Relatedness and corporate venturing: Does it really matter?

Abstract

Although many studies have focused on the issue of relatedness in corporate venturing, it is still unclear whether high or low levels of relatedness between a new venture and the parent firm leads to success as measured by venture performance. In this study, we raise the question of whether or not relatedness plays a determinant role in affecting success at the venture level. The study analyzes data on 88 new industrial product corporate ventures from STR4, the corporate start-up database of the PIMS project. Based on a review of the strategic management and corporate entrepreneurship literature, this study generates five hypotheses concerning the relationships among relatedness, the intangible assets of the parent firm, the entry strategy of the new venture, and the venture's market share. Two rival hypotheses on the general impact of relatedness on venture performance are generated. Theoretical and empirical evidence suggest that highly related ventures benefit from existing resources, exploiting corporate know-how, and sharing experience effects. This leads to the first hypothesis which states that high-related ventures achieve higher market shares relative to low-related ventures. On the other hand, the disadvantages generally associated with high levels of relatedness—such as higher coordination costs, political problems associated with resource sharing—appear to negatively affect the profitability (e.g.,R01) or the direct costs of the venture, leading to the rival hypothesis. Results indicate that there are no significant differences in the market shares achieved by high-, medium- and low-related ventures and that, therefore, relatedness does not affect venture performance. The third hypothesis predicts that, given the parent firm has developed high levels of intangible assets, high-related ventures achieve higher market shares than low-related ventures. Prior research has shown that intangible assets have a positive effect on venture performance. High-related ventures make possible higher levels of exploitation of the intangible assets held by the parent firm than low-related ventures, other things being equal. If well managed, these assets can neutralize the negative effects of high-relatedness, thus a positive interaction between relatedness and intangible assets should take place. Results support the hypothesis and show that the highest market shares are achieved by those ventures with high levels of relatedness and high levels of intangible assets. Two rival hypotheses concerning relatedness and its effects on the aggressiveness of entry strategy of the venture (as measured by relative price, relative promotional effort, and relative product quality) are generated. The first hypothesis states that the more related the venture, the more aggressive the entry strategy. High-relatedness implies high levels of resource sharing that should decrease the incremental costs needed to launch the venture. Thus high-related ventures have greater amounts of resources to be used for aggressive entry strategies than low-related ventures. The rival hypothesis states that the less related the venture, the more aggressive the entry strategy. There is empirical evidence that increased resource sharing is associated with increased direct costs. Thus, as compared with low-related ventures, high-related ventures might be handicapped in pursuing aggressive entry strategies. Results indicate that there is no significant relationship between relatedness and the aggressiveness of the entry strategy. Overall, this study suggests that the decision concerning the degree of relatedness does not explain, by itself, venture performance—nor does it explain the entry strategy chosen at the venture level. Only when combined with the intangible assets held by the firm at the corporate level does relatedness appear to determine venture success. Implications for practioners are: top management cannot decide a priori whether or not a new corporate venture should be highly related to the parent firm; high image firms should only venture in highly related businesses. Building image at the corporate level pays if various high-related ventures are present. Suggestions for further research are also offered.