Chapter 7: Growing profitable or growing from profits: putting the horse in front of the cart?
Top lists of and praise for the economy’s fastest growing firms abound in business media around the world. Similarly, in academic research there has been a tendency to equate firm growth with business success. This tendency appears to be particularly pronounced in – but not confined to – entrepreneurship research. In this study we critically examine this tendency to portray firm growth as more or less universally favorable. While several theories suggest that growth drives profitability we first show that the available empirical evidence does not support the existence of a general, positive relationship between growth and profitability. Using the theoretical lens of the Resource-Based View (RBV) we then argue that sound growth usually starts with achieving sufficient levels of profitability. In summary, our theoretical argument is as follows: In a population of SMEs, superior profitability is likely to be indicative of having built a resource-based competitive advantage. Building such a valuable and hard-to-copy advantage may at first constrain growth. However, the underlying advantage itself and the financial resources generated through high profitability make it possible for firms in this situation to now achieve sound and sustainable growth – which may require building a series of temporary advantages – without having to sacrifice profitability. By contrast, when firms strive for high growth starting from low profitability, the latter often indicates lack of competitive advantage.
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