INTRODUCTION

The purpose of this research project was to study various experiences of the entrepreneurs and their impact on the early performance of the firm. Empirical research on the relationship between initial firm performance and entrepreneur experiences has been found to have mixed results in the literature. Some types of entrepreneur experiences were found to be related to firm performance in certain studies but not in others (Cooper, Woo & Dunkelberg, 1989; Reuber and Fischer, 1993). Therefore, it was important to study the impact of different types of experiences in detail.

Results from this research have strong implications for banks, policy-makers, educationists and entrepreneurs. Banks or loaning agencies would have a better criteria to evaluate business plans and loan applications. Policy makers and educationists would be able to include appropriate measures in their programmes. Entrepreneurs would know what sort of experiences they should acquire before starting a new venture. Potential entrepreneurs would be saved from spending months and even years trying to get experience which may not be useful in starting and managing firms in the initial years. One of the most talked about delimma is choosing between taking a corporate job prior to starting a new venture or jumping into a new venture without experience. This research will increase our understanding of the importance of various experiences and their correlation with the initial firm performance in diverse circumstances.

For the purpose of our research, the sample was divided by industry types, namely, retail, wholesale and manufacture. This was done because diverse circumstances might contribute to the variations in literature findings. One of these variables was industry structure. While the focus of this paper was on the experience variables, non-experience variables were also investigated, namely, start-up capital, barriers to entry, competition and entry strategy. These will be discussed in detail in a subsequent paper.

Thirteen experience variables were selected. The objective was to include all important sources of pre-start-up experiences for the entrepreneurs. The managerial, entrepreneurial and technical experiences were each divided into two categories - experiences in similar industry or dissimilar industry. The results would show the importance of task similarity in the transferability of learning from one environment to the others. The importance of exposure to family business and family advice were also investigated specially because of the strong family networks in certain societies such as Pakistan. Previous start-up experiences would provide direct knowledge and skills to manage a new start-up. How this experience influenced a new firm’s performance was a subject of this research. Finally, the impact of formal education on new venture success was important to investigate because a common concern was whether one should put time and energy into further formal education or gain relevant hands on experience.

In the next section, literature on learning experiences is reviewed so as to select appropriate variables for further research. Then, research methodology is discussed, followed by presentation of results. Finally, results are discussed.

 

LITERATURE ON LEARNING EXPERIENCES

As discussed earlier, empirical research showed mixed findings for correlations between firm performance and various experience factors. Part of the reason was the impact of factors besides owner’s experience (Stuart and Abetti, 1990). Part of the reason was that in a number of papers pre-start-up experience was studied as a single unit and not as a combination of a number of different types of experiences (Reuber & Fischer, 1993).

The major factors besides experience that have possible correlation with firm performance were entrepreneur’s personality (Sexton and Bowman, 1986), strategic factor (Sandberg and Hofer, 1986) and entrepreneur’s orientation (Smith, 1967). Government and international regulations also affect the performance of new firms. Results obtained by Stuart and Abetti (1990) showed that strategy and organisation played a significant role in the early firm performance besides entrepreneurial experience. Therefore, level of competition, entry barriers and initial size of the firm were recorded during the survey.

For this project, thirteen types of experience variables were selected based on the literature survey. Cooper, Woo and Dunkelberg (1989) found positive relationship with management, industry, educational and partners’ experiences. Duchesneau and Gartner (1990) found positive relationship with management, start-up and family experiences. Stuart and Abetti (1990) found positive relationship with management, entrepreneurial and start-up experiences. Education had a negative impact on performance.

Dyke, Fischer and Reuber (1992) concluded that it was important to recognize heterogeneity among small business when considering the impact of various types of experiences across industries. Previous start-up and management experiences had significant relationship with performance in all five industries. Entrepreneurial experience, acquisition experience, exposure to family business and education showed mixed results. Partners’ experiences had positive relationships in some industries and negative in others.

 

RESEARCH METHODOLOGY

 

Sample

The sample was drawn from the city of Lahore in Pakistan. One hundred entrepreneurs were approached in the books retail, books wholesale and light engineering manufacturing sectors. Some of the interviewees were disqualified based on certain parameters. For example, some of the entrepreneurs declined to disclose firms’ sales figures. Others had inherited businesses from their parents and therefore had not gone through the start-up process. Some of the companies were only one year old. In all, seventy three interviews were completed and data was analysed.

