Market Attractiveness Model

Evaluating Market Attractiveness - A New Venture Perspective -
DISSERTATION der Universitt St. Gallen, Hochschule fr Wirtschafts-, Rechts- und Sozialwissenschaften (HSG) zur Erlangung der Wrde eines Doktors der Wirtschaftswissenschaften
vorgelegt von Daniel Spohn aus Deutschland
Genehmigt auf Antrag der Herren Prof. Dr. Hans Jobst Pleitner und Prof. Dr. Beat Schmid
Dissertation Nr. 2917
Difo-Druck GmbH, Bamberg 2004
Die
Universitt
St.
Gallen,
Hochschule
fr
Wirtschafts-,
Rechts-
und
Sozialwissenschaften (HSG) gestattet hiermit die Drucklegung der vorliegenden Dissertation, ohne damit zu den darin augesprochenen Anschauungen Stellung zu nehmen.
St. Gallen, den 4. Mai 2004 Der Rektor:
Prof. Dr. Peter Gomez
Preface
For me, writing this dissertation has been in many ways like the experience of starting a venture. For several years, many nights have been spent developing the project. As with the start of a venture, there have been periods of restless enthusiasm and other periods where it seemed impossible to get the project on a successful track. Over time it has been satisfying to see the project progressing gradually. As the success of a venture is generally based on the effort of more than one person, this dissertation would have never been possible without the support and contribution from many sides. First, I would like to thank my supervisors Prof. Dr. Hans Jobst Pleitner and Prof. Dr. Beat Schmid for their support and for having given me the opportunity to investigate a topic in which I personally was very interested. Furthermore, I would like to thank Deutsche Telekom for its financial support, and Creditreform, ZEW and Deutsche Ausgleichsbank for the provision of data sets, which have been essential for conducting this study. The case studies were only possible thanks to the cooperation of the entrepreneurs Dr. Christian Serarols, Claudia Eleuterio and Stefan Martinstetter. Moreover I would like to thank Dr. Klaus Edel for his comments on the statistical methodology, as well as Robert Hartl and my teachers and colleagues from the European Doctoral Programme of entrepreneurship for their feedback on earlier drafts of this study. I owe special thanks to my brother Felix, who has carried a large part of my responsibilities in our joint firm over the last year in order to give me the time needed to finish the dissertation. Most of all, I thank my wife Fabiola for her excellent comments on the dissertation, for her continuous support and patience. Thanks to my son Diego for his understanding when Ive had to tell him, too often recently, that I was busy. Writing a dissertation provides one reward that starting a venture does not provide. At one point, at the end, I can say: I am happy that it is finished.
Barcelona, July 2004
Daniel Spohn
II
Outline
Preface.............................................................................................................................I Outline........................................................................................................................... II Table of contents .......................................................................................................... V List of figures............................................................................................................. XII List of tables..............................................................................................................XIV List of abbreviations ................................................................................................XIX 1 Introduction .......................................................................................................... 1 1.1 Problem statement .......................................................................................... 1 1.2 General purpose of the study and objectives.................................................. 2 1.3 Definition of basic terms ................................................................................ 4 1.4 Delimitation of the study................................................................................ 7 1.5 Underlying assumptions and choice of general research strategy ................. 9 1.6 General structure of the study ...................................................................... 12 2 Literature review ................................................................................................ 15 2.1 Entrepreneurship research ............................................................................ 15 2.2 Strategy / Industrial organisation research................................................... 37 3 Development of a theoretical model of market attractiveness ....................... 53 3.1 Approach ...................................................................................................... 53 3.2 Additional applicable research programs for the theoretical framework..... 54 3.3 Alternative conceptual approaches towards structuring and classifying the market environment................................................................................ 66 3.4 Development of an integrated model for analysing market attractiveness from a new venture perspective ................................................................... 84 4 Methodology...................................................................................................... 121 4.1 Measurement of venture success on the industry level.............................. 123
III
