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1042-2587-98-231 $1.50Copyright 1999 byBaylor University

The Determinants of NewVenture Performance:An Extended ModelJames J. ChrismanAlan BauerschmidtCharles W. Hofer

This article argues that new venture formation is a speciai case of strategic managementtheory. Thus, Sandberg & Hofer's (1987) model of new venture performance, which statesthat new venture performance is a function of industry structure, venture strategy, and thefounding entrepreneur, must be extended to Inciude the resources and the organizationalstructure, processes, and systems developed by the venture to implement its strategy andachieve its objectives. The key assumptions underlying this model are presented, and spe-cific propositions concerning how resources and organizational structure, processes, andsystems affect new venture performance are developed.

B,because of the social and economic value of new business enterprises (Birch,1987; Reagan, 1985; Schumpeter, 1934), models leading to an improved understandingof the determinants of new venture performance represent significant contributions to theliterature. Perhaps the most compelling model of new venture performance developed inthe last decade was proposed by Sandberg and Hofer (1987). Their model specified thatthe performance of a new venture was the consequence of a confluence of factors thatencompass attributes of the entrepreneur (E), strategy (S), and industry structure (IS), asshown below.

New Venture Performance = f(E, IS, S) (1)

Using information on new ventures that sought funding from venture capitalists,Sandberg and Hofer found evidence that industry structure and strategy, separately andin combination, influenced new venture performance. Although their data did not sup-port the importance of the entrepreneur, Sandberg and Hofer stated that additionalresearch would be required before the entrepreneur could or should be removed from themodel of new venture performance. Subsequent work by Feeser and Willard (1990),Keeley and Roure (1990), and McDougall (1987), among others, has corroborated Sand-berg and Hofer's findings with respect to strategy and industry structure. Furthermore,Herron's (1990) study on the skills of the entrepreneur provided empirical evidence ofthe paramount importance of the entrepreneur in the new venture performance model.

Despite the importance and appeal of the model proposed by Sandberg and Hofer(1987), it is incomplete. There are other variables that can affect the performance of a newventure that go beyond the skills and behaviors of its founders, the form of its strategies,and the structure of its industry. More specifically, their model does not include theresources upon which a venture's strategy must be based, or the organizational structure,processes, and systems by which the venture's strategy must be implemented. To fill this

Fall 1998

gap, this article discusses the determinants of new venture performance from the per-spective of strategic management theory and describes why the concepts of resources andorganizational structure, processes, and systems are essential elements of any fullyspecified model of new venture performance.

KEY ASSUMPTIONS AND DEFINITIONS

Before proceeding further, it is necessary to define key terms, and the scope of thisarticle, discuss the contextual basis of the extended theoretical model of new ventureperformance proposed, and examine the critical assumptions that led Sandberg and Hoferto exclude resources and organizaitional structure, processes, and systems from theirmodel.

Definitions and ScopeA new venture is the end result of the process of creating and organizing a new

business that develops, produces, and markets products or services to satisfy unmetmarket needs for the purposes of profit and growth (Gartner, 1985; Normann, 1977;Sandberg, 1986). In this article, we define entrepreneurship as the creation of newventures, and entrepreneurs as the creators of new ventures (Gartner, 1988). There isevidence that many ventures are founded by teams of entrepreneurs and that the com-pleteness of these teams has a positive impact on new venture performance (Cooper &Bruno, 1977; Roure & Keeley, 1990; Roure & Madique, 1986). While acknowledgingthe importance of such teams, it is, nevertheless, beyond the scope of this article to dealwith nuances concerning the number of founding entrepreneurs associated with a newventure.

A venture is considered new if it has not yet reached a phase in its developmentwhere it could be considered a mature business. The precise moment in time in whicha new venture becomes a mature business has not yet been determined. However, theidea of business maturation could be equated with a firm that has fully completed thetransition to a Stage II organization in the sense of the model of organizational growthproposed by Scott (1971), or has reached the point of stability proposed in Kazanjian's(1988) four-stage model, or, more generally, has overcome the "liability of newness"discussed by Stinchcombe (1965). The length of time it takes for a new venture to maturewill vary depending on its industry, resources, strategy, etc. It seems reasonable toassume that the earliest this might occur would be three to five years after its creation,and, more usually, not until the venture is eight to twelve years old (Biggadike, 1979;Kazanjian & Drazin, 1990). It is not the purpose of this article to describe the stages ofgrowth through which a new venture may pass. However, because a venture's problemsappear to be contingent upon its stage of growth (Greiner, 1972; Kazanjian, 1988;Kazanjian & Drazin, 1990), we shall explore the manner in which the relative importanceof the determinants of new venture performance change as a venture evolves.

A new venture can take several forms: as a joint venture between two or moreestablished firms; as a corporate venture initiated as a self-contained organizational unitwithin the boundaries of an established company; or as an independent venture initiatedand controlled by one or more individuals acting in their own self-interest (Vesper,1980). Each type of venture possesses some unique characteristics with respect to own-ership, genesis, and purpose (cf. Borys & Jemison, 1989; Burgelman & Sayles, 1986;Gartner, 1985; Katz & Gartner, 1988). In keeping with the intent to extend the modelproposed by Sandberg and Hofer (1987), this article focuses its discussion on the inde-pendent venture. Nevertheless, we assume that the extended model applies to ventures of

6 ENTREPRENEURSHIP THEORY and PRACTICE

any form because, first, venturing is a special case of strategic management theory and,second, the model is derived from the dominant paradigm of that field. At the same time,given that venturing is a special case and there are different types of ventures, we do notmake the same claim of generality with respect to the propositions to be derived in thearticle.

