Abstract
The growth of the mid-sized enterprise arguably facilitates the resilience and stability needed for a thriving economy, even though such firms are comparatively overlooked or underrepresented in the scholarly literature. Further, the process of how mid-sized firms grow is seemingly unexplained. We address this gap in the literature through qualitative research and unveil a growth process model for mid-sized enterprise, illuminating the interaction of relationship and resource variables that are orchestrated by managers to achieve growth. Results from our research capture formative interactions and how they are developed, exploitative strategies coupled with galvanised relationships and integrated relationship and resource complexity as drivers to state-dependent growth. We unpack which variables foster growth as well as how, where and when they do so and contribute to literature with finer-grained description and prescription for growth objectives in mid-sized firms.
Keywords
The extant literature on small- and mid-sized enterprise (SME) growth reveals polarised foci on small start-up or emergent firms or the exemplar entrepreneurial firm that has turned conglomerate or multi-national (Carnes et al., 2017; Helfat and Peteraf, 2015). Meanwhile, explorations of medium-sized enterprises remain under studied. Borrowing conceptually from Heath and Sitkin (2001), the emphasis in the extant literature seems to be upon small and micro firms with relatively little attention afforded to mid-sized enterprises. Furthermore, Hossain, Ibrahim and Uddin’s (2016) review of the SME literature indicates there is a long list of fragmented and heterogeneous factors that have influenced SME growth, but the question of how firms grow requires more attention. Separately, we know from resource-based theory that resources – including bundles and complementarities, combinations of resources, capabilities and strategic resources – influence growth (Barney et al., 2011; Crook et al., 2008). We also know that resources are linked to performance (Newbert, 2008). So, while we know a lot about ‘what’ affects growth, analyses of growth as a process are rare (Davidsson and Wiklund, 2013; Sirmon et al., 2011) prompting calls for deeper, exploratory research on the growth process (McKelvie and Wiklund, 2010; Wright and Stigliani, 2013).
One contemporary stream of research, grounded in resource-based theory, that addresses these issues is resource orchestration – a confluence of resource management and asset orchestration (Carnes et al., 2017; Helfat et al., 2009; Sirmon et al., 2007). In brief, resource orchestration is concerned with managerial actions that effectively utilise the firm’s resources, combining principles of resource structuring, bundling and leveraging with asset search, selection, configuration and deployment (Hitt et al., 2011). Placed within the dynamic capabilities framework (Teece, 2007, 2012), resource orchestration facilitates the structuring and configuration needed in sensing and seizing growth opportunities. Further, the micro-foundations of managerial cognitions and intentions inform the link to organisational-level outcomes (Devinney, 2013; Barney and Felin, 2013; Felin et al., 2015). In sum, there is a call to empirically illuminate the process of resource orchestration across growth episodes of mid-sized firms (McKelvie and Wiklund, 2010; Sirmon et al., 2011). So, we explore how firms grow, specifically mid-sized businesses, with a focus on the process of managerial orchestration of resources and relationships.
From our field studies, we capture rich descriptions from top management teams who configure resources as an evolutionary process of growth and reconfigure those resources as a revolutionary process of growth. We contribute to the literature on firm growth by showing that mid-sized firm growth results from a process of resource orchestration. We uncover what resources are developed, when those resources are developed, how managers orchestrate those resources for growth and where specific resources facilitate revolutionary growth between episodes. Accordingly, our central research questions are concerned with growth processes in mid-sized firms; how do top managers orchestrate relationship and resource variables for growth objectives; how are relationship and resource variables reconfigured to empower growth as the firm transcends from one growth episode to the next and how do top managerial cognitions and intentions manifest into desired growth outcomes?
This article proceeds as follows: First, we outline the analytical framing for our study, drawing upon theories of venture growth, social and human capital. Second, we describe our methodological approach and third, our results. We conclude by developing a step wise model illuminating the process of growth in mid-size firms.
The episodic nature of growth
Like Chamberlin (1933), Penrose (1959) sees the firm as a bundle of resources and capabilities facing no theoretical limit to growth, but rather constrained or enabled by the firm’s entrepreneurial and managerial capabilities. Because of this potential constraint, Penrose (1959) suggests that the growth rate of the firm depends on the rate at which managers expand or develop their management teams (Tan and Mahoney, 2005). Managerial resources are consumed for a particular growth objective, but become free again once a new growth episode is completed; the resources are now available to pursue the next phase of growth (Penrose, 1959). Greiner (1972) proposed a stage model of firm growth, identifying evolutionary and revolutionary periods of firm growth punctuated by episodes of crises and resolution. While Greiner’s model has face validity, the linearity of his stage growth model, and stage growth models in general, has since been widely criticised in academic literature (Levie and Lichtenstein, 2010). The assertion that growth occurs in a neat, linear deterministic set of stages is an inaccurate assumption (Phelps et al. 2007). Acknowledging this inaccuracy and moving away from linear, biological lifecycle descriptions, Levie and Lichtenstein (2010) suggest that ‘dynamic states’ help explain adaptive organisational activities against the backdrop of opportunity, such as growth, capturing complexity and the iterative tension between continuous activity and stability over time. We embrace this theorising, adopting a dynamic state model of firm growth. We present growth as a complex configuration and reconfiguration, of key resources, manipulated, changed and adapted for managerial intentions to develop organisational opportunities. We reveal that growth occurs in episodes and identify the processes that drive said episodes in mid-sized firms.
Expected Characteristics and Challenges of the SME, Mapped Across Commercial Banking Categories.
To be clear, our emphasis is on the processes that drive growth rather than on the revenue categories themselves; the revenue bands established by the largest U.S. commercial banks allow us to study process differences across the size spectrum of mid-sized firms. Firms at different revenue bands face different conditions and pursue different methods to achieve growth. Our structural rationale for these revenue categories and sampling processes are further explained in the Methodology and Methods section below.
