Competitive intensity usually reduces average industry
profitability (Porter, 1980; Slater, 1993). It has the effect of
reducing pioneering advantages developed through lead time.
Therefore, when competitive rivalry is low, the initial
pioneering advantages developed during lead time are likely to be
more sustainable. Increased competition more quickly reduces
initial advantages and creates pressure to reduce prices and
Hypothesis 4a: Competitive rivalry affects venture capitalists' assessment of profitability.
Hypothesis 4b: Venture capitalists' assessment of profitability is significantly higher for low levels of competitive rivalry than for high levels of competitive rivalry.
Scope of Entry
Questions of scope are central to the development of a venture's strategies (Abell, 1980). Much of the conventional wisdom of earlier entrepreneurship literature advised ventures to pursue narrow or focused strategies (e.g., Low & MacMillan, 1988). However more recent studies utilizing large databases such as PIMS show new ventures that are both more aggressive and more broad than incumbents, display superior performance than those targeting narrower segments (e.g., Tsai, MacMillan & Low, 1991).
However, Stearns, Carter, Reynolds & Williams (1995) hypothesized broad strategies to be superior to narrow strategies yet were unable to find support for their proposition. Apparently, simplistic over generalization of scope strategies is dangerous (McDougall, Covin, Robinson & Herron, 1994). Timing of entry dictates the industry structure faced by new ventures (Lambkin, 1988; Miller, Wilson & Gartner, 1987). Pioneers enter a new industry with potential for high growth and late followers enter a mature industry with limited growth. Given this assumption about the relationship between timing of entry and likely industry structure, Stearns et al.'s (1995) finding of a significant interaction between scope and industry structure may be evidence of an interaction between scope and timing of entry.
McDougall, et al. (1994) found new ventures in high growth industries enter the market on a larger, more aggressive scale than new ventures in low growth industries. Lambkin (1988) also found pioneer-generalists (broad scope) to most likely display the highest level of long term performance.
Hypothesis 5a: A venture's scope strategy moderates the relationship between timing and venture capitalists' assessment of profitability.
Hypothesis 5b:For broad scope strategies, venture capitalists' assessment of profitability decreases with later entry; for narrow scope strategies, venture capitalists' assessment of profitability increases with later entry.
Entry Wedge Mimicry
Lieberman and Montgomery (1988) believe an important research
priority is the focus on the evaluation of specific entry
mechanisms, rather than on general investigations of timing of
entry. This concept of 'mimicry' may help integrate Vesper's
(1990) entry wedges into a conceptual framework of entry
mechanisms. Entry wedges are competitive weapons that may be used
to enter an industry, and comprise one of the few attempts to
explain entry mechanisms. High mimicry represents a high level of
imitation of others' entry wedges. This concept is useful in
explaining franchising. A franchisee buys and/or rents from the
franchisor the use of hopefully a proven proprietary entry wedge
and competitive shield (Vesper, 1990).
A "low mimicry" entry wedge may be achieved through offering an innovative product or service and/or introducing a marketing innovation that allows the entrant to overcome barriers to entry (Porter, 1980; Abell, 1980; Robinson, Fornell, & Sullivan, 1992). Innovation need not be a technological breakthrough (Karakaya & Kobu, 1994) or the creation of a new industry with a product's introduction- both developments are extremely rare (Vesper, 1990) but would be considered the extreme case of low mimicry. This concept of 'low mimicry' seems to support Vesper's (1990) 'new product' entry wedge.
Despite the cost to innovate being typically higher than the cost of mimicry (Spital, 1983), high mimicry sets parameters for competitive behavior. A low mimicry entry wedge has no such restrictions. An uninhibited choice of strategy appears better suited to the emerging market. Miller, et al. (1987) propose that the pioneer typically faces an emerging and growing market An emerging market is characterized by few competitive rules based on high technological and strategic uncertainty (Porter, 1980). This environment provides the pioneer a window of opportunity to introduce something new and possibly develop the rules of the industry to corporate advantage. Therefore, pioneers are usually more interested in entering with a new technology and then protecting their unique position and first mover advantage, rather than imitating others (Porter, 1980).
The franchise imposes a cost for the rent of a proven formulae and places restrictions on aspects of operations, marketing and expansion documented in the franchise agreement. The added cost and restrictions are expected to negatively affect profitability for the pioneer. Whereas a proven proprietary entry wedge and competitive shield are of greater value to a later entrant as they typically face more intense competition (Porter, 1980).
Hypothesis 6a: Entry wedge mimicry moderates the relationship between timing and venture capitalists' assessment of profitability.
Hypothesis 6b: For ventures with high entry wedge mimicry,
venture capitalists' assessment of profitability increases with
later entry; for ventures with low entry wedge mimicry, venture
capitalists' assessment of profitability decreases with later
Industry Related Competence
Success is more likely to be achieved by those entering an industry in which the venturers have prior experience (Roure & Madique, 1985; de Koning & Muzyka, 1996). Roure and Maidique (1985) found successful founders had experience in rapid growth firms that competed in the same industry as the start up. Opportunities are likely to occur too quickly to be able to be grasped by someone from outside the industry, they must posses the necessary skills a priori (Feeser & Willard, 1990).
Hypothesis 7a: Industry related competence affects venture capitalists' assessment of profitability.
Hypothesis 7b: Venture capitalists' assessment of profitability is significantly higher for ventures with high industry related competence than for ventures with low industry related competence.
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Last Updated 06/01/98