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ISB0010.1177/0266242614567483International Small Business JournalSenderovitz et al.

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Small Firms

Article bj
International Small Business Journal
2016, Vol. 34(4) 391­–411
Four years on: Are the gazelles © The Author(s) 2015
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DOI: 10.1177/0266242614567483
of firm performance after a isb.sagepub.com

period of rapid growth

Martin Senderovitz
University of Southern Denmark, Denmark

Kim Klyver
University of Southern Denmark, Denmark

Paul Steffens
Queensland University of Technology, Australia

Abstract
This article examines variations in performance between fast-growth – the so-called gazelle –
firms. Specifically, we investigate how the level of growth affects future profitability and how this
relationship is moderated by firm strategy. Hypotheses are developed regarding the moderated
growth–profitability relationship and are tested using longitudinal data from a sample of 964
Danish gazelle firms. We find a positive relationship between growth and profitability among
gazelle firms. This relationship is moderated, however, by market strategy; it is stronger for firms
pursuing a broad market strategy rather than a niche strategy. This study contributes to the
current literature by providing a more nuanced view of the growth–profitability relationship and
investigating the potential for the future performance of gazelle firms.

Keywords
gazelle firms, growth, profitability, strategy

Introduction
Gazelle firms – firms growing considerably faster than the average – make valuable contributions to
job creation and economic wealth in society (Anyadike-Danes et al., 2014; Birch, 1979; Fischer
et al., 1997). Even in periods of recession, gazelle firms have a notable impact upon job creation and

Corresponding author:
Martin Senderovitz, University of Southern Denmark, Sdr. Stationsvej 28, Slagelse 4200, Denmark.
Email: mse@sdu.dk
392 International Small Business Journal 34(4)

economic development (Henrekson and Johansson, 2010). Consequently, such firms have received
considerable attention in both the academic literature (Barringer et al., 2005; Colombelli et al.,
2014; Parker et al., 2010) and business press being portrayed as heroes in the economy; for example,
when honoured in various events recognizing high-growth firms such as Fast 500 (Deloitte.com,
n.d.) and The Gazelle of the Year (Boersen Business News, Gazelle 2014, n.d.).
Although gazelles make an important contribution to economic growth, there is some concern,
fuelled by a number of spectacular failures during the ‘internet bubble’ of the early 2000s, that
high-growth strategies, ultimately, may not elicit sustainable profitability over time (Eisenmann,
2006). High-growth firms can be defined as: ‘cash hungry machines; the faster the growth, the
greater appetite for cash’ (Brush et al., 2009: 486). Indeed, research has questioned the sustained
performance of gazelle firms (Bamiatzi and Kirchmaier, 2014; Parker et al., 2010). These concerns
are emphasized in an analysis of Danish gazelle data, which reveals that 58% of the firms appear
as gazelles in a single year but fewer than 5% appear in three or more years (Boersen, gazelle data
set: 2008). Moreover, recent research has shown that firms who pursue growth do so at the expense
of profitability and perform poorly in later time periods (Davidsson et al., 2009; Steffens et al.,
2009). Accordingly, we are interested in the question: is too much growth a bad thing for gazelles?
Specifically, we are interested in exploring the difference in performance between gazelle firms,
that is, whether very high growth might compromise sustained performance or whether it generally
enhances subsequent performance. The future profitability of gazelle firms is critical since growth
in the absence of profitability does not lead to value or wealth creation (Davidsson et al., 2009;
Ramezani et al., 2002). Importantly, other than a few notable exceptions (see Colombelli et al.,
2014; Markman and Gartner, 2002; Parker et al., 2010), most studies of gazelle firms have focused
on identifying factors which set gazelles apart from other firms, rather than exploring the future
performance of these high-growth firms.
The extant research reveals that the relationship between firm growth and profitability is com-
plex. Indeed, empirical evidence is extremely mixed; studies show contradictory outcomes. Some
suggest a significant positive relation between growth and profitability (Chandler and Jansen,
1992; Cox et al., 2002; Russo and Fouts, 1997) or a weak positive relation (Cho and Pucik, 2005;
Coad, 2007; Peng, 2004) or, indeed, no relation (Roper, 1999; Sexton et al., 2000). There is also
evidence, however, for a significant negative relationship (Davidsson et al., 2009). However, few
studies have empirically investigated the growth–profitability relation for samples of high-growth
firms (Brännback et al., 2009; Markman and Gartner, 2002).
There are several theoretical arguments supporting both a positive and a negative relationships
between growth and profitability. Arguments that favour a positive relationship include economies of
scale (Mansfield and Yohe, 2003; Teece, 2012), liabilities of smallness (Aldrich and Auster, 1986;
Strotmann, 2007) and first mover advantages (Lechner and Gudmundsson, 2012; Lieberman and
Montgomery, 1988; Suarez and Lanzolla, 2007). Alternatively, managerial challenges of growth
(Penrose, 1959 [1995]) and firm transition (Churchill and Lewis, 1983; Garnsey et al., 2006; Greiner,
1972) suggest that a negative relation between growth and profitability may exist. It is not entirely clear
how these mechanisms may affect firms at the very highest levels of growth. We review these theoreti-
cal perspectives to develop hypotheses for the growth–profitability relationship for gazelle firms.
In addition to investigating the growth–profitability relationship, we are interested in how stra-
tegic orientation influences this relationship. The ability of a firm to grow profitably should, to
some extent, depend on the strategy it pursues (Davidsson et al., 2009; Parnell, 2013; Tang and
Hull, 2012). Recent studies (Colombelli et al., 2014; Parker et al., 2010) have examined whether
growth and performance for gazelles are compatible with Gibrat’s (1931) law – implying that
growth is basically ‘random’ – or whether it reflects the expectations of strategic management
Senderovitz et al. 393

literature, stating that ‘strategy matters’ for growth and firm performance. Parker et al. (2010)
directly link strategy and gazelle performance by investigating a sample of such firms and compar-
ing performance in a later period. It is concluded that even though gazelle growth seems to be
fragile, particular strategies have a significant impact on growth and performance.
Building upon this line of research, this article investigates the interaction of strategy with the
growth–profitability relationship. In particular, we are interested in whether firms that pursue a
broad market strategy, rather than a niche strategy, are able to achieve fast growth more profitably.
To address these questions, this article is structured as follows: In the next section, we discuss theo-
retical perspectives regarding the growth–profitability relationship. On the basis of this descrip-
tion, we develop hypotheses about the growth–profitability relationship and how a gazelle’s
strategic orientation moderates this relationship. We then describe the methods used and present
the results and, finally, outline the discussion, conclusion and implications of this study.