Relationship and resource bundles across ‘states’
Anchoring on existing research, we focus upon the interaction of social and human capital (Davidsson and Honig, 2003; Miao et al. 2017), the active mixing of which acts as a resource (re-)configuration mechanism for achieving growth (Wright and Stigliani, 2013). Through this mechanism, resources are orchestrated in mid-sized enterprises to achieve growth. The mechanism involves the accumulation, bundling and configuring of resources and capabilities (Barney et al. 2011; Sirmon et al. 2011). To understand the interactions at the elemental level, we found it useful to specify three levels of social relationships in mid-sized firms: the individual level (social capital), the organisational level (relational capital) and the portfolio level of relational ties (network capital) (Coleman, 1988; Dyer and Singh, 1998; Granovetter, 1985). We label these ‘Relationships’ in our study. Similarly, we specified three levels of resources and capabilities: human capital (individual capability), routine capabilities (routinised core competencies) and dynamic capabilities (capabilities to reorganise existing resources and competencies) (Becker et al. 2004; Helfat and Peteraf, 2015; Teece, 2012). For our purposes, we label these variables ‘Resources’.
We argue that managers actively orchestrate the intensities and combinations of these variables to achieve growth within a particular growth state, akin to the process of purposeful structuring and configuring within resource orchestration literature (Carnes et al. 2017; Hitt et al., 2011) and the creation and sustainable deployment of wealth in strategic entrepreneurship (Hitt et al. 2001). We specifically theorise that a particular set or intensity of relationships and resources would most appropriately serve the growth objectives in each state, and each state would require a different emphasis of those variables for growth. We argue that these bundles of resources and relationships form the capacity to generate revenues so label the bundle ‘Generative Capacity’. Management, in turn, actively manipulates variables within the bundle as the mechanism for growth (Devinney, 2013; Barney and Felin, 2013; Felin et al. 2015). Essentially, this type of wealth creation, measured in terms of realised revenue, serves as an interactive function of ‘who you know’ and ‘what you’re capable of doing’. While each variable within the relationship and resource profile is important, several different paths of orchestration can be pursued in the development process; value creation requires synchronisation of these variables to generate revenue growth within and between each state (Sirmon et al., 2007).
Relationships as the building blocks of a firm’s generative capacity
Social capital and generative capacity
In addition to education, experience and other forms of knowledge, an actor also possesses social capital, which imbues an individual with the potential to derive benefits from his/her social structures or networks (Coleman, 1988). As Burt (2000) notes, better-connected people enjoy a connectedness advantage in an exchange. In the context of entrepreneurship, Davidsson and Honig (2003) suggest that successful entrepreneurship is a social game. Social capital, therefore, can be significant for mid-sized enterprise in generating economic value; those that are better connected have greater potential to exchange ideas and pool talent to derive economic value.
We suggest that social capital in the form of individual level relationships will reveal potential opportunities for growth, especially in the earlier episodes of growth. Individual actors such as the founders and senior executives possess key contacts they can draw upon to reveal opportunities for growth. In fact, the personal relationships of founding executives in a smaller and younger firm often serve as conduits to business transactions between firms. Successful consummation of the initial transactions deepens personal bonds and establishes organisational-level relationships separate from, and in addition to, the personal bonds among the actors. Furthermore, the success of the initial business transaction serves to support a gradually self-sustaining business operation while also generating legitimacy in the wider business community. As the enterprise continues to grow and succeed, the initial success and accompanying legitimacy could help bridge entry into new business opportunities (Burt, 2000; Davidsson and Honig, 2003).
Relational capital and generative capacity
On-going business relationships generate relational capital in the form of reputation, goodwill and inter-links (Gulati et al. 2000). The bonding power of these collective-level, inter-firm relationships bring access to external resources and capabilities, including valuable information, know-how, know-who, new markets and new technologies with further advantages in learning, economic value and broadening of capabilities (Adler and Kwon, 2002; Gulati et al. 2000). Thus, high relational capital abets economic advantage and potential growth. Several cycles of successful performance by a firm expands its relational capital with firms in its ecosystem, strongly establishing its credibility, accumulating trust and stabilising ties as a growth mechanism. Thus, we theorise that relational capital is a component of a firm’s generative capacity.
Network capital and generative capacity
Purposeful economic action is embedded in, and mediated within, a system of social relationships governing transactions that are generated through agreed-upon standards, allocative efficiencies and pooled resources (Granovetter, 1985). Further, initial social capital and the subsequent relational capital help tie a young firm to a network of organisational actors over time (Uzzi, 1997). For example, Hite (2001) found that network ties exist primarily at an interpersonal level during earlier episodes of a firm’s life and then evolve into more calculative relational strategies contingent upon growth, resource needs and sophistication (Hite and Hesterly, 2001). At the portfolio level of analysis, these collective firm-level ties form a composite of bonded and bridged relationships unique to the firm (Adler and Kwon, 2002; Nahapiet and Ghoshal, 1998). Thus, we argue that the composition, arrangement and strength of the ties in a firm’s network can facilitate entry into, expansion and brokerage of opportunities within a given network. As network ties of a firm evolve in breadth, depth and strength, this generates potential for performance improvements.
Resources as the building blocks of a firm’s generative capacity
Human capital and generative capacity
Human Capital includes the idiosyncratic knowledge, skills and characteristics of individuals (Becker, 1964). It explains why some people are more able (skilful, intelligent or articulate) than others (Barney, 1991; Becker, 1964). Kirzner (1997) observes that previously unknown knowledge, open-mindedness and alertness to opportunity are idiosyncratic to the individual entrepreneur; Shane (2000) highlights this individual knowledge acquisition through ‘prior knowledge’ of the industry or firm. Thus, we argue that human capital, especially in the form of tacit knowledge and opportunity recognition, helps set direction for and opportunistic deployment of valuable resources of a mid-sized enterprise and therefore determines a firm’s subsequent success and growth.
