LIST OF ABBREVIATIONS AND ACRONYMS
2.10 MEASURES OF SMC GROWTH AND DEVELOPMENT
2.10.2 Approach to growth and development measures
Measuring an organisations growth performance and development provides viable and useful information to decisionmakers on the outcomes of adopted strategies, ensuring they remain effective to sustain competitive advantage (Oyewobi, 2014; Robson, 2005; Seang, 2003).
Achtenhagen et al. (2010) argued that there is disparity in organisational growth literature over which measures to use in empirical studies, causing a fragmented theory base. Kiviluoto et al.
(2011) found that there is a clear preference among researchers for objective measures over subjective measures. Achtenhagen et al. (2010) contended that the simplified (objective) conceptualization of growth used in empirical studies by researchers differs from the
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practitioner’s view where growth is a more complex (subjective) phenomenon with a strong emphasis on internal development. Firm growth has been measured in terms of inputs (investment funds, employees), outputs (sales, revenues, profit), or value of the firm (assets, market capitalization, economic value added elements); each being subject to limitations as a growth indicator (Abu Bakar et al., 2011). Earlier seminal studies (for example, Penrose, 1959) have differentiated between growth as an ‘increase in amount’ and as an ‘internal process of development.’ Achtenhagen et al. (2010) further argued that to successfully link theory and practice, organisational development should be defined, measured and studied in a way that is meaningful and relevant to entrepreneurial practice.
Organisational growth has been conceptualized and measured in a number of different ways (Davidsson and Wiklund, 2000; Wiklund, 1998). Richard et al. (2009) cited three common approaches to measuring growth performance and development in organisations. The first approach involves a single measure being adopted on the basis that there is link between that measure and organisational performance (for example, Hawawini et al., 2003; Spanos et al., 2004). In the second approach, the researcher applies diverse measures to produce analysis with dissimilar outcomes but identical predictive variables (for example, Baum and Wally, 2003). The third approach combines outcome variables, based on correlation between them through convergent validity (for example, Cho and Pucik, 2005).
This study considers growth performance and development measures from the third perspective where different objective and subjective measures are combined. The study adopted multiple quantifiable economic and qualitative social indicators to measure small and medium-sized contractor (SMC) growth and development in relation to Targeted Procurement objectives (Coad and Hölzl, 2010). This follows Delmar’s (1997) suggestion that the use of multiple indicators may best represent the theoretical concept of growth. Achtenhagen et al. (2010) supported this view and suggested that reporting results along a range of different growth indicators should become a widely accepted approach in future publications. Moreover, the use of multiple indicators is a common feature in organisational growth studies (Achtenhagen et al., 2010; Delmar, 1997). Furthermore, the multiple indicators adopted captures the complexity and multidimensionality of growth processes (Achtenhagen et al., 2010), which has not found much scholarly or policy attention so far (Achtenhagen et al., 2010; Davidsson et al., 2006).
The adopted indicators of SMC growth performance and development are discussed further in the subsequent sections.
53 2.10.3 Economic indicators of SMC development
Economic indicators of SMC development in the context of this study are the objective or quantifiable measures of an organisation’s growth performance, which includes both financial and non-financial indicators (Coad and Hölzl, 2010). The financial indicators are turnover and profits, while the non-financial indicators are assets (plant and equipment) and number of employees.
2.10.3.1 Turnover
Turnover is the volume of construction contracts or work opportunities obtained by a construction firm over a certain period of time, usually a year (Armstrong, 2006). However, SMEs face challenges of lack of market exposure or access to sustainable work opportunities, which has a negative impact on the ability of the small businesses to create sustainable employment and foster economic empowerment (Rebello, 2005; Cheetham and Mabuntana, 2006; cidb, 2006). Consequently, governments of many countries have attempted to provide work opportunities through preferential procurement. Given that the primary objective of Targeted Procurement is to promote the participation of targeted businesses in public-sector contracts by providing greater access to work opportunities, one could argue that the increase in these businesses’ turnover is the main goal. Coad and Hölzl (2010) suggested that turnover may best reflect the short and long-term growth changes in an organisation.
