Gazelle Firms', Growth and Qualitative Changes in the Rus- sian Economy
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
‘Gazelle Firms’, Growth and Qualitative Changes in the Rus-
sian Economy
Yudanov, A. Yu., Professor,
Doctor of Science; Department of Economic Theory of The Finance Acad-
emy under the government of Russian Federation
Phone: (07) 499 -158 2034; fax (07) 499-157 7070
Email: yudanov@yandex.ru
Paper for presentation at The Moscow 'Services Management' Symposium: “Wealth and
Prosperity in the Period of Global Transformation: Experience of Russia and Asia” – June
29-20, 2008 at The Financial Academy (Government of Russia), Moscow.The empiric study of the American economist David Birch (Birch, 1987) who claimed that in
the USA new jobs were almost exclusively created by small companies (their contribution made
up to 82% within 8 years period starting form 1968 up to 1976) produced stormy scholarly and
even political disputes in the 80th of the last century. The David Birch conclusions were then
both supported (e.g. by Kirchhoff, 1994) and challenged (e.g. by Davis, 1994). At that the dis-
cussion was mostly focused on the role of the small business in whole. The “total residue” of
those discussions was the development of the small business support into the status of one of
national priorities first in the USA and then in a number of other developed countries.
In the mean time the most impressive fact is that according to David Birch (Birch, 1987; Birch
and Medoff, 1994) most of small businesses were really rather stagnant. In his opinion, the deci-
sive contribution to the country’s development was made by fast growing small companies con-
stituting an insignificant minority (about 3%) of all businesses. David Birch singled them out
into a specific type of firms calling “gazelles” thus emphasizing their agility as against heavy-
footed “mice” and “elephants” small and big static companies predominating in economy.
By now the large contribution made by a relatively small group of gazelle firms to national eco-
nomic growth (in terms of both employment and creation of GDP - see: GEM, 2005, p.15f) has
been validated by the findings of various researchers, many of whom have given a broader in-
terpretation of the “gazelle” concept. It is interesting but David Birch himself usually regarded
as an encomiast of the small business has never claimed that gazelles may be small firms only.
Vice versa his methodology provided that over the years a gazelle may often develop into a big
firm. A number of subsequent scholars (Muske and Woods, 2004; Lichtenstein and Lyons,
2006) were more categorical in rejecting to consider the rapid growth as the direct attribute of
the small size of a company. Returning to the classical views of Josef Schumpeter on a new lev-
el, scholars now associate rapid growth with entrepreneurial behavior, which can be observed in
small, medium-sized and even giant companies (or their divisions).
An empiric research of the competition in Russia was performed at the Financial Academy un-
der the Government of the Russian Federation in years 2003 – 2006 (Yudanov, 2007). Several
industries (pharmaceutics, confectionery, banking sector) were explored at the first stage of in-
vestigation, as well as firms significant for separate lines of business (Wimm-Bill-Dann, Baltika,
Integra, A4Vision). The typical success features in the country’s today market were roughly out-
lined in the result. The activities of over 50 most successful companies from other sectors of
business were examined on the second stage. At that the authors met with the striking phenome-
non connected with the fast growing firms (gazelles).
Fast Growing Firms: Exponential Growth Phenomenon
Despite the economic growth Russia enjoys starting with the year 1999 the situation in most of
the reviewed companies remained really hard even in 2006. Pressure of cheap import, state bu-
reaucratic constraints, unfair competition from the part of oligarchic groups and “shade econo-
my” companies forced those companies to care how to survive only.
Alongside with this sad fact the research elicited the multiplicity, wide range and amazing effi-
ciency of asymmetrical responses some companies worked out to escape the competition dead-
locks. The best known example of this kind in banking sector is the creation of the new seg-
ment of business - consumer finance market – by the Bank Russian Standard and subsequent
credit institutions that formed the most rapidly developing group of the national commercial
banks.
2The example of the Russian Standard is remarkable with the availability of some distinctive
features even if not totally though partially representing the experience of other Russian enter-
prises that achieved the biggest success in recent years. Thus we assume to summarize them
briefly.
1. Phenomenally rapid growth inclining to the exponential law. The graph showing the growth
of assets of the Bank Russian Standard is represented simultaneously in ordinary and semi-
logarithmic scale on the fig. 1. The agility of the Bank Russian Standard is obviously seen on
the left panel. From practically a ground zero it managed to develop into a remarkable even by
world standards market player with its assets over Rbl 292 billion (11 billion USD, 127-fold
growth in 2001-2006).
The semi-logarithmic scale (right panel) graphically presents the avalanche-type growth that as
well practically fits the ideal exponent curve1. Indeed in this scale the exponent curves look like
straight lines. And as the graph shows the rate of the Russian Standard assets growth falls on a
straight line as if the data for each year was artificially adjusted to that function. More properly
the approximation validity value is incredibly high R2 = 0,9998 (three nines in decimal plac-
es!!!).
This fact, in our opinion, is of great heuristic importance. Even with such a short series (only six
points) it is hard to believe in the random nature of this phenomenon (similar examples for other
firms are given below). The point is that the sales volumes of an individual firm (or actives of a
single bank) are subject to exclusively strong fluctuations. They respond to the fluctuations of
the macroeconomic activity, price behavior, advertising campaigns, rate of the sales chain de-
velopment and many other factors. Moreover not only the activities of the company per se are of
importance but those of the competitors as well.
