Zealand SMEs relate to the ‘business life-cycle’ model?
2. What are the points at which firms are forced to make decisions about key ‘transitions’ between one phase and another (i.e. between establishment and growth)?
3. What suggestions do we have for external organisations (e.g.
government agencies and/or industry bodies) in terms of assisting New Zealand firms to minimise the difficulties inherent in successful transitions?
As described below, we attempted to answer these questions by examining the business ‘life-cycle’ of the firms that we visited and by exploring the responses of their owners to questions about growth and development.
A FRAMEWORK FOR THE RESEARCH
Traditional approaches to the business life-cycle6 have been based on what is now a well-known approach to conceptualising firm development
5 Now a Senior Lecturer at Auckland University of Technology.
6 The ‘business life-cycle’ (and/or models that are based on firms progressing through different ‘business stages’) have become popular as a way of conceptualising the way in which firms change over time. Various researchers, (including those below) provided the basis for the conceptual framework for the research described in this report:
Churchill, N. C., & Lewis, V. L. (1983). The five stages of small business growth.
Harvard Business Review, May-June, 30-50.
Greiner, L. E. (1972). Evolution and revolution as organizations grow. Harvard Business Review, July-August, 37-46.
Steinmetz, L. L. (1969). Critical stages of small business growth: When they occur and how to survive them. Business Horizons, 12(1), 29-34.
that is based on two dimensions; size (either in terms of revenue or in terms of staff numbers) and ‘maturity’ (often measured by age). These models imply that firms move through identifiable ‘stages’ and that the movement from one stage to another marks a ‘transition point’ for the firm.
A synthesis of a number of the models can be seen in Figure 1, in which the five ‘stages’ identified by most models (initiation, development. growth, maturity, decline) are identified.
Figure 1: The business life-cycle
Sales revenue
Stage of life- cycle
Initiation Develop- ment
Growth Maturity Decline
This approach has been criticised on a number of counts: Firstly, there is an implication that over time all firms will progress through the stages identified – irrespective of their industry, size or other characteristics. A number of critics7 have noted that this implication means that the model is inflexible, and therefore has limited applicability. In particular, it does not appear to accommodate firms that do not go through the stages identified (or do not go through them in the order presented), and is unhelpful in shedding any light on any departures from the pattern (e.g. examples of
‘arrested development’8).
Secondly, critics note that the model is primarily theoretical, and that there is a lack of empirical evidence that firms actually do go through the stages
7 A full discussion of the merits or limitations of the model is beyond the scope of this report, however, for a summary of the major limitations see:
O'Farrell, P. N., & Hitchens, D. M. W. N. (1988). Alternative theories of small-firm growth: A critical review. Environment and Planning A, 20, 1365-1383.
Gray, C. (1993). Stages of growth and entrepreneurial career motivation. In F.
Chittenden, M. Robertson, & D. Watkins (Eds), Small firms: Recession and recovery (pp. 148-159). London: Paul Chapman Publishing.
Hofer, C. W., & Charan, R. (1984). The transition to professional management:
Mission impossible? American Journal of Small Business, 9(1), 1-11.
O'Gorman, C. (2001). The sustainability of growth on small- and medium-sized enterprises. International Journal of Entrepreneurial Behaviour and Research, 7(2), 60-75.
8 McMahon, R.G.P. (2001). Deriving an empirical development taxonomy for manufacturing SMEs using data from Australia's business longitudinal survey.
Small Business Economics, 17, 197-212.
as described, i.e. in the order that they are set out. In particular, there is a lack of evidence that small or medium enterprises follow the stages identified, as to date, the model has primarily been applied to large organisations.
Thirdly, there is concern that the use of any such model will actually be counterproductive, and that arguably its ease of use and apparent value will prevent researchers from examining whether it does in fact have any explanatory value in the way SMEs develop over time.
Despite these criticisms, there is one way that the various stages approaches are regarded as being helpful: In the way in which they provide a valuable conceptual framework for data collection.
This was the way in which the approach outlined in Figure 1 was used in this study. It provided the researchers with a conceptual (or theoretical) underpinning for the collection of data – a ‘baseline’ against which they could compare what they were told by the respondents.