4.2 Quantitative empirical study: Impact of industry factors on the success of new ventures in Germany ......................................................... 128 4.3 Qualitative empirical study: Case studies of ventures in telecommunication and e-commerce industries ......................................... 140 4.4 General considerations of validity and reliability ...................................... 146 5 Quantitative empirical study: Impact of industry factors on new venture performance in Germany................................................................................. 149 5.1 Applied data sources .................................................................................. 149 5.2 Hypotheses on impact of industry variables on venture success ............... 159 5.3 Operationalisation of variables .................................................................. 169 5.4 Characteristics and performance of new venture activity based on the DtA sample................................................................................................. 190 5.5 Analysis of the impact of industry factors on new venture performance .. 218 5.6 Synopsis of results...................................................................................... 265 6 Qualitative empirical study: Case studies of selected ventures from the telecommunication and e-commerce industries............................................. 279 6.1 Case study Imente ................................................................................... 279 6.2 Case study Open House .......................................................................... 302 6.3 Case study Tele-Ruf Kommunikations GmbH ....................................... 324 7 Conclusions, significance of results and perspectives for future research.. 343 7.1 Summarising conclusions........................................................................... 343 7.2 Significance of results for practice............................................................. 347 7.3 Scientific significance of results and perspectives for future research ...... 351 Bibliography .............................................................................................................. 354 Appendices................................................................................................................. 370 Appendix A: Calculations for operationalization of MES variable................... 370 Appendix B: Industry ranking: Startups per industry ........................................ 372
IV
Appendix C: Ranking of industries by subjective success evaluation............... 376 Appendix D: Ranking of industries by venture sales growth ............................ 381 Appendix E: Ranking of industries by venture profit level ............................... 386 Appendix F: Ranking of industries by years ventures needed to break even .... 391 Appendix G: Questionnaire guideline for case study interviews....................... 396 Appendix H: List of interviewees ...................................................................... 405 Appendix H: List of interviewees ...................................................................... 405
Table of contents
Preface.............................................................................................................................I Outline........................................................................................................................... II Table of contents .......................................................................................................... V List of figures............................................................................................................. XII List of tables..............................................................................................................XIV List of abbreviations ................................................................................................XIX 1 Introduction .......................................................................................................... 1 1.1 Problem statement .......................................................................................... 1 1.2 General purpose of the study and objectives.................................................. 2 1.3 Definition of basic terms ................................................................................ 4 1.3.1 1.3.2 Market and industry........................................................................ 4 Market attractiveness...................................................................... 6
1.4 Delimitation of the study................................................................................ 7 1.5 Underlying assumptions and choice of general research strategy ................. 9 1.5.1 Assumptions about the nature of social science: Objectivist approach ......................................................................................... 9 1.5.2 1.5.3 Type of study: Explanatory research ............................................ 11 General research approach: Triangulation ................................. 12
1.6 General structure of the study ...................................................................... 12 2 Literature review ................................................................................................ 15 2.1 Entrepreneurship research ............................................................................ 15 2.1.1 2.1.2 2.1.3 Research on market success factors ............................................. 15 Research on VC deal evaluation criteria...................................... 25 Conclusions and implications for the study.................................. 32
2.2 Strategy / Industrial organisation research................................................... 37
VI
2.2.1 2.2.2 2.2.3 3
Research on measuring industry effects ....................................... 37 Research on market success factors in strategy ........................... 42 Conclusions and implications for the study.................................. 49
Development of a theoretical model of market attractiveness ....................... 53 3.1 Approach ...................................................................................................... 53 3.2 Additional applicable research programs for the theoretical framework..... 54 3.2.1 3.2.2 3.2.3 3.2.4 3.2.5 3.2.6 3.2.7 Selection of research programs .................................................... 54 Industry economics ....................................................................... 54 Organisation ecology.................................................................... 57 Transaction costs economics ........................................................ 59 Contingency theory ....................................................................... 62 Game theory.................................................................................. 63 Summarising consideration of contributions in different fields ... 65