The growth–profitability relationship for gazelle firms

Firm growth has been an essential part of management research for decades (e.g. Birch, 1981;
Love and Roper, 2014; Penrose, 1959 [1995]; Storey, 1994) and also forms an important part of the
entrepreneurship research field (Davidsson et al., 2006; Wright and Stigliani, 2013). Stevenson and
Jarillo (1990) state that ‘entrepreneurship is the function through which growth is achieved’ (p. 21).
In strategic management, growth has been seen as an approach to achieve competitive advantage
and a way of increasing profitability (e.g. Cho and Pucik, 2005; Newbert, 2007). In general, there
are both contrasting theoretical views and conflicting empirical evidence regarding how the
growth–profitability relationship unfolds. Moreover, there is little direct evidence concerning the
top end of growth, that is, is even more growth good for rapidly growing firms? We critically
review various theoretical perspectives in an attempt to understand the growth–profitability rela-
tionship for rapidly growing firms.
Overall, according to Markman and Gartner (2002), two dominant yet divergent theoretical
views prevail. The first is predominately a market or environment argument: an outside-in perspec-
tive (De Wit and Meyer, 2010; Porter, 1980, 1985). The second is, on the contrary, predominately
internally focused or, similar to what Barney (1991, 2001) and De Wit and Meyer (2010) term, an
inside-out perspective. The two perspectives are presented in more detail in the next sections.

Growth and profitability

Various theoretical analyses suggest why growth leads to higher profitability. So, for example, econ-
omies of scale arguments imply that increasing production and/or sales generate higher profitability
(e.g. Besanko et al., 2013). Following the assumption that an L-shaped cost curve leads to the notion
of a minimum efficient scale (Gupta, 1981; Mansfield and Yohe, 2003; Wolff and Pett, 2006), where
firms are expected to benefit from growth in output at least to the point where the cost curve flattens
becoming almost horizontal. Therefore, in order to overcome the liabilities of smallness (Aldrich
and Auster, 1986; Strotmann, 2007), firms benefit from growing to a certain size. That said, empiri-
cal evidence suggests that in most industries, a minimum efficient scale is reached by rather modest-
sized firms (Audretsch et al., 2004; Mata and Machado, 1996). This suggests that for gazelle firms,
the benefits of high growth due to economies of scale might be relatively short lived. The resulting
cost–benefits of very high growth for gazelle firms are, therefore, expected to be moderate.
A similar argument is found in the theory of experience curve effects (Amit, 1986; Grant,
2013; Stern and Stalk, 1998). This theory holds that a higher cumulative volume will (over time)
394 International Small Business Journal 34(4)

lower the general production costs per unit and, thus, increase a firm’s competitive advantage.
The experience curve is L-shaped, with diminishing returns for higher levels of cumulative vol-
ume – the point at which marginal cost–benefits are negligible is again an empirical question. The
benefits of very high growth for gazelle firms are, therefore, expected to be modest in the majority
of industry settings.
Alternatively, first mover advantage (Lechner and Gudmundsson, 2012; Lieberman and
Montgomery, 1988; Suarez and Lanzolla, 2007) can create competitive advantage by rapidly
building a dominant market position, and thus, a quick entry followed by growth is important
for gaining high profitability. In particular, the theory of network externalities (Katz and
Shapiro, 1985; Ritala, 2012; Steffens et al., 2009) argues that the value of the offering depends
on the number of users, so above-average growth should lead to the potential for higher profit-
ability (Steffens et al., 2009). Evolutionary economics argue that an economy’s scarce resources
are allocated to the more efficient firms. Accordingly, growth opportunities accrue to more
profitable firms, favouring above-average firms with increasing market share, while reducing
opportunities for weaker, less profitable firms (Coad, 2007, 2009). In sum, these theoretical
perspectives argue that, in general, firms profit from growth in the sense that growth is posi-
tively related to profitability – at least up to a certain point. Reflecting the above theoretical
arguments, we argue that most gazelles may not yet have reached the theoretical minimum vari-
able cost and the minimum efficient scale; for gazelles, growth has a positive impact on
profitability:

Hypothesis 1a. Among gazelle firms, growth has a positive impact on future profitability.

The second theoretical perspective, similar to that which Barney (1991), Barney et al. (2001)
and De Wit and Meyer (2010) term an ‘inside-out’ perspective, argues that growth and profitabil-
ity may not be positively related. As pointed out by Penrose (1959 [1995]), growth is not just a
change in firm size but also a process during which the firm may encounter a number of organi-
zational and managerial challenges that reduce or reverse profitability-enhancing effects of
increased size. Relying on the organizational life cycle literature and managerial transitions
(Garnsey et al., 2006; Hambrick and Crozier, 1985; Kazanjian, 1988), we argue here that rapid
growth may lead to a range of internal challenges and difficulties that reduce or eliminate the
benefits of growth. In order to manage growth, firms are required to make significant shifts in
essential organizational procedures. This might involve changing the firm structure and reward
systems resulting in organizational disturbance, which – at least temporarily – reduces or elimi-
nates the benefits of growth.
Founders, chief executive officers (CEOs) and managers, therefore, face a dilemma in having to
choose between potential economies of scale and learning advantages and the organizational and
managerial risk(s) related to (high) growth. For these reasons, growth and profitability are not
always in positive accord. Gazelles have all experienced a very rapid growth, and the above-
mentioned organizational and managerial challenges may be expected. Thus, among gazelles,
where growth rates vary from 100% over a 4-year period to several thousand percent, we may
expect that growth will have a negative impact on profitability.
In summary, while we expect growth to have an impact on profitability, the overall nature of this
impact is unclear. So, in line with other studies (Balkundi and Harrison, 2006; Steffens et al.,
2009), we present a competing hypothesis:

