Firm Growth

Firm Growth

There are several theories that can be used to define and explain firm growth. This essay explores these theories to explain firm growth. The theories discussed in this essay include the resource-based theory, the stage models of growth theory and population ecology theory. The paper also briefly highlights some of the barriers to firm growth. The essay concludes by recommending firms to look for ways to grow since without growth, they are unlikely to withstand competition in the market.

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Firm Growth

The content of this work is based on firm growth. Various theories can be used to explain
firm growth. This essay explains what firm growth is based on the resource-based theory, the
stage models of growth theory and population ecology theory. Barriers to firm growth have also
been covered in this essay.

Firm Growth

The term growth has different meanings depending on the setting it is used. For instance,
for investors, growth is the increase in shareholder values. In businesses, growth in the increase
in sales and profits of a business. For the government setting, growth is defined as the increase of
employment opportunities provided by the government (Department of Trade and Industry,
Firm growth can be explained using different theories. According to the resource-based
theory, the entrepreneurial orientation is the main resource and capability driving the growth of a
small firm. According to this theory, growth is a demonstration of the entrepreneurial orientation
of the small firm. The resource-based theory groups resources into two types; tangible assets and
intangible assets. The tangible assets include land, physical things, machinery, and building. The
intangible resources include everything else that lacks physical presence but can be owned by the
firm. Things such as product reputation, the trademark and intellectual are intangible assets of a
firm. The increase in values of these resources; either intangible or tangible assets forms the
basis of growth (Birley, 1990).
According to the stage models of growth, growth is made of up five stages. The first
stage is the existence stage. At this stage, the business’ greatest barrier is to obtain customers and

to provide products and services needed by the customers. The second is the survival stage
whereby a firm looks for ways of generating adequate cash to break even. The generated funds
should also cover for repairs and replacement of capital assets they wear out (Deakins, 2006).
The third stage is the success stage in which two essential decisions have to be made. First, the
firm owner may decide to exploit the accomplishments of the firm and expand. The owner can
also decide to keep the firm stable and profitable and this provides a base for alternative owner
activities. The fourth stage is the take-off stage and main issue in this stage is determining ways
of growing quickly and how to finance the growth. In the last stage- resource maturity stage, the
firm consolidates and controls the financial gains associated with the quick growth. The firm at
this stage also has to retain the advantages of small size such as flexibility of response and
entrepreneurial spirit (Birley, 1990).
Population ecology is a branch of ecology that covers the changes of species population
and the way these populations interact. Just like any other organization, a firm consists of a
diversity of people who work to achieve a common goal. The population ecology theory studies
the way population sizes change over time and space (Robson, 2004). This theory is essential
since it can be used to predict the long-term probabilities of a species that lives in a given patch.
According to the population ecology theory, when the total population of the firm increases over
a given time, firm growth is said to have occurred (Robson, 2004). For instance, in a private
family health practice, when the number the of patients visiting is 20 per month and this number
increases to 30 the next month, the firm is said to have grown.
Firm growth is the increase in net profit trending of a firm (Westhead Paul, 2011).
Suppose in June 2011, the net profit of a firm corresponded to 37 percent, 59 percent in
November 2010, 62 percent in November 2011 and it is predicted to be 74 percent in the next

few months. This figures indicate an increase in the net profit trending which is growth
according to the industrial economics theory (O'Farrell, 1988).
There are underlying factors that drive growth. An entrepreneur’s growth is fueled by
motivation, education, management experience, the history of the family and even the training.
The strategy affects firm growth. Aspects such as workforce training, technology, market
positioning and customer concentration affect firm growth. Firm growth is instigated by the age
of the firm, the legal forms, the location and ownership. The firm’s sector also affects its growth.
For instance, a firm in the mining sector is much likely to grow faster than a firm in energy or
cyber security sector (Storey, 1994).
As the firm grows, it encounters challenges and problems. These are identified as barriers
to firm growth. Some of the barriers to firm growth are related to process capacity, demand
management and staffing (Birley, 1990). O'Farrell (1988) points risk management and dealing
with competition from companies providing similar products with the region as a firm’s growth
barriers. Above all, finance can be the biggest growth barrier since for a firm to grow, it requires
finance which is a scarce resource (O'Farrell, 1988).

Every firm needs to grow for it to survive in this competitive market. Growth has
different definitions based on firm growth theories. It could be important for a firm to consider
what it terms growth and look for ways to achieve it since without growth, its unlikely for the
firm to survive.


Birley, S. (1990). Growth and Performance Contrasts Between "Types" of Small Firms. Strategic
Management Journal, 535-557.
Deakins, F. (2006). Entrepreneurship and Small Firms. Maidenhead: McGraw-Hill Education.
Department of Trade and Industry. (2004). A Government Action Plan for Small Business.
Making the UK the Best Place in the World to Start and Grow a Business. London: DTI,
Small Business Service.
O'Farrell. (1988). Alternative Theories of Small-Firm Growth: A Critical Review. Environmental
and Planning, 1365-1382.
Robson, P. (2004). Small Firm Innovation growth and Performance: Evidence From Scotland
and Northern England. International Small Business Journal, 561-575.
Storey. (1994). Understanding the Small Business Sector. London: Thomson Learning.
Westhead Paul, W. a. (2011). Entrepreneurship: Perspectives and Cases. Financial
Times/Prentice Hall.


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