Fast-growing “gazelle” firms lead the charge

For those who hunt exciting acquisitions and are more interested in fortunes than in fortune cookies, this year is again favouring the home of the brave and the land of the free in the dragon century. 2012 is the year of the dragon and in the US it is the year of the Presidential elections that will favour the gazelles.

A symbol of good fortune and sign of intense power, the Oriental dragon is regarded as a divine beast – the reverse of the steamy monster that Westerners felt necessary to slay or ride into the 3D movies. In Eastern philosophy, the dragon is said to be a deliverer of good fortune and a master of authority.

Gazelles are leading edge companies that are the fastest growing firms without having a big or any R&D factory, led by entrepreneurs with an eye for opportunities, an ability to use teams and to delegate as their business grows. Unlike the steady and enduring “stayers” – firms that make up the large mass of medium-sized players – gazelles are again making the running and continuing to be a major source of new jobs.

Despite the Euro-wobbles, gazelles will become critical as the global recovery gains pace in America and the dragon economies. Fast growing businesses are continually adjusting their activities not only as a result of expansion but also in response to shifts in market opportunities and changes in technologies.

New start-ups aside, the group of well over a million steady “stayers” is also the pool from which the fastest growing firms spring.  The spring in the step of the gazelles is triggered by opportunities that arise, or follows changes in which members and how families run their business and in personal insights and mindsets.

The evidence comes from perhaps the largest ever study of European SME growth patterns and is also consistent with findings from studies of US SMEs. Called “Final Sector Report – Gazelles”, the 2010 study was conducted by WIFO (The Austrian Institute of Economic Research) a member of Innovation Watch, an agency of Europe INNOVA, itself an agency funded by the European Commission. Regardless of the country or its technological leadership or backwardness, the period (number of years) surveyed the size of firms studied or the sector; the large majority of SMEs do not grow, grow very slowly or shrink very slowly.

In statistical terms growth rates follow a Laplace distribution pattern, which is different from the normal distribution curve in that it has fatter tails, representing more firms at the extremes who either grow or shrink very fast.

In the study gazelles were defined as the 10% of all European SMEs with the fastest growth over the three-year study period, with growth rates ranging from over 10% pa to over 50% pa. It found that gazelles were more prevalent in the service sector as opposed to the manufacturing sector, and more prevalent in formerly communist countries such as Bulgaria, Latvia and Romania than in technologically advanced economies such as Germany and Finland. However, the most innovative gazelles with larger R&D budgets are in the technologically advanced countries.

Gazelles innovate far more than other SMEs – they launch new products into their existing markets and they also launch new products into new markets. Whether it’s called innovation or change management they regularly change their structures and processes as they manage the tension of responding to growing customer demand while keeping costs under control.

Most businesses grow slowly because of the high costs and risks associated with rapid expansion. Entrepreneurs who lead gazelles apply their natural flair or experience to build relationships and secure funds and support from family, friends, business partners, staff and others along the supply chain, as well as banks, angels and venture capitalist. The variety of sources of funds and operational support secured by the entrepreneur serves to leverage the financial resources required.

The study reinforced my conviction of the importance of strategic planning. Over longer periods or four or more years gazelles often show negative growth. (We should not be surprised, not even gazelles racing through the African savannah run forever and the lions take many.)

Gazelle growth slows or reverses when firms need to consolidate and digest their growth. From the point of view of the entrepreneur this can be either a time, after the heart racing excitement of the sprint, to return to the mass as a much larger no or slow growth business or to take a long breadth before springing into the next phase of innovation and rapid growth.

Despite global financial wobbles, leading companies will continue to make the most of 2012   by being at the front of the pack of gazelles and finding ways to build links with the dragon entrepreneurs of Asia.