Figure 1
Bank Russian Standard Total Assents (in million of Rubles as per the end of the year)
300000 292000 1000000
292000
112141
41780
250000 100000
15631
5667
200000 10000
2294
150000 1000
0,9763x
y = 838,16e
2
R = 0,9998
100000 100
112141
50000 10
15631
5667
2294 41780
0 1
2001 2002 2003 2004 2005 2006 2001 2002 2003 2004 2005 2006
Source: Annual reports of the Bank Russian Standard for 2002 – 2006.
1
Herewith and hereafter we mean the general interpretation of this term: у = аевx.
3Normally, it is impossible to find a regression equation to describe actual data with such incon-
ceivable accuracy not only using a simple exponential function, but even with the help of com-
plex multifactor models. Quite simply, actual sales keep “jumping” and deviating from theoreti-
cal values under the impact of significant factors not taken into account by the model2.
As soon as the “precise” exponential function appeared in the development of a company it is
reasonable to assume that it has not emerged out of nothing. Many reasons may exist due to
which the exponential growth happens to be hidden or disturbed subject to external influence.
But for the occurrence of that phenomenon (though as a singular event) are needed special con-
ditions. As we know, exponentials often appear in avalanche processes, such as the reproduction
of rabbits in Australia, when there is no shortage of resources for self-accelerating development.
This is apparently what happened in Russia when the population’s pent-up demand for consum-
er loans found an opportunity for satisfaction in the offers of Russian Standard Bank.
2. Meeting the long-felt needs (fair ground of success). The existence of enormous unsatisfied
needs for the consumer loans formed the primary source for the incredible success of Russian
Standard and the followers thereof. Until then the consumer loans were available only through
the extremely complicated and bureaucratized procedures of the gigantic state bank Sberbank.
In other words the success achieved by the Russian Standard was not due to machinations (no
matter either illegal or permitted under the imperfect laws of transitional economy) as it was
true with regard to no less impetuous rise of many of oligarchic groups but directly resulted
from the market success of the offered services. From this viewpoint one can say about the
“clean”, “white” basis for its business connected with the satisfaction of real consumers’ needs.
The assumption suggests itself that the success of the bank (and similar companies) is connected
with availability of vacant niches in the young Russian market which wait for appearance of
new attractive offers. When such an offer appears filling of big vacant space with its products
allows the firm to grow along an exponential curve long enough to become distinctively visible.
3. Success planning and forward competencies development. The conscious intention to occupy
(or to create) a certain segment of the market forms another noteworthy feature of the Russian
Standard. In other words in this case the success cannot be explained as a lucky chance or as a
chaotic development. Rustam Tariko the founder of the firm is a stranger in the banking busi-
ness. He acquired distinction as the owner of the company Rust Incorporated that controls 60%
of exclusive alcohol market in Russia. Setting up of a highly specialized bank (the Russian
Standard does not provide any other banking services except consumer lending) is an undisput-
able result of certain vision of the general business environment in Russia. No point-of-sale con-
sumer lending existed in the country but the bank Russian Standard from the very beginning
was created as a big operator of such a market. The competences necessary for “conveyor-type
processing” of applications for loans were prepared in advance. So the labor-taking Russifica-
tion of the scoring technology (customers solvency evaluation method basing on the question-
naire unsupported by documents) was performed. The partnership relations were built-up with
retail chains selling home appliances etc.
4. Competitive strength. The access of transnational players to the Russian market is one of the
favorite horror stories of business-journalism. Inter alia the Russian banks are extremely afraid
of the liberalization of the market and invasion of powerful foreign players. Usually they talk
about the loss of sovereignty of the national banking system. It was not by chance that the limi-
2
This is by the way the factor that determines the radical difference between the situation on the micro
level (level of an individual company) and the macroeconomic one where the exponential functions are
widely occurring due to remarkable persistence of a national economy.
4tation of foreign banks’ access to the domestic market was the point the Russian part most
strongly maintained at the WTO entry talks.
The more is notable that the successful Russian companies of the new generation even if not are
safe from the threats of foreign invasion but obviously have advantages that remarkably reduce
the risks. The Russian Standard is rather a threat itself to any new player in the market of ex-
press-lending than fears any would-be competitors. Specifically the Home Credit & Finance
affiliate of a big Czech bank did not gauge its strength properly when trying to overtake the
Russian Standard, suffered bad times (the quality of loans worsened drastically due to bloating
of volumes of lending) and had to slow the growth in the years 2005 – 2006. The strength of the
Russian Standard was also shown up when the bank refused an acqvisition attempt by the
French bank BNP Paribas.
All four features of the Russian Standard’s success story more or less revealed themselves in
activities of other fast developing companies. Another example of success reached in the bank-
ing sector though less known than the Russian Standard’s but yet no less impressive is con-
nected with activities of the National Factoring Company (NFC) - the creator of Russian factor-
ing market. In this case the rapid growth and unbelievably ideal exponential function are also
present (fig. 2).
Figure 2
THE NFC TURNOVER GROWTH (million USD)
1800 10000
1600 1600 0,7357x
y = 9,1877e 1600
2
R = 0,9994
1400 762
1000
1200
380
1000 80
100 164,5
800 40
20
600
762
10
400
200 80 380
40
20
164,5
0 1
1999* 2000* 2001* 2002 2003 2004 2005 1999* 2000* 2001* 2002 2003 2004 2005
* Estimate. Source: NFC Annual Reports for years 2000 – 2005.
