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• 4.1 Three Phase Growth
• 4.2 Key Growth Events
• 4.3 Evidence of Growth Thresholds

Firm-level growth is seldom a smooth process - it is buffeted by external factors such as exchange rates, market access, competition, and internal shocks, such as changes in management or ownership, or changes in key relationships. Fundamental to the growth process, though, is the drive and vision of the owner(s) and the management team (in some cases these are one and the same).

The companies covered in this study are all exporters and have therefore cleared one of the major growth hurdles for New Zealand-based businesses. The questions are how have they fared since they began exporting, and what major expansion points, if any, have they had to work their way through?

From this small sample of 30 firms, five have more than quadrupled their export receipts since 1995. Between them they have added over $200m to total exports over the past six years - about the same as annual wine exports over 2001. Another four companies have added more than $40m each to their export receipts since 1995, but from a relatively high export base in each case.

Graph 4.1: Two Types of Growth

From their growth experiences we seek to identify key growth stages and common features underpinning the growth process. We contrast these observations where appropriate with the experiences of slower growing firms within the group of firms interviewed.

All five fast growing firms are, or were, driven by owner managers. Two have been purchased by foreigners within the last three to four years, two have taken on outside equity, while one (the youngest) remains totally owner-operated. Owner management is by no means a pre-requisite for fast growth. Indeed it is often more strongly associated with slow growing businesses - capital constraints, an aversion to risk and a concentration of expertise on one aspect of the business are common characteristics of owner-operated business.

The four firms in this study that have lifted export earnings significantly (in absolute dollar terms) are all well established businesses where there is a clear separation of ownership and management. Two are foreign owned, while the other two are New Zealand owned companies that have been driven by founder manager-owners.

4.1 Three Phase Growth

Firms might be expected to follow an "S" shaped growth path. Typically the early years (two to five years) in exporting are dedicated to learning, and establishing the systems and structures that can support sales growth. Some companies enter exporting with a new breakthrough product. The product sells itself for the first year or so, or until competitors react. From there the company begins to conform to the more traditional model, albeit from a higher sales base.

The middle phase of growth is often very rapid. The distribution channels are in place, the product has been tweaked to meet market requirements or the product range has been fleshed out with R&D underway to deliver new product on a more continuous basis, credibility has been established, etc. There are examples within this study of firms' sales expanding at between 50% and 100%pa through this phase of growth. The next stage is where sales begin to plateau, or in some cases decline as a new company model is implemented. This stage often coincides with a change of ownership or direction for the company. In the graph below we have set out the export growth path for the five fastest growing companies from the group interviewed.

Two of the biggest exporters have both had new owners within the last three years. In one case the change of ownership has given the company's growth a boost by providing a world wide sales network and access to key new clients. In the other case, sales have contracted as the strategy for the New Zealand operation has changed to being more of an R&D centre than a manufacturing business. The next two biggest companies are in the second stage of growth. Sales seem likely to climb rapidly over the next two to five years, at which point, (or before) ownership changes may alter the growth path significantly.

Graph 4.2: The Growth Process

4.2 Key Growth Events

There are undoubtedly major events that either stall or boost growth. Some are within the firms' control and others come as external shocks or opportunities. The following list is by no means exhaustive and is based on information gathered from the firm interviews.

• Taking the plunge into exporting is probably one of the most important events influencing a company's growth path. Around 10 of the companies in this study began exporting within the last 12 years (two within the last five years). The impact on growth is not necessarily immediate or significant, as the above graph would suggest.

Table 4.1: Firm Growth⁷

Nominal value of exports sales (index 1995=100)

• The next most significant event shaping firms' growth prospects is probably a change of ownership. (Interestingly, we have no evidence from these studies that ownership changes are a catalyst for firms to begin exporting.) But changes in ownership can deliver many of the growth triggers discussed below. The actual outcomes depend on the strategy of the new owners and the characteristics of the firm they are buying into.
• Establishing or changing distribution systems is an expensive, time-consuming and potentially risky event, but a crucial part of the growth process for exporters. Some companies approach this issue with a very clear idea of what they require and plan the action meticulously. Most companies have made mistakes in developing distribution and have been forced to repeat, to some degree, this stage of the growth process. Once achieved, the distribution step can be both an avenue for growth as well as compelling growth - distribution can absorb a lot of investment that can only be justified by increasing sales.
• A step change in production capacity is an obvious growth event. The experiences of firms that have significantly expanded capacity highlight the dangers of what seems a positive step for growth. One company argued they were lucky to retain customers through the expansion phase because of disruption to deliveries and quality problems. Another contemplating a big expansion was particularly sensitive to exactly these issues. For some companies, consolidating activity on one site (in some cases a new site) brought real gains in process, communications and culture. Two companies were restructuring their production as part of their plant expansion projects. Specifically they were dividing capacity in two - one plant producing a few products on a more continuous basis (to get the benefits of scale) and the other plant sticking with a larger range of small-run customised products.
• Specific technology breakthroughs can be an important factor in influencing growth. In some cases the breakthroughs will be driven by the company. In other cases the market demands the company deliver specific technology. If it fails, its growth prospects are compromised.
• A closely related factor is the development of new products. They can signal a sharp change in growth especially if they meet a need in the marketplace that nobody else has seen or met. One company argued that if it had not developed a new product it would have lost sales - a potential negative growth event.
• Acquisitions are potentially very significant growth events. In previous studies we have discussed the two different approaches to growth - organic growth or growth by acquisition. Almost by definition, the former is not an event-driven process. There are at least eight firms in this study that have or are acquiring businesses as part of their growth strategy. In virtually all instances the acquisitions are small relative to the size of their existing business, and therefore are not particularly obvious (as yet) in the firms' growth trajectory.

4.3 Evidence of Growth Thresholds

At least six firms expect to have expanded sales from around $50/ $60m a year in 2000 to beyond $100m by 2005. The fact most of these firms are confident about boosting export sales beyond $100m (in some cases well beyond $100m) suggests they do not see any significant step changes, or barriers to growth through this range. We suspect, in reality, there will be important changes required as the firm expands.

In two cases the firm is simply continuing a growth strategy that has been in place for the last three to five years. One has completed a large plant expansion that was predicated on substantial sales growth, which has already been largely signed up to. Acquisitions (some already completed or under negotiation) will play a large part in the growth of the remaining three companies.

To sustain steady growth from $50m to well beyond $100m is likely to require some changes in how the company is managed. That may involve a change in manager, especially in the case of founder managers whose strengths often lie in driving the company through the early entrepreneurial stages of growth, (see section 7.3 for more discussion of this issue).

⁷Not all firms supplied data that could be used in this table.