STRATEGIES FOR NEW VENTURE GROWTH AND HARVEST:
A FIVE-YEAR FOLLOW-UP OF 176 YOUNG GROWING FIRMS IN DENMARK, IRELAND AND SCOTLAND
The initial strategies of a cohort of young growing independent manufacturing firms in Denmark, Ireland and Scotland were used to predict subsequent growth or failure over a six year period, using hypotheses drawn from the literature. Firms which pursued narrow market entry strategies in growth industries appeared more likely to achieve sustained growth than other firms. Firms which pursued broad market entry strategies in mature industries appeared more likely to fail and less likely to achieve sustained growth or harvest through a trade sale than other firms. However, some significant cross-national differences were found in the data. Implications for entrepreneurs, resource providers and entrepreneurship academics are discussed.
Large-scale empirical research by Birch (1987) and Kirchhoff (1994) in the U.S. and Gallagher and Miller (1991) in the U.K. suggest that the majority of jobs generated by businesses in these nations in the periods studied came from a minority of firms which grew fast by doing business in a new way. In manufacturing, these fast growing 'entrepreneurial' firms tend to be young. Young growing firms tend also to be the creators of new industries (Rothwell, 1983), thus replacing declining industries. They may also renew large, established firms, providing external challenge as they become major new competitors through sustained growth, or creating internal challenge through the absorption process following acquisition (or harvest, from the entrepreneur's perspective).
Given the demonstrated economic importance of young growing firms, the question arises: are some new venture strategies more successful than others for sustained growth and/or venture harvest? This question is significant not just for overall economic growth, but for entrepreneurs, for acquiring firms, for resource providers such as banks, government nurturing agencies and venture capitalists, and for entrepreneurship academics. For example, resource suppliers might withhold resources from entrepreneurs who pursued strategy types which research suggested were less likely to succeed. Careful validation and replication across different industry and national settings is therefore needed in research which seeks to answer this question.
The updating of a census of all independent manufacturing ventures in Denmark, Ireland and Scotland which had started between 1973 and 1987 and employed 50 or more people by 1987 provided an opportunity to predict the performance of these 176 'young growing firms' over the 6 years from 1987 to 1992 using hypotheses drawn from the new venture strategy literature. This paper reports some initial findings from this research.
REVIEW OF THE LITERATURE AND HYPOTHESES
Arguably, two main schools of theory have contributed to our understanding of the relationship between new venture strategies and performance: industrial organisation theory, interpreted for corporate strategy by Porter (1980) and others, and population ecology theory, interpreted for corporate strategy by Carroll (1984), Lambkin and Day (1989) and others. This section reviews empirical results of research on new venture strategies which has drawn on the work of these two very different schools. A theme of the research to date has been a recognition of two principal strategic dimensions: breadth of market entry (usually split into narrow or broad), and degree of industry maturity (with emergent, growth and maturity phases of industry evolution usually being recognized). Successful strategies for growth are reviewed first, then strategies which have different failure rates and finally strategies for harvest (defined here as a trade sale).
Strategies for growth
McDougall et al. (1994) in a study of 173 independent new (8 years old or less) computing and telecommunications ventures in the U.S. found that high growth industry environments provided "a favourable environment for new ventures to achieve sales growth" (p.357) and that "the highest sales growth rates were exhibited by new ventures pursuing broad-breadth strategies in high growth industries" (p.357). Broad-breadth strategies were strategies which aimed to serve a broadly-defined market in terms of number, sizes, and types of customers, as well as a broad product line and many channels of distribution.