3.3 Alternative conceptual approaches towards structuring and classifying the market environment................................................................................ 66 3.3.1 3.3.2 3.3.3 3.3.4 3.3.5 Model of Porter: Five forces model.............................................. 67 Baakens market framework ......................................................... 71 Dean and Meyers model.............................................................. 76 Hinterhubers framework ............................................................. 78 Summarising consideration of critical aspects for developing structured models of market environments................................... 82 3.4 Development of an integrated model for analysing market attractiveness from a new venture perspective ................................................................... 84 3.4.1 3.4.2 Objective of model ........................................................................ 84 Basic structure of the model: Five environmental levels of ............. analysis ........................................................................................ 85 3.4.3 Macro level: Opportunities in global & national environment.... 91
VII
3.4.4 3.4.5
Inter-country level: National competitiveness.............................. 95 Inter-industry level: Opportunities & threats from related industries....................................................................................... 99
3.4.6 3.4.7 3.4.8 4
Intra-industry level: Market, dependencies & competitors........ 101 Venture / firm level: Relative positioning to competition........... 112 Summary ..................................................................................... 115
Methodology...................................................................................................... 121 4.1 Measurement of venture success on the industry level.............................. 123 4.2 Quantitative empirical study: Impact of industry factors on the success of new ventures in Germany ...................................................................... 128 4.2.1 4.2.2 4.2.3 Variables under investigation..................................................... 131 Selection of data sources and sampling criteria......................... 134 Method of data analysis and interpretation: Analysis of correlation and multivariate regression..................................... 137 4.3 Qualitative empirical study: Case studies of ventures in telecommunication and e-commerce industries............................................... 140 4.3.1 Industrial focus on cases from the telecommunications and ecommerce sectors........................................................................ 140 4.3.2 4.3.3 4.3.4 4.3.5 Variables under investigation..................................................... 141 Selection of case studies ............................................................. 141 Method of data collection ........................................................... 143 Method of data analysis and interpretation: Pattern-matching and explanation-building............................................................ 145 4.4 General considerations of validity and reliability ...................................... 146
VIII
Quantitative empirical study: Impact of industry factors on new venture performance in Germany................................................................................. 149 5.1 Applied data sources .................................................................................. 149 5.2 Hypotheses on impact of industry variables on venture success ............... 159 5.3 Operationalisation of variables .................................................................. 169 5.3.1 5.3.2 Operationalisation of venture success........................................ 169 Operationalisation of industry variables on the intra-industry level and barriers to entry ......................................................... 174 5.3.2.1 Operationalisation of variables of market structure ......... 175 5.3.2.2 Operationalisation of variables of market dynamics......... 179 5.3.2.3 Operationalisation of variables of competitor structure ... 182 5.3.2.4 Operationalisation of variables of barriers to entry ......... 187 5.3.2.5 Operationalisation of additional control variables ........... 187 5.4 Characteristics and performance of new venture activity based on the DtA sample................................................................................................. 190 5.4.1 Sample description on venture level ........................................... 190 5.4.1.1 Structure............................................................................. 190 5.4.1.2 Success measures ............................................................... 193 5.4.1.3 Inter-temporal development of success measures for ............. sub-samples........................................................................ 200 5.4.2 Sample description on aggregated industry level....................... 207 5.4.2.1 Structure............................................................................. 208 5.4.2.2 Success measures ............................................................... 210 5.4.3 Summary of characteristics and performance of new ventures in sample .................................................................................... 217 5.5 Analysis of the impact of industry factors on new venture performance .. 218 5.5.1 Dependencies among variables .................................................. 218
IX