The impact of human capital is perhaps more salient in the earlier episodes of new venture growth, when much of the core knowledge resides in key individuals such as the founder(s) and top managers of the firm and when other key resources are not yet fully developed. However, as the firm matures and grows, human capital becomes more embedded into the firm’s structures, organisational capabilities and collective reputation, as opposed to resting strictly within certain individual actors. In more mature states of development, collective human capital within the organisation may manifest as a core competency of the firm. With repeat cycles of performance and continual improvement, the core competency becomes encoded into organisational-level routines.
Routine capabilities and generative capacity
Routines are stable patterns of interaction that are collective, coordinated and derived from retained trial-and-error activities for efficient organisational performance (Becker et al., 2004; Teece, 2012). Routines lay out procedures that nurture reproducibility over time (Kelly and Amburgey, 1991) and may incorporate incremental and idiosyncratic adaptations in response to feedback from performance outcomes. When superior to those of competitors, firm routines could be a source of competitive advantage with the potential to enhance organisational reputation (Teece, 2012). Routines can create the desired efficiencies and stability needed for organisational prosperity and durability (Feldman and Rafaeli, 2002). Organisations that actively develop routines in the early states of growth improve organisational certitude and thus improve their performance (Koryak et al. 2015). When capable of developing and adapting routines to new opportunities, organisations, especially mature ones, foster longevity and renewal, incrementally changing or modifying their capacity to generate revenues over time (Nelson and Winter 1982).
Dynamic capabilities and generative capacity
The organisational capacity to recreate, adjust or replace non-optimal or outdated business models is the focus of the dynamic capabilities framework (Helfat and Peteraf, 2009; Teece et al., 1997). As Teece (2007, 2012) suggests, dynamic capabilities are about sensing opportunity, recombining resources and transforming competencies for further growth. They determine the efficacy and speed at which a firm can reshape existing resources to respond to changes in the business environment, especially in the rate of core-skill re-development, learning and procedural integration (Teece, 2012; Winter 2003). Dynamic capabilities not only adapt to external changes but also shape innovation through collaborative efforts with other enterprises, demonstrating the entrepreneurial scan and search across markets for new and better applications (Helfat and Winter 2011; March and Simon, 1958; Nelson and Winter 1982). The application of prior knowledge and previous markets in the human capital paradigm is also enhanced by dynamic capabilities aiding the entrepreneur to launch the firm and penetrate markets. Launch and penetration suggests that dynamic capabilities may be important in the earlier states of SME growth and may also counteract the inertial effects of exploitative or dysfunctional routines as firms become mature allowing adaptation and application of capabilities that facilitate growth.
To summarise, we theorise that the combination of relationship and resource (R&R) variables are interactive as a revenue-generating mechanism; yet, they vary in intensity within each state through the synchronised effort of, or orchestration by, top management to achieve desired growth objectives. We also theorise that the intensity of each R&R variable is configured by top management to facilitate evolutionary growth within a state, while the R&R profile is being formed and then exploited. Further, this profile is purposefully reconfigured by top management to facilitate growth between states, where growth is a means to transcend from one state to the next. Time is an element in this growth process, such that the process of configuration and reconfiguration serves as an antecedent to growth. Thus, our research objective is to discern the intensity of R&R configuration as a within-state growth process. In addition, we study how managers reconfigure R&R to drive between-state growth.
Methodology and method
Dynamic growth states – size-bands within mid-size firm classification categories
The U.S. Small Business Administration (SBA) Office of Advocacy broadly defines SMEs as those organisations with fewer than 500 employees (U.S. International Trade Commission, 2010). Further, the Department for Business Innovation and Skills (BIS) establishes its upper boundary for medium-sized enterprise at £500 m (BIS Small Business Survey, 2012). Given this relatively large ‘M’ size band, it is important to locate a framework to delineate medium-sized firms at different stages of development. One such framework exists within the underwriting categories established by the largest U.S. commercial banks, who classify SMEs according to total annual revenues. The top U.S. commercial banks have developed proprietary software to empirically derive a probability of default for their SME commercial banking clients under $20 million in revenue. Known as the ‘Z-score’, this measure serves as a primary approval method under a given threshold, taking into account the idiosyncrasies of factors including industry, economic conditions, past financial performance, debt leverage, cash flow available to amortise new and existing debt, among others. As a firm’s revenue exceeds this threshold, the Z-score loses its predictability due to increasing complexity of the focal firm requiring more detailed analysis of financial operations for credit approval. Through its continued operations, a healthy firm’s revenue will drive the level of working capital needed to maintain operations as the amount of receivables, inventory and work-in-process greatly exceed the level of payables. Commercial banking categories therefore, serve as proxy for the level of complexity and similarity of issues faced by mid-sized firms within a growth revenue band, as well as for distinctions between revenue bands. Other growth indicators, such as increases in employees or assets, are excluded in the categorical determinations of commercial banks, primarily due to simplicity and practicality in financial reporting. Total revenues are reliably reported to the commercial bank on an annual basis through corporate tax returns and audited or reviewed financial statements. In addition, this revenue categorisation is consistent across federally regulated financial institutions. Importantly, revenue changes will co-vary with employee strength, asset size, product variety, structural differentiation, size and complexity of investment in new projects (Delmar et al. 2003; Gilbert et al. 2006). In sum, we believe these commercial banking categories are based upon relevant variables consequential for the complexity of firm growth. For further clarification of commercial banking categorisation, refer to the appendix of this manuscript.
As continued clarity, we limit our study to mid-sized enterprises that are growing organically, as opposed to undergoing acquisitive growth through exploitation of opportunities within their main lines of business as opposed to unrelated diversification; we assume that such opportunities exist in the economy. Also, we know that some firms grow past the $500 million size, but they are not considered typical mid-sized enterprises and thus, excluded from our study as are those below the $2 million size who typically, represent start-ups and emerging firms. Hence, we limit our study to the three states of growth as depicted in the following conceptual growth model (Figure 1). Conceptual model, resource orchestration for growth in mid-sized enterprise.