Identification of urgent demand unsatisfied by the standard credit products lies at the root of the
NFC’s triumph. Factoring enables the companies to obtain loans even if they do not have any
assets to be in pledge for a regular credit. As any empiric in Russia knows this is a painful point
5of many and many of domestic enterprises (especially small and/or fast growing). So the fair
business is once again present in our interpretation of this term.
The intended character of the success is not in doubt as well. The Financial Corporation Ural-
sib, the parent company of NFC, was looking for promising niches to carry out business in vari-
ous new directions simultaneously and immediately developed them into independent compa-
nies as soon as the success began to show. This story occurred for example to the Leasing Com-
pany Uralsib which built up its assets 32 (!) times as much only during the year 2004.
Also NFC does not fear the competitors at all. Vice versa it promised in public to join the big
thirty factoring companies in the world within the next five years. The intention to gain the rep-
utation of the most innovative and technologically advanced factoring company in the world is
also indicative. We need to remember that almost all Russian companies do not have any ambi-
tions connected with expansion abroad to appreciate the company’s ambitions.
The similar processes were observed in other industries which were subject of our study. Specif-
ically in pharmaceutics the gazelles appeared in the sub-market of dietary supplements (DS).
The collapse of the Soviet Health Care System made the quality medical counsel almost un-
available for the considerable part of the Russian population. Under the circumstances the de-
mand inevitably shifted towards self-treatment. Accordingly the demand for DS, medical phyto-
products (herbs), immune response modifiers was pushed up.
A group of DS manufacturers filled the market ensuring the fabulous growth. For example, Eva-
lar increased the volumes of sales 58 times within 1998 – 2006. And the victories in the strug-
gle against foreign competitors specified the overall result of DS manufacturers’ targeting on a
vacant niche. If the position of domestic manufacturers in the medicines sub-market is almost
catastrophic (over 3/4 of the market is covered by import) then the situation in the DS sub-
market is reversed. Domestic companies controlled 70% of the DS market in the year 2006 (ac-
cording to Pharmexpert consulting agency) and their share is growing.
The strategy of the Korkunov company presented the most successful asymmetric response to
the invasion of powerful Swiss transnational corporation Nestle that purchased the best Soviet
plant Rossia. Having created the segment of the premium-class chocolates conforming to the
national taste preferences Andrey Korkunov ensured thirteen-fold sales growth (from $10 mil-
lion USD in 2000 up to $132 million USD in 2006). For comparison: Rossia enjoyed less than
threefold sales growth within the same period.
How typical are those examples? Do similar “success stories” exist in other markets? According
to our data the response to these questions is unexpectedly optimistic: there are “clusters” of
companies rapidly developing and often enjoying exponential rise in the Russian economy.
The examples of fast growing companies detected within the limits of this research are pre-
sented on the figure 3 (all panels are provided in semi-logarithmic scale). The company DCS
detected the unmet demand of companies in good equipping of office spaces more particularly
in modern collectors for numerous wires connecting the office appliances. The import of those
collectors was extremely inefficient due to carriage costs (actually hollow plastic tubes were
transported). The sales volume of DCS had increased 12.5-fold within years 2000 – 2006 and
the import was almost totally driven out of the market in the result of the correct selection of the
niche.
The success of this small company manufacturing products of not a vital importance should
hardly be mentioned if it were not typical for the whole group of companies satisfying the needs
of the normal business conduct. The company SPSR-Express has developed into a national lead-
6er in express-mail services (sixteen fold growth within five years from 2002 till 2006) since it
started to deliver valuable mailing units even to minor settlements (the powerful foreign com-
petitors such as DHL, FedEx and others have never done it). The company Pragmatic-
EXPRESS grew 46-fold within the years 2000 – 2004 since it was the first company in Russia
that carried out catalogue sales of stationeries what is very convenient for offices. And the
growth of the company 1C known to everyone in our country (software for business manage-
ment adjusted to the Russian conditions) was 12-fold in the years 1999 – 2006.
The shoe factory Ralf Ringer may serve as an example of another typical group of fast growing
companies. He targeted his production at “not-rich” but evidently “not-pauper” Russians (lower
middle class and adjacent relatively poorer strata) and ensured for them the optimum price-
quality relationship and fast renewal of the assortment. In the result the company enjoyed 100
fold expansion of the footwear production within the period of 1995 – 2006. And the expansion
occurred against the picture of the dying domestic footwear industry actually crushed by import.
The 11-fold sales growth of the company Gloria Jeans stands high against the dying clothing
industry of Russia. The domestic manufacturers of dumplings, ice-cream, furniture, companies
organizing entertainments for children and many others also compose the group of fast develop-
ing companies targeting on the Russians who have broken forth the poverty.
Finally, the third group of detected gazelles works for both of the above-mentioned groups of
clients: they provide services to the business internal needs and at the same time provides goods
and/or services to the thin layer of the forming middle class. Indeed the success of the providers
of wireless telecommunication services (the 17-fold exponential growth of VimpelCom within
the years 2000 – 2006 is shown on the Figure 3) obviously was based on both private and cor-
porate clients. Retail chains are also “servants of two masters”. As an example of the retail
chains on the figure 3 is shown with the wholesale and retail bookselling company Top-Kniga
with its 23-fold growth within 6 years (just as well it could be replaced in our study with Piatio-
rochka and Euroset or pharmacy chain 36,6). The chains gain benefits on account of buyers and
on account of suppliers for whom they create extremely attractive distribution channels.