Hypothesis 1b. Among gazelle firms, growth has a negative impact on future profitability.
Senderovitz et al. 395

Strategic orientation as a moderator of the growth–profitability

relationship
Davidsson et al. (2009) argue that the impact of growth on profitability seems to depend on the
context in which the firm is embedded reflecting the more general notion of contingency theory.
Within contingency theory, it is hypothesized that there is no one best way to organize or manage
a firm (Galbraith, 2012; Van de Ven et al., 2013; Woodward, 1958); rather, such strategies depend
upon the environment to which the firm relates (Scott and Davis, 2007). Extensive literature reveals
that this is true not only for larger, established organizations but also for younger and smaller
organizations (e.g. Barth, 2003; Parnell, 2013; Tang and Hull, 2012), such as typical gazelles
(Henrekson and Johansson, 2010).
Consequently, there is no one best strategy; the most beneficial approach depends on the nature
of the environment. In effect, an explicit growth strategy is not necessarily beneficial – it depends
on context. Like Durand and Coeurderoy (2001), we follow the contingency theory logic and argue
that the profit implications of a growth strategy depend on other additional internal procedures and
strategies. Specifically, we argue that a growth strategy is most beneficial when it fits the other
internal chosen strategies. Basically, a growth strategy should not be perceived or evaluated in
isolation from the remaining strategies pursued by the firm.
Porter (1980, 1985) claims that in order to achieve competitive advantage, firms need to make
two choices. First, between gaining a competitive advantage through: (a) having low cost of pro-
duction or (b) offering a unique product or service; second, whether to target a broad or niche
market. In this article, we focus on the second aspect of Porter’s strategy framework and compare
firms that have a broad, rather than a niche, market strategy.
All other things being equal, we can expect that growth is easier to achieve when the market or
the market potential is larger rather than smaller. The size of the market determines the upper limit
of firm growth; it determines how much ‘there is to fight for’. Applying a resource-based view
(RBV) lens, gazelle firms must hold some form of underlying resource-based advantage in order
to achieve sustained, profitable growth over a 4-year period (e.g. Davidsson et al., 2009). The RBV
argues that firms targeting a narrow market tend to have more specialized assets (O’Cass and Sok,
2014; Peteraf, 1993; Wernerfelt, 2013) than their broader-scope competitors. Such specialized
assets may be important for achieving competitive advantages in niche markets but provide fewer
opportunities for expansion and may, furthermore, develop path dependencies (Nelson and Winter,
1982; Sydow et al., 2009), making it more difficult to enter new markets.
Population ecology argues similarly that investment in plant, equipment and specialized person-
nel is not easily transferable to other tasks or markets (Hannan and Freeman, 1977; Manev et al.,
2014). In their original article, Hannan and Freeman (1977) argue that in certain conditions, niche-
oriented specialists will outperform broader-oriented generalists due to the greater extent of asset
specificity suited to (smaller) niche markets (p. 948). In dynamic and uncertain markets, however,
the efficiencies gained from specialization may not be easily transferred into new and changing
environmental requirements.
Using this line of reasoning, Parker et al. (2010) argue that gazelle firms are likely to develop
routinized strategies which are reinforced by their early association and positive performance feed-
back from their rapid growth, thus potentially developing organizational inertia and path dependen-
cies (Nelson and Winter, 1982; Sydow et al., 2009). As such, firms will find it difficult to gain
strategic momentum (Amburgey et al., 1993; Greve, 1999) to change direction and market strategy
at a later stage. Gazelles employing a niche strategy, and thereby developing specialized assets, will
be particularly vulnerable to such strategic inertia. This emphasizes the dynamic nature of long-run
profitable growth. Thus, in dynamic and uncertain markets, organizations with a broader-oriented
396 International Small Business Journal 34(4)

market strategy are likely to be more resilient than market-nichers. As a consequence, firms with a
broad market strategy will be in a better position to maintain high levels of growth.
All-in-all, we hypothesize that firms who target a broader market are more likely to gain benefit
from growth than firms who target a narrow market:

Hypothesis 2. Among gazelle firms, firm growth will have a more positive effect on profitability
among firms with a broad market strategy than among firms with a niche market strategy.

Methods
We conducted a longitudinal study of a large sample of Danish gazelle firms. Data derived from
legislated financial reporting requirements were used to identify the population of 2475 Danish
gazelle firms over the period 2004–2007. These same data provided our core independent variable,
firm growth and related characteristics. To complement official records, a survey was conducted in
2008 to identify firm strategy and other characteristics, resulting in 964 completed responses (39%
of all gazelles). The data were gathered and structured by Greens Research Institute (a well-reputed
Danish national research institute) on behalf of Boersen Business News (the largest national busi-
ness media – the Danish equivalent of the Financial Times). Survey respondents were CEOs or
owner-managers. Official government records were again used to determine subsequent firm prof-
itability, our dependent variable, for the financial years 2007–2010.

Sample
We aimed to identify the population of all Danish gazelle firms over the period 2004–2007. Birch
(1979, 1981) originally defined a gazelle as a firm that has grown at least 20% a year for four con-
secutive years, from a base of at least US$100,000 in revenue; in effect, at least doubling in size
over that 4-year period. However, there is no current universal agreement on how to define gazelles.
Definitions vary in terms of growth thresholds, time period and various growth indicators (Acs and
Mueller, 2008; Acs et al., 2008; Henrekson and Johansson, 2010; Parker et al., 2010), but all defini-
tions reflect measures of high-growth firms. We attempted to follow as closely as possible Birch’s
original definition. Where revenue data were available, the gazelles were defined and identified as
firms that had experienced at least 100% increase in revenue over the 4-year period (2007–2010),
had a revenue larger than 1 million Danish Kroner (approximately US$200,000) and had positive
equity. Due to Danish Accounting disclosure regulation, revenues were not available for approxi-
mately two-thirds of the sample. For these firms, gazelles were identified as those that had experi-
enced at least 100% increase in gross profit over the 4-year period (2004–2007), had a gross profit
larger than 0.5 million Danish Kroner and positive equity. The population of Danish gazelle firms
was identified through D&B (previously known as Dun & Bradstreet) which contains certain
financial information and general company data as reported to the Danish Accounting Authoritative
as a legislative requirement. D&B includes all listed and non-listed (value-added tax (VAT) regis-
tered) firms in Denmark.