McDougall et al. expressed their hypotheses and results in terms of average sales growth rates (over an unspecified period) for four different strategy/industry growth combinations among their sample of (surviving) firms. The data available for this paper also enables classification of survivors by growth rate, but in addition to this, classification of the complete 1987 population of young growing firms by harvest, independent survival, or failure over a 6 year period. Therefore hypotheses can be expressed in terms of different expected proportions of sustained (high) growth firms versus all other firms in the 1987 population. Problems in obtaining sales data for many firms in this population of firms necessitated substitution with employment data. However, McDougall et al. found a highly significant correlation of 0.9 between sales and employment in their sample. This was a far higher correlation than between any of the other combinations of 20 variables tested, and suggests that the substitution can be made without much loss of construct validity. Overall, McDougall et al.'s findings suggest the following two hypotheses for this research:
Hypothesis 1. The proportion of young growing firms which entered industries in the growth phase of their evolution (growth industries) and had sustained growth will be higher than the proportion of young growing firms which entered industries in the mature phase of their evolution (mature industries) and had sustained growth.
Hypothesis 2. The proportion of young growing firms which entered growth industries with broad-breadth market strategies and had sustained growth will be higher than the proportion of young growing firms which had sustained growth with other strategy/industry phase combinations.
McDougall et al. (1994) also found that the average sales growth of new firms in their sample which pursued broad breadth strategies in low growth industries was significantly lower than the average sales growth of all other ventures in their study. This provides a third hypothesis:
Hypothesis 3. The proportion of young growing firms which entered mature industries with broad-breadth strategies and had sustained growth will be lower than the proportion of young growing firms which had sustained growth with other strategy/industry phase combinations.
Sandberg (1986) found that in a sample of 17 new ventures from different industries, a higher proportion of ventures entering the "later stages" of the evolution of an industry were commercial failures (2 out of 6, or 33%) than those entering the "development or growth stages" (1 out of 11, or 9%). Similarly, Romanelli (1987) in a study of 108 entrants to the minicomputer industry between 1957 and 1981 found that "later entrants" had a higher failure rate (25 out of 33, i.e. 76%) than "pioneers" or "early followers" (19 out of 70, i.e. 27%). These results suggest hypothesis 4:
Hypothesis 4. The proportion of young growing firms which fail will be higher for firms entering mature industries than those entering emergent and growth industries.
Sandberg (1986) also found that 1 out of the 3 (33%) ventures in his sample of 17 ventures which pursued a "broadly-defined" strategy and entered "later stages" of the evolution of an industry failed, compared with 2 out of 14 (14%) of other ventures (p.122). Similarly, Romanelli in her minicomputer study found that "later entrants" with a "generalist" strategy (more or less equivalent to McDougall et al.'s "broad-breadth" strategy and Sandberg's "broadly-defined" strategy) had by far the highest failure rate (6 years after start-up) across the 6 combinations of specialist/generalist and pioneers, early followers and later entrants, at 80% compared to 35% for the 5 other entry combinations together. This prompts hypothesis 5:
Hypothesis 5. The proportion of young growing firms which enter mature industries with broad-breadth strategies and fail will be higher than the proportion of young growing firms which had other strategy/industry phase combinations and failed.
The link between acquisition and corporate performance is a source of controversy in the main-stream strategic management literature (Pablo, 1994), yet there has been surprisingly little reported research on trade sales of entrepreneurial companies by entrepreneurship academics (Petty et al., 1992, Bygrave et al., 1994). Relander et al. (1994) asked 27 venture capitalists in 24 European venture capital firms about their approach to exiting technology-based venture capital investments through trade sales, and found that profitability was a more important criterion than technology acquisition to potential buyers in the opinion of the venture capitalists. This study does not report on profit levels; however, one might expect past research on new venture strategies and performance to provide a guide. Unfortunately, the literature which considers the relative profitability of new firms pursuing different strategy/industry phase combinations is very conflicting. Sandberg (1986) found that broadly-based strategies in early stage industries were most successful in terms of return on equity. Stuart and Abetti (1987), however, found that the more profitable firms in their sample of new technology-based ventures were in low growth markets, and Kunkel's (1991) study of IPO ventures found moderate evidence to support this also. McDougall et al. (1994) found no significant relationships between return on sales and strategy/industry growth combinations. In view of these conflicting results, no hypothesis is put forward concerning variation in proportions of harvested firms across different strategy/industry phase combinations.