Capturing R&R dynamism across growth states
An interpretative qualitative methodology was adopted consistent with research designs analysing how meanings are mutually constituted between individuals and their environment over time; this approach enables the researcher to delve into meaning making in specific contexts to assess how people make sense of the challenges and events they encounter (Miles et al. 2018; Thorne, 2014). In this multi-case qualitative study, we investigated the relational and resource dynamics in mid-sized enterprises. The methodological strategy was to interview CEOs of 12 privately held manufacturing firms in a U.S. metropolitan statistical area (MSA) in the upper Midwest region that is sustained by several Fortune 500 original equipment manufacturers (OEMs). The CEOs of these firms were selected and interviewed as individuals who had the knowledge of the operations and a sense for their firm’s overall strategy. Privately held manufacturing firms were chosen a priori because it is desirable to isolate and capture the relationship-resource dynamics associated with their major sources of revenue, being OEM. Those manufacturers who sold directly to retail establishments, or who were distributors of products, were eliminated. As Eisenhardt (1989) recommended, we selected cases for theoretical reasons because random selection of cases is neither necessary nor preferable for our study.
Cross-Section of Final Sample.
Interview protocol in this study followed the suggestions from Wengraf (2001) and Weiss (1994). Interview questions began broadly, for example, ‘What have been the primary keys to success for your company?’, such that the interviewee self-selected the substantive points of their firm’s value-added proposition. Clarification questions were used to deepen the perspective until the immediate theme was exhausted. Further, general questions increasingly narrowed the subject matter to isolate revenue-generating activities such as: ‘How do you go about generating revenue?’, ‘What roles have relationships played in generating revenue?’ and ‘What roles have capabilities played in generating revenue?’ while clarification questions delved into the subject matter within that question. Finally, these questions were directed to revenue growth over a time period; temporal questions included, ‘Describe your company’s operations 5 years ago and compare it with today’ and ‘How have they changed in order to generate additional business?’ As a result, the interviews produced a detailed narrative of each firm’s relationships and resource bundles, from the CEO’s perspective, toward revenue-generating activity over time.
Case Study Evidence – First-, Second- and Third-Order Analyses.
Results
Distinguishable profiles across states
Second-Order Analysis – Common Themes.
As depicted in Table 4, a State II entity was characterised as an organisation bonded to client relationships through CEO social capital; the CEO was the primary contact for the firm’s economic commerce. Relationships between the firm and the primary OEMs included longer histories of cyclicality and joint crisis resolution. These relationships were supported by basic standardised processes that were efficient and effective, described as ‘blocking and tackling’. Dynamism within the State II entity was moderately characterised as combinations of processes that increased speed of delivery.
In contrast to a State II entity, firms within State III had developed winning relational formulas that included high levels of niche commerce and reputation. The CEO was a critical point of entry for these firms; however, the CEO served as less of a bonding interface, compared to State II, and more of an intermediary to functionalities within the firm. State III firms were more reliant on the exploitation of operational formulas, described as ‘lean and mean’, that offered nuances and included some flexibility in those operations. Flexibility and nuance subsequently supported niche commercial areas and reputation of the firm.
Compared to previous states, those firms in State IV were characterised as complex resource and relational organisations. This complexity included continuous innovation, broadening of resource applications and partnership-like OEM relationships with mutual investment and successful penetration into new growth markets. The changing complexity of R&R profiles across each state leads to our first proposition for growth among mid-sized enterprise.
Growing firms will exhibit distinguishable configurations of resource and relationships across the growth states for mid-sized enterprises.
Profile reconfiguration precedes growth transition
In this section, we examine temporal first-order analyses to uncover descriptive R&R orchestration over time. In choosing the timeframe during which to focus our study, we knew that any timeframe, such as 3 years or 5 years would be arbitrary as there was no scholarly guidance for it. Therefore, we chose to ask CEOs to relate their growth-related decisions and operations over a 5-year period based on the reasoning that accomplishing growth requires vision, planning, implementation and the fruition of outcomes in the face of environmental uncertainty over time (Dess et al. 2014; Hitt et al. 2015). The 5-year framework is large enough that it would encompass management’s actions related to a growth episode. Further, a 5-year period stretches but is not beyond the timeframe from which respondents can recall the key details (Grünhagen, Dorsch and Wollan, 2008). The following quotes were from the CEO of a State III automation integration firm. We direct attention to the process of resource orchestration and the development of economic relationships. [W]e tend to have a growth curve that is very sharp upward good growth, and then we have to put some processes and some people in place, and then we take a breather for a year or two…and we take a breath and fix some things…and then we go at it again and have another strong couple years, really large growth. Right now we’re at that same point where we’ve had a lot of growth leading up to the last few years, and we’ve just recently been investing in people and some software, looking at what we do well and where we have room to make some improvements. So many projects later, some of the other opportunities came up at [global OEM 1], and those were people that had kept tabs on [our company]. [And] we started asking to get introduced as a supplier to [global OEM 1]. And we started doing those projects, which was just a small portion of what we do for [global OEM 1] today. And as those projects become successful, supply management gets involved and they give you more visibility to other factories. And before I knew it, we were probably doing a larger portion of [our processes] for these similar types of key customers, and we were becoming partner suppliers and preferred suppliers. CEO Automation Integrator II
The antecedents for the growth of this State III entity included a repeat sequence of growth spurts, followed by process improvement, with growth levelling off during the improvement periods. Implemented process improvements then set the platform for the next period of growth. Further, subsequent growth was derived through client alignment within the current industry and clientele base, including an active process of market share gains while solidifying a recognisable position.