Achtenhagen et al. (2010) reported that increase in sales/turnover, along with profitability were cited as the most crucial growth dimensions to entrepreneurs. However, the entrepreneurs viewed a combination of different measures as relevant. In a review of 35 articles published in nine leading strategy, organisation, and entrepreneurship journals between 1981 and 1992, Weinzimmer et al. (1998) found that 83% of the studies used sales (turnover) as a measure of growth, with about 75% using sales as the only measure of growth. Kiviluoto et al. (2011) found a similar trend in their review of 118 empirical articles on firm growth performance. In an earlier review of 55 empirical studies (1989 – 1996), Delmar (1997) found that 31% of studies used turnover or sales as a measure of organisational growth. A later study by Achtenhagen et al. (2010) reported that the findings of the earlier reviews still largely hold with 42% and 27% studies using turnover and employees respectively as growth measures. The results from these reviews indicates that turnover is an essential measure of an organisation’s growth and development. Moreover, annual turnover has been used as a dependent variable of growth performance in previous construction management research (Abu Bakar et al., 2011, 2012).
54 2.10.3.2 Assets
Assets are generally defined as any property including resources in the form of buildings or engineering works or components created by capital expenditure (Calvert et al., 2003). Assets comprise of fixed assets (assets that are relatively permanent, in that they are not held for sale or for conversion into cash but are retained as an instrument of production, or in order to earn revenue for example, land, buildings and machinery) and current assets (assets made or acquired for sale and conversion into cash, or assets in the form of cash in hand or money at the bank) (Calvert et al., 2003). Assets in the context of this study refers to fixed assets, particularly plant and equipment used in the execution of construction projects.
Asset growth is a commonly used indicator of firm growth (Coad and Hölzl 2010; Weinzimmer et al., 1998). Although some scholars are of the view that plant and equipment does not improve a contracting business’ competitiveness since they can be easily bought, this is not always the case, especially for small businesses with limited resources. Moreover, Lubit (2001) and Tam and Harris (1996) argued that plant and equipment is a contributor to technical ability and thus a performance indicator for contracting businesses. Rasiah et al. (2014) asserted that companies must invest in more assets in the long-term in order to grow (and increase in size).
Windapo and Cattell (2011) also suggested that lower graded contractors in South Africa should invest in fixed assets and maintain adequate cash reserves to enhance sustainable growth.
The capital-intensive nature of the construction industry requires contractors to acquire and retain their own plants and equipment while maximizing its utilisation. Tan et al. (2007) lists possession of plant and equipment along with its efficient utilisation and maintenance as an important indicator for measuring the technical ability of construction organisations. Fagbenle and Oluwunmi (2010) found that indigenous construction firms in Nigeria invest little or nothing in plants and equipment. The inability of SMCs to enhance their operational capacity through the acquisition of plants and equipment results in their employment as subcontractors on simpler less capital-intensive and more labour-intensive works, thus hindering their growth and development (cidb, 2013).
2.10.3.3 Size (Number of employees)
Total number of employees is one of the most commonly used indicators to measure an organisation’s size (Bonaccorsi and Giannangeli, 2008; 2010). It is also the most used measure of organisational growth, along with sales/turnover (see Achtenhagen, 2010; Delmar, 1997;
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and Kiviluoto et al., 2011). Coad and Hölzl (2010) argued that employment has certain advantages as an indicator of firm growth over turnover. For instance, measuring size in terms of employment reduces measurement problems compared to financial measures such as turnover as it does not require deflation. Coad and Hölzl (2010) further suggested that employment is more robust for measuring the growth of small firms, who are notorious for concealing true profits (Cressy, 2006). Kirchhoff and Greene (1998) also suggested that analysing new employment created over time by firms is the appropriate methodology for understanding the process of economic growth.
Becchetti and Trovato (2002) and Stam et al. (2006) reported a positive relationship between the size of an organisation and its growth. Rasiah et al. (2014) also suggested that a firm’s ability to expand in size represent evidence of its success. Moreover, Windapo and Cattell (2011) reported that companies with relatively stable growth in number of technical employees exhibited growth in turnover, improved profit, increased cash position and fixed asset value;
while companies with stronger growth in number of technical employees did not exhibit the same pattern. Achtenhagen (2010) argued that many studies take an increase in employment as an indicator of whether a company is growing successfully or not, even though many entrepreneurs have a much more sceptical view on employment. The OECD (2010) supported this view, stating that most firms do not wish to grow, especially in employment, even under favourable macroeconomic conditions. Nonetheless, the number of employees in an organisation constitute the organisation’s human resources, which goes beyond mere numbers to further reflect the organisation’s capacity.