There are many methods by which the performance of a venture might be measured(Dollinger, 1984), and it is beyond the scope of this article to debate the relative meritsof these approaches. Rather, we shall discuss venture performance along two dimen-sions: survival and success. The first, survival, is the opposite of failure. A venture failswhen it ceases to exist as an economic entity. Failure may occur because a venture isunable to satisfy its financial obligations to creditors or because it is unable to meet theobjectives of its owners. Put differently, survival is an absolute measure of ventureperformance that depends on the ability of the venture to continue to operate as aself-sustaining economic entity (Barney, 1986a). Success, by contrast, is a relative mea-sure of venture performance that occurs when the venture creates value for its customersin a sustainable and economically efficient manner (Barney, 1991; Coyne, 1986; Schum-peter, 1934). Although it may take several years for a new venture to earn a profit(Biggadike, 1979; Weiss, 1981), its ability to create lasting, hard-to-imitate value, sug-gests that if it survives those initial years, superior levels of profitability and growthvis-a-vis its competitors should occur. We take this two-dimensional view of new ven-ture performance because a central assumption of the theoretical model presented in thisarticle is that the determinants of a venture's survival are somewhat different from thedeterminants of its success. For example, while strategy is considered a primary cause ofbusiness success (Hofer & Schendel, 1978), it is rarely featured prominently as a causeof business failure (Cochran, 1981; Dickinson, 1981).

Venturing and Strategic Management TheoryThe initiation of a new business venture is predicated upon the decisions of its

founders concerning customers, products or services, resources, technologies, and meth-ods of organization (Cooper, 1979; Gartner, 1985; Katz & Gartner, 1988). In the field ofstrategic management such decisions are called "strategic" because each has a significantimpact on the performance of the business making them. For example, strategic man-agement theory suggests that a business unit's performance is both directly and indirectlyrelated to the environment of the industry in which it competes, the resources it controls,the strategy it uses to align available resources with environmental opportunity, and theorganizational structure, processes, and systems it employs to implement its chosenstrategy (Hofer & Schendel, 1978; Porter, 1980, 1985; White & Hamermesh, 1981).Theorists also agree that top management is responsible for making strategic decisions,and, therefore, is responsible for the performance of a business (Andrews, 1971; Schen-del & Hofer, 1979).

Such decisions are also important to a new venture, although the nature of thedecisions and the problems it confronts are different from those facing an establishedbusiness owing to differences in history, age, size, attitudes toward change, and so on(Cooper, 1979; Stinchcombe, 1965). In fact, as the research models used in the studiesof new venture performance shown in Table 1 suggest, the determinants of performanceof a new venture and an established business are nearly identical.

Based on this evidence, we conclude that the performance of new ventures andestablished businesses depends upon a set of factors that vary more in importance andform than type. As a consequence, any theory of new venture performance should betreated as a special case of strategic management theory (Sandberg, 1986; Schendel &Hofer, 1979) and include consideration of the entrepreneur (E), industry structure (IS),

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Table 1

Research Models Used in Studies of New Venture PerformanceNVP = f(E, IS, BS, R, OS)

study

Research Model

IS BS OS

Bauerschmidt & Chrisman, 1990Boag, 1987Boardman, Bartley, & Ratliff, 1981Bourgeois & Eisenhardt, 1988Brockhaus, 1980bButler & Hansen, 1991Carsrud, Olm, & Thomas, 1989Chaganti, Chaganti, & Mahajan, 1989Chrisman & Leslie, 1989Cooper & Bruno, 1977Copper, Willard, & Woo, 1986Cooper, Woo, & Dunkelberg, 1989Covin & Covin, 1990Covin & Slevin, 1990Covin, Slevin, & Covin, 1990Cragg & King, 1988Cuba, Deeenzo & Anish, 1983Cuba & Milbourn, 1982Davidsson, 1991Dollinger, 1985Dubini, 1989Duchesneau & Gartner, 1990Eisenhardt & Schoonhoven, 1990Feeser & Willard, 1989Feeser & Willard, 1990Ferdows, 1980Fombrun & Wally, 1989Frank, Plaschka, & Roessl, 1989Gales & Blackburn, 1990Ginn & Sexton, 1990Hambrick & Crozier, 1985Herron, 1990Hunsdiek, 1985/86Ibrahim & Goodwin, 1986Jarillo, 1989Kazanjian & Drazin, 1990Keeley & Roure, 1990Larson, 1991MacMillan, Zeman & Subbanarasimha, 1987Mansfield, 1962McDougall, 1987Miller & Toudouse, 1986Montagno, Kuratko, & Scarcella, 1986Orpen, 1985Peterson, Kozmetsky, & Ridgway, 1983Randolph, Sapienza, & Watson, 1991Reynolds, 1987Robinson, Salem, Logan, & Pearce, 1986Romanelli, 1989Roure & Keeley, 1990Roure & Madique, 1986Sandberg & Hofer, 1987Sapienza, 1992

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ENTREPRENEURSHIP THEORY a n d PRACTICE

Table 1

Continued

study

Sapienza & Herron, 1990Sexton & Van Auken, 1985Smallbone, 1990Small, Gannon, Grimm, & Mitchell, 1988Stuart & Abetti, 1987Stuart & Abetti, 1990Van de Ven, Hudson, & Schroeder, 1984Venkataraman, Van de Ven, Buckeye & Hudson, 1990Westhead, 1990TOTALS (62 Studies)

E

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33

Model

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KEY: E = Entrepreneur.IS = Industry structure.BS = Business strategy.