T HE PARTICIPANTS
A random sample of 500 New Zealand firms employing fewer than 50 full- time staff provided the basis for the research. This list was purchased from a commercial database supplier, and fifty firms from this list were recruited by telephone. These firms were chosen to represent two broad industry sectors (manufacturing and service industries) and two size groups (fewer than 5 FTEs9 and employing 5 to 50 FTEs).
Each of these firms was then visited by a member of the research team.
These firms were located throughout New Zealand – with researchers visiting firms in a wide variety of locations – from Whangarei to Invercargill.
The firms varied in terms of age (from just one year to over a hundred years), size (from zero to 50 FTEs) and turnover (from $130k p.a. to $13m p.a.). Just over half (28) were what could be described as family firms10 and around a quarter (11) were exporting.
The individuals that were interviewed were mostly men (there were only five women) and in terms of ethnicity were predominantly New Zealand Europeans. Four of those who were interviewed were immigrants.
T HE INTERVIEW
The interviewee (usually the firm’s owner, but in some instances the manager) was interviewed using a structured schedule that was designed to help the researcher elicit information that was relevant to the research questions. The research was carried out in accordance with the guidelines provided by the Massey University Human Ethics Committee and followed a set protocol in terms of the way in which the respondents were selected, the way the data were collected and the uses to which they could be put following the interview.
9 Full-time equivalent staff.
10 For the purpose of this study a firm was described as a family firm if two or more members of the same family were working in the firm or was a part owner.
What the research revealed
The owners and managers of the firms that we visited as part of this study gave us a fascinating insight into the experience of owning and managing a firm in New Zealand today. The way in which the interview schedule was designed provided these individuals with a framework for telling us about the changes that have occurred in the life of the firm over time. What they told us is summarised below, grouped around three broad themes: stages of firm development; firm transitions and sources of external assistance.
F IRM DEVELOPMENT
We asked respondents to identify the ‘key events’ or ‘milestones’ that had affected the firm’s development – over the whole life of the firm where possible. In some instances this list of events was short as the firm had only been in existence for a brief period, but other firms had been in existence for decades, and this exercise produced a detailed list – in one case the interviewee described events that had occurred since the early years of the 20th century.
Amongst the most common business-related ‘milestones’ or ‘key events’
was the employment of staff:
“when you employ another person you’re actually increasing other overheads because you’ve got employee management …, well middle management has got to increase so it chews away at that profit that you were making” (Firm 3).
Other common events were moving into bigger premises (or into the first set of leased premises) or securing new business:
“…..and went from a cottage industry as I said, under the house to the first rented industrial site and then came here” (Firm 14).
“Probably the first milestone was our first big contract” (Firm 26).
A number of respondents identified milestones for the firm and then related these milestones to broad economic trends being experienced throughout New Zealand at a particular time:
“We had an operation in Christchurch for example which we bought in about 1981 … we had to close it in 1987 because of the effect of Rogernomics and all the rest of it so there was a massive downturn” (Firm 23).
Others described their key events in the context of a changing industry – and some of those that had been in operation for many years produced fascinating tales of industry cycles and turbulence:
“1980 I suppose is where the automotive accessory market probably changed and you got more into general type accessories rather than hard parts, we did hard parts call ... (engine components, axles, brake pads) non hard parts which we call accessories (could be mirrors and clocks) and all sorts of things so we moved away in the late 70’s from hard parts into general accessories and rode that wave and then you’ve got 87, 88 which was the de-regulation of the oil industry which meant that the oil companies bought the sites and basically changed the focus of that whole industry and we lost say 70 – 80% of our market overnight” (Firm 5).
In addition to describing factors in the external economic environment, industry cycles and typical business milestones, many of those interviewed also identified what would at first sight be categorised as non-business events. The most common events identified in this context revolved around personal issues such as the death of a family member or close friend, a change in marital status or health problems:
“After the divorce – (I) went off the rails and, of course, the business suffered. Tax didn’t get paid” (Firm 38).
“Yeah, on the 8th I had one hip replacement done and on something like the 28th I had the second one done - so that was a bit of a worry” (Firm 48).
These non-business events in many cases impacted on how the business was run, the direction it took, and on decisions to grow the business or not.