Resources are an element of an organisation’s strengths or weakness, and just as physical resources (financial, equipment, raw materials) can enhance or constrain productivity, so too can human resources (for example, experience, skills and training) (Armstrong, 2006).
Employees represent a significant factor of an organisation’s success (Cascio et al., 1999), and higher levels of strategic and human resource planning has been shown to have a significant impact on organisational competitiveness and performance, as well as higher productivity, greater cost effectiveness and greater overall efficiency (Ferris et al., 1990; Gratton et al., 1999). Inadequate human resource capacity in terms of skilled technical workers and professionals is often cited as the reason for poor performance of construction organisations (Morrison et al., 2003; Ogunlana et al., 1996; Wang, 2000). Abu Bakar et al. (2012) found that human factor was a significant factor contributing to the growth of construction companies in
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Malaysia. This was aligned to an earlier study by Morrisson et al. (2003) who noted that human factor was considered as the key element determining small business prosperity.
In line with Armstrong’s (2006) description of human resources, and Achtenhagen’s (2010) claim on the sceptical position of practitioners on employment, this study conceptualises organisational size as the number of permanent and skilled employees in an organisation.
Moreover, in the specific context of this study, there seems to be a cyclical link between contractor development initiatives and job creation. Von Broembsen (2005) alluded that there is a mismatch between policy objectives of promoting SMEs as both vehicles of poverty alleviation and agents of employment generation thus ignoring their training and education which compromises the profitability and sustainability of small businesses. Von Broembsen (2005) further proposed that, governments should shift their focus from SME development programmes that support wealth redistribution or poverty alleviation to those that develop entrepreneurial skills and create jobs.
2.10.3.4 Profit
Profit is a financial indicator of an organisation’s profitability and growth, usually expressed as a percentage of turnover (Oyewobi et al., 2013). The main aim of any business is to yield profit (Naoum, 2003; Norris, 1990; Tam, 2002). Prats et al. (2012) affirm that profitable growth remains a top-priority for most executives around the world. In economic theory, the maximization of profit is regarded as the sole objective of a rational firm. However, in reality, it is found that the entrepreneurs generally do not care to maximize profits but simply to earn a satisfactory return. Baumol (1959) argued that managers are more concerned with the maximization of sales or sales revenue rather than profits. Notwithstanding, profitability is vital to corporate survival of every company project as inability to maintain appropriate profit levels is a precursor to business failure (as cited in Mazzoli, 2014).
Higher growth rates for a firm are indicative of good financial performance and vice-versa (Kahya and Theodossiou,1999). Small firms depend on retained profits for growth to avoid external lenders retaining a stake in the company which reduces the profitability-growth relationship. Coad and Hölzl (2010) also reported that more profitable firms will grow increase their market share and access to external finance as well as their motivation to grow, while less profitable firms will decline. Growth rate has also been reported to be a significant determinant of profitability (Coad, 2007; Cowling, 2004). Coad and Hölzl (2010) however argued that growth rates do not seem to increase with profits.
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Phua (2006) contended that measuring organisational performance in terms of economic profitability has the advantage of reducing measurement ambiguity. This is also in line with established research standards that use profitability as a proxy for organisational performance (for example, McGahan and Porter, 1997). Moreover, profit has been used as a measure of firm performance in previous international construction management studies in the UK (Kagioglou et al., 2001), Australia (Furneaux et al., 2010), and Korea (Han et al., 2007; Han, Kim and Kim, 2007; Park et al., 2011), as well as general firm growth literature (Kiviluoto et al., 2011).
Profitability measures are considered most suitable for assessing small firm performance (Begley, 1995, as cited in Kiviluoto et al., 2011). However, Cressy (2006) warned that small businesses are notorious for concealing true profits from the tax authorities for income or corporation tax purposes. According to Coad and Hölzl (2010), profit rates are heterogeneous and persistence across firms.