7Figure 3
Examples of fast developing companies growth
A) DKS (sales, million of dollars) B) VimpelCom (sales, million of dollars)
100 10000
4928
49,8
35,3
3211
24
2146,7
1335,6
15,5
779,6
9,5 427,9
285,7
10 7
100
0,5001x
4 y = 170,13e
2
y = 2,8157e
0,4189x R = 0,9966
2
R = 0,9962
1 1
2000 2001 2002 2003 2004 2005 2006 2000 2001 2002 2003 2004 2005 2006*
C) Top-Kniga (sales, million of dollars) D. Ralf Ringer (sales, million pairs of shoe)
1000 10000
2150
y = 8,4681e 0,4747x 230-240
1000
R2 = 0,9995
1000 540
1450
220
100 150 714
89 110
330
60
56 100 30
34,2 180 0,4164x
20
y = 16,746e
22,6 2
R = 0,9871
13,6
10
10
1
1
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006*
2000 2001 2002 2003 2004 2005* 2006**
8Let us note that the exponential growth of mobile operators started after the 1998 crisis, which
shook them up and forced them to go over from a “skimming” strategy (sale of overpriced ser-
vices exclusively to wealthy “new Russians”) to work for the mass market at moderate prices.
And retail chains achieved success only after the appearance of chain stores offering goods at
prices affordable not only for rich people. In other words, in both cases we find a direct connec-
tion between the start of exponential growth and the discovery of a major unmet need.
Altogether over 50 Russian companies came in our view that ensured minimum fivefold sales
growth over 6 years but there are many examples of 10, 20 and even 80-fold growth. If we take
into account the selective character of the search then we may assume that the search refers only
to a minor part of the phenomenon. Table 1 gives an overview of the general role of fast grow-
ing firms in our economy.
DISTRIBUTION OF RUSSIAN COMPANIES BY GROWTH RATES
(2000-2005, sales volume in constant prices)
Average annual growth rate Percentage of total number of Share in total sales growth
firms of the whole group, %
Very fast (over 20%) 22,41 65,48
Fast(10%-20%) 20,68 38,41
Middle (2%-10%) 24,47 10,83
Stagnation (below 2%) 5,60 5,35
Negative growth 26,84 -20,07
The whole group of 4337 big 100 100
and middle-sized Russian firms
Source: calculations based on “Expert” Media Holding database. The author is thankful to T.I.
Gurova and Yu.A.Polunin for providing access to the database and assistance in working with
it.
The table shows the existence in contemporary Russia of an unexpectedly large number of firms
that enjoy very high growth rates. Among a highly representative sample of firms (in 2005 the
total sales volume of 4337 firms exceeded 15 trillions rubles that is approximately equivalent
to GDP size) an average annual growth of 20% and higher was shown by 22,41% of compa-
nies, or almost one fourth of the total number.
The author is far from equating all these firms with authentic gazelles. The fast growth of many
of them can be directly or indirectly explained by certain extraordinary factors, starting from
the favorable situation in the world oil market (in fact, such energy giants as "Gasprom" or
«Lukoil», have not shown super-fast growth rates) and down to non-market competitive advan-
tages ( related, for instance, to working inside oligarchic groups).
Nevertheless, the big number of fast-growing firms3 and their even grater role in the combined
growth of all group of companies (65,48% - see table 1) is a fact of huge significance. A firm,
3
The journal “Secret Firmy” (see. №23, 20.06.2005) together with the Expert Institution and the Associa-
tion of Managers interviewed over fifty domestic manufacturers from different industries. They deter-
mined that about 15% of firms were growing at rates minimum 60% within the period 1999-2004, or con-
tinuously increased their growth. We think that these figures are seriously inflated but we consider the
appearance of such estimates to be symptomatic per se.
9that on the average raises its sales by more than 20% a year has a totally different economic
nature than a slow-growing or stagnant firm. (We should stress here that the measurements
were done in constant prices, and the growth couldn't be caused by inflation.) First and fore-
most, such a firm is aimed at achieving the super-fast growth: constant expansion of production
capacities, and permanent recruitment of new employees. Normally a crazy growth is pretty
wasteful in terms of costs, it requires the permanent injections of financial and other means.
In other words, the existence of a big number of fast-growing firms is as much a feature of the
new Russian economy, and also defines its nature, as a big number of companies that can barely
make both ends meet4. Thus, gazelle firms is a part of a big and macro-economically important
class of "fast" companies. And as we hope to show, it is especially important in terms of the
evolution of this country's economy.
Fast growing companies and goal directed movement.
Let us ask a question: what is the fundamental difference between the Russian banking system
of the year 2007 and the same system of the year 1999? The answer is obvious if we skip the
details: the main difference is in the creation of the consumer lending industry. Let us pose the
same question regarding the retail trades. And the answer is in the supremacy of chain stores
(supermarkets, hypermarkets, discounters etc) that gained the foothold in the market. The main
innovation in the communication industry is the transformation of wireless telecommunication
into the mass phenomenon leading the new life to some social stratas and age groups. And the
fast-growing companies familiar to us always happened to be in the center of industrial evolu-
tionary shifts.
Let us try to make a broader generalization. What kind of qualitative improvements have taken
place at the micro level in the Russian economy in the period since the memorable nationwide
default of 1998? In our opinion, positive changes are mostly observed in two sectors with the
highest concentration of fast growing firms. Namely, the infrastructure for doing business has
been upgraded and lines of production have appeared targeting the “sub-middle” or “upper low-
er class” (in effect, the social stratum in which unprivileged agents—the “workhorses”—of
reform are mostly concentrated).