Measures
Dependent variable.  The dependent variable in this study is the profitability of the firm. In line with
arguments in similar studies (Aupperle et al., 1985; Watson, 2007; Wennberg and Holmquist,
2008), profitability is measured using return on equity (ROE) for the financial years 2007, 2008,
2009 and 2010. Our measure has the advantage of being objective and based on publicly available
Senderovitz et al. 397

data (Pirolo and Presutti, 2010). In order to focus on operating results and avoid potential tax
manipulation triggered by relative high Danish company tax levels, gross margin is used to meas-
ure returns (profits). The measure (ROE) is a profitability ratio eliminating a firm size effect in our
dependent variable. The logarithm of ROE was used to account for the left-skew nature of the
distribution.

Independent variable. The independent variable in this study is firm growth. Measuring firm
growth, however, is not simple or unambiguous. There are conceptual and methodological
choices to be made concerning at least three issues: first, the time period for measuring firm
growth; second, the method of calculation (using absolute or relative growth); and third, the
choice of growth factor, for example, number of employees, sales, assets, market share, manage-
ment perception of firm development and so on. Development in sales or number of employees
are often used as indicators in studies that wish to compare and analyse firm growth (Davidsson
and Wiklund, 2000; Gilbert et al., 2006); however, there is not necessarily complete correlation
between growth in sales and number of employees (Delmar, 1997). Shepherd and Wiklund
(2009) investigated the concurrent validity between various growth factors and concluded that
the validity is moderate to high between growth in sales and growth in employees and also mod-
erate to high between absolute and relative growth in number of employees. This means that
results and findings in studies using one of these indicators should be comparable to studies
using one of the other indicators.
We measure relative firm growth in terms of number of employees over a 4-year period (years
2004–2007). Growth measured in employees makes it possible to have a much larger and more
representative sample (e.g. compared to using sales), as only around one-third of all Danish firms
reveal their sales figures (due to Danish accounting legislation). By using employees and a growth
indicator, we can make a broader analysis and comparison of the growth across all sectors and
industries in the sample. Specifically, we measure the average growth in the number of full-time
employees over the period 2004 and 2007: (Employees_year2007 − Employees_year2004)/½
(Employees_year2007 + Employees_year2004).

Moderator.  The ‘strategic orientation’ of the firm is a dummy variable indicating whether the firm
pursues a niche market strategy (1) or broad market strategy (0) (Porter, 1980, 1985). The variable
is measured by the question: ‘Is your company primarily engaged in a market niche?’ (with three
options: 1. Yes, 2. No and 3. Do not know/Do not want to answer).

Control variables.  In the analysis, we control for geographic region, industry, firm age, firm size
(number of employees) and the CEO or owner-manager’s educational background, age and gender.
In addition to these control variables, two further variables are used to predict sample selection
(continuation of the firm) (Heckman, 1976). The data were based on financial and company data
from the 2007 accounts (available in early/mid-2008) and the survey conducted in mid-2008. We
elaborate further on these variables in the analysis section.

Statistical analyses
To test our hypotheses concerning the impact of firm growth on future profitability, we conducted
a series of separate regression analyses of firm profitability measured in 2007, 2008, 2009 and
2010. The primary independent variable, firm growth, is measured over the preceding period
2004–2007. The high risk of fluctuation in performance among gazelles (Jänkälä and Silvola,
2012) and ambitions to understand long-term performance consequences motivated us to test our
398 International Small Business Journal 34(4)

results over several time periods. These regressions were corrected for sample bias due to firm
termination (e.g. Heckman, 1976).
Specifically, we conducted hierarchical linear regression. We estimated a model with the control
variables and then introduced the main effects of our independent variables, followed by the inter-
action effect. The estimates were adjusted to correct for sample selection bias (Greene, 2008;
Heckman, 1976). In particular, we corrected for those firms that terminated between 2008 and
2010 (N = 251). Sample selection due to firm non-survival may be particularly problematic since
profitability may be related to survival. Heckman (1979) proposed a two-step selection model in
which sample selection is assessed via a probit model and used to adjust the estimation of the focal
ordinary least squares (OLS) regression model. Our correction for profitability is based on a maxi-
mum likelihood extension of Heckman’s approach as implemented by the Heckman routine in
STATA 11 (StataCorp, 2011).
To effectively correct for selection bias, at least one variable must be identified that influences
sample selection (firm survival) but not the focal dependent variable (profitability) (Greene, 2008;
Heckman, 1976). We included two variables in the sample selection model, namely, ‘project post-
ponement’ and ‘recruitment knowledge’. We used project postponement as prior research has indi-
cated that firms postponing projects as a risk reduction strategy and a way of dealing with external
uncertainty are more likely to adapt and so survive (van Hoek, 2001; Yang et al., 2004a, 2004b).
Recruitment knowledge was chosen as prior research that suggests staffing and recruitment knowl-
edge are of crucial importance – especially for younger and growing firms. According to both
empirical and theoretical studies of human resource management in small organizations, organiza-
tional approaches and knowledge pertaining to staffing have profound effects on firm survival
(Cardon and Stevens, 2004; Heneman and Berkley, 1999; Heneman and Tansky, 2002). However,
concurrently, the effect and connection of recruitment on firm performance vary greatly with a
number of contextual factors and stage of the firm development and are thus not clear or direct
(Baron, 2003). Both variables are not directly associated with the profitability of the firm.
A robustness test was made in order to ensure that our results are stable and robust across
industries (Capon et al., 1990; Davidsson et al., 2002). We tested our results on split samples of
industries with expected variations in level of knowledge intensiveness and financial capital inten-
siveness. The findings, reported below, indicate that our core results are robust across different
industry sectors.