5.5.1.1 Dimensions of venture success .......................................... 219 5.5.1.2 Dimensions of independent industry variables.................. 220 5.5.2 Analysis of overall sample .......................................................... 227 5.5.2.1 Sales growth....................................................................... 227 5.5.2.2 Profit level.......................................................................... 231 5.5.2.3 Time to break even ............................................................. 234 5.5.2.4 Subjective absolute venture performance .......................... 238 5.5.3 Impact of contingency variables................................................. 242 5.5.3.1 Industry sector ................................................................... 242 5.5.3.2 Market growth rate ............................................................ 250 5.5.3.3 Venture growth rate ........................................................... 254 5.5.3.4 Intra-industry heterogeneity .............................................. 259 5.6 Synopsis of results...................................................................................... 265 6 Qualitative empirical study: Case studies of selected ventures from the telecommunication and e-commerce industries............................................. 279 6.1 Case study Imente ................................................................................... 279 6.1.1 6.1.2 6.1.3 Venture profile ............................................................................ 279 Competition and general market setting..................................... 281 Explanation of market impacts on venture success .................... 281 6.1.3.1 Macro level ........................................................................ 281 6.1.3.2 Inter-country level.............................................................. 283 6.1.3.3 Inter-industry level............................................................. 285 6.1.3.4 Intra-industry level............................................................. 287 6.1.3.5 Barriers to entry................................................................. 293 6.1.3.6 Venture / firm level............................................................. 294
6.1.4 6.1.5
Excursus: Derived strategic recommendations for Imente ........ 295 Summarising evaluation of the impact of critical market characteristics on venture performance throughout different evolution phases.......................................................................... 300
6.2 Case study Open House .......................................................................... 302 6.2.1 6.2.2 6.2.3 Venture profile ............................................................................ 302 General market setting................................................................ 303 Explanation of market impacts on venture success .................... 304 6.2.3.1 Macro level ........................................................................ 304 6.2.3.2 Inter-country level.............................................................. 306 6.2.3.3 Inter-industry level............................................................. 308 6.2.3.4 Intra-industry level............................................................. 310 6.2.3.5 Barriers of entry................................................................. 316 6.2.3.6 Venture / firm level............................................................. 317 6.2.4 Excursus: Derived strategic recommendations for Open House .......................................................................................... 320 6.2.5 Summarising evaluation of the impact of critical market characteristics on venture performance throughout different evolutionary phases .................................................................... 322 6.3 Case study Tele-Ruf Kommunikations GmbH ....................................... 324 6.3.1 6.3.2 6.3.3 Venture profile ............................................................................ 324 General market setting................................................................ 325 Explanation of market impacts on venture success .................... 326 6.3.3.1 Macro level ........................................................................ 326 6.3.3.2 Inter-country level.............................................................. 328 6.3.3.3 Inter-industry level............................................................. 328 6.3.3.4 Intra-industry level............................................................. 330
XI
6.3.3.5 Barriers to entry................................................................. 337 6.3.3.6 Venture / firm level............................................................. 338 6.3.4 6.3.5 Excursus: Derived strategic recommendations for Tele-Ruf ..... 339 Summarising evaluation of the impact of critical market characteristics on venture performance throughout different evolutionary phases .................................................................... 341 7 Conclusions, significance of results and perspectives for future research.. 343 7.1 Summarising conclusions........................................................................... 343 7.2 Significance of results for practice............................................................. 347 7.3 Scientific significance of results and perspectives for future research ...... 351 Bibliography .............................................................................................................. 354 Appendices................................................................................................................. 370 Appendix A: Calculations for operationalization of MES variable................... 370 Appendix B: Industry ranking: Startups per industry ........................................ 372 Appendix C: Ranking of industries by subjective success evaluation............... 376 Appendix D: Ranking of industries by venture sales growth ............................ 381 Appendix E: Ranking of industries by venture profit level ............................... 386 Appendix F: Ranking of industries by years ventures needed to break even .... 391 Appendix G: Questionnaire guideline for case study interviews....................... 396 Appendix H: List of interviewees ...................................................................... 405 Appendix H: List of interviewees ...................................................................... 405
XII
List of figures