We present below the first-order analyses from a State IV automation integration firm. Further, we draw attention to the recognition of limitations from the CEO, in the first quotation, followed by the intentions to broaden capabilities and adapt them as resource orchestration for growth to new markets and non-typical processes. The second quotation is representative of the relationship intensity and mutual investment that is characteristic to growth of State IV entities. I can talk for a long time about characterising [our company] when I say a systems integrator. Historically, that has been about welding, metal joining and cutting…and we recently diversified from metal joining and cutting to other, more elaborate processes…which has kind of brought us some growth and maybe a new generation of life. What we do is technology based, we’ve got a lot of engineers, it requires a level of training, a level of education…and if you’re a specific size, and your customer is saying “We need you to be in Thailand, we need you to be in Russia, we need you to be in Poland” you have to have the horse power to be able to do that and still deliver what you’re doing here. So that was part of the, that was the catalyst for us saying “it’s time to get a little bit bigger”. CEO Automation Integrator
The antecedents to growth for this State IV entity included an intentional broadening of resources that brought new growth, as well as strategic, relational and global alignment with their OEM clients. Our micro-analyses of these State III and State IV entities revealed that CEOs first recognise current limitations, then intentionally change their processes and strategically align relationships as a way to transition to a higher revenue category. Thus, we present our second proposition:
Reconfiguration of relationships and resources will precede the transition of firms from one growth state to the next.
Transitions from State II to State III
From Tables 3 and 4, we examine R&R variables that are changed in intensity as the CEOs transition their firms from State II to State III. We focus our attention on those variables that change in response to growth (a reactive, or passive response) and those that drive growth (an active, or intentional change process). Undertaking descriptive and comparative first- and second-order analysis between states helps to illuminate variable reconfiguration, by managers, as a growth mechanism. For those variables that are drivers to growth, we further examine the micro-foundations of that reconfiguration process, namely the intentions and resultant means that facilitate active change to the firm’s R&R profile.
Reactive variables; those that change in response to growth
In transition from State II to State III, structure, function and key personnel are added as the firm grows in revenue, resulting in social and human capital that are more dispersed across the firm. The social capital of the CEO transforms from a bonding interface of the organisation, to a critical point of contact within its functional groups. Likewise, the human capital of the CEO transforms from hands-on capabilities toward organisational value setting and direction. Consider the following first-order analyses as an exemplar of this transitional change: 5-years ago, we would have an operations meeting, or we’d be going after the design or quoting stage of project, and I’d be doing a lot of direct quarterbacking. And now, the biggest difference today, those key players now can handle the responsibility, now have a staff structure underneath them, and there’s a level of trust that they can go off and do a lot of the work without me micro-managing it. If you get the right people, and you mould them, and then having the same values that I have, you can cut them lose and say “go get ‘em.” I still have…you know, I’m a pretty particular guy, and I like I said, I still stay heavily involved in the details. That’s kind of what gives me peace of mind; we’re not going to lose the steering wheel. CEO Automation Integrator II
In transition from Sate II to State III, dynamic capabilities moderately transform from speed and complementarity toward flexibility and featured nuances as a differentiating factor from competitors. We direct attention to the comparative first-order analyses in Table 3, as well as the following quotation of a State III pump manufacturing firm: What we can do better than anyone else is be small, flexible, adaptable, lean and mean. Us, [Pump Manufacturer], we’re very flexible; we can move on a dime. When we see the opportunity, jump on it. When we see a customer struggling, go fix it. So even a company that wants to be flexible, unless you have that top level ability to say, “Ok, let’s not do that, let’s do this”, you’re never going to be a flexible as you need to be. And so I think that really is one of our secrets. CEO Pump Manufacturer
In transition from State II to State III, network capital transforms from alignment within an OEM’s supply change management system toward protected information exchange across permissible channels, based on firm-level reputation and mutual benefit among participants. In short, networks are intentionally constrained to protect the firm’s idiosyncratic comparative advantage. In support of this observation, we direct attention to the comparative first- and second-order analysis as shown in Table 3.
Intentional variables; those that drive growth between states
From the second-order analyses, we found that relational capital, characterised as history, longevity, reliability and leveraged opportunities between the mid-sized firm and its clients in State II, intensified to deeper relational bonds and increased reputation developing into mutual trust in State III firms. Similarly, routine capabilities became more complex, strengthening from standardisation for efficiencies and effectiveness in State II firms to combinations of nuanced organisational routines in State III firms. Specifically, routine capabilities were honed from standardisation in State II to winning, nuanced formulas in State III, while relational capital was galvanised from reliability in State II to deeper trust and reputation in State III.
Furthermore, we examined the micro-foundations (Barney and Felin, 2013; Devinney, 2013; Felin et al. 2015) of this growth process in transition from State II to State III. In the following first-order analyses, CEO cognition, intentions and resulting actions indicate that routine capabilities were honed as a transition mechanism from State II to State III: From five years ago to now there’s been a continuous investment in technology. We’ve made great advances in our building to design stuff more quickly, our analysis tools are way better, a lot of fluid dynamics software we’ve just continuously upgraded…that along with the IT. And then the other thing is basically our manufacturing system, the lean principles that we’ve applied...you know, minimum part travel, the part goes into a cell and [comes] out of a cell complete, and it’s simplifying the manufacturing process, and then basically driving your production cycle down to two-day intervals…has sucked out so much lead time. So the lead time and the productivity, those two things together. CEO Pump Manufacturer
Continuous upgrades, lean principles and simplifications to processes as incremental and honed improvements to capabilities are consistent with the description of incremental improvements to processes as articulated by Becker et al. (2004). In this case, the CEO describes ‘advances in our building to design’ as discerned fine-tuning for additional periods of growth, and ‘minimum parts travel’ and ‘driving your production cycle down’, for example, as a resultant means of that resource orchestration.