Results
Tables 1 and 2 display the descriptive statistics. Table 1 indicates that the gazelle firms are repre-
sented in all regions across all industries, with higher numbers in the regions near Copenhagen and
in the wholesale or retail industry. The majority of gazelle managers (the CEO or the owner-
manager) are males between 41 and 55 years, with a vocational or a short or medium-long higher
education.
Table 2 displays the correlations, mean and standard deviation (SD). The mean of firm age and
number of employees are approximately 13 years and 12 employees, respectively, although both
demographics show a large SD. The gazelles have experienced a growth of approximately nine
employees in the period from 2004 to 2007. A niche market strategy is most common among the
gazelles; 67% pursue a niche strategy, whereas the remaining 33% pursue a broad market strategy.
The correlation table shows generally low correlations for the independent variables and control
variables (except, as expected, the dummy-coded variables), which suggests low correlation
between the important variables. For analysing potential multicollinearity, we conducted multicol-
linearity analyses. The variance inflation factor (VIF) has been analysed for all variables.
Senderovitz et al. 399

Table 1.  Descriptive statistics.

Region North Jutland 9%

  Copenhagen area 34%
  South Denmark 22%
  Zealand 10%
  Mid Jutland 24%
Industry Primary industries 1%
  Manufacturing industries 15%
  Building and construction 18%
  Trade (wholesale/retail) 30%
  Transport 5%
  ICT 10%
  Knowledge service 12%
  Finance, insurance and other services 10%
Age; CEO or owner-manager 18–40 years 7%
  41–55 years 64%
  Over 56 years 29%
Gender; CEO or owner-manager Female 6%
  Male 94%
Educational background Primary school (9–10 years) 1%
  Vocational education 28%
  High school 11%
  Short/medium-cycle higher education 34%
  Long higher education 26%
Strategic orientation Niche market strategy 67%
  Broad market strategy 33%

Source: Gazelle data 2008, Boersen Business News and Greens Research Institute.
ICT: information and communications technology; CEO: chief executive officer.

The individual multicollinearity coefficients are not reported here for space constraint reasons. The
analyses of VIF show acceptable values under 4.0 (Hair et al., 2010). For the dummy-coded vari-
able and when entering the interaction effects in Model 3, the values increase as expected (see the
arguments for this in Brambor et al., 2006). Overall, the analyses show acceptable low levels of
multicollinearity.
Table 3 presents the results of the regression analyses for the measure of profitability in 2007
(log ROE). This table displays un-standardized coefficients, their level of significance, summary
statistics for each model and change statistics for each step of the hierarchical sequence. Model 1
contains the control variables, Model 2 introduces the main effects of employee growth and strat-
egy (dummy variable), while Model 3 examines the interaction effect of strategy and employment
growth. Table 4 compares the regression results for Models 2 and 3 (without displaying the control
variables) for profitability in different years: 2007, 2008, 2009 and 2010.
The main effects model (Model 2) shows a significant increase in explanatory power compared
with the controls (change F 7.83; p < .001). We find a positive significant relationship between
growth in the number of employees and ROE (B = .277; p < .001). Table 4 illustrates that this result
is consistent for all years 2007–2010, albeit with a slightly decreasing effect size. Hence, we find
support for Hypothesis 1a and evidence to reject the competing Hypothesis 1b.
When the interaction effect of growth and strategy is introduced (Model 3), we observe a sig-
nificant increase in the model’s explanatory power (change F 8.03; p < .001). The interaction of a
400 International Small Business Journal 34(4)

Table 2.  Correlation table.

Mean SD 1 2 3 4 5 6 7 8 9 10 11

1. Return on equity (ROE), Log 1.42 0.71

2. Growth, no. of employees Rel. 0.54 0.43 .23**
3. Differentiation strategy 0.86 0.34 .06* .04
4. Niche strategy 0.67 0.47 −.10**−0.03 .08**
5. Growth employees × different 7.59 16.5 .08** .28** .18** −.07*
6. Growth employees × niche 0.34 0.44 .04 .67** .09** .59** .13**
7. Geographic region (reference: North Jutland) 0.09 NA −.06* .01 −.12** .01 −.02 .00
8. Copenhagen area 0.34 NA .07* .03 .07* .05* 0.01 .06* −.23**
9. Southern Denmark 0.23 NA −0.02 −.05* 0.01 .00 .01 −.03 −.17** −.30**
10. Zealand 0.1 NA .03 .03 −.06* −.05 −.03 −.01 −.11** −.24** −.18**
11. Mid Jutland 0.24 NA −.03 −.01 .04 −.03 0.01 −.04 −.18** −.40** −.31** −.19**
12. Industry (reference: primary business) 0.01 NA −.06* −.04 .02 −.03 −.02 −.03 .04 −.08** .09** −.01 −.01
13. Manufacturing 0.15 NA −.08** −.02 −.03 .09** .06* .06* .07** −.15** .02 .00 .10**
14. Buildings and constructions 0.18 NA .15** .05 −.05 −.17** .02 −.08** .03 −.08** .00 .08** .01
15. Trade 0.3 NA −.21** −.15** −.08** .01 −.10** −.09** .01 −.07** .07** .03 −.02
16. Transport 0.05 NA .01 0.00 −.01 −.01 −.03 −.03 .05 −.04 .01 .00 .00
17. ICT 0.09 NA .07** .13** .06* .03 .03 .09** −.06* .19** −.10** −.06* −.03
18. Finance 0.01 NA −.08** −.06* .03 −.01 .00 −.05 .05 −.06* .00 .01 .03
19. Knowledge services 0.13 NA .08** .05 .10** .06* −.05* .09** −.10** .15** −.03 −.05 −.03
20. Other services 0.09 NA .12** .03 .03 .02 .11** .03 −.03 .11** −.05 −.02 −.05
21. CEO age (reference: 18–40 years) 0.43 NA .04 0.03 −.03 −.02 −.04 −.03 .06* .03 −.06* .03 −.03
22. CEO age 41–55 years 0.68 NA .03 −.01 .00 .01 −.02 −.03 .04 .02 −.02 .01 −.04
23. CEO age +56 years 0.34 NA −.01 −.06* .00 .04 −.03 −.05 .05* .02 −.03 .03 −.05
24. Gender (reference: male) 0.94 NA −.08** .02 −.02 .03 −.02 .06* .01 −.04 .01 .01 .02
25. CEO education (reference: primary school) 0.2 NA .01 .01 .03 .01 −.02 .02 .04 −.01 −.03 .07** −.04
26. Vocational education 0.34 NA .01 −.05 .04 −.01 −.05* −.04 .05* −.02 −.02 .07** −.05
27. High school/A-levels 0.15 NA −.01 −.01 .03 .03 −.04 .02 .03 .01 −.01 .03 −.04
28. Short/medium further education 0.37 NA .01 −.01 .00 .02 −.02 .01 .03 .00 .01 .00 −.03
29. Longer further education 0.3 NA −.02 .02 .05 .01 .01 .03 .02 .12** −.06* −.01 −.08**
30. No. of employees 12.12 21.01 −.07* −.06* −.07* −.07* .58** −.07* .03 .02 .01 −.06* −.01
31. Firm age 13.21 9.17 −.17** −.26** .04 .00 .04 −.14** −.01 −.02 .05* −.04 .01