Indeed the free market economy in Russia presented a very strange picture in the 90th. The nor-
mal business-supporting infrastructure which exists all over the globe was absent in Russia.
There was no leasing, no factoring, no means of firm-management automation, no recruiting. In
fact, there were even no normal distribution channels.
And simultaneously there were no goods for the key officers of the lower and middle levels, for
the backbone working in the companies. The people who performed the major part of the skilled
work in companies could not intelligently spend their moderate but not exiguous salaries. They
were offered either pure cheap or good products for prohibitively high price. Actually those
practices destroyed the motivation of skilled labor. The economy of this kind could be com-
pared with an organism without the digestive tract. This is the way how the country swallowed
without digesting the import purchased for the crude oil money and sold to people from a dirty
trailer in a bazaar.
4 This fact is also supported by our own data: it is no coincidence that almost 27% of the firms have not
increased their sales in spite of six years of economic growth in the country
10The contribution of the gazelles into elimination of those intolerable conditions is exclusively
great. The country gained though underdeveloped but mainly already built-up infrastructure of
the business practices and mastered the production of consumer goods for the Russians with a
medium income level.
Why the share of the fast growing companies is so great in the general flow of the qualitative
changes in the economy? From My point of view the consciousness of the gazelles’ choice of
the field of activities plays the key part. The future niche was intentionally selected on the basis
of exploitability and absence of competitors. And there is no wonder that the initiated explosive
growth is not only valuable for the company per se but is affecting the industry structure as well
when the plot is attained for the reason that the urgently called-up novelty was brought to the
market5.
But the matter is not only in the goal-directed behavior of the fast growing companies per se. No
less important is that the appearance of such players in the market caused the surge of intention-
al adaptive modifications from the part of other companies. In particular we detected the follow-
ing mechanisms of expansion of changes within the industries and in related sectors of indus-
tries in the Russian market: (1) Imitation; (2) Competition; (3) Synergy.
(1) The first of the above mechanisms is observed very well. The fast growing companies in
Russia obviously have the tendency to “follow the tail” of a successful path-breaker what results
in the creation of a cluster of rapidly growing enterprises. Rusanna, Konfael, Frouge followed
the path of Korkunov. These new companies have practically become famous from scratch pro-
ducing candies of widely different flavors. But in terms of the business-model all of them pat-
terned after Andrey Korkunov’s strategy: started to produce good quality (and rather expensive)
sweets adapted to the Russian taste. The Consumer finance market once pioneered by the Rus-
sian Standard was immediately filled by imitators (25 banks minimum today). And Gloria
Jeans set the pattern for the whole group of yet small domestic jeans manufacturers. The con-
sciousness of changes is not in doubt in all of those cases. The imitators closely follow the path-
breaker. They make sure that the success is reached (that does not happen always) and then rush
after it.
5
It is easily seen that the assumption of the exclusive role of gazelles in the economic evolution means
just the specification of the standard provision that the “division of business entities by innovators and
conservators is the starting point of the evolutionary theory”. See: V. Maevskiy (2001).
11Figure 4
Sales dynamics of main juice producers (million of rubles)
Source: annual reports of companies.
(2) The competition with business rivals forms the second mechanism of auspicious changes
expansion which is actually equal to compulsion for the introduction of innovations. Indeed the
growth of competitive ability of the change agent means the threat of shaking the rivals out.
They have to pattern after the innovation and/or search for asymmetric responses.
Such compulsion for innovations is actually observed within the described clusters of fast grow-
ing Russian companies. Wimm-Bill-Dann (WBD) for example lost its leadership in the juice
market when it underestimated the importance of improvement of packing and assortment per-
formed by its competitors. It is clearly seen on the figure 4 that WBD was three times ahead of
the closest pursuer in the year 2000, and moved to the third position in the year 2005 and is infe-
rior two times to the new leader. It is easy to understand what titanic efforts the “losers” should
endeavor to return to the path of success. For example WBD copied the concepts of the rivals’
package and the main assortment innovations (mixed, pulpy and vegetable juices).
(3) The synergetic mechanism of improvements expansion is connected with inclusion into the
evolution process of companies located upward, downward and “sideward” from the innovators
in the technology chain. And this mechanism is that the interacting gazelles tend to grow
stronger and steadier than the isolated ones.
The interaction of banks and trade serves as the best example of that tendency. The introduction
of point-of-sale consumer lending into the Russian business practices rebounded to advantage of
shops ant retail chains selling household appliances. In return the endeavors of trading networks
in promotion of household appliances increased the demands for point-of-sale loans. And again
it was the conscious process. The Russian Standard carried out a pilot project with M-Video
12household appliances chain stores to persuade the traders into cooperation and proved that the
volume of retail sales increased over 40% thanks to the point-of-sale lending.
So it appears that the conscious character of the evolutional changes of the Russian economy is
documentary confirmed to the extent that these changes are connected with activities of fast
growing companies6. As the author perceives this conclusion does not fully comply with the
prevailing tendencies in evolutionary economic theory.
Indeed it is usually assumed that the changes in the economy are of random nature. R. Nelson,
one of fathers of modern evolutionary economics justly called the acknowledgment of the prin-
ciple of randomness to be the key feature of any evolutionary theory. Later on G. Hodgson
(Hodgson, 2002) pointed out that “an adequate evolutionary economics must be Darwinian”. It
means that it should proceed from the assumption that a progress may be achieved in the course
of natural selection from random variations and survival of the fittest only.