Three industries were selected so as to illustrate similarities and differences amongst different industries. Effects of entry strategy, industry structure, firm size were investigated besides studying the impact of the thirteen experience variables on the firm performance. However, the results of variables other than experience variables will be discussed in a subsequent paper. A pilot study of five firms in each industry was conducted. This study confirmed that the questionnaire was useful with minor modifications. It also helped in finalizing the list of entrepreneurs to be interviewed. Once the pilot study was completed and questionnaire modified, full scale survey was started.

 

Variables

One of key constraints in the sample survey was the reluctance of entrepreneurs to reveal financial data. Although growth in profits was initially considered as an important firm performance measure, it was dropped later because of unavailability of relevant data. The employee variable was also discarded because both retail and wholesale businesses were one or two room operations with unproportional change in employee levels as sales grew. Thus, initial growth in sales was selected to be the firm performance measure. Table 1 shows the variables measured and recorded during the survey.

TABLE 1
Definitions of the Variables

1.

INIGR SALE Initial growth in sales obtained by taking the difference in sales in the first and second year of firm’s operation.

2.

STCAPITAL Initial capital.

3.

ENTSTRATEGY Entry strategy could be innovation, differentiation or cost based.

4.

BARENTRY Barriers to entry could be high or low.

5.

COMPETITION Competition could be high or low.

6.

MNGTEXP Management experience in similar industry.

7.

MNGTDIS Management experience in dissimilar industry.

8.

TECHEXP Technical Experience in similar industry.

9.

TECHDIS Technical Experience in dissimilar industry.

10.

ENTEXP Entrepreneurial experience in similar industry.

11.

ENTDIS Entrepreneurial experience in dissimilar industry.

12.

PRVSTART Number of Previous start-up experiences.

13.

FAMEXP Exposure to family business.

14,

ADVICE Advice from family.

15.

MNGTPART Total management experience of partners.

16.

ENTPART Total entrepreneurial experience of partners.

17.

EDUCATION Level of education.

18.

MNGTCRS Number of management courses attended.

RESULTS

The first year sales were highest in the light engineering manufacturing sector due to the larger initial capital outlay and the size of the firms. The initial capital of light engineering manufacturing was 11 times that of retail and seven times that of wholesale sectors. However, the initial growth in sales the books wholesale sector was the highest amongst the three sectors as shown in Table 2. The retailers did not grow as much as the wholesalers because of proliferation in the retail sector in the last ten years. The engineering sector grew even less because of the sluggish growth in the industry partly due to stagnation at original equipment manufacture (O.E.M) level. The initial sale to capital ratio was highest for the manufacturing sector showing that even though their initial capital outlay was the largest of the three sectors, their assets utilization was also the largest.

TABLE 2
Sample Details

 

Books Retail

Books
Wholesale

Light Engineering Manufacturing

 

MEANS

   
       
Sample Size

26

23

24

Number of years

13.75

6.08

9.40

Start-up capital

1,430,000

2,470,000

16,650,000

Number of employees

5.75

6.0

9.5

First year sales

560,000

1,760,000

13,080,000

Second year sales

1,050,000

3,826,000

18,685,000

Current sales

2,243,300

7,980,700

57,339,000

Initial sales growth

0.44

0.54

0.30

Overall sales growth

0.24

0.34

0.23

First year sales/Capital

0.40

0.70

0.78

Tables 3, 4 and 5 illustrate the relationship between firm performance and each of the three non-experience variables, namely, entry strategy, competition, and entry barriers.

Table 3 shows that in the retail sector most of the entrepreneurs used cost based entry strategy, however, differentiation corresponded to the best performance. In the wholesale sector, most entrepreneurs opted for innovation strategy mostly creating innovation in the product line. Innovation resulted in the best performance as well. In the manufacturing sector most entrepreneurs went for cost based strategy which corresponded to the best result probably because of the strong bargaining power of the wholesalers in this sector.

TABLE 3
Entry Strategy

 

Books Retail

Books Wholesale

Light Engineering Manufacturing

 

No.

Performance

No.

Performance

No.

Performance

Innovation

9

0.47

10

0.81

7

0.22

Differentiation

6

0.66

4

0.67

4

0.25

Cost

11

0.33

9

0.59

13

0.47

Table 4 shows that firms facing high competition at the time they started their operations performed worse than firms that faced low competition.