SD: standard deviation; ICT: information and communications technology; CEO: chief executive officer.
*Correlation is significant at the 0.05 level (one tailed); **correlation is significant at the 0.01 level (one tailed).
Senderovitz et al. 401

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

 
 
 
 
 
 
 
 
 
 
 
 
−.05  
−.05* −.19**  
−.08** −.27** −.30**  
−.03 −.09** −.10** −.15**  
−.04 −.13** −.15** −.21** −.07**  
−.01 −.04 −.04 −.06* −.02 −.03  
−.05 −.16** −.18** −.25** −.09** −.12** −.03  
−.04 −.13** −.15** −.21** −.07** −.10** −.03 −.12**  
−.02 .01 −.01 .00 −0.01 .02 −.02 −.01 .01  
−.01 .03 −.0 .02 .01 −.03 −.01 .01 .00 .75**  
−.01 .03 −.03 .04 .01 −.05 .00 −.02 .01 .85** .80**  
−.03 .04 .06* −.03 .01 .01 −.02 .01 −.08** −.03 −.03 −.02  
−.01 .00 −.01 −.03 .06* .01 −.02 −.04 .06* .18** .18** .22** .04  
.02 .01 .03 −.03 .05 −.01 .02 −.06* .04 .20** .17** .22** .05* .76**  
−.02 −.04 −.07* .04 .04 .04 −.02 −.02 .04 .20** .18** .20** .02 .86** .80**  
.00 .03 −.04 −.01 −.01 .05 −.02 −.02 .03 .16** .18** .18** −.04 .75** .66** .79**  
−.03 −.04 −.09** −.04 −.01 .10** .01 .11** .01 .16** .16** .19** −.01 .78** .69** .81** .68**  
−.01 .11** .07* −.09** −.03 −.05* .03 −.10** .09** −.07* .00 −.03 .00 −.04 −.07* −.05 .00 .02  
.08** .07* −.02 .10** .04 −.13** −.03 −.08** −.04 −.08** −.02 .05 .01 −.01 .00 −.01 .02 −.02 .20**  
402 International Small Business Journal 34(4)

Table 3.  Hierarchical linear regression of 2007 profitability (log ROE).

Model 1 Mode 2 Model 3

  Controls Main effects Interactions

Region (reference: Copenhagen area)
  North Jutland −.114 −.134 −.141
  Southern Denmark −.005 −.005 −.004
 Zealand .021 .012 .009
  Mid Jutland −0.50 −.066 −.071
Industry (reference: manufacturing)
  Primary industries −.218 −.156 −.140
  Building and construction .331*** .318*** .309***
  Trade (wholesale/retail) −.111 −103 −.104
 Transport .162 .103 .077
 ICT .262** .204* .188
 Finance −.533* −.491 −.504
  Knowledge services .260** .280** .282**
  Other services .345*** .374*** .372***
Firm age −.010*** −.006* −.006**
CEO age (reference: 18–40 years)
  41–55 years .037 .038 .036
  +56 years −.028 −.016 −.019
CEO gender (reference: male) −.249** −.290** −.270**
CEO education (reference: primary school)
  Vocational education .046 .062 .057
  High school −.005 −.009 −.006
  Short/medium-cycle higher education .027 .045 .041
  Long higher education −.071 −.081 −0.74
No. of employees −.002 −.001 −.002
Growth (2004–2007) .277*** .537***
Niche strategy −.113* .090
Growth × niche strategy −.365**
R2 .124 .166 .176
Adjusted R2 .106 .145 .154
Change in R2 .124 .042 .010
Model change F statistic 7.15*** 7.83*** 8.03***

Source: Gazelle data 2008, Boersen Business News and Greens Research Institute.
ICT: information and communications technology; CEO: chief executive officer.
N = 964.
*p < .05; **p < .01; ***p < .001.

niche market orientation and growth in number of employees has a negative effect on profitability
(B = −.365; p < .01). Again, this result is consistent for all years 2007–2010, although the effect is
only marginally significant for 2010 profitability (B = −.141; p < .1). Hence, we find support for
Hypothesis 2. Thus, those gazelles following a niche-oriented market strategy have a less positive
relationship between growth and profitability.
Figure 1 displays the impact on profitability of the interaction between strategic orientation and
growth for these gazelle firms. We can see that growth has a positive impact on subsequent
Senderovitz et al. 403

Table 4.  Hierarchical linear regression of profitability: longitudinal effects 2007–2010.

Return on equity (ROE) 2007 2008 2009 2010

Controls Yes Yes Yes Yes
Main effects only (Model 2)
  Growth (2004–2007) .277*** .215*** .227*** .212***
  Niche strategy −.113* −.096** −.074* −.112*
Full interaction model (Model 3)
  Growth (2004–2007) .537*** .380*** .400*** .314***
  Niche strategy −.090 −.031 −.062 −.036
  Growth × niche strategy −.365** −.234** −.252* −.141†

Two-sided tests for non-hypothesized relationships. One-sided tests for hypothesized relationships.
***p < .001; **p < .01; *p < .05; †p < .1.