The existence of Darwinian mechanisms in the evolutionary economics cannot be denied in-
deed. Thousands of decisions are taken on various floors of the hierarchic pyramid of the com-
pany as spontaneous responses to the changes in the inner and outer environment are equivalent
to the avalanche of random mutations. Naturally a part of them is rejected as being hazardous. It
is clear also that if a company does not sort out the “hazardous” changes then sooner or later the
competition sorts out the company itself.
Table 2
Biological analogies of evoulationary process in the economy of Russia
Darwinian biological evolution Intentional economical evolution
Variation Random variation does not ensure au- Directed variation implies adaptation
tomatic adaptation to the environment to the projected environment
Natural selection Realizes the process of adaptation to Realizes the adaptation to the real-
the environment. world environment
Inheritance me- Successful mutations are passed on to Successful routines (Nelson R.R.,
chanism offspring and spread throughout the Winter S.G., 1982) and technological
population structures (Mayevski V.I., 1994) are
expanding over the economy.
However the phenomenon of fast developing companies points to the existence of conscious
evolutionary mechanisms (see the table 2) together with the Darwinian ones. The “founding
fathers” of the gazelles consciously search for a promising niche; evaluate the assets necessary
for the successful capturing thereof; accumulate the assets and then work fully stretched to im-
plement the plot. Thanks to those mechanisms the company makes one jump ahead to a new
business model. We should stress that the Darwinian mechanisms exist under the conscious ver-
sion of the evolutionary economics. Every vision has to pass the test of the real market. The
risks and uncertainty inherent in the market are basically irremovable. Even a genius entrepre-
neur cannot size up the future precisely. In these terms the randomness takes the elemental part
in the intentional version of evolution as it does in biology.
6
The connection of the conscious objective determination and the fast rates of further practical growth is
detected within the pioneer international empiric research Global Entrepreneurship Monitor (GEM, 2005,
p.14).
13But nevertheless the principal difference does exist between the natural selection of advanta-
geous versions from absolutely random mutations and the selection from intended attempts to
lead the company to a promising niche.
In particular the big difference is unavoidable in productiveness: the generation of favorable
modifications is carried out more efficiently in the result of intentional efforts than following a
random process. In the most simple case: if the total number of possible mutations equals V,
and s number of mutations can be considered appropriate, then the probability of successful
s
adaptation under the random process is equal to p random . Under the conscious process of a
V
search for a niche, one can at least expect that an entrepreneur will not consider totally inappro-
priate options (f). Then the probability of successful adaptation should be
s
pint prandom .
Vf
Studying the problem more realistically one should consider another reason of a higher proba-
bility to succeed when consciously looking for a new niche rather than doing it randomly.
Namely, there is a possibility to use other people's (other industry's, other country's, other tech-
nology's, etc) experience. Adapting it to the conditions of one's own firm is considerably easier
and less risky than creating everything anew. And there is every reason to believe that the firms
with a strong growth potential of their own, and as we think gazelles in particular, have a much
better capacity to adopt the best experiences7 (Cohen and Levinthal (1989) have named it ab-
sorbtive capacity). Thus, many companies among those we have studied, have made their own
breakthroughs creatively adapting western technologies of production, organization or market-
ing to Russian conditions.
So accordingly we should expect that the intentional evolution should be much faster than the
Darwinian one. We consider the fact of detection of a remarkable number of fast developing
companies with exponential growth parameters to be noteworthy in this context. In the absence
of resource constraints the living beings also proliferate exponentially. But such exponential
growth is not usually being observed in the actual biocenotic community since there are no va-
cant niches plenty of resources. And the creation of new niches happens so uncommonly in the
result of random mutations that the expectation to detect these short moments in real life is ex-
tremely low.
A deliberate search for new niches, on the contrary, is very productive. That is why at any given
time some entrepreneur discovers a new niche and exponential stages of company growth can
be observed in practice. It is also obvious that particularly large numbers of vacant niches can
be discovered in emerging market economies like the one in Russia. As noted above, there are
still many yawning gaps in our economy waiting to be filled with goods and services that are in
demand but are not on sale in the country. In fact, a deliberate search for unmet needs has the
greatest chance of success in Russia and similar countries.
Approaches to the companies’ exponential growth modeling
7
J. Cantwell (2002) has shown this logic is based on E. Penrose’s (1995) idea that a firm’s inner potential
tends to increase the value of the resources it uses. A strong firm can use resources, including informa-
tion, in a more efficient way than the whole economy in general. There is a big number of empirical data
that proves this rule. The most well-known example is the growth of big firms through diversification
strategy, as described by A.Chandler (1990).
14The fact that the growth dynamics of many of fast developing companies exactly follows the
almost perfect exponential curve offers hope for the success of the respective process modeling.
This is one of cases when the mathematical analysis method does not intrude upon economics
ab extra but directly follows from the actual data. The assumptions provided below do not pre-
tend to be the solution of such an ambitious task but just trace a possible path of movement to-
wards that direction. The biological models of the population dynamics may be reasonably tak-
en as the departure point. In particular the growth of the population size under unlimited re-
sources (the rabbits in Australia) is described with use of the exponential function (the biologi-
cal approaches to the problem are provided following the: Began, Harper, Townsend, 1986):
dN
rN (1),
dt
where:
N means the number of specimen;
t means the time;
r means natural breeding rate.
Taming into account the limitation of resources and the intraspecific competition con-
sequent thereto the exponential equation (1) shall be replaced with the logistic curve (2)
dN K N
rN (2)
dt K
where:
K means the limit number of specimen which existence is possible under available resources.