Table 4
Competition

 

Books Retail

Books Wholesale

Light Engineering Manufacturing

 

No.

Performance

No.

Performance

No.

Performance

High

15

0.34

12

0.45

15

0.30

Low

11

0.62

11

1.01

9

0.66

             

Table 5 shows that firms that faced high entry barrier on average did better because of the protection against higher competition.

TABLE 5
Entry Barriers

 

Books Retail

Books Wholesale

Light Engineering Manufacturing

 

No.

Performance

No.

Performance

No.

Performance

High

14

0.51

13

0.94

15

0.52

Low

12

0.35

10

0.35

9

0.11

             

TABLE 6
Entrepreneur Background Experiences

 

 

Books Retail

Books Wholesale

Light Engineering

 

NO.

MEAN

NO.

MEAN

NO.

MEAN

MNGTEXP

5

0.72

7

0.46

12

5.50

MNGTDIS

7

3.20

13

2.50

2

0.35

TECHEXP

0

0.00

0

0.00

0

0

TECHDIS

0

0.00

0

0.00

0

0

ENTEXP

5

0.25

12

6.20

8

3.15

ENTDIS

11

4.00

5

0.45

0

0

PRVSTART

11

0.50

10

0.55

8

0.45

FAMEXP

13

10.15

14

5.90

2

0.85

ADVICE

17

0.50

14

1.01

11

0.45

MNGTPART

6

1.13

5

0.75

14

8.15

ENTPART

6

1.38

4

1.90

2

0.85

MNGTCRS

2

0.13

0

0.00

6

0.55

According to Table 6, in the retail sector, family advice, family exposure, previous startup experience and entrepreneurial experience in dissimilar industry were the dominant forms of pre-start up experiences. In the wholesale sector, family advice, family business exposure, previous start up experience, entrepreneurial experience in similar industry and management experience in dissimilar industry were the most common forms of pre-start-up experiences. In the manufacturing sector, management experience in similar industry, entrepreneurial experience in similar industry, management experience of partners and management courses were the common forms of experiences.

TABLE 7
Family Advice

 

Retail

Whole Sale

Manufacturing

 

No.

Performance

No.

Performance

No.

Performance

YES

14

0.50

12

1.01

9

0.45

NO

12

0.36

11

0.36

15

0.38

Table 7 shows that in the retail and wholesale sectors, entrepreneurs who took family advice performed better than the other entrepreneurs. Also more than half the entrepreneurs got advice in retail and wholesale sectors while only thirty-seven percent entrepreneurs got family advice in the manufacturing sector.

TABLE 8
Relationship Between Types of Experiences and Performance

 

 

BOOKS RETAIL

BOOKS WHOLESALE

LIGHT ENGINEERING MANUFACTURE

  INIGRSALE PROB>F INIGRSALE PROB>F INIGRSALE PROB>F
MNGTEXP

0.15 0.02
MNGTDIS

0.08 0.012

ENTEXP

0.19 0.005

ENTDIS 0.17 0.03

PRVSTART 0.18 0.08 0.15 0.05

FAMEXP

0.15 0.001

ADVICE 0.25 0.05

MNGTPART

0.11 0.008
ENTPART

EDUCATION -0.15 0.09

0.05 0.05
MNGTCRS

0.06 0.03
PROB>F   0.1252   0.0005   0.0472

Table 8 illustrates the correlation coefficients of experience variables and significance levels using regression for each industry. In the books retail sector, four experience variables were significantly related to the initial form performance. Entrepreneurial experience in dissimilar industry, previous start-up experience and family advice were ively related while education was negatively related. In the books wholesale sector, management experience in dissimilar industry, entrepreneurial experience in similar industry, previous start-up experience and exposure to family business were positively and significantly related to firm performance. In the manufacturing sector, management experience in similar industry, management experience of partners, execution and management courses were positively and significantly related to the firm performance.

Previous Page | Main Menu |Next Page

 

 

1997 Babson College All Rights Reserved
Last Updated 1/15/97 by Geoff Goldman & Dennis Valencia

To sign-up for the Center for Entrepreneurial Studies' publication lists,
please register with the
Entrepreneurship WebTeam.