Testing of the hypotheses required valid construct measures of the constructs 'market breadth' and 'phase of industrial evolution'. Though construct measures exist in the literature, none of them proved fully usable for this study, in part because of the nature of the firm population, and in part because the construct measures, designed for U.S. conditions, were rendered unreliable by nation-specific factors. Getting assessments on these construct measures from the firms themselves was not feasible, partly because of the likelihood of an unacceptably low response rate (for example, McDougall et al  obtained an 11% response rate) and partly because a significant proportion of the firms had disappeared at the time of this study. Sandberg (1986) measured growth industries as industries with 15%+ average compound growth rates over 5 years to the year of entry. For the nations in this study, only 7 firms met this criterion at the 3 digit ISIC code level. Four of these were in Ireland, where industrial production statistics for some industries were highly skewed by the transfer pricing of new multinational branch plants which accounted for most production in these industries. Industrial production statistics at higher digit levels were hampered by the small size of some industries, and the consequent withholding of commercially sensitive information. In addition, national industrial growth was not a good measure for many of the firms in the population, because of the small home markets of the nations sampled and the need for some firms to export very early on. A lower industry growth rate of 10% (twice the maximum average annual rise in GNP for any 5 year period from 1969 to 1987 in the three nations sampled) classified 11 Danish firms, 7 Irish firms and one Scottish firm as having entered growth industries. This measure still seemed poor, as it excluded entry by many firms to small fast-growing sectors of mature 3 digit ISIC industries, unlike McDougall et al.'s self-report industry growth scale (p.554).
It was concluded that the firms would have to be classified by the researcher using the available information on product type and range and markets served contained in a data bank of information on each firm built up since 1989 when the database was begun, and the McDougall self-report scale as a guide. In an attempt to assess reliability, the firms were classified twice, six months apart. The second classification differed from the first for only 2 out of the 176 firms, which suggests that intra-rater reliability was satisfactory. Inter-rater reliability was not tested. Both classifications were conducted before assessing the performance of the firms over the 5 year period after 1987. The raw performance data was collected between the two classifications, from the cross-referencing of commercial directories, media files and a government agency database.
McCann (1991) measured growth as a 5-year average annual compound rate, classified into low (less than 10%), average (10 to 50%) and high (50% or higher). This study had data for a 6 year period (1987 to 1992) and so a 6 year average annual compound employment growth measure was chosen. The highest 6 year annual average growth rate of any firm in this sample was 32%. Therefore McCann's high and average classes were combined and any firm with a 10% or more growth rate was classified a 'sustained growth' firm. This measure could be biased in favour of younger and smaller firms, since higher growth rates can be achieved more easily from a smaller base. Therefore a second absolute growth measure of all firms employing more than 200 people by 1992 was used to check against possible lack of validity of the growth rate measure.
Given the censored nature of the starting population (only firms aged 15 or less and surviving independently and employing 50 or more by 1987), the assumptions of parametric tests are probably violated. The chi-square test for equality of proportions was used, where cell numbers permitted, to test the hypotheses. The results need to be interpreted cautiously, because the inter-rater reliability of the construct measures for the independent variables (market entry strategy and stage of industrial evolution) has not been checked.
Table 1 shows the numbers of Danish, Irish and Scottish young growing firms (i.e. the 1987 population) with each market breadth/industry phase strategy which had, by the end of 1992, 1) achieved sustained growth, 2) been sold (trade sale), 3) survived relatively unchanged, 4) 'sank' below 50 employees, 5) failed (liquidation, receivership, bankruptcy, or closure) and 6) no known status. The table also shows the numbers of firms which grew to employ 200 or more by 1992.
The results are described below by hypothesis number. Additional observations follow.