Figure 1: Delimitation of the study................................................................................. 9 Figure 2: Assumptions about the nature of social science: Objectivist approach ........ 11 Figure 3: General structure of chapters of study........................................................... 14 Figure 4: Aggregation of research on market factors in entrepreneurship ................... 33 Figure 5: Summary of research on market factors in strategy...................................... 50 Figure 6: Structure - conduct - performance paradigm (source Scherer and Ross 1990:5).......................................................................................... 55 Figure 7: Key market factors in research programs...................................................... 66 Figure 8: Porters model of five competitive forces ..................................................... 68 Figure 9: Portfolio matrix of Baaken............................................................................ 74 Figure 10: Model of determinants of new venture formations by Dean and Meyer (1996) ............................................................................................... 77 Figure 11: The three aggregation levels of environment.............................................. 86 Figure 12: The five environmental levels of the model................................................ 88 Figure 13: The 5 x 5 model of market attractiveness ................................................... 90 Figure 14: Macro level - Opportunities in global & national environment.................. 91 Figure 15: Inter-country level - National competitiveness ........................................... 95 Figure 16: Inter-industry level Opportunities & threats from related industries....... 99 Figure 17: Intra-industry level Market, dependencies & competitors..................... 101 Figure 18: Intra-industry level including barriers to entry ......................................... 110 Figure 19: Venture / firm level - Relative positioning to competition ....................... 112 Figure 20: The 5 x 5 model of market attractiveness including variables.................. 120 Figure 21: Orientation of research design................................................................... 122 Figure 22: Alternative measures of new venture success ........................................... 124 Figure 23: Investigated independent variables on the intra-industry level................. 175
XIII
Figure 24: Years of foundation of ventures in sample ............................................... 191 Figure 25: Average subjective performance measure by years of venture foundation.................................................................................................. 194 Figure 26: Average venture growth in sales measure, by years of venture foundation.................................................................................................. 196 Figure 27: Average venture profit (in 1,000 Euro) by years of venture foundation... 197 Figure 28: Average years needed to break even by years of venture foundation....... 199 Figure 29: Average share of ventures in % without breaking even until 2001 by years of venture foundation ................................................................................ 199 Figure 30: Development of venture sales 1998-2001................................................. 201 Figure 31: Sales growth of ventures in percent for years of operation....................... 201 Figure 32: Annual growth of number of employees by year of venture foundation .. 202 Figure 33: Annual growth in taxable sales for Germany from the value-added tax statistics ..................................................................................................... 202 Figure 34: Development of the number of employees 1998-2001 ............................. 203 Figure 35: Annual employee growth rates1998-2001 in percent ............................... 204 Figure 36: Annual growth of number of employees by year of venture foundation .. 204 Figure 37: Development of the venture profits 1998-2001 ........................................ 205 Figure 38: Mean of venture profits compared with sales ........................................... 206 Figure 39: Development of average venture profits by year of venture foundation .. 206 Figure 40: Annual venture profits in 1000 Euro 1998-2001 ...................................... 207 Figure 41: Distribution of industries among four major industry sectors .................. 208
XIV
List of tables
Table 1: Studies of entrepreneurship research investigating sets of market success factors ............................................................................................. 17 Table 2: Table 3: Summary of market success factors ............................................................ 20 Studies of entrepreneurship research investigating market-strategy interactions .................................................................................................. 25 Table 4: Studies of entrepreneurship research investigating VC deal evaluation criteria.......................................................................................................... 26 Table 5: Table 6: Table 7: Table 8: Summary of VC deal evaluation criteria related to market......................... 29 Empirical studies on industry effects .......................................................... 40 Indicators for former underestimation of industry effects .......................... 41 Profiles of previous studies in industrial organisation/strategy research dealing with the impact of individual market factors.................................. 43 Table 9: Summary of market success factors in industrial organisation/ strategy research........................................................................................................ 46 Table 10: Porters five competitive forces framework including second order determinants ................................................................................................ 69 Table 11: Evaluation of Porter's "five forces model" .................................................. 70 Table 12: Baakens framework of the market environment........................................ 73 Table 13: Evaluation of the market framework of Baaken ......................................... 76 Table 14: Evaluation of the model of Dean and Meyer .............................................. 78 Table 15: Structure for environmental analysis and forecast by Hinterhuber............. 80 Table 16: Evaluation of the framework of Hinterhuber .............................................. 82 Table 17: Critical aspects for developing frameworks of market environments ........ 84 Table 18: Minimum aggregation level and research questions for five levels of analysis ........................................................................................................ 89 Table 19: Model of market attractiveness: Macro level .............................................. 94