“In 1983 I suffered from back problems through playing rugby for years and finally after spending $2000 a year on chiropractic fees, it got worse and my doctor sent me to Auckland for a back scan and my surgeon who operated on me advised me to close down, as I’d never go back doing my job so I closed down for a period of six months but he was wrong fortunately and I had a successful back operation, very successful – the business has been small since that time” (Firm 34).
In some instances the events told us as much about the personal life experiences of the owner as it did about the stage of the firm. An owner in his mid 40s describes the early years of his firm which he started while he was also establishing a family and suffering one of the worst possible events that could impact on a parent – the death of a child.
“I started a business in May of 81, I bought the house in November of 81 or thereabouts, I got married in March 82, we had our first child in September 83 and then September 85 my child got cancer, then March 87 we had our second child. They were testing years” (Firm 47).
The implication of this quote is that the firm and the owner were ‘growing up’ at the same time – passing different milestones and surviving a variety of crises. At the time the research was done, both the firm and the owner were in a period of maturity and stability.
While tragic, this story was not unusual – many respondents described the death of a family member, the experience of getting a divorce or encountering a major illness as having an impact on the firm’s development (i.e. the crisis was specifically mentioned in response to a question about the key events in the firm’s life). This suggests that the owners of small New Zealand firms do not regard their business and personal ‘lives’ as separate – they recognise the interrelationships between business and leisure, and work and family. This absence of boundaries between business and personal life has implications for the way in which these individuals run their firms and the way in which they think about the future.
It also has implications for those agencies and organisations offering business assistance. While no amount of traditionally defined business assistance can alleviate the stress caused by such uncontrollable occurrences, it is clearly important that those working with individuals operating small firms should recognise the interrelationships between the business and personal lives of the owner and/or manager.
When the respondents discussed the consequences of the milestones they had identified, a recurring theme was the difficulties that go with employing staff. One aspect of this was an inability to find appropriately trained staff:
“…if there was an abundance of skilled qualified people out there, absolutely, but trying to manage and obtain good skilled people is such a
mission that you’re better off to just produce quality work at a lesser rate and stay at that level because I’ve watched other businesses over a number of years and they try and grow and they hire sort of sub standard tradesmen, etc and the wheels just fall off the trolley like – unbelievable, you know they’re out doing horrendous amounts of rework and if you’re doing reworking you may as well be sitting in the sun enjoying the day you know because you’re actually losing more than sitting in the sun so once you see that creeping in, you’ve got to squeeze – the quality factor. The major factor of this industry at the moment is that there is a phenomenal shortage of qualified people” (Firm 21).
Another aspect of employing staff that was regarded as being problematic related to the burden of taking on new staff, in terms of both compliance and management. In this context most discussion was about the apprenticeship scheme. Many of our respondents (almost half) talked about taking on apprentices, and almost all of them commented on the difficulties inherent in this:
“For guys like myself it becomes very hard to actually take on an apprentice because of the financial burden – yeah we’ll call it financial burden but it really does put stress on your company big time – in lots of ways” (Firm 3).
“Our apprentice has just finished his apprenticeship – that’s the third apprentice that I’ve put through since I’ve been in business, yet there’s no incentive to do that” (Firm 29).
While it is possible that some of these statements were simply a reaction to a scheme that had changed since those being interviewed had been apprentices, there were clearly some very real issues being identified:
“I looked at putting an apprentice on the government scheme but there’s no assistance like I rang them up and said “what’s the assistance”, because it’s more down time for me to train and I just said is there any sort of financial assistance and they said no, no we can’t assist you in that way but then I can go to the unemployment service and get someone that’s been out of work for 3 months and they pay 75% of their wage so – and here’s the government saying push apprenticeships but they’ve got no incentive, that’s why I’ve just gone back to subbing guys” (Firm 6).
A broader issue was training:
“I still don’t think you can train in three years, you need five … they’re in a class situation with one tutor or one point of view and the industry changes so quick … whose training the tutor in the new techniques?” (Firm 3).
These comments are typical of a large number of respondents who described their difficulties with employment or expressed their anxieties about taking on staff. These issues are significant, because an increase in employee numbers is considered a standard way of measuring growth, and is often identified as a desirable goal by government. If firms are experiencing difficulty in employing more staff then this is problematic for those promoting economic growth.