20% of all firms entering growth industries had sustained growth compared with 10% of all firms entering mature industries, using the growth rate measure. A chi-square test suggested that this difference in proportions was not statistically significant (chi-square=2.36974, d.f.=1). using the absolute growth measure, the proportions are 11% and 3%. However, for Danish firms alone, proportions for the growth rate measure changed to 17% and 3%, which were significantly different (chi-square=4.74146, d.f.= 1,p<0.05). For the absolute measure, the proportions for Denmark were 12% and 1%. For Ireland, the proportions were 31% and 29% for the growth rate measure and 17% and 4 % for the absolute growth measure. For Scotland, the proportions were 17% and 12% for the growth rate measure and 17% and 4% for the absolute growth measure. Thus the results for Ireland and Scotland are not as clear-cut as those for Denmark. This suggests that hypothesis 1 may be nation-contingent. It should also be noted that, using the growth rate measure, similar absolute numbers of sustained growth firms appeared from mature industries (11) and growth industries (12), and these two groups of firms had similar average growth rates (17.6% p.a. and 15.7% p.a.). Using the absolute growth measure, 6 of the sustained growth firms entered growth industries, and 3 entered mature industries, but the average firm size in each group in 1992 was the same (346 and 344).
Contrary to hypothesis 2, the broad market entry/growth industry combination did not produce a higher proportion of sustained growth firms than other combinations. In fact only 10% of firms in this combination achieved sustained growth (the proportions for the other growth or mature industry combinations were 26%, 13% and 8%). For each of the 3 nations, the equivalent proportion was also not the highest. Therefore hypothesis 2 would appear to be rejected for this sample.
Interestingly, the proportion of all firms with a narrow market entry/growth industry combination and achieving sustained growth was significantly higher than for all other growth or mature industry combinations together (26% compared with 10% for all other combinations; chi-square=4.45566, d.f.= 1,p<0.05). This result held for Denmark also (23% compared with 4%; chi-square=6.34425, d.f.= 1,p<0.025). For Ireland, the proportions were 33% and 40% (note reverse direction), and for Scotland the proportions were 25% and 13%. Using the absolute growth measure, the proportions were 14% and 3% for all firms, 9% and 2% for Denmark, 22% and 4% for Ireland and 25% and 4% for Scotland. Except for the growth rate measure for Ireland, a narrow market entry/growth industry combination seemed to produce a higher proportion of sustained growth firms than other combinations taken together.
The narrow market entry/growth industry combination produced 9 sustained growth firms while other combinations produced 14 sustained growth firms on the growth rate measure. Equivalent numbers on the absolute growth measure were 5 and 4. The average growth rate for sustained growth firms in the two groups generated by the growth rate measure was 13.1% p.a. and 15.6% p.a., and average size for the two groups generated by the absolute growth measure was 307 and 393.
The proportion of all young growing firms which achieved sustained growth in the broad breadth/mature industry combination was 8%, compared with 17% for all other combinations together. This is in the direction predicted by the hypothesis, but the difference in proportions is not significant (chi-square=2.10152, d.f.=1). By nation, the proportions were 0% and 11% for Denmark, 24% and 29% for Ireland, and 11% and 15% for Scotland. There was no difference between sustained growth firms with broad-breadth/mature industry combinations and other combinations in terms of average growth rate (16.4% versus 16.7%). By the absolute measure, the broad breadth/mature industry combination produced the lowest proportion of sustained growth firms of any growth or mature industry combination (1% compared with 8% for the other combinations together). This result is in line with hypothesis 3. Finally, the only sustained growth firm which had a broad breadth/mature industry combination under the absolute growth measure was also the smallest sustained growth firm by this measure.
12% of all firms which entered mature industries failed compared with 7% of all firms which entered growth industries. The proportions for Denmark were 7% and 5%, for Ireland 29% and 15%, and for Scotland 8% and 0%. It is likely that many of the 12 Danish firms whose status in 1992 remains unknown closed down (as they appeared on no recent records). All the 'unknown' firms entered mature industries. If these firms are excluded from the calculation of proportions, the proportions reported above change to 13% and 7% for all 3 nations combined and 9% and 5% for Denmark. If the unknown firms are included with the failures the proportions change to 22% and 7% for all 3 nations and 25% and 7% for Denmark. There were insufficient numbers of failed firms in some strategy combinations to conduct chi-square analyses.