It is easily observed that as long as NAs I see it, the Lotka-Volterra model is naturally suited for modeling the development of fast
growing firms and directed evolutionary processes associated with their activities because: (1) it
is initially intended to describe the main “peculiarity” of the development of these firms, their
exponential growth; (2) it explains the process of extinction of growth; and (3) it provides a
simple algorithm for taking into account the influence of competitors (other contenders for re-
sources).
We should specifically mention that the use of the Lotka-Volterra model with regard to econom-
ics is not new. This model is most widely used in macroeconomics, in particular in description
of cycles. At that the ability of the model to generate the fluctuations was exploited (with as-
sumption of delays). This approach was employed by R. Goodwin (Goodwin, 1967) and much
later by D. Arrowsmith and Place (Arrowsmith and Place, 1990) for the description of growth
cycles. In microeconomics the Lotka-Volterra model was used for the theoretical description of
the equilibrium of two or more companies splitting the market (also with possible fluctuations).
With that the ability of the Lotka-Volterra model to describe the length of the exponential
growth pathways and as well as the process of moving from those pathways to the plateau was
not of interest. Apparently it is connected with the fact that the phenomenon of the exponential
growth of some companies was either ignored or was understood narrowly8. In order to fill this
gap, we need, first and foremost, a meaningful economic interpretation of this model as applied
to gazelles, and also its modification in order to take account of non-biological realities. Such
are the initial modeling problems to which I will confine myself in this article.
First of all, in my opinion, it is demand that should be treated as “resources” in the microeco-
nomic version of the model. Without denying the significance of material resources, we should
bear in mind that the market economy belongs to the category of demand-constrained economic
systems. The market is structured in such a way that anyone who has the money is usually able
(naturally, with some exceptions) to acquire any material resources. As regards companies, the
source of funds for them is demand for their products.
It is correct to apply the model to an individual company but not to whole “population” of the
companies in the industry. In biology one rabbit may not grow as big that its individual con-
sumption may become comparable with the total volume of the resource. But a company is able
to satisfy the remarkable part of the demand or all the demand with its products.
Thus it is reasonable to interpret the K parameter as the demand volume for products of an indi-
vidual company. Accordingly in this event N should be regarded as its sales volume. A “fast”
company growth retardation (movement from the exponential curve) in this case should be tra-
ditionally explained in terms that the production volume faces the demand limits.
A meaningful interpretation of the parameter r, which determines the company’s growth rate
(the steepness of the exponential curve), is also of great importance. Let us note that this para-
meter does not depend on the volume of demand. Even if demand is many times higher than
supply, the company’s growth cannot be arbitrarily fast. There are bound to be difficulties with
capacity additions, recruitment, etc. So, r in economics reflects the maximum possible rate of
expansion of the company’s production potential.
Let us note that such constraints on growth for successfully developing firms were mentioned a
long time ago by Edith Penrose. She pointed out (Penrose, 1995, p. 45) that many specific assets
8
That usually comes to mind in connection with the companies-pioneers in new technologies.
16(as inside knowledge, experience and authority) cannot be recruited in the market. The Russian dumpling manufacturer U Palycha (premium handmade pelmeni), who probably knows very little about the theory of the firm, reasoned along similar lines when he said that the growth rate of his gazelle was limited by the ability of experienced workers to teach newcomers how to make pelmeni. So, we are now close to an economically intelligible explanation of a fact that researchers find particularly shocking: a PERFECT agreement between actual sales patterns in many fast grow- ing firms and a mathematically exact exponential curve (let us recall that the accuracy of ap- proximation may reach R2 = 0.999). The common sense of an economist refuses to accept the fact that sales volume, i.e., a quantity depending on many factors (autonomous demand fluctua- tions, price movements, competitor activities, advertising, etc.), follows a simple mathematical rule without any deviation. One is tempted to exclaim: this is impossible! Meanwhile the paradox could be easily explained: most of factors that usually affect the sales volume are not limitative in this case. We should remind that the demand is unlimited on the exponential part of growth path (N
Namely M should then replace K in all equations of the Lotka-Volterra model.
On the other side the similar products of competitors may claim for the potential de-
mand for the products of the company that naturally should be deemed as the deduction from
the volume “due to” this company. And this deduction can grow impetuously if we take into
account the above-mentioned imitation mechanism.
In general the equation describing the growth rates of each company is principally
transforming as follows:
dN M N C (K A B ) N C
rN rN (5),
dt M (K A B )
where:
C - means the demand decrease for the company output in the result of competitors’ activities.
The variable A is apparently connected with the “power” of the company and therefore with the
sales volume N. The bigger the company is the more it is capable to improve the product, adver-
tising, sales promotion etc. to facilitate the growth of demand for its output. The variable B ap-
parently shall be different for various participants of the cluster of interrelating companies. It is
logically to expect the formation inside the cluster of the hard core from the companies that ac-
cumulate the maximum of positive synergetic effects and so are expected to produce the longer
continuance of the exponential growth period. At last the variable C should not be necessarily
symmetrical for any participants of the competitive struggle just as it is in the Lotka-Volterra
classic model. Some of them suffer to a bigger extent from the competitors activities.