R = Resources.OS = Organization structure, systems, and processes.

business strategy (BS), resources (R), and organizational structure, processes, and sys-tems (OS), as shown in the functional relationship depicted below.

New Venture Performance = f(E, IS, BS, R, OS) (2)

Implicit Assumptions of the Sandberg & Hofer ModelSandberg and Hofer (1987) also considered venturing as a special case of strategic

management theory, yet did not include resources or organizational structure, processes,and systems variables in their model. By excluding variables representing these deter-minants of performance, they made two implicit assumptions that require examination.

1. Resources and organizational structure, processes, and systems have, at best, a mar-ginal direct affect on new venture performance.

2. The venture possesses, or can develop, the resources and organizational structure,processes, and systems necessary to implement its intended strategy.

While not included in their model, Sandberg and Hofer (1987) recognize the im-portance of resources, pointing out that any strategy intended to be non-imitative isindicative of some desired distinctive competence. Nevertheless, an intended strategy isnot always realized (Mintzberg, 1978), and a strategy, whether realized or not, may notalways fulfill organizational objectives. A desired distinctive competence may not ma-terialize, and there is no guarantee that the venture's structure wiU be conducive to theimplementation of its chosen strategy (Chandler, 1962; Hofer & Charan, 1984). Fur-thermore, the lack of other key resources such as distribution channels and image mayoffset advantages of distinctive competence (Sandberg, 1986).

Sandberg and Hofer may have excluded resources and organizational structure,processes, and systems variables from the model because the availability of financial

Fall, 1998 9

resources and professional managers are not of critical concern in venture capital-backedventures, and because the oversight of the venture capitalist investors may compensatefor a lack of formal control systems. Nevertheless, inadequate financial resources, man-agement teams, and control systems are known to be prominent causes of failure amongventures without such backing and support (Hofer & Charan, 1984; Schendel & Hofer,1979).

Likewise, these variables may have been excluded from the model because theentrepreneur exerts such a profound influence on the venture. It is conceptually useful toconsider the venture's resources and organizational structure, processes, and systems asseparate constructs, however, because the entrepreneur, no matter how influential, is notthe organization or its only resource (Gartner, 1985; Katz & Gartner, 1988).

The above discussion suggests that both resources and organizational structure,processes, and systems variables are directly related to new venture performance andmay not be reflected in a venture's strategy. As a consequence, both of the assumptionsthat might support the exclusion of these variables from the model are of questionablevalidity for ventures not backed by venture capitalists. In fact, Sandberg (1986) andSandberg and Hofer (1987) questioned whether the model would apply to other types ofventures.

EXTENDING THE MODEL OF NEW VENTURE PEREORMANCE:THE EIRST STEPS

Having established the necessity of incorporating resources and organizational struc-ture, processes, and systems variables in models of new venture performance, we nowturn our attention to an extended discussion of the elements included in the modelproposed by Sandberg and Hofer (1987). Some of the critical variables affecting newventure performance with respect to the entrepreneur, industry structure, and strategy aredisplayed in Tables 2-4, respectively. Although we shall attempt to extend the theoreticalfoundations of the existing model, this section will also attempt to draw attention to therelationships between the elements of Sandberg and Hofer's model and the two elementsthat were excluded from their model.

The EntrepreneurA long and continuing tradition argues that the entrepreneur is important to the

venture's creation and performance (Baumol, 1968; Carland, Hoy, & Carland, 1988;McClelland, 1961; Schumpeter, 1934). However, in spite of the numerous attempts toestablish empirically the importance of an entrepreneur's personality, the evidence hasbeen inconclusive (e.g., Brockhaus, 1980a).

More recently, however, theorists have suggested that greater progress might bepossible if the focus of research is shifted to the types and quality of the entrepreneur'sbehaviors and decisions (Carsrud & Johnson, 1989; Gartner, 1988; Hofer & Sandberg,1987). This is because the determination of the type of venture that is started, thestrategies used to enter the chosen industry and compete within it, the attempt to identifyand secure necessary resources, and the development of an organization able to effec-tively implement the chosen strategy, emanate from the behaviors and decisions of theentrepreneur(s).

Furthermore, other theorists have suggested that these behaviors and decisions willbe a function of the entrepreneur's skills, experience, and values (Buchele, 1967;Scherer, Adams, & Wiebe, 1989; Susbauer, 1979). Over the last few years, research onthe skills of the entrepreneur (Herron, 1990), the experience of the entrepreneur (Van de


Table 2

Entrepreneurial Variables Affecting New Venture Performance

PERSONALITY CHARACTERISTICSAutonomyConfidenceInitiativeLocus of controlNeed for achievementNeed for affiliationNeed for powerPersonality typeRisk-taking propensitySelf-relianceTolerance for ambiguity

VALUES AND BELIEFSContribution to societyPowerSecurityStatusWealth

SKILLSCommunication skillsFinancial skillsInterpersonal skillsManagerial skillsManufacturing skillsMarketing skillsOrganizational skillsPersonnel skillsTechnical skills

EXPERIENCE AND EDUCATIONAgeEntrepreneurial parentsExperience in founding companiesExperience in high-growth organizationsExperience in large firmExperience in similar positionsFormal educationGeneral management experienceIndustry experiencePre-startup trainingShared experience of foundersStart-up experience

BEHAVIORS & DECISIONSAbility to focus on essentialsDecision-making processFlexibilityGoal directionLength of work dayManagement styleOrganizingPlanningProblem analysisRisk-reducing behavior

Ven, Hudson, & Schroeder, 1984), and the experience of the venture team (Roure &Maidique, 1986) has provided support for these viewpoints (see Table 2). Thus:

El: The survival and success of a new venture will be a function of the behaviors anddecisions of the entrepreneur.