Regarding increased relational capital, the following first-order analyses reveal galvanised trust and reputation to be a micro-foundational process: [I]n OEM environments, there’s a trust thing built there. It’s getting that perfect balance to value and then consistently performing. So you build that trust [to] where the guy goes “They give me the value and they’re never going to screw me”…and so you’ll keep those guys. …[Our company], we’re kind of unique in the world; we’re known for honest, straight forward, our word is our bond. As we build that relationship more and more and more, they become less and less concerned that we’re going to steal stuff. And then that releases energy that would not become realised. CEO Pump Manufacturer …over an 11-year period, the people we’ve worked with have been at engineering and management levels, and they continue to move through their organisation. So those relationships that have developed and have proven themselves eight/nine years ago, you know those folks have had successful careers, and know about our company’s reputation and what good things we’ve done for them. And so, I think we’ve developed a customer fan base or support base…you know, we have good reputation, and those guys think highly of us. CEO Automation Integrator II
In these two separate cases, trust and reputation is built as an intentional and cyclical process in transition from State II to State III, gaining exposure, performing successfully and garnering reputation for integrity and value creation.
Given these second-order and micro-foundational analyses, we make the following proposition:
Mid-sized firms will be more successful in achieving revenue growth and transitioning from State II to State III if they are able to increase relational capital while strengthening routine capabilities to create value.
Transitions from State III to State IV
Similar to analysis in the preceding section, we examined the intensity of R&R variables as they transitioned from State III to State IV, focusing on reactive variables that respond to growth, as well as active variables that are drivers of growth. Further, we examined the micro-foundations of those active drivers to reveal management intentions and resulting means as a growth mechanism.
Reactive variables; those that change in response to growth
As the mid-sized firm continues to grow, social capital of the CEO becomes a precious commodity enabling executive-to-executive connections to facilitate continuing and additional economic commerce. Regarding human capital, significant portions of CEO time is spent in executive development across firms, conveying and setting value, and communicating tolerance levels of risk in those economic transactions. For support, we direct attention to Tables 3 and 4 and provide this additional quote representing tolerance setting of the CEO. My role as CEO was to first of all to prove the value beyond the founder, basically to do a generation transition; did we have a reason to exist beyond the passion of our founder? And I’ve done that. The second thing was to analyse the lead purpose of our reason to exist. In my opinion, when I came into this role we were so stuck on one purpose…in fact, we called it clarity of purpose, we need clarity of purpose. And then, we were defining ourselves in terms of what we wouldn’t do. And it was like all these caveats boxed into work that was ever, ever small…because that’s how we de-risk what we were doing. So part of my deal was getting us to think in terms of a bigger box. CEO Automation Integrator
Organisation routines continued to strengthen in transition from State III to State IV, moderately augmenting lean and mean winning formulas with innovation, integrated solutions and comprehensiveness. The network capital of the firm was used to strategically navigate penetration into their OEM’s network of manufacturing plants: You asked a little bit about the [OEM] network. And they do have a Central Engineering/Central Purchasing group that we work with. But, the Central Engineering and Purchasing is part of the [OEM] organisation that is funded by the Product Groups. So if the Product Groups don’t like the solutions that are coming out of the Central Purchasing and Engineering process, they’re gone; [they] have autonomy to select a different path...which for us, it is so important that we’re spending equal time at the plant locations from more of a tactical position, and then at the product group level from more of a strategic [position], because we don’t feel confidence in allowing the central part of [OEM’s] organisation to represent [our firm] inside of the company. We need to invest further than that, so therefore we do spend the time to be at the plants [and] we spend face time the time to spend face time with the product groups. CEO Seat Manufacturer
Intentional variables; those that drive growth between states
Referring again to Table 3, we found strong qualitative support for increased dynamic capabilities and relational capital as mobilising factors to growth in our sample of State IV entities. During State III, for instance, interviewees described dynamism as flexibility in their operations, with featured nuance and greater sophistication toward comparative advantage. These descriptors intensified during State IV, including intentional and aggressive broadening of applications, creation of new markets, progressive learning and continual innovation; capabilities were actively adapted to seize opportunities for new applications and a regeneration of growth. Similarly, relational capital continued to grow in complexity between states, moving from winning formula relationships, increasing reputation and increasing trust levels in State III entities to OEM partnership intensity, mutual investment (such as coinciding FDI) and increased depth and breadth to the economic relationship in State IV entities.
As further support, the micro-foundation of dynamic capabilities as a growth process is evident in the following first-order excerpt: So part of my deal was getting us to think in terms of a bigger box. My observation was and is that “Guys, there’s money to be made effectively managing risk, and we have the best foresight to manage that risk with. Our job is not to cost ourselves out of this; our job is to cost effectively manage risk. We want the risky order, while managing it. That’s why we exist, right?” And getting that mindset shifted…I think that was part of my role as CEO…you know, to kind of change that “think”…to maybe open our eyes and be a little less afraid of risk, and more recognising our reason to exist is to recognise the risk but to manage it, and not to run away from it. I can talk for a long time about characterising [our company] when I say a systems integrator. Historically, that has been about welding, metal joining and cutting…and we recently diversified from metal joining and cutting to other, more elaborate processes…which has kind of brought us some growth and maybe a new generation of life. The strategy for growth was really two facets, one was to expand the processes that we offer…so we did a technology expansion, and at the same time, concurrently, we did a global expansion. So we moved into [foreign country] with a joint venture, and we’ve also moved into [another foreign country] with a small start-up. So we put together a 5-year plan, and it included specific growth targets. CEO Automation Integrator
Here, the CEO recognised the limitations of the ingrained and restrictive firm-level thought processes. The CEO also felt the need to ‘change that think’ of being risk averse and move the enterprise to instead manage risk – take risks when the new opportunities come with higher expected rewards. As a result, more elaborate capabilities were developed, releasing a new generation of growth as part of the transition from State III to State IV.