F IRM TRANSITIONS
The second broad area researched in this project was that of ‘transitions’.
This was based on one of the key concepts implied in the model presented in Figure 1; that firms will go through identifiable stages (initiation, development, growth, maturity, decline) and that there will be a ‘transition’
between one stage and another.
The researchers explored this notion by showing the respondents a diagram of a modified life-cycle/stages model and then working with the
interviewee to produce a visual depiction of the firm’s ‘life-cycle’11. This exercise produced a one-page summary of the events that had already been identified and a curve that in some (but not all) cases was similar to the life-cycle model that the respondents had seen.
The respondents were then asked to identify the main ‘eras’ or periods in the life of the firm and indicate whether retrospectively they could see any points at which they felt the firm was going through a ‘transition’.
This section of the interview produced some fascinating and revealing comments, with many of the interviews prepared to name their eras with quite precise and literal names. One interviewee described his firm’s eras:
“First it was ‘hard slog’, then it was all about ‘learning the ropes’ and finally we’re into ‘cruising’” (Firm 29).
Another talked about the ‘hard yards’ being followed by ‘life after the crash’
(Firm 49).
These comments were often highly revealing about the way the respondents felt about these events – particularly about the very difficult periods – for those who had faced bankruptcy for example. They also often revealed the owner’s intentions and objectives for the future - possibly more accurately than a direct question about this topic would have. For example, the term ‘cruising’ (as used by Firm 29) was probably the single most typical term used by the respondents when discussing their future – a finding that is significant as it appears to suggest that the respondents were not actively considering future growth.
This section of the interview in fact revealed three distinct patterns in the responses. The first pattern (exhibited by roughly 1/5th of the respondents) was the set of respondents who produced a life-cycle diagram that fitted the classic model that they had been shown – i.e. where start-up and growth stages were followed by ‘maturity and decline’. Some of these individuals seemed to suggest that this pattern was a natural consequence of their type of business (such as a trade), where the firm is primarily built around the skills of a particular person. In one instance the owner explained the curve in the context of being in a declining (or sunset) industry.
The second pattern (exhibited by roughly 2/3rds of the respondents) was of those respondents whose diagrams did include future growth.
The third pattern (exhibited by roughly 1/5th of the respondents) was of those respondents whose diagrams were virtually flat throughout the entire period i.e. there was little growth shown at any time – even during the firm’s early stages. This group could be described as exhibiting a pattern of
‘capped growth’12 This group included those who had made a conscious decision to curtail growth, usually because he or she wanted to keep total control of the business or to maintain a certain ‘quality of life’.
Overall, this section of the interview revealed some fascinating stories, and gave the research team an insight into the different approaches to doing business in New Zealand today. All of the individuals we spoke to had
11 In this exercise the events already identified were entered onto the horizontal axis of a proforma life-cycle diagram. The interviewee was then asked to ‘graph’
the firm’s progress in terms of a scale that they selected themselves (e.g. turnover or staff numbers).
12 McMahon R.G.P. (2001). Deriving an empirical development taxonomy for manufacturing SMEs using data from Australia's business longitudinal survey.
Small Business Economics, 17, 197-212.
experienced successes and failures, and some had coped with difficult or tragic personal events while continuing with day to day operations.
Within the context of this exercise a number of other issues were raised.
The first was growth - and as already noted, three different patterns were exhibited. A second key issue was ‘succession’, particularly in family businesses. A third issue was the number of hours required to run a business – it was clear that this played a significant part when it came to making key decisions about ‘growth’ and ‘succession’ – and whether to make the transition from one stage to another. These three inter-related issues are explored in greater detail below.
Growth
As noted above, the responses revealed three distinct patterns of the firm’s development up to the point when the researcher visited (as perceived by the interviewee). These patterns could be described as ‘capped growth’,
‘on a growth curve’ and ‘maturity and decline’. While the respondents tended to fall into one of the three groups quite easily (based on their depiction of their firm’s development), to grow or not to grow was clearly a complex issue – as even those who described their firms as being on a growth curve tended to put a caveat on future growth:
“…we don’t want to keep growing and growing and growing” (Firm 42).
