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Strategies for High–Growth Entrepreneurial Firms

“Has my firm selected the right strategy?” and “Can we execute our strategy effectively and efficiently?” are two, critical questions entrepreneurs must ask continuously (Bhide, 1996). In fact, it may be that the search for and the defense of competitive advantage (as determined by the choice and implementation of strategies) is at the heart of what an entrepreneur does. The ultimate purpose of competitive strategy is for the firm to achieve a sustainable competitive advantage (Hitt et al., 1997). The long–term plan a firm uses to achieve its goals (Zahra, 1993b) and the mechanism it uses to align with its environmental conditions (Hitt & Ireland, 1985), an effective strategy helps the firm form the competitive advantages that differentiate it from rivals. In the pursuit of unique market positions, competitive strategy demands that entrepreneurial firms choose a set of activities that differ from those selected by rivals in order to deliver a unique value to the marketplace (Porter, 1996). Careful study of the entrepreneurial firm’s competitive strategy is important, because it significantly influences the venture’s performance (Zahra, 1996). As described next, there are three basic or generic strategies—low–cost producer, high–quality producer, and time–based producer—that can lead to performance success in the high–growth entrepreneurial firm.

Low–Cost Strategy (LQS). Because the firm’s intention in employing the low–cost producer strategy is to produce goods or services at the lowest cost, relative to competitors, and with features that are acceptable to customers, this strategy is often called the cost leadership strategy (Hitt et al., 1997). This strategy calls for firms to focus consistently on efficiency and on finding ways to drive its costs lower than competitors. This requires a standard set of product characteristics that satisfies customers and does not increase the price beyond that which target customers are willing to pay nor that of competitors’ prices (Anderson & Narus, 1995). The LCS also requires not only efficient manufacturing processes but also careful coordination with suppliers to maintain low–cost raw materials, scale economies (where possible), efficient inventory management systems (e.g., just–in–time systems), and a highly effective marketing and distribution program. When this strategy type is designed and implemented effectively, it allows the high–growth entrepreneurial firm to earn above–average returns, even when competing in a relatively unattractive industry (Hitt et al., 1997; Porter, 1985).

Oftentimes, smaller entrepreneurial firms, even those experiencing high rates of growth, encounter difficulties when striving to implement the LCS. These problems surface typically because smaller firms lack the size required to gain scale economies through the acquisition of raw materials and the manufacture of products. As a result, smaller entrepreneurial firms must focus on other activities to keep their costs lower than rivals’. Normally, because they tend to be less bureaucratic, entrepreneurial firms’ overhead costs are lower than larger competitors. However, overhead costs’ differences are rarely significant enough to offset the smaller firm’s cost disadvantage in purchasing and manufacturing scale economies. For these reasons, the LCS is difficult for entrepreneurial firms, even high–growth ones, to implement successfully. Nonetheless, the high–growth entrepreneurial firm that can implement this strategy type effectively can expect positive returns. The following hypothesis is suggested by these arguments:

Hypothesis 1: Implementation of a low–cost producer strategy in HGEFs is positively related to firm performance.

High–Quality Strategy (HQS). Of strategic importance in both manufacturing and service sectors (Rienzo, 1993), quality involves meeting or exceeding customer expectations in the goods or services provided (Dean & Evans, 1994). Synder, Dowd and Houghton (1994) argue that quality is a primary battleground in the global markets that are a key part of the NCL. In fact, quality has become a critical factor in global competitiveness for many firms and in multiple markets (Sherman & Hitt, 1996). Often, a focus on quality is intended to enhance a product’s performance and reliability and/or to create additional differentiated features that customers value (Hackman & Wageman, 1995). Specifically, the HQS is a strategy to produce products with the highest levels of quality, relative to competitors’ offerings, that can be sold to customers at what they perceive is an acceptable price.

HGEFs seeking to implement the high–quality strategy must produce products that at least meet but normally exceed the quality of competitors’ offerings. To facilitate the design and especially the implementation of this strategy, many firms use total quality management systems (TQM) (Reger, Gustafson, DeMarie & Mullane, 1994), even though most of them are not easy to implement successfully (Krishnan, Shani & Bayer, 1993). However, because of their relative simplicity and flexibility, entrepreneurial firms may be able to use TQM systems in a manner superior to their use in larger companies.

While studies examining the outcomes of TQM systems have produced inconsistent results, firms implementing a HQS effectively can be high performers. One path to higher financial performance from quality is derived through improved customer satisfaction (Ittner & Larcker, 1996). Effective implementation of a HQS typically enhances the firm’s productivity, allowing it to increase the value of its products to customers. Increased value often is provided when productivity improvements allow a firm to offer its high–quality products to customers at a lower cost. These arguments suggest the following hypothesis:
Hypothesis 2: Implementation of a high–quality strategy in HGEFs is positively related to firm performance.

Time–Based Strategy (TBS). In turbulent and highly dynamic environments such as the NCL, it is imperative to make and implement strategic decisions in a speedy manner (Eisenhardt, 1989, 1990). An increasing number of large and small firms now consider speed to the marketplace an important competitive weapon (Sheriden, 1994). Firms committed to making strategic decisions rapidly are sometimes called “pioneers.” Among other achievements, a pioneer may be the first to introduce a new product or technology to the marketplace (Zahra, 1996). The perception of value associated with time–based strategic actions is consistent with the view articulated many years ago by Sun Tzu—that speed is the essence of competitiveness and allows taking advantage of the enemy’s (competitor’s) lack of preparedness. In the context of business firms, Sun Tzu’s positions challenge firms to move rapidly in order to seize marketplace opportunities (McNeilly, 1996). Speed can yield several benefits, including those of allowing the firm to surprise competitors, helping it to exploit rivals’ weaknesses, and helping it build on its competitive momentum. Additionally, when executed properly, the TBS may allow the high–growth entrepreneurial firm to gain market share, achieve greater legitimacy in the marketplace, and improve its access to sources of capital as compared to rivals (Deeds and Hill, 1996).

Chen and Hambrick (1995) argue that entrepreneurial firms may have a special advantage when competing on the basis of speed. Because they are smaller and more flexible, entrepreneurial firms may be able to imitate competitive actions faster than larger competitors. In fact, Chen and Hambrick (1995) found that small firms had a higher propensity for action and were able to execute actions more rapidly than larger companies. Through this capability, small firms were able to compete effectively against their larger rivals in the same market. This evidence and the arguments presented herein suggest that HGEFs implementing a TBS will achieve higher financial performance, as shown in the following hypothesis:

Hypothesis 3: Implementation of a time–based strategy in HGEFs is positively related to firm performance.

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