E2: The entrepreneur's personality, skills, experience, and values affect the entre-preneur's behaviors and decisions.

Consistent with the second proposition, researchers have suggested that the entre-preneur's skills and previous experience will influence both its ability to obtain resources(Eisenhardt & Schoonhoven, 1990; Sandberg, 1986), and the decision regarding the industryin which the venture will enter (Cooper & Bruno, 1977; Eeeser & Willard, 1989, 1990).

Fall, 1998 11

E2a: The resources assembled by a new venture are influenced by the skills andexperience of the entrepreneur.

E2b: The industry which the venture enters, and hence industry structure, is influ-enced by the skills and experience of the entrepreneur.

Similarly, the experience and skills, along with the personality and values, of theentrepreneur have been linked with decisions regarding the strategy (Andrews, 1971;Eisenhardt, 1989; Herron, 1990; Vesper, 1980), and organizational structure, processes,and systems of a venture (Bouwen & Steyaert, 1990; Hofer & Charan, 1984).

E2c: The entrepreneur's skills, experience, personality, and values will affect theformulation of the venture's business strategy.

E2d: The entrepreneur's skills, experience, personality, and values will affect theconfiguration of the venture's organizational structure, processes, and systems.

Industry StructureThe first strategic decision confronting the entrepreneur is which opportunity to

pursue, or in other words, the corporate strategy decision of, "What business(es) shouldwe be in?" (Hofer & Schendel, 1978, p. 27). This is arguably the most important strategicdecision because the structure of the industry (e.g., stage of industry evolution, barriersto entry and mobility, nature of rivalry, power of buyers and suppliers, nature of buyerneeds, degree of industry heterogeneity, as shown in Table 3) providing the opportunitywill infiuence both the probability of venture success and the likelihood that a newentrant will survive long enough to be successful (Porter, 1979, 1980). However, asnoted above, this decision is not context-free since the experience and skills of theentrepreneur will, or should, largely determine the industry a venture enters.

Industry structure has both an absolute and a relative affect on new venture perfor-mance. The attractiveness of the industry with respect to business opportunities affectsthe absolute or average profit potential of the industry, and, therefore, the expectedreturns of a venture (Porter, 1979, 1980). First of all, structural barriers and gateways tothe industry have a profound impact on whether a new venture will be able to enter it atall (Kunkel & Hofer, 1991; Porter, 1980; Yip, 1982). Second, the level of resourcesnecessary for survival, the possibility of retaliation by incumbents, and the growth indemand relative to supply will directly infiuence the ability of the venture to remain inbusiness during its formative years when it is most vulnerable to competitive shocks(Hannan & Ereeman, 1984; Kunkel & Hofer, 1991; Stinchcombe, 1965). Third, themunificence of the industry environment will determine the amount of resources avail-able to the venture since capital typically fiows to those industries where opportunitiesare abundant (Carroll & Delacroix, 1982; Eisenhardt & Schoonhoven, 1990; Ulrich &Barney, 1984). And in turn, the resources a venture is able to secure will affect itsprobability of survival.

ISl: Industry structure has both a direct and moderating effect on new venturesurvival.

The structure of the industry that a venture enters also has a moderating effect on itsrelative performance, and, hence, its ability to achieve success. This is so because whilethe structure of the industry may provide opportunities, such as when industry hetero-geneity results in an unfilled market niche, opportunities by themselves are a necessarybut not sufficient condition for venture success. The venture must also possess or be ableto acquire rare, hard-to-duplicate resources (Barney, 1991; Dierickx & Cool, 1989), andmust formulate a strategy to align those resources with opportunity in a manner thatcreates value (Andrews, 1971; Hofer & Schendel, 1978).


Table 3

Industry Structure Variables Affecting NewVenture Performance

STRUCTURAL CHARACTERISTICSDegree of industry concentration/fragmentationElasticity of demandEntry barriers- access to distribution cbannels- brand image- capital requirements- cost advantages independent of scale- economies of scale- experience curves- product differentiation- switching costsExit barriersIndustry profitabilityIndustry value addedIndustry failure rateIndustry sectorKey success factorsOpportunities to create high barriers subsequent to entryProduct heterogeneityStability of demandStage of industry evolutionSize and growth rate of industrySubstitute productsTechnological and regulatory changes

INDUSTRY RIVALRYAggressiveness of competitorsCompetitors' commitment and dependence on industryCompetitor diversityDegree competitors have established positionsDegree of exposure to competitive attackExcess capacityExcess cash, borrowing positionLevel of competitionPresence of small firms with weak positions

NATURE OF BUYERS AND SUPPLIERSConcentrationHeterogeneityImportance to successNumberRelative size

IS2: Industry structure has a moderating effect on new venture success.