0.7
7

0.6
6

0.5
5
Profitability (Log ROE)

0.4
4

0.3
3

0.2
2

0.1
1

0
Low High
Growth (Rela ve Employment)

B
Broad Strategy Niche Strategy

Figure 1.  Relationship between growth and profitability moderated by strategic orientation.

profitability for both firms with a broad strategic market orientation and those with a niche market
orientation. However, this impact is stronger for firms pursuing a broad strategic market orientation.
We also note that for gazelle firms with relatively low levels of growth, the choice of a niche or
broad market strategy has little impact on profitability. However, for those gazelle firms that achieve
very high growth, pursuing a broad market strategy, on average, improves subsequent profitability.
We also make a few observations regarding the control variables. Several industries show a
higher level of profitability than manufacturing, namely, building and construction, information
and communications technology (ICT), knowledge services and other services. Male CEOs tend to
lead gazelles with higher profitability than females.
404 International Small Business Journal 34(4)

As mentioned above, we conducted a robustness test to investigate to what extent our results
may be driven by variation in fixed costs across industries. Prior literature suggests that perfor-
mance and drivers of performance might vary across industries (Capon et al., 1990; Davidsson
et al., 2002). We tested our results on split samples of those industries with a sufficient number of
observations: manufacturing, building and construction, trade (wholesale/retail) and ICT. The
robustness tests reveal consistent results for all four industries in 2007; consistent results for 2008
and 2009 for building and construction, trade (wholesale/retail) and ICT; and finally, for 2010,
consistent results for building and construction and trade (wholesale/retail). Considering the ICT
industry as the most knowledge-intensive industry, our robustness test shows that our results are
relatively insensitive to knowledge-intensivity. Meanwhile, considering manufacturing as the most
financial capital-intensive industry, our results seem robust in both short and long terms for less
financial-intensive industries and robust in the short run in more capital-intensive industries.
Therefore, overall, we can conclude that our results are relatively stable and robust across indus-
tries, although we see some minor industry variations.

Discussion
In this article, we have investigated the relationship between firm growth and profitability among
gazelle firms. In particular, we have examined how strategic orientation moderates this relation-
ship. In previous studies of growth and profitability, gazelle firms tend to be hidden in the popula-
tion of firms which conform to normative growth trajectories. Accordingly, we have limited
knowledge concerning the growth–profitability relationship for such high-growth firms. Relatively,
few studies have explicitly and empirically investigated the growth–profitability relation for high-
growth firms (Brännback et al., 2009; Markman and Gartner, 2002).
The longitudinal nature of the data set gave us the opportunity to incorporate a time difference
in the measurement of the independent, dependent and moderating variables. The independent
variable (growth) was measured from 2004 to 2007, the moderating variable (market strategy) was
measured in mid-2008, whereas the dependent variable (profitability) was measured in 2007–2010.
Thus, the study has an appropriate time lag between growth, strategy and subsequent profitability,
eliminating causality issues and increasing the robustness and validity of our results.
The empirical results demonstrate a positive relationship between growth and profitability among
gazelles, and we confirm our hypothesis that strategic orientation moderates the relation between
growth and profitability. It is shown that the positive relation between growth and profitability
among gazelles is strongest for firms that pursue a broad market strategy, compared to a niche mar-
ket strategy. These results were notably consistent over from 2007 to 2010. Exploring strategic
moderation adds to the stream of research examining whether growth and performance for gazelles
are compatible with Gibrat’s (1931) law of ‘random growth’ or whether and how strategy actually
matters. Our study confirms the results from Parker et al. (2010) and Colombelli et al. (2014), show-
ing that certain strategies – at least temporarily – have a significant impact on performance.
Following contingency theory logic, profit implications of a growth strategy depend on the fit
between the environment and other additional internal procedures and strategies. Reflecting popu-
lation ecology and the RBV, gazelles are likely to develop specialized assets and routinized
strategies – partly fuelled by the positive feedback from their high-growth achievements. A greater
extent of asset specificity and path dependencies for market-nichers may make it more difficult to
enter new markets and/or changing environments; so, it is challenging to maintain the same level
of profitable growth as firms with broader strategies. Empirically, firms with a broad market strat-
egy outperform market-nichers. Our descriptive results show that a niche strategy is the most
Senderovitz et al. 405

common among the gazelles with only 33% of pursuing a broad strategy; thus, the majority of
gazelle firms do not follow the preferred strategy for enhancing profitability.
The moderator effect may be due to the fact that niche market-oriented firms are operating in
markets where there is relatively less ‘to fight for’. The pie that needs to be shared among the
incumbent firms is smaller compared to that in the wider market. This argument has certain limita-
tions; the question is, whether a growth strategy is about achieving a greater share of a given and
fixed-sized market or whether it is about enhancing or creating a market? Some argue that entre-
preneurship, perhaps especially for gazelles, is about enhancing or creating new markets (Gartner
et al., 2003; Sarasvathy, 2001). It could, therefore, be argued that the issue of strategy, growth and
profitability should be analysed as a positive-sum game rather than a zero-sum game.
As previously noted, the research linking growth and profitability is generally inconclusive and
may potentially be moderated by a number of variables. Beside market strategy, general macro-
economic conditions have the potential to be influential. The gazelle period of rapid growth under
scrutiny occurred during a period of booming financial development (2004–2007), whereas the
financial situation in the subsequent years (2007–2010), when we measure profitability, was a
period of recession. Such economic turmoil has the potential to generate volatility and inconsist-
ency. However, despite this external macro-economic turbulence, the results remain consistent for
both the growth–profitability relationship and the interaction effect of growth and strategy (see
Table 4). Only the interaction effect disappears after 4 years (in 2010), but this is not surprising
since many gazelles are dynamic and operate in complex environments. We argue that these con-
sistent results indicate a high level of robustness for our core findings.

