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INTRODUCTION

Entrepreneurship researchers are fundamentally concerned with the impact of venture strategies upon performance. With no history and few set practices, new ventures have a wide set of potential strategic approaches available to them. However, not all choices appear to translate into success.

A body of theory suggests that new ventures are best served by implementing niche and/or focus strategies (Abell, 1980; Porter, 1980; Vesper, 1990). Porter (1980), for example, proposes that niche strategies allow firms to target the needs of the customers in the market by focusing their limited resources on a narrow portion of the market while they establish a market position and develop a knowledge base. This can provide the new venture with a competitive advantage over large and/or existing firms.  It has also been argued that firms that pursue niche strategies avoid head-on competition as their narrow domain is less threatening to established competitors and therefore less likely to engender a retaliatory response that the new venture could not survive financially (Scherer & Ross, 1990). Thus, extant theory on new venture strategies points to a number of competitive benefits that are argued to enhance the viability and performance of new firms as they develop both the financial and human capital necessary to survive. In direct contrast to these theoretical propositions, findings from empirical research in entrepreneurship strongly suggests that a broad/aggressive approach for a new venture may be the key to success (Biggadike, 1979; McDougall, Covin, Robinson & Herron, 1994;  Miller & Camp, 1985; Sandberg, 1986). For example, when examining growth, Biggadike (1979) found that those entrants  with  broader  product  lines  were  able  to  capture  more of the market than  firms that pursued moderate or narrow breadth strategies.
 
Thus, a gap has emerged in the literature on new venture strategies. Empirical evidence suggests that aggressive strategies may lead to better growth and performance, while theoretical arguments suggest just the opposite. We suggest that the dissonance between the expectations of theory and the empirical evidence may exist because researchers have been unable to properly test the initial strategies of new, independent ventures. First of all, much of the research which has found positive performance implications of broad/aggressive strategies has examined internal corporate ventures. In contrast to new, independent ventures, corporate ventures often have access to a great deal of financial, human, and capital resources. As such, these studies may not reflect the true relationship between initial strategy and performance in new, independent ventures as originally suggested by new venture theorists.  Second, most of the research on the performance implications of new venture strategies has measured strategy variables a number of years after firm birth (Eisenhardt & Schoonhoven, 1990; McDougall, Covin, Robinson & Herron, 1994; Stearns, Carter, Reynolds & Williams, 1995). Empirical models which measure strategy variables subsequent to founding may not provide an accurate test of the effectiveness of a niche strategy. As firms evolve over their first few years of life, their strategies evolve and coalesce (Romanelli, 1989). The strategies which led to their initial success may no longer be the strategies which they are currently pursuing. Thus, measuring strategy several years after founding may not provide a valid theoretical test of the relationship between initial venture strategy and performance.

This research aims to examine independent ventures at the point of formation so as to investigate the apparent dissonance between the theory of new venture entry and the extant empirical research findings. We suggest that some measure of resolution may lie in the consideration of initial resources as a moderator between breadth and new venture growth.  While previous research in this area has been hampered by a lack of information on new ventures at the point of formation, we were able to overcome this issue through the development of a database which includes measures of strategic decisions at the point of formation for a large sample of new bank formations that has been developed by the authors over the past two years with the direct assistance of the U.S. Office of the Comptroller of the Currency.

THEORETICAL DEVELOPMENT

In virtually all organizational research, and perhaps most especially in entrepreneurship research, much of the literature has "crystallized around one definitive research question: 'What causes certain firms to outperform their competitors on a sustained basis?" (Meyer, 1991:828). In entrepreneurship research, this has lead many researchers to believe that the fundamental liabilities of newness and smallness require an emphasis upon the initial decisions of the venture and the conditions of the environment in which they enter to be critical predictors of future success (Eisenhardt & Schoonhoven, 1990; Stearns, Carter, Reynolds & Williams, 1995; Venkataraman, Van de Ven, Buckeye & Hudson, 1990). Indeed, this focus has a long theoretical and anecdotal history.