Business StrategyWhile corporate strategy broadly specifies the industry where opportunities are

pursued, business strategy specifies the particulars of opportunity in terms of products,customers, and technologies (Abell, 1980) and how resources are deployed (Chrisman,Hofer, & Boulton, 1988). In other words, business strategy deals with the way a firmcompetes in a given industry (Hofer & Schendel, 1978). Table 4 provides a list ofbusiness strategy variables found to be related to new venture performance.

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Table 4

Business Strategy Variables Affecting NewVenture Performance

PLANNING AND STRATEGY FORMULATIONBreadth of planning effortsDepth of planning effortsFormality of strategic planningFrequency of planningFunctional area planningConsideration of multiple alternativesQuality of strategic planningRational and rapid decision making

GOALS AND OBJECTIVESAmbitiousness of goalsTargeted market shareTargeted profitability

STRATEGIC DIRECTIONAbility to maintain initial strategyAggressiveness of strategyClarity and breadth of strategy

ENTRY STRATEGYEntry wedge used- new products or services- parallel competition- franchising- geographic transfer- supply shortage- tapping unutilized resources- customer sponsorship- government sponsorship- supplier sponsorshipOrder of entry- pioneer- early- la te

COMPETmVE WEAPONSCost positionDifferentiation- product attributes- marketing mix attributes- service- technologyInnovationIntegration: forward or backwardPricing strategyStrategic positioning

SEGMENTATIONExtent of differentiation by market segment

SCOPEBreadth of products offeredBreadth of services offeredBreadth of customer groups servedBreadth of customer functions satisfiedBreadth of technologies utilized

INVESTMENT STRATEGYAdministrative functionsEngineeringMarketingManufacturingR&D

POLITICAL STRATEGYAlliances with competitorsAlliances with customersAlliances with governmentAlliances with suppliersAlliances with other stakeholders

The strategy of a new venture, however, is unique, a special case with its ownpeculiar characteristics. Unlike an established business, a new venture has little historyand no "realized" strategy from which to build (Cooper, 1979; Mintzberg, 1978). In itsearly stages, the new venture's intended strategy must be designed to surmount ratherthan build or exploit barriers inhibiting entry into an industry if it is to survive (Bain,1956; Caves & Porter, 1977; Hatten & Hatten, 1987; Porter, 1980). The venture's initial


strategy must specify what resources are needed as well as how those resources shall beobtained. A new venture must pursue opportunity without regard to resources currentlycontrolled (Stevenson & Jarillo, 1990) because the only resources available are those theentrepreneur possesses or can muster from capitalists willing to accept the risk oforganization (Schumpeter, 1934).

This, of course, must be accompanied by a clear strategy for developing and de-ploying the resources the venture controls, or seeks to control, if the venture is to attaina lasting competitive advantage in its targeted market (Coyne, 1986; Hofer, 1975; Sand-berg & Hofer, 1987; Ohmae, 1982). Without such a strategy there is little hope that theventure will be able to achieve the growth and profit potential inherent in its industry(Porter, 1980, 1985). However, while competitive advantage and success may be sought,survival, which depends upon available resources, remains a paramount strategic con-cern.

SI; A venture's strategy has a direct and moderating effect on its survival andsuccess.SI a: A venture's strategy to obtain resources from the environment has a direct

effect on its survival and a moderating effect on its success.Sib; A venture's strategy for the development and deployment of the resources

it controls directly effects its success and survival; the effect of strategy onthe former is greater than the effect on the latter.

S2: In its early stages of evolution, a venture's strategy to obtain resources is just asimportant as its strategy to deploy resources.

Kazanjian's (1988) study of high-technology ventures indicates that as a venturegrows and develops, strategy continues to be critically important. His findings alsosuggest, however, that across stages of growth, the strategic problem is more importantin the first and last stages than it is in a venture's intermediate stages. Whereas strategyin early stages of growth is equally concerned with problems of securing and deployingresources, in later stages of growth the problem shifts to the manner in which thoseresources should be redeployed to maintain the momentum of the venture's early years(Hofer & Charan, 1984). Thus, as the venture approaches maturity and, hence, becomesmore like an established business, the utilization or redeployment of its stock of re-sources becomes relatively more important for sustaining competitive advantage thansecuring flows of new resources (Dierickx & Cool, 1989), although such resource flowscontinue to be vital to replenish critical stocks and replace stocks that are no longer ofsignificant value.

S3; As the venture approaches maturity, its strategy to develop and deploy theresources it controls becomes more critical, and its strategy to obtain additionalresources from the environment becomes less critical, than in its earlier stagesof growth.

FURTHER EXTENSIONS TO THE MODEL OF NEWVENTURE PERFORMANCE

As stated earlier, resources and organizational structure, processes, and systems areintegral parts of strategic management theory (Hofer & Schendel, 1978), and new ven-tures are organizations which represent a special case of that theory. Furthermore, theevidence provided in Table 1 shows that a large proportion of the recent studies in thefield of entrepreneurship includes variables representing one or both of these elements intheir research models. Therefore, solid theoretical and practical grounds exist for con-Fall, 1998 15

eluding that both sets of variables belong in any model of new venture performance. Theremainder of this section explores these previously excluded elements of the extendedmodel of new venture performance.