XV
Table 20: Model of market attractiveness: Inter-country level ................................... 98 Table 21: Model of market attractiveness: Inter-industry level ................................ 100 Table 22: Model of market attractiveness: Intra-industry level ................................ 109 Table 23: Model of market attractiveness: Barriers to entry..................................... 111 Table 24: Model of market attractiveness: Venture / firm level ............................... 115 Table 25: Summary of the unique characteristics of the developed model of market attractiveness ................................................................................. 116 Table 26: Evaluation of alternative measures of venture success ............................. 127 Table 27: Profile of firms from case study ................................................................ 143 Table 28: Measures to minimise area of concern regarding validity and reliability . 148 Table 29: Data sources - Data collection and applied data sets ................................ 158 Table 30: Operationalisation of dependent variables of venture success.................. 174 Table 31: Operationalisation of market structure ...................................................... 179 Table 32: Operationalisation of market dynamics..................................................... 182 Table 33: Operationalisation of competitor structure................................................ 186 Table 34: Operationalisation of barriers to entry....................................................... 187 Table 35: Operationalisation of control variables ..................................................... 189 Table 36: Venture size in employees at year of start up............................................ 191 Table 37: Distribution of average venture size in average ventures sales in 1,000 Euro ................................................................................................. 192 Table 38: Distribution of ventures among four major industry sectors...................... 193 Table 39: Summarising descriptive analysis of success measures ............................. 194 Table 40: Frequency table of subjective performance measure ................................. 194 Table 41: Frequency table of venture sales growth .................................................... 195 Table 42: Frequency table of average venture profits in 1,000 Euro ......................... 197 Table 43: Frequency table of years to break even success measure........................... 198
XVI
Table 44: Top 25 industries with most business startups in Germany according to the DtA sample...................................................................................... 209 Table 45: Top 25 industries by venture sales growth................................................ 212 Table 46: Top 25 industries by achieved level of venture profits ............................. 213 Table 47: Top 25 industries by years needed to break even...................................... 215 Table 48: Top 25 industries by subjective venture success evaluation ..................... 216 Table 49: Correlation table of dependent variables of venture performance ............ 219 Table 50: Correlation table of independent industry variables (part 1)..................... 225 Table 51: Correlation table of independent industry variables (part 2)..................... 226 Table 52: Correlation of industry factors with subjective venture performance....... 229 Table 53: Variables considered for inclusion in regression analysis (venture growth overall sample)........................................................................... 229 Table 54: Regression table of overall sample for venture growth............................. 230 Table 55: Correlation of industry factors with venture profits.................................. 232 Table 56: Variables considered for inclusion in regression analysis (venture profit overall sample) ............................................................................. 233 Table 57: Regression table of overall sample for venture profits ............................. 234 Table 58: Correlation of industry factors with years to break even .......................... 236 Table 59: Variables considered for inclusion in regression analysis (years to break-even overall sample) .................................................................... 237 Table 60: Regression table overall sample for years to break even .......................... 237 Table 61: Correlation of industry factors with subjective venture performance....... 240 Table 62: Variables considered for inclusion in regression analysis (subjective venture performance overall sample)..................................................... 240 Table 63: Regression table of overall sample for subjective performance ............... 241 Table 64: Correlation of industry factors with venture performance measures by industry sector ........................................................................................... 243
XVII
Table 65: Correlation of industry factors with venture performance measures by industry sector ........................................................................................... 245 Table 66: Summarising regression results of 16 regressions by industry sector....... 249 Table 67: Correlation of industry factors with venture performance measures by market growth categories .......................................................................... 252 Table 68: Summarising regression results of 12 regressions by market growth category ..................................................................................................... 254 Table 69: Correlation of industry factors with venture performance measures by venture growth categories ......................................................................... 256 Table 70: Summarising regression results of 12 regressions by venture growth category ..................................................................................................... 259 Table 71: Correlation of industry factors with venture performance measures by intra-industry profit heterogeneity categories ........................................... 