COMPETITION IN YOUNG, TECHNOLOGY-BASED FIRMS: STRATEGY IDENTIFICATION, CONTEXT, AND PERFORMANCE.
Karen A. Bantel
Deborah R. Ettington
Wayne State University
Detroit, Mich. 48202
Do identifiable and distinct strategies exist for young firms in a variety oftechnology-based industries? If so, do thecontextual variables of environment and stage ofproduct development lend insight into firms'selection of strategy? Finally, what are theperformance implications?
Research on strategy for young firms in technology-based industries, of high interest as such firmsrepresent an increasingly critical component of theU.S. economy, is rather sparse and somewhatcontradictory. McDougall & Robinson's (1990) study,identifying underlying strategic archetypes for newventures, represents an important step forward. Thepresent study was designed as an extension andelaboration of their work. Drawing on their strategymeasures, we narrowed the range of dimensionsconsidered and concentrated on multiple measures ofeach. Our dimensions are: low cost vs.differentiation, aggressiveness/scope, involvement invalue chain, customer relationships, and financing.We further extend beyond the McDougall study byanalyzing the context within which these firms havechosen their strategy (environment and stage ofproduct development), and by analyzing performance.
The sample consists of 998 firms competing intechnology-based industries represented by 35 SICcodes in the states of Michigan and Ohio; addresseswere obtained from Dun & Bradstreet. (D&B). Theseindustries, including semiconductors, magnetic media,measuring and controlling devices, and opticalinstruments, were selected because of the rapidlychanging nature of their base technology. Arelatively broad range of industries was selected inorder to gain a generalizable understanding ofstrategy for young, technology-based firms.
Further, the firms in the sample are between 5 and 12 years old (founded between 1980 and 1988); these firms are considered "adolescent" in that they have survived the initial critical years during which many firms fail, yet they have not yet reached the mature phase in which they resemble all other firms. The McDougall & Robinson study looked at firms 8 years old and younger; many of their youngest firms are potentially highly unstable, possibly decreasing insight into viable strategies.
Method & Analysis:
Questionnaires, validated by pre-test, were sent to the CEO, President, or Chairman of the Board of each firm. A total of 208 surveys were returned and useable; approximately 70 firms are no longer in business (22% response rate). The strategy items were factor analyzed to pinpoint strategic dimensions, followed by cluster analysis to identify groups of firms pursuing similar strategic approaches that, in turn, differ from other groups. Finally, each of the clusters was profiled on environment, stage of development, and performance.
Factor analysis of the strategy items yielded the following five factors: 1) focus on product leadership and product/process innovation, 2) focus on providing a broad range of products to a large number of customers and market segments through a variety of distribution channels, 3) highly vertically integrated, flexible manufacturing, and customer service oriented, 4) develop close relationship with customers through direct sales, in- house marketing, and after-sales service, and 5) focus on financing strategies with high dependence on external financing and many stockholders.
Cluster analysis yielded six clusters of firms as follows: 1) firms with some focus on product/process innovation, with relatively narrow product/customer breadth, and indirect sales, 2) firms highly focused on product/process innovation, with low vertical integration, and indirect sales, 3) firms with high capital from a variety of sources to finance technology leadership strategy, 4) firms highly focused on excellence in manufacturing and sourcing, technology follower, 5) firms highly focused on product, customer, market segments, and distribution channel breadth, and 6) firms focusing on direct sales, in-house marketing, and after-sales service for competitive advantage.
Anovas were used to gain insight into the differences across the clusters with regard to stage of development, environment and performance. With regard to stage of development, cluster 2 differed from the other clusters: the products offered by these firms are in the early introduction stage of the product life cycle. This is consistent with these firms' focus on product and process innovation. Analysis of environmental munificence and turbulence showed significant differences across firms on turbulence: clusters 2 and 4 were significantly lower than the remaining clusters and 2 was significantly lower than 4. Cluster 2 firms perceive relative lack of environmental turbulence as their products (and perhaps industry) are in the early stages of development and competitors have not yet become established. Cluster 4 firms, faced with a relatively stable environment, choose to focus on manufacturing and sourcing excellence to differentiate on quality and cost; they are less concerned about technological leadership as change on this dimension is probably not very rapid. With regard to the performance variables, current profitability was significantly higher for clusters 2, 4, and 6 than for clusters 1, 3, and 5. Also, on profit compared to competition and profit compared to the previous year, cluster 2 was significantly higher than the remaining clusters. We can generally conclude that the strategies pursued by firms in clusters 2, 4, and 6 are the most successful in the adolescent phase of technology based firms.
This study extends and supports the McDougall & Robinson (1990) study by finding consistent patterns in strategic activity among firms across a large number of technology intensive industries and by finding clusters of firms that are most similar to each other in their pursuit of strategy. This study extends beyond the McDougall & Robinson (1990) study by pinpointing differences across the clusters on their environmental and performance characteristics. This provides insight into how environmental characteristics can have an influence on firms, choice of strategy. It also indicates that there are direct performance implications of strategy type for technology based adolescent firms.
|Return to Babson College
Main Home Page
©1996 Babson College. All rights reserved.
Last updated November 19, 1996 by Cheryl Ann Lopez