Just last month, McKinsey reported on a slower growth period for private markets. “As private market managers look to boost performance in this new era of investing,” the authors wrote, “a deeper focus on revenue growth and margin expansion will be needed now more than ever.”
Because firm owners choose how resources are allocated based on their theories of value, these owners’ competences are key to their firms’ value creation — especially for private firms where ownership is typically concentrated in a few individuals. Considering the current state of the private market, those competences play an enormous role in a firm’s success. New research published in Strategic Entrepreneurship Journal identifies which competences are crucial for firms to experience growth — and how owner–managers from family firms could struggle to leverage one of those elements.
The study authors — Jannis von Nitzsch of the University of Munich, Miriam Bird of the Technical University of Munich, and Ed Saiedi of BI Norwegian Business School — set out to determine what constitutes sound judgment on the part of owner-managers of private firms to create value. They chose to focus on two competences: Matching competence, defined as the ability to theorize about the potential value of specific resource combinations (“what to own”), and governance competence, which is the ability to create effective governance arrangements to align incentives within a firm (“how to own”). The goal, then, was to study the role of entrepreneurial judgment in resource allocation decisions.
“In private firms, growth is the most important indicator of value creation,” von Nitzsch says. “This led us to integrate the construct of owner competence with Penrosean growth theory (a concept suggesting that growth begets growth), which had remained rather vague about how owners competently allocate resources to achieve growth.”
To better understand what constitutes sound judgment on the part of owner-managers of private firms, the researchers used owner-managers’ LinkedIn profiles to gauge their matching competence and governance competence. These measures were then integrated into a longitudinal sample with information on their firm’s growth and various firm characteristics. The researchers also collected survey data from German owner-managers to verify that the study approach properly captured matching and governance competence.
They found that owner–managers’ competences are particularly important in the early years of their firms when no standardized processes are in place. And — surprisingly — they found that owner-manager matching competence was not strengthened in family firms. Despite the family’s trust and support of the owner, von Nitzsch says, family dynamics can actually hinder the exploration of risk-taking novel strategies. To overcome this challenge, the researchers suggest instituting governance mechanisms that prevent inference from family members.
Overall, the findings suggest owner-managers reflect on their own competences, their unique firm environment (e.g., whether or not family members influence their decision making), and the combined influence on firm growth.