261 Table 72: Number of significant correlations for different categories of industry heterogeneity by success measure............................................................. 262 Table 73: Summarising regression results of 12 regressions by industry heterogeneity category .............................................................................. 264 Table 74: Summary table of significant correlations in different contexts with results of hypotheses ................................................................................. 267 Table 75: Importance and generalisability of industry variables from hypotheses... 275 Table 76: Importance and generalisability of industry variables not included in hypotheses ................................................................................................. 276 Table 77: Macro level analysis Imente...................................................................... 282 Table 78: Inter-country level analysis Imente ........................................................... 284 Table 79: Inter-industry analysis Imente ................................................................... 286 Table 80: Intra-industry level analysis Imente .......................................................... 290 Table 81: Barriers to entry analysis Imente............................................................... 293 Table 82: Venture level analysis Imente ................................................................... 295
XVIII
Table 83: Macro level analysis Open House ............................................................. 305 Table 84: Inter-country level analysis Open House .................................................. 307 Table 85: Inter-industry analysis Open House .......................................................... 308 Table 86: Intra-industry level analysis Open House ................................................. 313 Table 87: Barriers to entry analysis Open House...................................................... 317 Table 88: Venture level analysis Open House........................................................... 318 Table 89: Macro level analysis Tele-Ruf .................................................................. 327 Table 90: Inter-country level analysis Tele-Ruf........................................................ 328 Table 91: Inter-industry analysis Tele-Ruf................................................................ 329 Table 92: Intra-industry level analysis Tele-Ruf....................................................... 333 Table 93: Barriers to entry analysis Tele-Ruf ........................................................... 337 Table 94: Venture level analysis Tele-Ruf ................................................................ 338
XIX
List of abbreviations
CE Dep diss. DtA e.g. EBIT ed. Eds et al. EG EP EU FS FP FTC GBV GEM GNP Hyp INP IP IPO JP LOB MS N capital employed dependent variable dissertation Deutsche Ausgleichsbank for example earnings before interest and taxes editor editors et alii (and others) employee growth economic profit European Union firm survival firm profit Federal Trade Commission gross book value Global Entrepreneurship Monitor gross national product hypothesis industry profit internet protocol initial public offering Japan line of business market share number of firms
XX
n.a. NACE p. P&E PCM Pp PIMS Prof. R&D Rev. ROA ROE ROI ROS SBU SEC SG SIC sig. SME Std. Er. TMV Toler. transl. US VC V
not applicable nomenclature of economic activities in the European Union page plant and equipment price cost margin pages profit impact of market strategy professor research and development revision return on assets return on equity return on investment return on sales standard business unit Securities & Exchange Commission sales growth standard industrial classification significance small and medium sized enterprise standard error total market value tolerance Translation United States venture capitalist variable
XXI
vs. ZEW
versus Zentrum fr Europische Wirtschaftsforschung
XXII
CHAPTER 1 - INTRODUCTION
1
1.1
Introduction
Problem statement
Since the beginnings of entrepreneurship and business research, the primary motivation of most research has been to understand why some firms are more successful than others. Understanding the secrets - the factors and constellations - that have made some companies perform better in the past may not only serve to satisfy scientific curiosity, but it may also help to build more successful companies in the future under the premise that entrepreneurs are able to influence the factors and constellations that are identified as being related to higher venture success. The different dimensions of these factors related to higher success have been investigated in earlier studies. For many years, research in entrepreneurship has concentrated on the impact of the characteristics of the entrepreneur on venture success, and a considerable body of evidence has shown that the entrepreneurs characteristics explain a relatively high share of venture success. In the mid 1980s more comprehensive models were developed in entrepreneurship research, which included, apart from variables related to the entrepreneur, the variables of the industry in which the venture operated and those of the strategies chosen. This extension of the dimensions taken into consideration resulted from the intention of building models with a better capacity to account for entrepreneurial success. It has been shown that environmental factors also explain, to a large extent, the venture success phenomenon. Recognition of the importance of environmental factors was fuelled by the increasing popularity of other scientific fields such as organisational ecology, industrial economics and industrial organisation. These fields shared a common belief in the dominant importance of the industry structure for organisational success. Nowadays, environmental factors are commonly accepted as constituting one of the most important dimensions when studying venture success. Research on the impact of the strategy dimension on venture success has led to the basic conclusion that there is not one strategy that leads to venture success, but that there might well be one strategy that leads to venture success in specific environmental settings. Consequently, understanding the environmental setting in which an organisation operates is a prerequisite for defining successful strategies.