“I don’t foresee any benefits in being wealthy unless you can be worth millions and I don’t ever see that happening so I’d rather now have a lifestyle” (Firm 47).
Individuals such as these talked about their desire to grow, but within certain limits, i.e. their stated desire to increase turnover was often followed by concerns about retaining certain elements of the current situation (e.g.
staff numbers or the ability to spend time with a family when desired). For this group of respondents, growth was seen as something that was attractive, but it was not ‘growth at any cost’: Many of the respondents in this study placed the need for stability and quality of life before firm growth:
“Because we didn’t want to grow in the market, quite early on we decided that we would only want 15% of the share, we didn’t want any more than that because we felt that if we took any more of the market, we would just have more headaches. We’d rather have 15% of the best clients in the industry” (Firm 8).
In other instances a decision to restrict growth was related less to free choice than to necessity:
“…after the date of my back operation larger contractors and major companies knew we didn’t have the staff to handle the big work that we did before...I’ve been quite happy to go along that road, the quieter road than the more hectic road prior to that time” (Firm 34).
Others talked about constraining future growth in the context of current needs:
“As long as you can put food on the table and keep a roof over your head, what more do you need?” (Firm 26).
A small group talked explicitly about their objectives in terms of growth.
These individuals were able to articulate not only the actions they would take to enact growth but also why growth was beneficial for both them and their firm.
Succession
As part of the interview the respondents were asked to describe what type of business they operated. In many instances they described their enterprises as ‘family businesses’, where the individual had either taken over the business from a family member, or was planning to hand over to a family member or a close family friend:
“The business was established by my father five years before the second world war…I’ve been running the company since 1973” (Firm 34).
Often the interviewee raised the issue of future succession. At these times it appeared that some owners were grappling with a desire to retire, while also wishing to retain a measure of control over the firm:
“Yeah but I’m due to sell it and my son is going to buy it but… he’ll employ me for five years or whatever till I want to go out and we’ll just run it, he’ll be the owner” (Firm 31).
In some cases decisions about succession were linked to non-business
‘milestones’ such as health:
“If you asked me six months ago [how long I would be doing this for] I would have said forever, but I’ve had bowel cancer and had my bowel ripped out in the last three months and the answer is I don’t know...So my son came over from Australia and he’s gonna have a go at trying to support or get into the business” (Firm 4).
Plans for succession also affected intentions to grow the firm:
“…we’re both over 60, we were really keen to slow down and when we found we couldn’t really pass the load to someone else we’d perhaps been reluctant to pick it up again ourselves and felt, well it’s easier to pass it on to somebody else. So I think that’s as much an influence as the other outside influences, it’s all a personal life-cycle rather than a business life- cycle” (Firm 36).
These findings suggest that issues of control and quality of life play an important part in decisions relating to growing the firm when the handover of the firm is looming. In some cases the researchers found that the interviewee would rather hand over to a family member, or sell or close the firm, rather than face what may have been perceived as a more difficult option – to grow the firm themselves.
Work & life choices
When describing their working lives many of the interviewees noted the large amounts of time that owners of SMEs invest in their firms:
“We don’t see we’d be doing this for the next 20 years because it’s very long hours and it’s very high pressure” (Firm 42).
While the amount of time spent in establishing a firm is not a surprise, what is interesting is that in many instances this was described positively:
“A lot of people say if you run your own business like … you shouldn’t let the business run you, you’ve got to have interest outside of work and the phrase you’ve got to have your own lifestyle, it just doesn’t sit with me.
Lifestyle is perhaps not it, you’ve got to run your own life without the business running you rather than being determined to have – like I’m going to play golf three days a week or I’m going to do this. It’s just let it happen, if you want to go and do something, go and do it, whether it’s spontaneous or regular or what” (Firm 26).
For some respondents it was clear that they had made a positive choice to invest such a large proportion of time in the business and it reflected the way in which the firm was central to both their personal and work lives:
“We were just looking at the holiday accrued the other day for looking at the Christmas holiday break and these guys might have 40 – 60 hours, 90 hours of holiday left and I think mine was like 560 hours or something you know, I just haven’t taken any time off really” (Firm 21).