The micro-foundation of intensified relational capital is illustrated in the following first-order analysis quote: We have a handful of [Industry I] customers that are continuous purchasers, and we have [Industry II] people now that are continuous purchasers…and I would say how I would characterise those relationships, and how they differ from our overall relationships, are…we have a much higher level of collaboration with those particular customers on the front end. So, what they’ll do, they’ll come and say “we have a challenge; we have something that’s difficult to do, we’d like you guys to work with us to develop that proposal”…and I would say those relationships are a lot closer to a partnership, than a transaction. CEO Automation Integrator In the case of [OEM 1], we’ve been doing business with [them] since the 1940’s. So it is a relationship that has truly been tried and tested over the years and decades. And [OEM II], we started doing business with [them] in the late 1960’s. So there’s been a reliance…and not that you can rest on legacy…but I do think that over the years there’s an open relationship, there is a commitment to investment on the side of [OEM I] and [OEM II] they will join with us, they will deploy some of their resources on behalf of our collective endeavours. And in both cases, we’re talking probably about sixth generation…six generations of products solutions that we’ve been able to develop together. CEO Industrial Seat Manufacturer
In these two separate cases, repeated and complex solutions to customer problems, high levels of collaboration, generation of collective endeavours and mutual commitment to investment formed the micro-foundational means for growth. Affiliations were intensified and alliances were developed, offering a micro-foundational view of how these particular entities grew from State III to State IV over periods of time. Given these micro-foundational analyses, we offer the following proposition:
Firms that successfully grow from State III to State IV would strengthen their dynamic capabilities and relational capital.
With the qualitative data and analyses above, we are now able to offer a more comprehensive process model of mid-sized enterprise growth. We commenced with the interaction of social and human capital (Davidsson and Honig, 2003; Miao et al. 2017) incorporating firm-level components. We examined the interaction of these components over practically defined revenue bands and then observed the interactively orchestrated variables of growth across states. Further, with rich description from qualitative research, we captured micro-foundational underpinnings of this growth process, identifying specific and changing determinants within and between mid-sized business growth states. We offer a finer-grained conceptual model of this growth process in Figure 2. As depicted here and from Table 4, the relationships and resources of the mid-sized firm are interactive, combined, varying in intensity and synchronised by management to create value, as measured by total revenues. Further, the combinations and intensity of variable deployment is heavily dependent upon the state, such that those firms within State II rely on their CEO as a primary contact to value creation with direct influence to the firm’s capabilities. As a means of growth within this state, relational consistency and reliability is developed over various trials and periods of time, while speed and complementarity are added to routinised capabilities of the firm, described metaphorically here as ‘blocking’ and ‘tackling’. To grow past this state however, and as depicted in the model, the firm must not only improve on its routinised core competencies but also add additional nuances to its capabilities such that it can go deeper into existing relationships to create value. Growth within State III can then be described as an exploitation strategy with clearly identifiable, lean core competencies and strong relationships that act as a winning formula based on reputation, trust and niche areas of commerce. Flexibility, nuanced capability and comparative quickness are components to growth within this state. Exploitative strategy has a saturation point, however; in order to grow past this state, the mid-sized firm must leverage relationships and extend core competencies. Affiliation and alliances are formed with key constituencies that capture mutual investment, intensity and relationship complexity, coupled with integrated solutions, continuous innovation and cutting-edge offerings. Value creation, as measured by total revenues, is then a result of an aggressive broadening of applications, progressive learning and creating new growth markets. As depicted in Figure 2, the process of growth of the mid-sized firm is an orchestration process whereby managers manipulate and ‘mix’ the relationships and resources of the firm for value creation, as measured by total revenues. Time is an element in this value creation, such that manipulation of R&R variables is an antecedent to growth and where within-state growth is an evolutionary process and between-state growth is a revolutionary process.
Finer-grained conceptual model of mid-sized enterprise growth.
Discussion
Within this article we critically analyse how growth is achieved in mid-sized firms. We believe that understanding firm growth is vital given the resulting impact on the economy. Even though understanding firm growth is crucial, research into understanding its process is rare (Davidsson and Wiklund, 2013; McKelvie and Wiklund, 2010), especially with regard to mid-sized firms. In this article, we analysed the process of firm growth while focusing our attention on internally generated exploitative growth processes of mid-sized enterprises using case study evidence.
As theoretical contribution, this research advances our understanding of how mid-sized firms grow, thus addressing the call for deeper, exploratory analysis on the process of growth (Davidsson and Wiklund, 2013; McKelvie and Wiklund, 2010). Through qualitative research, we captured rich descriptions of top management cognition, asset combination and resource orchestration as elements of the growth process. Specifically, building on Penrose’s idea (Penrose, 1959) that growth occurs in episodes, we show that managers align resources and relationships to produce an episode of growth and reconfigure them to produce the next episode of growth. Each state had a certain blend or profile of relationships and resources suited to produce growth within the state. This configuration of resources and relationships relates to the challenges and context that mid-sized firms face in each state. Further, managers reconfigure the relationships and resources to set the platform for the next state, which is characterised by different challenges and context. In sum, growth of mid-sized firms does unfold in episodes as Penrose (1959) theorised. Furthermore, managers align the resources and relationships of the firm to the challenges and context that the firm is immediately facing to drive revenue growth. And, as growth flattens and the context changes, managers realign their resources and relationships when and as they embark on the next episode of growth. Even as our research may help explain how growth occurs, within a state and between states, it also suggests why growth may stagnate. A mid-sized enterprise may be unwilling or uninterested in growth, which would inhibit growth, but it may also be unable or unaware of how to reconfigure its resources and relationships. Stalling of growth due to these reasons is consistent with the empirical analyses of Hanks et al. (1993), and our research offers a rationale for stagnation, due to the absence of reconfiguration of the resources and relationships, even when a firm has growth intentions.