Narrow strategies have long been suggested as a means for the new venture to enter a market and to establish itself for future success. These techniques have been called guerrilla-warfare tactics aimed at niches that are too small to engender retaliation by established competitors (Harrigan, 1986; Sandberg & Hofer, 1987). This has been outlined by several researchers in various forms of focused strategies (Abell, 1980; Porter, 1980) that appear to be the most effective use of the limited resources available to the new venture. These strategies are specifically geared toward avoiding head-on competition with established competitors, preventing retaliation efforts, and allowing the establishment of the infrastructure and administrative systems necessary for continued survival and long-term growth (Timmons, 1994).

Given this background, it is curious that so much of the empirical entrepreneurship research available has found just the opposite. Rather than narrow approaches that allow the firm to become established within an industry, the findings have suggested that  "rather than picking a small niche to serve, the most successful firms ... have tried to be aggressive, broad-minded, and opportunistic" (Miller & Camp. 1985: 99).  Many of the studies performed have been completed on firms that are internal corporate ventures and part of the PIMS database of firms. They have consistently found that broader product lines, more aggressive market penetration, and goals that are set higher, lead to improved survival and long-term performance (Biggadike, 1979; Miller & Camp, 1985; Kekre & Srinivasan, 1990). Biggadike pointed out that "the negative financial results were not conscious but, the moment managers decided to seek a toe-hold in their served market, the had, in effect, preordained them" (Biggadike, 1979: 193). Unfortunately, as a test of new entry theory, internal corporate ventures may be inappropriate as they have unique resource endowments that may make them incomparable to independent start-ups (Biggadike, 1979; McDougall, Covin, Robinson & Herron, 1994; Shrader & Simon, 1997). The theoretical underpinnings of a niche entry assume limited financial and human capital. As such, internal corporate ventures are not under the same limitations and constraints as independent ventures that have no established system of direct support.

The findings of other empirical research that have specifically analyzed independent ventures have been much less consistent and have often been found to be contingent upon the type of environment entered or the industry's maturity. For example, McDougall, et. al. (1994) found that those firms with the highest growth rates were those pursuing broad breadth strategies in  high growth industries. In a similar vein, Romanelli (1989) found that aggressive firms had higher growth rates in their start-up years, but that a key was tailoring the strategy to the conditions of the environment.  Further support was provided by Chandler & Hanks (1994) when they found that those firms that had developed a broader variety of resources had higher sales growth. These studies and others regarding the growth and performance patterns of new firms (Cooper & Gimeno-Gascon, 1992) generally focus upon young firms (as opposed to new firms) and are measured subsequent to their founding. Indeed, research has rarely been able to examine the impact of initial strategic decisions upon new venture growth. One exception is Sandberg's study (1986) which utilized a small sample (N=17) of  venture capital-backed firms developed from venture capitalist files and was able to capture the strategic decisions at the point of founding. He found that firms that pursued a differentiated strategy significantly outperformed those firms that pursued a focus strategy.

It is potentially problematic for research on new ventures to rely on data that was gathered years after firm formation or on small-sample studies. An important study by Romanelli (1989) found that new firms exhibited a large amount of strategic instability during birth and furthermore found that it took between two and three years for a new firm's strategy to coalesce. This has important implications for entrepreneurship research. If we measure the new venture's  strategic approach after this point, we may not be tapping the strategy that was used at start-up and indeed the strategy that may have been responsible for survival and growth  up to that point. As has been pointed out by numerous researchers, many firms fail during the first two years of existence and many others achieve only a marginal type of survival (Cooper, Gimeno-Gascon & Woo, 1994; Timmons, 1994) that may be directly attributable to their start-up efforts (Hansen, 1995).
 
Given this information, we suggest that the theory of niche entry for independent ventures may be appropriate, but has remained untested. As the theory applies to independent ventures at the point of start-up, the effectiveness of the strategy of the firm may be contingent upon the resources available at firm formation.  This research specifically examines independent bank start-ups in the United States during the period 1985-1988. This examination allows us to test initial strategic decisions related to aggressiveness as well as the financial resource endowments of the new venture at the point of venture formation. Using interviews with bank founders as well as literature from entrepreneurship, strategy and finance, the authors developed hypotheses as outlined in the following paragraphs.
 
 
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