However, for some business owners the long hours did indeed result in stress and impacted negatively on family life, and were a necessity rather than a choice:
“As you get older, you know you don’t need the $150,000 or whatever, because time is more important. I’ve seen too many guys my age die, a really good friend of mine is struggling with leukemia at the moment in Australia and he’s just worked so hard for the last 15 years and hardly any time for his kids and he’s got all these millions of dollars and he’s fighting for his life. It’s really sobering” (Firm 25).
These findings are significant as they help dispel much of the rhetoric surrounding the characteristics of the ‘lifestyle entrepreneur’ – a label that often has a negative connotation, and is one that is applied by outsiders to people in business who are not constantly striving for growth.
The individuals quoted above may be described by some as ‘lifestylers’, but many would resent this label – their aim is quality of life within the context of a life that is built around the firm. In the context of the current debate on ‘work-life’ balance, this distinction is important: While some owners were concerned about the high numbers of hours they are investing, for others ‘balance’ just wasn’t on the agenda; for them the firm is more than just a job, it is an integral part of a life that they have chosen.
E XTERNAL ASSISTANCE
In the final section of the interview the respondents were asked to talk about the way in which external agencies could have assisted them to cope with some of the key milestones that they encountered, or eased the problems associated with the transition from one phase to another.
The most significant finding is that relatively few firms could tell us about instances when they had sought help in relation to a challenge that related to a transition in the way it was described in Figure 1: Despite the fact that most respondents were able to identify (and name) key eras, many found it difficult to discuss transitions between one stage and another. For example, most found it difficult to identify events that preceded or followed a transition. In the context of the final section of the interview this meant that the respondents were largely unable to relate the times when they did seek assistance from external advisors in relation to the events surrounding transitions.
In most cases the most usual form of business advice came from fairly routine interactions with banks and accountants:
“The bank – the bank has been marvellous - I’m with the National Bank and they have been unbelievable fantastic” (Firm 1).
Far fewer respondents talked about interactions with government agencies, due perhaps to their lack of understanding on how these agencies could help. However, those that had attempted to gain help described these experiences with passion.
“I asked the government to help me, I asked them and they said you’re not exporting enough ‘John’, $200k a year export is not enough for us to be interested” (Firm 33).
Many were aware that assistance could be available, but were either unsure about how to access it or unwilling to try it:
“At the end of the day every time I think about or read something and think oh why aren’t I doing that and I make inquiries, I find that either everybody else is doing it and government departments don’t want to know you or there’s very little assistance to be had from anybody or by anybody… you talk to them and you get beaten around and you find that nobody really wants to know. You’re just one of many and you give up really but there’s probably a number of government departments or local bodies that maybe do offer assistance but I don’t know how you find them” (Firm 1).
There was also an inability on the part of the respondents to differentiate between the services offered by different government agencies. For example, interviewees seemed unable to distinguish between the interactions they had with agencies for regulatory or compliance purposes (e.g. IRD) and those that they chose to interact with for the purposes of obtaining assistance (e.g. NZTE) The implication of the inability to make this distinction is a perception that government assistance overall is lacking.
“Yeah it seems that – like little businesses - I don’t think the government tries in any way to try and help you. Iit’s – like I said at one stage there - I just thought “oh what’s the point, paying GST, paying tax, paying this”, and you’re struggling to keep going and there’s no real sort of government assistance and like you don’t pay your GST, they’re straight onto you”
(Firm 6).
Given the high profile of the various programmes delivered by New Zealand Trade and Enterprise (and its predecessors Industry New Zealand and Trade New Zealand), we were surprised not to find more firms that had attempted to use these resources.
This lack of use of the schemes that are available is worrying – and given that some of the firms that were included in this study were what might be described as members of target groups for New Zealand Trade and Enterprise, their lack of satisfaction with the services they have received should also be a matter of concern.
Conclusions
The purpose of the study described in this report was to contribute to understanding more about the dynamics affecting the growth of small and medium enterprises in New Zealand. We were particularly interested in examining the experiences of those in charge of these firms as they dealt with the consequences of the ‘key events’ and ‘milestones’ in the life of the firm. What we have presented in this report is a summary of the key messages that emerged as we visited the firms and interviewed their owners. Reflecting on these messages in relation to our initial research questions, we can draw a number of conclusions.