The proportion of all young growing firms entering mature industries with broad breadth market entry strategies and failing between 1988 and 1992 was 16% compared with 6% for all other firms. This difference in proportions is statistically significant (chi-square= 4.07439, d.f.= 1,p<0.05). Excluding 'unknown' firms from the analysis changed the proportions to 19% and 6% (chi-square=5.5738, d.f.= 1,p<0.025). Including unknowns with failures changed the proportions to 29% and 9% (chi-square=10.86991, d.f.= 1,p<0.005). The true figure lies somewhere between these three, all of which support hypothesis 5. There were no substantive differences between the three nations.
Observations on other firm categories
The proportion of young growing firms with a broad breadth entry strategy which were acquired between 1988 and 1992 was significantly lower than the equivalent proportion of firms with a narrow breadth strategy (13% versus 27%; chi-square=4.4260, d.f.= 1,p<0.05). This difference in proportions was significant for the Danish young growing firm population also (13% versus 32%; chi-square=4.22237, d.f.= 1,p<0.05). The proportion of young growing firms with a broad breadth marketentry/mature industry combination and which were acquired between 1988 and 1992 was lower than for firms with other combinations (11% versus25%; chi-square= 4.47839, d.f= 1,p<0.05). However, the difference in proportions in Denmark (29% versus 26%) was substantially and statistically insignificant. These characteristics are somewhat similar to the strategy/outcome profile for sustained growth firms. Indeed, around one third of sold firms achieved 10% or more compound growth over the period 1987 to 1992 (data was not available for some merged firms).
There were no statistically significant differences between the proportions of firms with different strategy/industry combinations which survived relatively unchanged (less then 10% growth per annum over 6 years and employing 50 or more in 1992) or 'sank' (less than 50 employees in 1992 but still in business). However, about 5 to 6 times more firms entering growth industries survived than sank, while only 2 to 3 times as many firms entering mature industries survived as sank. The profile of firms which sank appeared closer to that of failed (and 'unknown') firms than to that of survivors.
Finally, it was noted that sustained growth firms appeared from all major industry groups, including food, clothing, timber products, furniture, printing, non-metallic minerals, metal products, precision engineering and electrical/electronic engineering industries.
DISCUSSION AND CONCLUSIONS
Taken together, the results suggest an overall pattern in which some strategy/industry combinations are more successful than others at producing young firms which are capable of sustained growth and/or harvest and which at the same time have a lower failure rate. However, the most successful combination was not that suggested by previous research. Table 2 illustrates the overall findings. The table was created by collapsing the cells for sustained growth firms and sold firms together as 'successful outcomes', collapsing the cells for sank, failed and unknown firms together as 'unsuccessful outcomes', collapsing the cells for broad/growth and narrow/mature together on the basis that their proportions did not change significantly across different outcomes, and excluding the 3 firms which entered emergent industries.
Overall, firms with narrow-breadth industry combinations had a higher success rate (53%) and a lower failure rate (12%) than firms with other combinations, while firms with broad breadth/mature industry combinations had a lower success rate (19%) and a higher failure rate (39%). However, there were national variations to this trend. The failure rate for Scotland did not vary by strategy/industry combination, and the low success rate/high failure rate of the broad breadth/mature industry combination was not as marked in Ireland as in Denmark. Also, the success rate of broad/growth and narrow/mature combinations together was almost as high as that of the narrow/growth combination in Ireland and Scotland (45% to 50% for Ireland and 44% to 50% for Scotland).
In sum, for each of the four cells in table 2 where systematic variation from average rates appears to exist, there are cross-national differences which suggest that this variation is not generalisable across the three nations. This has important implications for the interpretation of previous published research on the performance outcomes of different new venture strategies in single nation samples.
