Academic journal article Entrepreneurship: Theory and Practice

The Determinants of New Venture Performance: An Extended Model

Academic journal article Entrepreneurship: Theory and Practice

The Determinants of New Venture Performance: An Extended Model

Article excerpt

Because of the social and economic value of new business enterprises (Birch, 1987; Reagan, 1985; Schumpeter, 1934), models leading to an improved understanding of the determinants of new venture performance represent significant contributions to the literature. Perhaps the most compelling model of new venture performance developed in the last decade was proposed by Sandberg and Hofer (1987). Their model specified that the performance of a new venture was the consequence of a confluence of factors that encompass attributes of the entrepreneur (E), strategy (S), and industry structure (IS), as shown below.

New Venture Performance = f(E, IS, S) (1)

Using information on new ventures that sought funding from venture capitalists, Sandberg and Hofer found evidence that industry structure and strategy, separately and in combination, influenced new venture performance. Although their data did not support the importance of the entrepreneur, Sandberg and Hofer stated that additional research would be required before the entrepreneur could or should be removed from the model of new venture performance. Subsequent work by Feeser and Willard (1990), Keeley and Roure (1990), and McDougall (1987), among others, has corroborated Sandberg and Hofer's findings with respect to strategy and industry structure. Furthermore, Herron's (1990) study on the skills of the entrepreneur provided empirical evidence of the paramount importance of the entrepreneur in the new venture performance model.

Despite the importance and appeal of the model proposed by Sandberg and Hofer (1987), it is incomplete. There are other variables that can affect the performance of a new venture that go beyond the skills and behaviors of its founders, the form of its strategies, and the structure of its industry. More specifically, their model does not include the resources upon which a venture's strategy must be based, or the organizational structure, processes, and systems by which the venture's strategy must be implemented. To fill this gap, this article discusses the determinants of new venture performance from the perspective of strategic management theory and describes why the concepts of resources and organizational structure, processes, and systems are essential elements of any fully specified model of new venture performance.

KEY ASSUMPTIONS AND DEFINITIONS

Before proceeding further, it is necessary to define key terms, and the scope of this article, discuss the contextual basis of the extended theoretical model of new venture performance proposed, and examine the critical assumptions that led Sandberg and Hofer to exclude resources and organizational structure, processes, and systems from their model.

Definitions and Scope

A new venture is the end result of the process of creating and organizing a new business that develops, produces, and markets products or services to satisfy unmet market needs for the purposes of profit and growth (Gartner, 1985; Normann, 1977; Sandberg, 1986). In this article, we define entrepreneurship as the creation of new ventures, and entrepreneurs as the creators of new ventures (Gartner, 1988). There is evidence that many ventures are founded by teams of entrepreneurs and that the completeness of these teams has a positive impact on new venture performance (Cooper & Bruno, 1977; Roure & Keeley, 1990; Route & Madique, 1986). While acknowledging the importance of such teams, it is, nevertheless, beyond the scope of this article to deal with nuances concerning the number of founding entrepreneurs associated with a new venture.

A venture is considered new if it has not yet reached a phase in its development where it could be considered a mature business. The precise moment in time in which a new venture becomes a mature business has not yet been determined. However, the idea of business maturation could be equated with a firm that has fully completed the transition to a Stage II organization in the sense of the model of organizational growth proposed by Scott (1971), or has reached the point of stability proposed in Kazanjian's (1988) four-stage model, or, more generally, has overcome the "liability of newness" discussed by Stinchcombe (1965). …

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