Speeding Products to Market: Waiting Time to First Product Introduction in New Firms

Schoonhoven, Claudia Bird, Eisenhardt, Kathleen M., Lyman, Katherine, Administrative Science Quarterly

We used the techniques of event-history analysis to examine the speed with which newly founded organizations ship their first products for revenues, an important entrepreneurial event. In a longitudinal study of new ventures in the U.S. semiconductor industry, we found that substantial technological innovation lengthens development times and reduces the speed with which first products reach the marketplace. Organizations that undertook lower levels of technological innovation, had relatively lower monthly expenditures, whose founding organization structures included both a manufacturing and a marketing position, that had more competitors in the marketplace, and were founded in the Silicon Valley region of the U.S. shipped their first product for revenues significantly faster than other new ventures. Since several theoretical perspectives were utilized, results indicate that it is worthwhile to synthesize from several perspectives in order to understand the timing of entrepreneurial events. Implications for theory and future research on new organizations are discussed.(*)

New organizations face a perilous childhood. According to "liability of newness" arguments, newly founded organizations are particularly prone to failure (Stinchcombe, 1965). Compounding liabilities posed by newness and small size, new organizations seeking to develop products that reach beyond prevailing technical standards must overcome an additional liability derived from the process of new knowledge development. This paper examines the impact of technological innovation, entrepreneurial and organizational characteristics, and environmental variables on a significant entrepreneurial event: the number of months from its date of founding that it takes a new organization to ship its first product for revenues.

Several theoretical as well as practical concerns generate interest in this entrepreneurial event. Shipping its first product for revenues is a major milestone for a new organization. Among several events that occur in new firms, the speed with which an organization ships its first product to market is significant. Fast products are important (1) to gain early cashflow for greater financial independence, (2) to gain external visibility and legitimacy as soon as possible, (3) to gain early market share, and (4) to increase the likelihood of survival. In general, the more quickly a new venture develops its first product and ships it to the first customer, the more quickly it will embark on the path to greater financial independence. During the research and development period when a strong revenue stream does not exist, new firms are dependent on investors for their operating capital. When the first shipment for revenues is made, the new firm is on its way to a more favorable resource-dependence position. Gilman (1982), who studied the rate at which industrial innovations were first introduced to the marketplace found that an innovation's economic value is sensitive to the elapsed time between initial investment and the time at which earnings start. Shorter development times created greater economic value for the innovating organization.

Shipping the first product for revenues is also thought to be a favorable harbinger of survival for new organizations. Rapid pace is an advantage in many high-technology industries (e.g., Eisenhardt, 1989a), and, specifically, in the semiconductor industry speeding products to market is acknowledged as one of the major bases for survival. Britain and Freeman (1980) reported that in semiconductor firms, executives "seemed to view themselves as participants in a race. Failure to keep up [with technological innovation] meant the firm's failure" (Freeman, 1982: 11). Similarly, in an interview for a study of innovation among semiconductor and electronics firms, Charles Sporck, the chief executive of National Semiconductor, stated, "Time is a real fact, and it is an awesome fact. If you get the product out six months [later], even though it may be better, the market may be lost, and so you have failed" (Jelinek and Schoonhoven, 1990: 314).

Despite the significance of this entrepreneurial event, there has been little empirical research within the organization theory tradition to identify factors that influence how long it takes new organizations to ship their first products for revenues. The research on young organizations that does exist has primarily examined factors that contribute to survival or failure of young organizations. Two approaches characterize this research stream: (1) investigations of the effects of environmental conditions on rates of death among new organizations and (2) studies of the characteristics and activities of organizations themselves as determinants of new organization survival rates (Romanelli, 1989). However, few studies have combined these approaches, and no study has examined the joint effects of environmental conditions at the time of founding and characteristics of the firms' early activity patterns on the speed with which new organizations develop their first products for market. A better understanding of factors that influence early organizational outcomes should improve knowledge of the social and economic effects associated with new organizations.

This paper examines the influence of organizational conditions (innovation, structure, resources, and organizational members) and environmental circumstances (competitors, investors, and mimetic pressures) on the speed with which new organizations develop their first products for market. The current state of theory on new firms is in its own infancy. No single theory provides sufficient guidance for model development and hypothesis generation regarding entrepreneurial events. As a consequence, we have integrated several theoretical perspectives to explain the first-product-shipment event in new organizations. When theory fails, logic and good knowledge of the empirical setting also help inform the hypotheses that are developed. Because no satisfactory theory exists, this research is exploratory and builds on several perspectives to outline expected effects of organizational and environmental conditions on the waiting time to first product shipment in a population of new organizations in the U.S. semiconductor industry.

BACKGROUND AND HYPOTHESES

In Stinchcombe's (1965) seminal paper on the liability of newness, he argued that new organizations are greatly influenced by the social conditions at the time of founding and that initial conditions have lasting implications for organizational outcomes. Initial conditions include the external social structure as well as conditions within the organization. His arguments have substantially influenced subsequent research on newly founded organizations, although this research stream has primarily focused on environmental rather than organizational conditions.

