New ventures' strategic growth patterns: antecedents and outcomes

Abstract

Drawing upon two literature strands -entrepreneurship and strategic management, this study attempts to explore new venture growth in an effort to identify the strategic growth patterns that the ventures pursue during their development as well as the antecedents and the performance outcomes of these patterns. Toward this direction, it defines new venture growth in terms of the ‘strategic logics’ that drive new venture development, i.e. in terms of the growth strategies that the ventures pursue during their development, providing simultaneously a new conceptualization for these strategies. Indeed, contrary to prior studies, which treat growth strategies in a rather fragmentary manner creating confusion regarding the growth decisions to be made, this study brings growth down to its fundamental activities, including choices of both the direction and the mode of the ventures’ growth. The direction of growth refers to the product and geographic diversification decisions that the ventures should make, being in line with the corresponding decisions made by established firms. The mode of growth incorporates the extent to which growth choices rely on incremental or radical innovation development, limiting the dilemma of internal-innovation versus external-acquisition growth -faced by established firms- solely to the innovation pole. This limitation is due to the irrelevance of the acquisition expansion alternative for new ventures, which would be better off pursuing internal development, having their market potential still substantial and untapped. Conceptualizing new venture growth strategies in terms of these dimensions -product diversification, geographic diversification and innovation-, this study develops a theoretical framework, seeking to explore the strategic growth patterns that the ventures pursue during their development, attempting also to identify the antecedents of new venture growth as well as to predict the effect of strategic growth patterns on new venture performance. Indeed, this framework, which is built at the intersection of three major theoretical traditions, i.e. the resource-based view, the dynamic capabilities view and the social cognitive theory, examines the effects of five blocks of factors -the ventures’ resources, dynamic capabilities, prior growth strategies, the entrepreneurs’ sociocognitive attributes and the characteristics of the external environment-, on the ventures’ growth dimensions as well as the effects of these dimensions on performance. Besides the direct effects hypothesized to exist between each construct and the study’s dependent variables, this framework also assumes the existence of interrelations among the growth dimensions, implying also indirect relationships among constructs. It suggests that growth decisions are made simultaneously, supporting the existence of bidirectional relationships between both dimensions of the direction of growth (product and geographic diversification) and between the direction and the mode of new venture growth. The incorporation of these interrelations in the study provides deeper insights on the issue under investigation, allowing for trade-offs -potentially inherent in trying to optimize the decisions jointly- to be explored. The developed model is empirically investigated by using a sample of successful Greek new ventures between 2000 and 2008 which competed in the ICT sector, the food and beverages sector, the chemical sector and the textile and clothing sector. Data collection is conducted through personal interviews, with the ventures’ founders to constitute the key informants of the study given the extensive knowledge they possess regarding their ventures’ organizational characteristics. All variables of the framework are operationalized through scales adapted from extant literature so as the content validity of the measures used to be rather high. Construct validity and reliability is also checked through the conduct of Principal Component Analysis and Confirmatory Factor Analysis and the computation of the scales’ Cronbach’s a. Data analysis includes two major steps: first, a Durbin-Wu-Hausman test which checks for endogeneity among the three growth dimensions examine and after, a Path Analysis model which calculates both the direct and indirect effects of the study’s constructs on dependent variables. Although the results do not support the hypothesized endogenous relationships among the growth dimensions -rejecting a joint consideration of the growth decisions-, both dimensions of the direction of growth, i.e. the product and the geographic one are found to be related to the mode of growth. Indeed, product diversification seems to exert a positive effect on the innovation dimension whereas geographic diversification is found to be negatively related to the ventures’ innovativeness. This link of direction and mode combined with the lack of support for simultaneity in the ventures’ growth decision making processes indicate a rather defensive mode of new venture expansion, according to which new ventures seek to balance their choices regarding the ‘where’ of growth with the ones regarding the ‘how’ of growth. This balanced defensible development seems to match well with the needs of the ventures which lack an inherited position and thus, strive to obtain viability. Regarding the factors that affect new venture growth strategies, it is found that sociocognitive characteristics of founders are the main drivers of the direction of growth whereas both entrepreneurial and internal factors are the main determinants of the mode of growth. These findings highlight the central role of entrepreneurs in the ventures’ strategic growth process, pointing out that this role is even more critical in the case of the ‘where’ decisions of growth because of the high degree of uncertainty they entail and their operation as antecedents of the mode decisions. Moreover, the negative link found between prior growth strategies and new venture growth patterns strengthen the argument of a defensive growth mode implied by the direction-mode relationship, suggesting a rationalization of the ventures’ initial strategies before any further expansions are attempted. Taking these direct effects of antecedent factors on new venture growth dimensions together with their indirect effects implied by the relationship found between the direction and the mode of new venture growth, one can conclude that no trade-offs are inherent in trying to optimize both decisions jointly. Indeed, the results suggest that no antecedent factor acts as a key mediating influence in the joint optimization thus, no factor leads to a sub optimization of either the direction or the mode decision for the optimization of the other. Finally, the findings regarding the link between new venture growth patterns and performance support the hypothesized positive relationships of both the product diversification and innovativeness on performance whereas they provide evidence on the marginal effect of geographic expansion on new venture performance. These results, combined with the relationship found between the direction and the mode of new venture growth, are also indicative of an incremental mode of new venture expansion, suggesting that new ventures need to pursue product expansion through radical innovation to succeed.