1. The respondents were able to identify key events/milestones in the life of the firm. In undertaking this activity they identified events that related to: the business itself (employment of first staff member, moving, financial crises, etc); the industry (industry cycles) and the external economic environment. Many respondents also identified more personal events, such as divorce, illness or death. This willingness to identify events that might normally be seen as relating to an individual’s personal life as having an impact on the firm indicated that the owners in this study blurred the distinction between ‘personal lives’ and
‘business lives’.
2. The researchers found that the notion of the business life-cycle was ‘meaningful’ to respondents. All those interviewed were familiar with the stages model that they were shown, were able to identify the stage that they believed best described their firm at the time the interview took place, and could articulate the reasons for their choice.
3. The respondents were also able to identify different ‘eras’ in the life of their firm – and in undertaking this exercise they often explicitly linked their assessment of the past to their plans for the future.
However, despite the fact that many of our respondents were aware of having made a ‘transition’ from one stage to another, they were much less able to describe the events that occurred at the point of transition or which led up to or followed the transition.
4. Few firms drew upon any sort of assistance in the context of development and/or transitions. Furthermore, few respondents identified any external advisors or other sources of ‘input’ to the firm.
Instead, routine interactions with banks and accountants were the norm.
5. The diagrammatic representations of the life-cycles of the 50 firms that took part in the study revealed three distinct patterns of development: ‘maturity and decline’ (exhibited by approximately 1/5th of the firms), ‘on a growth curve’ and ‘capped growth’, (exhibited by approximately 2/3rds and a further 1/5th of the firms respectively).
6. Whether a firm exhibited one development pattern rather than another was due to a complex set of factors. These included those that were outside the owner’s control (e.g. large-scale economic reform or the existence of a downward turn in the industry); as well as those that were somewhat within the owner’s control (e.g. a lack of managerial capacity). In addition, whether a firm exhibited one or another pattern of development also appeared to relate strongly to the attitude to growth held by the owner or manager, and this position was
also the consequence of a number of inter-related factors, including their age.
These findings are highly significant, as to our knowledge, it is the first time in New Zealand that a research team has attempted a project of this scale (50 firms) using such a labour-intensive research method (site visits and interviews). The result is that there is now new information on the way in which SMEs in New Zealand develop.
However, further research is still clearly needed before it will be possible to make suggestions to external organisations (e.g. government agencies and/or industry bodies) about the way in which New Zealand firms could best be assisted (especially in the context of those firms that explicitly wish to make the transition from one stage to another).
But before this further research can be undertaken successfully, it will be essential to work towards a new way of thinking about firm development in New Zealand, based on the study described in this report.
This new understanding will recognise that identifying SMEs in terms of where they fit in relation to a stages model, only has value if used in conjunction with an analysis of the owner’s objectives for the firm.
For example, an owner who is young and who may be described as being
‘mid-career’ (if he or she was working within a corporate setting) is likely to have a completely different set of objectives for a firm that he or she owns than an owner who is at the end of a successful business career.
Instead of assessing a firm in terms of one dimension only (i.e. assessing where the firm fits in terms of the five stages in Figure 1), subsequent research teams will be advised to ‘overlay’ this with a second dimension:
the objectives of the owner or manager. The result will be an understanding of firm ‘developmental capacity’ (instead of firm growth) that will derive from two independent sets of factors, both with an influence on how the firm itself will demonstrate its development. This demonstration of development may be growth (as implied in the stages model) but an alternative possibility is that it may be a rejection of growth.
This approach will allow researchers to move beyond a simple examination of a firm in terms of its stage, and will instead provide them with a way of conceptualising firm development in new terms. A more appropriate term may prove to be to talk about a firm’s ‘mode of operating’ – a situation that will be the result of a) the firm’s potential to realise greater potential and b) the individual owner’s objectives.
This approach should prove to be particularly satisfactory for SMEs, where the owner is an especially important influence on the way in which the firm develops. It will almost certainly prove to be an improvement on the current state of affairs, where firms are frequently differentiated from each other in terms of firm stage – a situation that ignores the complexity of the related (but separate) concepts of growth and development.