The finding that broad breadth/growth industry combinations did not produce a higher proportion of sustained growth firms goes against a trend in the literature, based on United States data, which identified this combination as a good one for rapid growth, while accepting that a narrow breadth/mature industry combination might be better for rapid achievement of profitability (Kunkel and Hofer, 1993; McDougall et al., 1994). One explanation of this finding would be that small nations may not be good seed-beds for firms to pursue broad breadth/growth industry combinations. This is supported by the low number of firms in this sample which were classified as having this strategy combination. Another explanation may be that firms entering with this combination may have different sub-strategies with different performance outcomes, and that some previous research may have been based on biased samples.
Specifically, Romanelli (1987) found that "aggressive" generalists entering at the growth phase of the US minicomputer industry had a 100% survival rate and included the most successful firms in their industry. These firms rapidly expended as many resources as possible as fast as possible over a broad spectrum of market opportunities. "Conservative" generalists entering at the growth phase had only a 20% survival rate, in her study. It may be that studies such as those of Sandberg (1986), Kunkel (1991) and McDougall et al. (1994) under-sampled conservative generalists and over-sampled aggressive generalists in the growth phase, because of the nature of their sampling frames (firms which sought professional venture capital, initial public offerings, and survivors in the computer and telecommunications industries, respectively). In this study, the two firms which achieved sustained growth through a broad breadth/growth industry combination could be described as aggressive generalists in that they rapidly established broad product lines. They were also in the same industry - computer systems.
The relative absence in this study of aggressive generalists achieving sustained growth after entering growth industries suggests that firms attempting this strategy in small nations may have problems unique to a small nation setting, such as lack of rapid access to large markets and ability to attract and deploy resources quickly. To be successful with a broad breadth/growth industry combination, one must build market share fast to establish an entrenched position while resources are relatively abundant before the market matures. It may be easier to do this from a large nation base. For new firms in a small nation, narrow breadth market entry strategies may be easier to resource adequately, although this strategy will produce few spectacular growth firms. The relatively low growth rates of 'sustained growth' firms in this study compared with the U.S. samples of high growth firms in the literature (e.g. McCann, 1991; Siegel, Siegel and MacMillan, 1993; McDougall et al., 1994) would support this interpretation.
The very small number of firms in the sample which entered emergent industries (3 out of 176, all of which were in Denmark) supports the view that small nations might not be good seed-beds for very new industries. Many more firms appeared and grew by applying established technology to particular market segments across a whole range of established industries than by developing and launching products in emergent industries. This suggests that the strength of young firms in small nations may be in application rather than original development.
These interpretations of the data suggest that the performance outcomes of different new venture strategies may vary across nations, and that consequently strategy prescriptions for new ventures generated from empirical research on United States data may not always be applicable to other national settings. Also, systems of resource supply, such as a professional venture capital industry which relies on a few spectacular successes to offset write-offs, might not work as well in small nations as in the United States, because spectacular successes may be rarer. Different national systems of nurturing young growing firms may be needed in small nations. These systems might focus less on subsidising emergent industries and more on enabling access to existing technology and detailed market intelligence information. Financing systems which concentrate on building a core of sustained growth firms which dominate specialised market segments may be more productive than systems which bet on possible spectacular successes. Finally, entrepreneurship academics need to take great care in generalising from samples of new ventures which are drawn from possibly skewed sampling frames, and particularly in generalising across national boundaries.
The uncertain validity of the construct measures for market entry strategy and industry growth, and the lack of testing of inter-rater reliability, necessitated caution in the interpretation of results. Further work will address this, enlarge the suite of performance outcomes to include profit measures, and extend new venture strategy and performance studies across different national settings by developing a database on young growing firms in a mid-sized nation (France).
This study was made possible by a Research Fellowship at the Department of Entrepreneurship and Leadership, INSEAD sponsored by the Human Capital and Mobility Programme of DG XII of the Commission of the European Communities.
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