Caution: Businesses Urged to Maintain Speed Limit, Says New Study by Kauffman Center for Entrepreneurial Leadership

Business Wire, May 7, 2001

Business Editors

KANSAS CITY, Mo.--(BUSINESS WIRE)--May 7, 2001

Fast growing businesses should consider easing up on the growth accelerator in order to turn up profitability if they are to continue to survive and thrive, according to new research into successful businesses from around the world.

The study, conducted by the Kauffman Center for Entrepreneurial Leadership and Ernst & Young LLP, served to reaffirm the lessons of the recent dot.com crash in the U.S. suggesting that growth alone is not a key to long term business success. Rather, the study found that exceptional businesses are those that straddle the fine line between growth and profitability.

While acknowledging that the likelihood of business survival is dramatically improved if the venture is growing, the study concluded that increased market share is not enough to prevent extinction. The study analyzed 1,100 entrepreneurial businesses across nine different industries in 17 countries - all of which are former recipients of the Entrepreneur of the Year(R) Award, an annual awards program conducted by Ernst & Young.

"The hue and cry of the 90s was to "entrepreneurialize". Existing firms were encouraged to become more nimble, proactive, and innovative - in short, more like the young entrepreneurial firms streaming into the economy," said Larry W. Cox, Research Manager at the Kauffman Center. "Recent experience, however, and the results of this study show that while growth is necessary, it is not sufficient for long-term success. It must be wedded to greater levels of efficiency, profitability and true wealth creation in order to produce a healthy firm with solid future prospects."

"The entrepreneurial spirit is what keeps our world's economy thriving," said Gregory K. Ericksen, global director of Ernst & Young's Entrepreneur of the Year program. "The entrepreneurs surveyed for this study clearly exemplify the profound effect entrepreneurialism continues to have on our lives."

The study, which segments entrepreneurial business leaders into three groups depending on their approach to growth, provides new insight into the understanding of what it takes for a firm to achieve and sustain both higher than normal growth and profitability.

According to the study, the three groups of entrepreneurs are:

Builders - who are focused on sales growth;

Harvesters - who focus on profitability, and;

Leaders - who are above average in both profits and growth.

Among the study's findings:

- Builders are extremely entrepreneurial emphasizing technological innovation,
taking initiative and tolerating greater risk. Leaders, on the other hand,
maintain the same growth trajectory as builders, but are more moderate in their
entrepreneurial posture and, thereby reap greater returns.

- Harvesters obtain as much as 67 percent of their sales by selling existing
products to existing customers, and, to a greater extent, develop those
products and markets internally. Leaders garner only 37 percent of their sales
from such penetration and utilize acquisitions and mergers to a greater extent
to obtain new products and markets.

- International expansion is not necessarily the path to greater firm vitality.
The degree of internationalization does not distinguish between harvesters,
builders and leaders.

"Leaders do not pursue growth at the expense of profits. Neither do they stall the growth of their firm in order to cash in their chips," said S. Michael Camp, Vice President of Research at the Kauffman Center. "Rather, they build profitability into the growth process by increasing efficiency at the same time they are increasing reach," he continued.

Implications from the study are subtle, yet profoundly important for firm's competing in a turbulent business environment.

According to the study's authors, among the implications:

- Both harvesters and builders should consider modifying their

strategies in pursuit of a leader position in the market.

Accordingly, harvesters should expand their efforts to

introduce new products to new markets and lessen their

dependence on existing products and customers. Builders, on

the other hand, could benefit by de-emphasizing new products

for new markets while increasing efforts to build profits.

Builders should increase incentives for the CEO, top

management, and all other employees, but should shift the

focus of their incentive programs to reward efficiency and

increased margin as well as growth. Harvesters should

increasingly implement incentive programs that encourage

market share gains and the retention of talented employees.

- Privately owned firms should consider how to redistribute

their stock ownership and wealth to increase growth. It is

important for private firms that the entrepreneur gives up a

modicum of control in order to obtain the outside investors

who possess the resources needed to fuel growth.

The Kauffman Center for Entrepreneurial Leadership in Kansas City, Mo. is taking an innovative approach to accelerating entrepreneurship through educational programming and research. Inspired by his passion to provide opportunity for other entrepreneurs, Ewing Marion Kauffman launched the Kauffman Center, the largest organization solely focused on entrepreneurial success at all levels - from elementary students to high-growth entrepreneurs. The Kauffman Center is funded by the Ewing Marion Kauffman Foundation. For more information visit the Web site at www.entreworld.org.