Conclusion
Contributions and managerial implications
In this article, we sought to answer the question: Is too much growth detrimental for gazelles? That
is, whether very high growth might compromise the sustained performance of gazelle firms, or
whether very high growth generally enhances subsequence performance. The positive correlation
between growth and profitability for gazelles has theoretical implications. The result suggests that
the effects of economies of scale (Besanko et al., 2013; Mansfield and Yohe, 2003), experience
curve effects (Amit, 1986; Grant, 2013; Stern and Stalk, 1998), first mover advantages (Lechner
and Gudmundsson, 2012; Lieberman and Montgomery, 1988; Suarez and Lanzolla, 2007) and
network externalities (Katz and Shapiro, 1985; Ritala, 2012; Steffens et al., 2009) seem to out-
weigh the potential organizational and managerial challenges of high growth. In this context, this
article addresses the discussion and critique (Davidsson et al., 2010; Gibb and Davies, 1990)
regarding the lack of empirical evidence and ‘crystal ball’ determinism that form the basis of
organizational life cycle models (Churchill and Lewis, 1983; Garnsey et al., 2006; Greiner, 1972).
From a managerial point of view, life cycle models may be intuitively appealing as they accurately
point to the gradual nature of firm evolution and offer managerial solutions to the various chal-
lenges. However, a lack of empirical support may question their validity and practical and manage-
rial usability.
To our knowledge, there are few analyses pertaining to how market strategy moderates the
growth–profitability relationship among gazelle firms. This article helps to address this gap, con-
tributing to knowledge regarding the effect of a broad versus niche strategy for high-growth firms.
By investigating the interaction effect of market strategy, we contribute to analyses regarding how
strategy affects the performance of gazelles. Reflecting previous studies of gazelle firms
(Colombelli et al., 2014; Parker et al., 2010), we generate new results in support of the strategic
406 International Small Business Journal 34(4)

management perspective, thus challenging Gibrat’s (1931) law of random growth in this respect.
Our findings show that market strategy has a clear impact on performance – at least for a short(er)
period of time. Complementing contingency theory (Durand and Coeurderoy, 2001; Scott and
Davis, 2007; Van de Ven et al., 2013), the moderation results suggest that no particular strategy is
universally valid. The potential benefit of a particular strategy depends on context; as such, growth
and market strategies should be aligned. In particular, CEOs of gazelle firms focused upon a nar-
row market should be cautious as very rapid growth may limit profitability. In general, they should
remain aware of the potential danger of developing (too) specific assets, (too) narrow path depend-
encies and organizational inertia, making change and adaption into other, more profitable, markets
more difficult.

Limitations and future research

The strength of our study is that we follow a sample of gazelles longitudinally over two overlap-
ping four-year periods, in total a seven-year period. However, at the same time, this is a limitation
in that we only follow the gazelles over a seven-year period. Future research may test results over
longer periods of time in order to investigate long-run effects. A second limitation is that we inves-
tigated the impact of growth on gazelle profitability for a specific time period (2007–2010), during
which time, the Danish economy experienced an economic downturn. It is unclear whether our
findings can be generalized to different macro-economic cycles; this suggests a useful avenue for
future research. In a similar manner, it would also be relevant to investigate whether our findings
are applicable for other nations and/or in developing economies. Future research may replicate this
study in other countries to examine whether the results are generalizable. This study was limited to
one moderator: a broad versus niche market strategy. It would be a fruitful line of investigation to
explore other moderators, such as environmental dynamism, differences in growth intentions, mar-
ket positions as well as other elements of a firm’s strategy.
In line with several other studies of growth (Davidsson and Wiklund, 2000; Gilbert et al., 2006;
Shepherd and Wiklund, 2009), we use number of employees as a growth indicator. Although the
concurrent validity between various growth factors is ‘moderate to high’ between growth in sales
and growth in employees, future research might investigate other samples using sales, or other
relevant available measures, as a growth indicator. We also argued that the moderator effect might
arise as niche market-oriented firms are operating in markets where there is relatively less room for
growth. The potential for market share is smaller compared to that in the wider market. This argu-
ment views the situation as a zero-sum game. Future research might investigate strategy, growth
and profitability as a positive-sum game, investigating how gazelles may focus on growing the
overall market or creating new markets in line with theories such as entrepreneurial bricolage,
effectuation and opportunities (Baker and Nelson, 2005; Dew et al., 2009; Sarasvathy, 2001).
These suggestions for future research would enhance our knowledge and understanding of the
influential factors on the performance of gazelles.

Funding
This research received no specific grant from any funding agency in the public, commercial or not-for-profit
sectors.

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Author biographies
Martin Senderovitz, PhD, is Assistant Professor at the University of Southern Denmark. The primary research
interests are firm growth, entrepreneurial management, bricolage, effectuation and causation, strategic think-
ing and management of growth in small-to-medium enterprises (SMEs) and gazelles. He has more than
10 years experience in teaching or lecturing at graduate and undergraduate levels in Strategy, Entrepreneurship,
Marketing, Organizational Behavior and Business Negotiation. In addition, he has professional experience
from the international shipping business and international consultancy work within curriculum development,
teacher training and business consultancy in a number of countries.
Kim Klyver received his PhD in entrepreneurship from the University of Southern Denmark (2005). Before
becoming a full professor, he held postdoctoral positions at Swinburne University of Technology (2006) and
at Stanford University (2009). In 2013–2014, he was visiting scholar at the Department of Sociology at
Stanford University and ACE at the Queensland University of Technology (QUT). His main research interests
in entrepreneurship include social capital, gender, institutional theory and behavioural genetics. His research
has received several scientific rewards internationally. He has published 27 international peer-reviewed jour-
nal papers, and his research has appeared in journals such as Journal of Business Venturing, Entrepreneurship
Theory & Practice, Journal of Small Business Management and Entrepreneurship & Regional Development.
He serves on several editorial boards, including the board of Journal of Small Business Management and the
board of Entrepreneurship & Regional Development. He has been the principal investigator on several
research projects funded by the Danish Research Council and is currently leading the Danish Panel Studies on
Entrepreneurial Dynamics (DaPSED).
Paul Steffens is Associate Professor and Deputy Director of the Australian Centre for Entrepreneurship
Research (ACE), Faculty of Business at Queensland University of Technology (QUT), Australia. He has
published over 50 works on various entrepreneurship- and innovation-related topics, including the Journal of
Business Venturing (JBV) and Entrepreneurship Theory & Practice. He serves on the editorial board for JBV.
He has been a chief investigator for several major research programs including the current Comprehensive
Australian Study on Entrepreneurial Emergence (CAUSEE).