A classification model for firm growth on the basis of ambitions, external potential and resources by means of decision tree induction

The model that was presented by Ahlström (1998) is a simple basic growth model in which three pillars of firm growth are identified, namely growth competence and resources, growth potential and growth ambitions. In this article, this model will be empirically tested using quantitative data from annual reports of a sample of Belgian SMEs as well as qualitative data from a mail survey. The model is empirically tested by means of a datamining technique, namely decision tree induction. In our empirical model, the three pillars of Ahlström’s model are present. The goodness-of-fit measures clearly indicate that the model is good. Validations of the model for other time periods show that the model can be considered as stable over time. All hypotheses of the Alhström model are confirmed in the expected direction with a high hit ratio of 77.7%. Profitability and solvency (which were used to measure the resources and competence factor) turned out to be the most important growth related variables. The relationship between profitability and firm growth is positive, while solvency seemed to be negatively related to growth. The relationship between (perceived) growth potential (measured by a benign environment factor) and firm growth turns out to be positive. Growth ambitions are also positively related to firm growth. If the average profitability (measured over a period of 6 years) is above a certain percentage, firms are classified as strongly growing firms. If the average profitability is below this percentage, firms with the right conditions for resources and competence as well as for potential are classified as weakly growing firms when the growth ambitions are low and as strongly growing firms when the growth ambitions are high.