In terms of practice, our research maps the growth process, providing a clearer picture to managers on how to grow, what resources to develop, when those resources are most salient and which combinations facilitate growth objectives. The CEOs of State I entities may, for example, be able to objectively compare their firm’s relationship and resource profile against the descriptive characteristics of a State II entity in this model in order to position their firm for the next growth episode. Our research illuminates the internal variables that managers can invest in as they seek further growth. Specifically, if a State II entity thrives on strong and expanded CEO relationships, organisational alignment with its OEM counterpart, consistency and speed of production and operational complementarity, then the CEO and other managers in a State I firm can invest accordingly to produce desired growth. Essentially, the model in Figure 2 could guide managerial attention, cognition and variable manipulation for growth within any state and between states of the mid-sized firm.
Limitations
As one would expect, the very nature of case study selection process introduces some limitations. In this study, U.S. Midwestern manufacturing entities were chosen to study relationships and value-added capabilities relative to their respective OEM clients. While this process served our purpose, it also potentially reduced generalisability across business sectors and/or across geographies. In addition, the interview process has limited study to the perceptions of growth by CEOs whist they may have the broadest perspective of their firm’s operations, history and comparative strategies, their perceptions would provide a narrow set of evidence.
We had asked CEOs to describe their operations 5 years ago and compare them to the present day, capturing the dynamism of key variables as the firm solidified or transformed its profile for growth objectives. As a limitation, participants in our study may have inaccurate details of past processes or events, thus creating bias from recall and memory. Further, our model may imply some linearity as a growth process, for example, that growth of the firm passes in a deterministic pattern from State II through State IV. As our brief critique of Greiner (1972) and stage model literature suggests, this is an erroneous assumption. Rather than a linear progression, our model more firmly captures how firms harness relationships and resources, as opposed to moving through each stage. We acknowledge that some firms may be gifted with relationships and resources that are so aligned and so capable that they are born at State IV, for instance, thus not undertaking the linear progression that our model implies. Finally, our model captured the growth of established firms in relatively stable manufacturing environments; younger firms in a more volatile environment may yield a different progression.
Generalisation and future research
Our model, and the variables within it, may lend itself to Schmid (2018) and then Lehrer and Schmid’s (2021) conceptualisation of personalisation as a growth mechanism in Germanic mid-sized enterprise (the German Mittelstand). Personalisation in the German Mittelstand embodies a collective and projected pride and personality in conducting business to build trust, reputation, social capital, stakeholder goodwill and hence growth and stability. Lehrer and Schmid (2021) affectionately call this the ‘scaling up of personalisation’, to where the Germanic personality of the firm cannot be disassociated from any dominant individual manager or firm owner, especially at varying states of growth. These mid-sized firms serve industrial niche markets through their quality, service, design, innovation and solution offerings (Schmid, 2018), similar to the mid-size firms serving their OEM counterparts within our study. Our model may help explain how personalisation permeates the orchestration of relationship and resource variables for growth objectives; for example, through varying ‘mixes’ of Human, Social and Relational Capital. Further, De Massis, Audretsch, Uhlaner and Kammerlander (2018) found that the success and sustainability of such Mittelstand firms comes from the integration of niche focus, customer collaboration, globalisation strategy and constant improvements to products and services, coinciding with the integration of variables and state-specific profiles developed in our model. De Massis et al. (2018) argue that mid-size firms creatively innovate for growth in the face of resource constraints. The micro-foundations of our model provide a basis for how top management teams orchestrate constrained resources for effective growth outcomes. Given the similar characteristics found in our study, our model may generalise toward Germanic Mittelstand Firm growth objectives. The model may also serve as a rubric to reveal R&R differences between countries, especially those that promote and support entrepreneurship and the mid-sized firm; for instance, country-specific R&R variables in operation may converge or diverge given the degree of similarity of internationalisation in (say) State IV firms.
Our model may also generalise to the R&R building process between SMEs and large-scale enterprises (LSEs) in supply chain literature. Archer, Hong & Jeong (2006), for instance, may provide a practical platform for application of our model, namely the cooperative and collaborative economic efforts between the small- and/or mid-sized enterprise and their downstream LSE. Archer et al. (2006) advocate that sustainability and growth of the SME are dependent upon relational position and operational strategy, in relation to their respective downstream partners/clients, and that strategically allocated resources secure better negotiation terms in that supply chain position. Our model may help understand the critical changes that enable a mid-sized firm’s penetration, stability and growth through their supply chain relationships. Collaborative work with supply chain scholars may help bridge any converging and/or diverging perspectives for growth and success within the supplier/LSE relationship and this model provides a substantive beginning.
Our model also supports Nason and Wiklund’s (2018) recent assessment of firm-specific and re-deployable resources (fungible, versatile) as a growth mechanism; in our model, the synchronised malleability of an organisation’s resource profile supports fungibility and versatility as a means of exploitive growth and yet, further extends this theorising by identifying those interactive variables that are manipulated, changed and combined for state-specific and state-transcendent growth. Contrary to Nason and Wiklund (2018), our model also reasserts that inimitable resources are valuable attributes to the growth objectives of the firm. In our study, resources that are idiosyncratically honed, nuanced, galvanised and/or finessed by mid-sized firms for instance, would have their advantage inoculated to competitor actions, providing both protection and a source of growth in mutual relationship with their respective OEMs. As noted above, CEOs describe how continuous and cyclical development of their relationships and resources act as growth mechanisms, indicating that time creates some inimitability coupled with opportunity. Further research may be needed to tease out Nason and Wiklund’s (2018) debate of versatility over inimitability as a growth mechanism, at least in the mid-sized enterprise.
Conclusion
We see firm growth as a complex process. Further, the growth process is under studied in academic literature and deserves the attention of scholars, especially in the context of mid-sized firms. As presented above, the R&R Framework begins to capture the complexity of this process emerging in episodes. We therefore offer growth in mid-sized firms as a dynamic orchestration of relationship and resource variables that are manipulated and adapted by management in pursuit of growth.
Footnotes
Declaration of conflicting interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.