The liability of newness thesis has been examined primarily by organizational ecologists, and empirical research has provided relatively consistent support for the basic argument. Several studies have found that organizational mortality rates are negatively related to age (Carroll and Delacroix, 1982; Carroll, 1983; Freeman, Carroll, and Hannan, 1983; Tucker, Singh, and House, 1984). While this research has supported the general liability of newness argument (that is, age-dependent death rates), this stream of research has limitations. Population-level studies capture the conditions under which the rate of failure increases, but population studies cannot explain which firms fail and why. Specifically, population studies do not explain (1) what are important organizational outcomes that precede death that might be related to subsequent survival, like shipping the first product for revenues, and (2) what are the internal conditions in addition to external events that may influence new venture outcomes? Wholey and Brittain (1986: 528) have remarked that while ecological research is typically characterized by large sample sizes drawn over long periods of time, these studies have lacked detailed measures of internal organizational characteristics. Hypotheses developed here are based on initial organizational conditions, as well as environmental conditions. We begin with technological innovation. The focus of the study is on the initial start-up period when the liabilities of newness and smallness are greatest.

Technological Innovation

In a departure from most past research on new organizations, we investigated the extent to which new-firm outcomes are influenced by internal processes. The first of these concerns research and development activities within the firm that may be characterized as attempts at technological innovation, where technological innovation is defined as a technology new to a given organization or to a given industry (Tornatzky et al., 1983: 2).

Although innovation has been widely studied during the past fifteen years (e.g., Downs and Mohr, 1976; Kimberly, 1979; Tornatzky et al., 1983; Van de Ven, 1986), much of this research is about innovation adoption and diffusion. As it is currently formulated, this literature has little direct relevance for the speed with which first products are shipped for revenues in new organizations. Therefore, rather than repeat this widely reviewed literature, we focus on elements of significance to this research and identify dimensions of technological innovation likely to have implications for speeding first products to market.

Technological innovation is important to the speed of first product shipment because innovation creates a form of uncertainty for the new venture. Nelson and Winter (1977: 47-51) remarked that among the consistent findings about innovation is that "innovation involves uncertainty in an essential way." They argued that any innovation involves considerable uncertainty before it is ready for introduction to the economy, because research and development (R&D) is by definition an uncertain business; uncertainty resides at the level of the individual development project, because the "best" way to proceed is seldom apparent. Our concern is not to predict uncertainty created by attempts at technological innovation but, rather, to regard the degree of innovativeness as an initial condition and to examine its impact on speeding first products to market.

Technological innovation has several dimensions. We focus on (1) innovation achieved through the creation of new knowledge and (2) innovation created by knowledge synthesis, in which existing technical knowledge is combined (synthesized) in unique ways to create a new product. On the one hand, extensive new knowledge is created de nouveau, and, on the other, technical knowledge that already exists is combined in nonstandard ways to create a new product.

The more highly innovative a new venture's first product, the more new information that must be created by the firm's technical experts during the research and development period (Galbraith, 1977; Schoonhoven, 1981). The most highly innovative new semiconductor designs are argued by industry experts to be the most uncertain to develop (Webbink, 1977; Dataquest, 1987). Recent research has found some support for the relationship between innovativeness and waiting time to product introduction to the marketplace. In a study of biomedical and pharmaceutical start-up firms, technological innovativeness was positively associated with longer waiting times to product introduction (Roberts and Hauptman, 1987).

In new organizations, innovation may also be based on knowledge synthesis. Rather than creating extensive amounts of new knowledge, firms may build on what is known to advance the state of the art. Dewar and Dutton (1986) distinguished between radical and incremental innovations. An innovation based on unique combinations of existing knowledge might be considered an incremental innovation in Dewar and Dutton's terms. Similarly, Tushman and Anderson (1986) observed that much technological progress is incremental, enhancing and extending the underlying technology. In the semiconductor industry, product innovations are often attributed to more incremental improvements in process technology and device design (Wilson, Ashton, and Egan, 1980). We advance two innovation-related hypotheses:

Hypothesis 1a: The greater the new knowledge created during the first product's development, the greater the waiting time to first product shipment.

Hypothesis 1b: The greater the synthesis of existing knowledge, the greater the waiting time to first product shipment.

Entrepreneurs

While the study of entrepreneurship has seen a surge of interest in the 1980s, careful studies of the effects of entrepreneurs on new-organization outcomes are rare. What is needed is research that directly links entrepreneurs' attributes with new-venture outcomes, research that takes into account external conditions as well as entrepreneurial attributes. Recent work within organization theory has begun to address this need by increasing the scope of relevant entrepreneurial characteristics. Some studies have focused on the entrepreneur's background, in particular the entrepreneur's work experience, and linked it to organizational outcomes (Miller, 1983; Van de Ven, Hudson, and Schroeder, 1984). In a study of organizations in the educational software market, Van de Ven, Hudson, and Schroeder (1984) found that new-firm success was positively related to the entrepreneur's skills and expertise. Research has also found a positive relationship between the entrepreneur's prior experience in a large high-technology company and overall success of the new firm (Cooper and Bruno, 1977; Van de Ven, Hudson, and Schroeder, 1984).

Consistent with this research, we expect that new ventures founded by industry-experienced individuals will be advantaged in the creation of favorable organizational outcomes, including the speed with which first products are developed and reach the market. Greater experience in the parent industry, especially within research-intensive industries, should provide years of having experienced and observed a reasonable number of innovation development projects, with attendant learning-curve effects, which should shorten the development time in the new venture.

Prior start-up experience should also facilitate speeding products to market. New ventures founded by entrepreneurs with at least one member experienced in a …

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Publication information: Article title: Speeding Products to Market: Waiting Time to First Product Introduction in New Firms. Contributors: Schoonhoven, Claudia Bird - Author, Eisenhardt, Kathleen M. - Author, Lyman, Katherine - Author. Journal title: Administrative Science Quarterly. Volume: 35. Issue: 1 Publication date: March 1990. Page number: 177+. © 1999 Cornell University, Johnson Graduate School. COPYRIGHT 1990 Gale Group.

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