University of Illinois at Urbana-Champaign
350 Commerce West
1206 S. Sixth Street
Champaign, IL 61820
Resource based arguments concerning organizational growth suggest that entrepreneurial mental models concerning the firm and its environment play a key role in shaping the path of company expansion. We tested these arguments using a sample of 54 high growth firms in various industries. Narratives were used to identify managerial logics regarding the growth and expansion paths to firms intended to pursue. We examined how resource availability in the year prior to the writing of the narratives influenced the frequency with which different growth logics were discussed, and how the discussion of these growth logics influenced subsequent resource availability and profitability.
A random sample of 54 companies was selected from the Kauffman Foundation's recently developed database of high growth firms. This database contains narrative information written about the company by the CEO and/or a top management representative. It also contains financial data for each firm over several years. Through a two-stage content analysis process we identified all sentences containing discussions of the companies' plans for future growth, and constructed a taxonomy for coding these discussions. Six growth logics were identified: Capital Intensive Expansion, Market Expansion, Human Resource Development, Alliances and Partnerships, Product and Service Expansion, and Technical Improvements. Poisson regressions were used to test several hypotheses concerning how resource availability (i.e. cash, fixed assets and inventory) influenced the frequency with which each of these growth logics were discussed. OLS regressions were used to test hypotheses regarding how the discussion of these growth logics influenced future resource availability and future profits.
Higher inventory levels were found to be associated with greater discussion of Market Expansion. Discussions of more capital intensive growth logics with slower paybacks were found to be negatively associated with future cash reserves, and discussions of growth logics with quicker paybacks were found to be positively associated with future cash reserves. Discussions of Product and Service Expansion were positively associated with future levels of inventory. We also found that firms which discussed Capital Intensive expansion paths more frequently, but which had lower cash reserves, had lower profits in the future than firms which discussed Capital Intensive expansion paths more frequently but had greater cash reserves. Finally, we found that firms with high fixed assets that pursued a Technical Improvement growth strategy had higher levels of profits in the future than firms with high fixed assets that do not pursue this growth strategy.
Our results suggest that the resources available to a firm will influence
management's perceptions regarding the firm's feasible growth strategies.
This study also provides some evidence to suggest that the growth strategies
which a firm discusses more frequently, and thus is more likely to pursue,
can affect the availability of resources and profitability of the firm.
To the best of our knowledge, this study is the first to provide evidence
testing Penrose's cognitive proposition (Mahoney & Pandian, 1992).
This is an important contribution to the resource based literature.
Of practical importance to entrepreneurs, the results of this study suggest
that their ability to identify and leverage the resources available to
them through the selection of appropriate growth strategies has important
repercussions which may be separated in time from when the decision is