It is interesting that the equation (5) describes well many practically valuable market situations
despite the simplicity thereof. So when A=B=0 the exponential growth may wither when scarce-
ly started. This often happens when a company finds a perspective niche but turns out to be in-
capable to place its product therein as the unique one. Due to high profitability, the innovator is
followed by many imitators (the magnitude of C rapidly increases) and its market share rapidly
dwindles. The innovator cannot resist this, say, by more intensive advertising (an increase in the
magnitude of A) because its product is perceived as a “twin” of competing goods (a “me-too
product” in marketing theory terms).
The dare should be taken about the brand formation and the product shall psychologically show
up against the clones. That should facilitate the whipping up the demand for this product (А >
0) and the innovator may reap the fruits of its innovation activities.
Even the description of such economic curiosities as network effects may be performed with the
use of the equation (5). It is known that the demand for the internet-services is increasing with
the growth of the number of users since the popularity of this communication mean raises the
benefit a person may get from the network connect. It is enough to assume that the synergetic
effect depends on the size of total output by all competitors i.e. В = f(N1,N2) to describe those
phenomena.
So, in contrast to our schematic formula, the real-world model will inevitably prove to be quite
complicated. But we think that these difficulties can in principle be overcome and that the task
is sufficiently attractive, both intellectually and practically, to justify the efforts involved.
References
Arrowsmith D., Place C. (1990) An Introduction to Dynamical Systems. Cambridge: Cambridge Univer-
sity Press, 1990
18Began M., Harper J. L., Townsend C. R. (1986) Ecology. Individuals, Populations and Communities.
Russian Edition: Moscow: Mir, 1989, vol. 1.
Birch D. L. (1979) The Job Generation Process: a Report, prepared by the Massachusets Institute of tech-
nology Program on Neighbourhood and Regional change for the Economic Development Ad-
ministration. US Department of Commerce. Washington- Cambridge. Mass: MIT, Press, 1979.
Birch D. L. (1987) Job Creation America. How Our Smallest Companies Put the Most People to Work.
N.Y.: Free press 1987.
Birch D., Medoff J. (1994) “Gazelles,’ in: Solomon, L.C., and A.R. Levenson (Eds.), Labor
Markets, Employment Policy, and Job Creation (pp. 159-168). Westview. Boulder, Co, 1994.
Cantwell J.A. (2002) Innovation, Profits and Growth: Penrose and Schumpeter, in: Pitelis Ch. (Ed.) The
Growth of the Firm. The Legacy of Edith Penrose. Oxford: Oxford University Press, 2002
Chandler A.D. Jr.(1990) Scale and Scope: The Dynamics of Industrial Capitalism. Cambridge MA: Har-
vard University Press, 1990
Cohen W.M., Levinthal D.A. (1989) Innovation and Learning: Two Faces of R&D//Economic Jornal,
1989, Vol. 99, pages 195-209
Davis S. J. at al. (1994) Small Business and Job Creation: Dissecting Myth and Reassessing the Facts//
Business Economics 1994, #29(3).
GEM Global Entrepreneurship Monitor (2005) Autio E. 2005 Report on High-Expectation Entrepreneur-
ship.
Goodwin, R.M. (1967) A Growth Cycle. In: Feldstein, C.H. (ed.) Socialism, Capitalism and Economic
Growth, Cambridge, 1967, p. 54-58
Hodgson G. M. (2002) Darwinism in Economics: from Analogy to Ontology // Journal of Evolutionary
Economics, 2002, vol. 12, issue 3, pages 259-281
Kirchhoff B.A. (1994) Entrepreneurship and Dynamic Capitalism. Westport. Conn: Praeger, 1994.
Lichtenstein G., Lyons T. (2006) Managing the Community’s Pipeline of Entrepreneurs and Enterprises:
A New Way of Thinking about Business Assets, Economic Development Quarterly, 2006; 20,
pp. 377-386.
Lotka A. J. (1925) Elements of Physical Biology. Williams and Wilkins, Baltimor, 1925.
Mayevski V.I. (1994) Economic Evolution and Economic Genetics // Voprosy economici, № 5, 1994 г.,
С.58-66. (in Russian)
Mayevski V.I. (2001) Evolutionary Theory and Technologic Progress // Voprosy economici, № 11, 2001
г., С.58-66. (in Russian)
Muske G.,Woods M. (2004) Micro Businesses as an Economic Development Tool: What they Bring and
What they Need,// Journal of the Community Development Society, 2004, 35(1), pp. 97-116.
Nelson R.R. (1995) Recent Evolutionary Theorizing About Economic Change // Journal of Economic
Literature. 1995. Vol. XXXIII. March. P. 63.
Nelson R.R., Winter S.G. (1982) An Evolutionary Theory of Economic Change. Cambridge, MA: Har-
vard University Press.
Penrose, E. (1955) Limits to the growth and size of firms // The American Economic Review, Vol. 45, №
2, May 1955, p. 540.
Penrose, E. (1995) The Theory of the Growth of the Firm. Oxford: Oxford University Press, 3rd edn.
Volterra V. (1926) Variations and Fluctuations of the Number of Individuals in Animal Species Living
Together. (Reprinted in: Chapman R. N. Animal Ecology, McGraw-Hill, N.Y., 1931).
Yudanov A.Yu., ed. (2007) The Exeprience of Competition in Russia. Causes for Success and Failure.
Moscow: KnoRus (in Russian). Aside from the author of this article the following authors con-
tributed to the book: N.N. Doumnaya, G.V. Kolodnyaya, V.V. Rasumov, V.E. Korolkov. Special
thanks to M.M. Dubovikov and V.A. Uspensky who have considerably helped to develop the
concept of the book.
19You can also read