ResourcesAs shown in Table 5, resources include the tangible and intangible assets an orga-

Table 5

Resource Variables Affecting New Venture Performance

INTANGIBLE ASSETSAccess to capital marketsAccess to distribution channelsAccess to labor marketsAccess to suppliersAccess to raw materialsCompleteness of management teamContractsCultureDatabasesEmployee flexibilityEmployee specializationFunctional skillsfinancial- manufacturing- marketing- technicalGeographic locationIntellectual propertyLicensesOutside consultants- accountants- bankers- government sponsored- professional- university- venture capitalistsReputationSocial networksTrade secretsTrained professional managers

TANGIBLE ASSETSCurrent assets- accounts receivable- cash- inventory- prepaid expenses- suppliesEquipment & MachineryFacilities- plant- officesFinancing- long term debt- short term debt- equityInitial sizeLand


nization controls or seeks to control (Barney, 1986b, 1991; Caves, 1980; Dierickx &Cool, 1989; Hall, 1992; Wernerfelt, 1984). Up to this point, we have not attempted todistinguish between tangible and intangible assets. However, it now becomes necessaryto do so because there are important differences in the manner in which these two typesof resources affect the probalDility of a venture's survival and success.

Tangible assets are, in general, those resources for which there are well-definedmarkets and, therefore, can be priced in concordance with their value. The tangible assetsa company controls are typically included on its balance sheet. By contrast, intangibleassets lack well-defined markets, making them more difficult to price in a mannerreflecting their true value (Barney, 1986b). It is important to note that some tangibleresources, such as labor and land, also possess intangible qualities. For example, land hasvalue that can be priced through market mechanisms. At the same time, because land isfixed in space, its location may have additional value that is more difficult to establishbecause of its dependence upon the use and user. A location giving a venture easy accessto raw materials, suppliers, customers, labor, or support services is more valuable thana location that does not (Cooper, 1979). Therefore, the price of the land may not fullyreflect the value of the location for a venture using it.

The tangible and intangible assets any new venture possesses or can control is aprimary determinant of its strategy (Andrews, 1971; Carroll, 1984), and thus, moderatesthe effect of strategy on performance (Amit, Glosten, & Muller, 1990; Barney, 1991;Freeman, Carroll, & Hannan, 1983; Quinn, 1985). Insufficient or inaccessible resourcesmay severely limit the range of feasible strategic alternatives available and put theindependent venture at a further disadvantage to relatively better endowed and en-trenched competitors. Resource inadequacy, for example, may force a new venture toforgo a strategy predicated on economies of scope (Carroll, 1984), even though such astrategy may be necessary to obtain a competitive advantage in the earlier stages of anindustry's evolution (Brittain & Freeman, 1980; Hannan & Freeman, 1977; Romanelli,1989; Sandberg & Hofer, 1987).

Put differently, the performance of a venture in a given industry depends upon morethan just a good idea. It is one thing to formulate a broad scope, low-cost strategy basedon a new technological process; it is quite another to secure the resources and build thecompetence necessary to implement such a strategy. Even a venture with a carefullydesigned strategy cannot survive if it lacks capital. Likewise, achieving success will bealmost impossible if the venture lacks people with the requisite skills or commitment tomake the strategy a reality.

In general, the survival of a venture will depend upon its ability to secure tangibleresources such as capital, credit, land, facilities, and labor with which to do business; fewventures can survive for long without these resources. The probability of the short-termsurvival of a venture with adequate tangible resources should be high because smallmistakes and initial losses can be absorbed more readily (Hambrick & D'Aveni, 1988;Katz & Gartner, 1988; Schumpeter, 1934; Venkatraman, Van de Ven, Buckeye, &Hudson, 1990; Weiss, 1981). Nevertheless, having even more of these resources does notnecessarily increase the probability of superior performance (Stevenson & Gumpert,1985; Stevenson, Roberts, & Grousback, i989). in fact, while a venture's chances forsurvival appears to be positively related to its initial size, an indirect measure of itstangible assets, the research of Cooper, Woo, and Dunkelberg (1989) suggests that suchresources are not necessarily related to a venture's successful growth. This is becausetangible resources, being relatively plentiful, simple to understand, and easy to trade,imitate, or substitute for, usually do not provide a basis for creating a sustainablecompetitive advantage (Barney, i991). These assets will not typically generate above-normal levels of profits because their prices will more fully refiect their long-term value(Barney, 1986b, 1991).

Fall, 1998 17

RI: The level of a venture's tangible resources will have a positive effect on itsprobability of survival but not necessarily its probability of achieving success.

By contrast, the success of a venture will depend more upon its ability to obtain ordevelop intangible assets such as networks (Dubini & Aldrich, 1991), favorable location(Cooper, 1979), functional skills and know-how, patents, and reputation (Hall, 1992).Intangible assets are more complex, less likely to be imitated, and more difficult tosubstitute for or obtain through internal trade or development; and the reasons for theirvalue are more ambigious. Thus, they are more likely to possess the properties necessaryfor sustained competitive advantage than tangible assets (Barney, 1991; Reed & DeFil-lippi, 1990).

The most important intangible asset a venture can possess is distinctive competence,or what it does uncommonly well (Andrews, 1971). A distinctive competence possessesall the characteristics necessary for obtaining a sustainable competitive advantage thatcan lead to success because, representing a confluence of technical and managerialresources (McKelvey, 1982), it is especially difficult to duplicate (Grant, 1991). Asnoted above, a strategy intended to create competitive advantage depends on the avail-ability of intangible assets with distinctive properties and value; and, in turn, a distinctivecompetence depends on a strategy to obtain and align the assets necessary for its de-velopment.

