Modeling new venture performance: An analysis of new venture strategy, industry structure, and venture origin

Abstract

This study examined the relative role of strategy, industry structure, and origin (independent vs. corporate or parental venture) on the profitability and growth of 247 new ventures in two segments of the information processing industry: computer-related and communications-related equipment manufacturing. Each of the 247 ventures was eight years old or less. Most previous research examining the role of these three factors in new venture performance has examined them singularly or in limited combinations with very few firms in their sample. The theoretical agenda in this study was to advance this research stream by simultaneously examining origin, strategy, and industry structure as well as the interaction between strategy and industry structure using a large sample of new ventures. The applications agenda in the study was to uncover patterns in the interactive role of strategy, structure, and origin that might provide meaningful insights to aid strategic decisions in new ventures. From the theoretical perspective, the study found that variability in new venture performance was better “accounted for” when all three factors were included in a statistical model. Overall, these results suggested that new venture strategy and industry structure and their interaction are essential for understanding new venture performance while origin is secondary (more important in explaining market share growth than higher profitability). Several study findings may be of interest to the practicing new venture strategist. The study uncovered eight basic strategy patterns across the 247 firms. A detailed description of these eight distinct patterns is provided in Appendix A of this article. Overall performance results suggest that no one strategy is always the best new venture strategy. But when we examined the fit of different strategies with different industry structures, we were able to distinguish high from low performing new ventures dramatically. In other words, specific new venture strategies were very effective in some industry settings and ineffective in others. For example, new venture entrepreneurs were able to successfully enter and compete in high barrier industries by employing strategies emphasizing superior product quality and higher customer service. Alternatively, when entry barriers were low, strong marketing skills offered the best advantage. The key to the success of these marketing-oriented ventures was the establishment of a distribution system in which products were pulled through by their strong brand identification and name recognition. These venture managers supported brand identification and name recognition with a high level of advertising and promotion experience and gave constant attention to adding new channels of distribution. Although earlier studies suggested that parented new ventures are more effective in achieving profitability, origin was not a significant explainer of profitability for the new ventures in this study. Much has been written recently that argues for creating an entrepreneurial climate in a corporation. Many corporations have wholeheartedly embraced efforts to foster an independent spirit among parented ventures, so much so that many corporations have attempted to replicate an independent climate in their corporate-sponsored start-ups. Rather than an origin difference between new ventures, perhaps it is the difference in the climate or spirit of the venture, or more specifically the manner in which the corporation manages the start-up, that accounts for profitability differences.