R2: A venture's level of intangible resources has a positive direct and moderatingeffect on its success.

While strategy continues to matter as a venture matures, the value of its intangibleresources increases in its own right. In fact, when considered in the context of industrystructure, distinctive competence, once developed, has been shown to affect the perfor-mance of a mature business irrespective of its strategy (Chrisman & Boulton, 1987;Sousa & Hambrick, 1989). This is partially because a strategy, whether intended or not,has emerged and become realized (Mintzberg, 1978). While an outmoded strategy mayeventually erode competitive performance, because resource advantages are no longermaximized, the presence of a stock of distinctive intangible resources continues to beimportant to venture success (Dierickx & Cool, 1989).

R3: As a venture approaches maturity, the direct effect of intangible resourcesbecomes more important to its success.

Organizational Structure, Processes, and SystemsAn organization's structure, processes, and systems, the primary means by which it

implements its strategy, involve selecting and building a structure to divide work; co-ordinating and integrating functions; facilitating flows of information; managing theprocesses of recruitment, training, and succession; and, motivating, measuring, andcontrolling behaviors of organizational members (Andrews, 1971; Galbraith & Kazan-jian, 1986). Research has indicated that the organizational structure, processes, andsystems of a new venture are associated with its performance (Bourgeois & Eisenhardt,1988; Covin & Slevin, 1989; Duchesneau & Gartner, 1990; Eisenhardt, 1989; Eisenhardt& Bourgeois, 1988; Miller, 1983; Slevin & Covin, 1990). Table 6 lists organizationalstructure, processes, and systems variables that research and theory suggest are relatedto new venture performance.

A central tenet of strategic management theory is that an organization's performancedepends on the congruence of its strategy and structure, processes, and systems (Chan-dler, 1962). Powell (1992) has even suggested that organizational alignment skills can beviewed as strategic resources, capable of producing above-normal profits. No matter how


Table 6

Organizational Structure, Systems, and Process VariablesAffecting New Venture Performance

ORGANIZATIONAL STRUCTUREBoard of directors' roleCentralization/decentralizationDelegation- administrative decisions- implementation decisions- line function decisions- strategic decisionsFlexibilityFormalityNumber of hierarchical levelsOrganic versus mechanistic structureParticipative management

SYSTEMS AND PROCESSESControl- financial- functional- startup processHuman resources- compensation- hiring, firingManagement informationSpeed of implementation of new processes and systems

OWNERSHIP STRUCTUREDispersion of ownership among employeesShare of equity owned by founders

implementation variahles are viewed, though, the congruence of structure, processes, andsystems with strategy is especially important for a new venture hecause hoth influencethe development of its distinctive competence (Selznick, 1957). As Scott (1971) notes,however, in its early stages of development a new venture is usually a "one-man" showwith little or no formal structure, functional differentiation, or clear pattern of product-service transactions. Furthermore, a new venture rarely has objective or systematicmethods to measure individual or sub-unit performance and bestow rewards; and itscontrol systems will be rudimentary, at best. The absence of fixed structure and func-tional specialization may be unavoidable since decision-making power is largely vestedin the hands of the entrepreneur(s). Nevertheless, it also appears that the structuralflexibility inherent in a new venture may be necessary for fostering the development ofdistinctive competence, because it may not be entirely clear at the time of creation whatsort of structure, processes, and systems will be needed to support its strategy as itmatures (McKinney & McKinney, 1989). Put differently, the lack of structural formalityof a venture in its early stages of growth may facilitate its ability to develop structure,processes, and systems that are in accord with the strategy that is eventually realized(Mintzberg, 1978).

Thus, a venture's initial structure gives rise to an emergent culture that may eitherpromote or constrain future growth (Bouwen & Steyaert, 1990; Kilman, Saxton, Serpa,& Associates, 1985). Barney (1986a) has suggested that one of the few periods in whichit might be possible for an organization to develop a culture providing sustainable

Fall, 1998 19

competitive advantage is in its early stages of growth. This is because the characteristicflexibility of a venture may foster a culture that is both imperfectly imitable and uniquelysuited to the strategic deployment of resources that are necessary to achieve success.

On the other hand, the structural attributes that increase the probability of a venture'ssuccess may decrease its probability of survival. The entrepreneurial processes of a newventure are at odds with the processes necessary to ensure fixed structural responses(Dosi, 1988; Kanter, 1988). In the words of population ecologists (Hannan & Freeman,1984), the structure of the new venture is not reproducible because it does not includehighly standardized organizational routines, nor has it been institutionalized. While thecost of standard routines and a formal structure is organizational rigidity, the benefits arereliability and accountability, both of which favor a venture's survival prospects in aturbulent environment (Hannan & Freeman, 1977, 1984; Selznick, 1957; Stinchcombe,1965). As Katz and Gartner (1988, p. 436) note, a new venture is unique in that both itsability to adapt and its vulnerability to environmental selection pressures are high.

OSl: In a venture's early stages of growth, flexibility of organizational structure,processes, and systems has a negative effect on its probability of survival, buta positive effect on its probability of success.

Despite its importance in the early stages of a venture's growth, this lack of formalorganization must be overcome at some point if the venture is to develop into a sub-stantial, mature enterprise (Hambrick & Crozier, 1985). Research has suggested that asit approaches maturity, a venture's performance is positively related to decreased cen-tralization and increased formalization and functional specialization (Kazanjian &Drazin, 1990). In other words, the initial flexibility of a new venture's structure, pro-cesses, and systems should promote the discovery of a pattern of organizational align-ment that best suits its particular strategic needs. However, once that pattern is found itis essential that any advantage it endows becomes institutionalized through standardroutines and reporting relationships.

0S2: As a venture approaches maturity, formality of structure, processes, and sys-tems increases the probability of survival and success.

Thus, the venture's needs with respect to its structure, processes, and systems varydepending on its stage of growth. However, an organization cannot be transformedovernight, or simply by fiat; it must go through a process of transition that carries withit unique pitfalls as well as potential benefits.

Various authors have noted the crises of transition that characterize the developmentof a venture as it attempts to realign its organizational structure, processes, and systemsto meet a new set of needs and challenges (Greiner, 1972; Hofer & Charan, 1984; Scott,1971). A revised structure cannot ensure a venture's success, though; that depends uponhow well its strategy and distinctive competence are aligned with its environment. On theother hand, Hofer and Charan (1984) suggest that after start-up problems have beensolved, problems in the transition from one stage of growth to another are the most likelycauses of venture failure. With a structure ill-suited for its strategy, the venture may getcaught in the middle, unwilling to revert to its old strategy or rate of growth, yet unableto make the transition to a new structural arrangement.

0S3: A venture's organizational structure, processes, and systems are most impor-tant to its survival during periods in which it must make the transition fromone stage of growth to another.

CONCLUSIONS

In this article we have argued that the formation of new ventures is a special case of


strategic management theory, and, as a consequence, any model of new venture perfor-mance should recognize the critical nature of resources and organizational structure,processes, and systems. Such extension is consistent with the theoretical and empiricalliterature, and should apply to all types of new ventures, whether initiated by individualsacting independently in their own self-interest or by one or more established corpora-tions. The extension of theory presented in this article suggested an intimate relationshipbetween the five factors that determine the performance of new ventures. First, it isimportant to note that new venture performance will be primarily a function of thecritical decisions and behaviors of entrepreneurs in recognizing environmental opportu-nity, assembling resources needed to pursue opportunity, developing a strategy to alignresources to exploit opportunity, and designing an organization capable of putting thestrategy into action. Second, the development of independent ventures begins with adecision about the nature of the business, a decision that involves a choice amongindustries. Regardless of the type of venture, the structure of the entered industry iscritical to survival and success. Third, once the initial corporate strategy decision ismade, the performance of any venture will largely depend upon the business-levelstrategy selected by the entrepreneur. Finally, in spite of its importance, a strategy is onlyas good as the resources it deploys and the structure, processes, and systems the ventureuses to implement it. If the venture is resource-poor or structurally weak, its probabilityof forestalling failure is low; if it lacks the resources and organizational structure,processes, and systems needed to develop competitive advantage, its probability ofsuccessfully exploiting economic opportunity is nil.

DIRECTIONS FOR FUTURE RESEARCH

This article provides initial guidelines for future studies of new venture performance.Variables for operationalizing the five elements of the model are provided in Tables 2-6and the propositions presented above suggest the nature of their relationships with newventure survival and success.

Future studies should proceed in the following directions. First, confirmatory re-search to test the basic propositions proposed in this article is needed. Such studiesshould also attempt to establish the importance of the numerous individual variablesrepresenting each element of the model. Second, exploratory research is needed todevelop more fully strategic management theory as it applies to new ventures. Althoughthis study provides a skeletal theory and model of the determinants of new ventureperformance, the questions this extended model may answer are dwarfed by the ques-tions it leaves unanswered. For example, how do the various variables that represent thedeterminants of new venture performance interact? What sorts of strategies work bestwith certain types of distinctive competences? At what point in time in a venture'sdevelopment, and by what processes, does a distinctive competence emerge? And so on.

Third, comparative studies of independent and corporate-owned ventures could leadto a better understanding of their differences with respect to the nature of the relation-ships between performance and the variables represented by the five elements of themodel. Such studies would permit greater cross-fertilization of research results andaccelerate the accumulation of knowledge in the field. Based on what has been found todate with respect to corporate-owned ventures (e.g., Burgelman, 1983a, 1983b, 1984),we expect that differences in resources and organization, structure, processes, and sys-tems (Kanter, 1989; McKinney & McKinney, 1989; Sykes, 1986) may explain whyindependent ventures appear to have higher failure rates, yet when surviving, tend tooutperform corporate-owned ventures (Weiss, 1981).

Whatever research directions are taken, it is hoped that the extended model of new

Fall, 1998 21

venture performance outlined in this article will encourage researchers to more fullyconsider the nature of both the sample studied and the various contingencies that mightinfluence results. Future studies should, therefore, ensure that representative samplesfrom identifiable populations of ventures are selected, and carefully reflect on and reportthe manner in which each of the five elements of the model are controlled for or allowedto vary.

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James J. Chrisman is Associate Dean (Research), Director of the Ph.D. and MBA Thesis Programs, andProfessor of Venture Development at the University of Calgary.

Alan Bauerschmidt is Professor of Management at the University of South Carolina.

Charles Hofer is Regents Professor of Strategy and Entrepreneurship at the University of Georgia.

The authors are indebted to D. Ray Bagby, Garry Bruton, Gary Castrogiovanni, Frank Hoy, J. KayKeels, Craig Russell, William R. Sandberg, and K. Mark Weaver for their comments on earlier drafts of thismanuscript.

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