There are clear differences regarding the extent to which an entrepreneur can actively influence the three main dimensions for creating more successful companies, namely: the characteristics of the entrepreneur, the environment and strategy. With respect to the dimension of successful entrepreneurs, it can be observed that many of the identified characteristics are innate or are personality traits which, for an adult, can only be changed to a limited degree. Without any doubt, these factors do have a great impact on venture success. However, from the view of the individual entrepreneur who seeks ways to create a more successful company, the majority of the identified success factors regarding the characteristics of the entrepreneur have to be considered as given and are rarely changeable1. On the other hand, on business start-up, the entrepreneurs have substantially more possibilities to influence the industry dimension and the strategies employed than their own personality traits. A better understanding of market and industry environments and their impact on venture success might enable entrepreneurs to recognise risks, choose attractive environments and, as a consequence, start more successful ventures. Knowledge of the industry and the market environment is essential to choosing successful strategies. Despite the acknowledged importance of the industry and market environments in general, research results regarding the specific impacts of the industry and market environments are considered weak and highly contradictory2.
1.2
General purpose of the study and objectives
The purpose of this research is to gain a better understanding of the influence of market environments on venture performance with the aim of contributing answers to the primary research questions that have arisen from the stated problem. Specifically, the following main research questions will be addressed: 1. Which particular characteristics of market environments increase the probability of new venture success and what is their respective strength of impact?
As stated by Ian MacMillan in a speech at Vxj University on May 5th, 1999: However this research [on the characteristics of the entrepreneur] turned out to be of not much value. 2 Deficits in the current knowledge about the impact of the environment on venture success have been pointed out by Levenhagen and Thomas 1993, Schmude 1994, Brderl, Preisendrfer, and Ziegler 1996, MllerBling and Klandt 1996, Low, and Abrahamson 1997.
2. To what extent does the impact of market environment characteristics vary among different contexts such as economic sectors and market lifecycle stages?
3. What
are
the
underlying
mechanisms
through
which
market
characteristics impact venture performance?
This study takes into consideration some of the above-mentioned shortcomings of previous research by focusing solely on the market environment dimension and by including a more comprehensive factor set. The general objective of this study is to identify specific indicators or constellations of indicators for higher probabilities of venture success. This will help both investors and entrepreneurs to evaluate venture environments and to identify the related risks. A better understanding could lead to an increase in venture success. The specific objectives of this study, derived from the above mentioned research questions, are: 1. To analyse the empirical results from relevant studies in the areas of entrepreneurship and strategy research with respect to marketventure success relations.
2. To study, from different theoretical perspectives, the market factors that affect organisational success.
3. To propose a new proprietary theoretical model of market attractiveness that concentrates on the specific perspective of new ventures and provides a structuring framework for the analysis of the impact of market variables on venture success.
4. To empirically identify markets in which new ventures have been the most successful.
5. To empirically study the relationship between industry variables and the success of new ventures.
6. To empirically study the impact of contingent variables on the relationship between industry variables and the success of new ventures.
7. To empirically identify the mechanisms through which market factors influence venture success.
The individual objectives of the study are interrelated. The results of previous empirical research and theory (objectives 1 and 2) are the basis for the development of a proprietary theoretical model of market attractiveness (objective 3). This proprietary model in turn will serve as a reference for the subsequent empirical investigation. The empirical study is not aimed towards the empirical verification of the theoretical model, instead it is the objective of the empirical study to investigate specific aspects of the relationship between industry variables and venture success (objectives 4 to 7) referring to the model as a structuring framework.
1.3
Definition of basic terms

1.3.1 Market and industry
Market: A market is defined as an "exchange mechanism which brings together the sellers and buyers of a product. Markets, in practice embrace a number of product,
spatial and physical dimensions"3. Throughout this study the focus will be on markets from a product perspective. According to such a perspective, a narrow market definition defines markets as "a group of goods or services, which are viewed as substitute products by buyers"4. A further distinction has to be made according to the inter-temporal nature of markets. The traditional school, based on an industrial economic perspective, views market structure as exogenous and stable. In contrast, the Schumpeterian and Chicago schools view market structure as dynamic and constantly evolving. The Schumpeterian school focuses on revolutionary innovations that make rivals positions obsolete and change industry structure. Similarly, the Chicago school believes in the long-term convergence of competitive patterns as and when less successful firms imitate the strategies of the more successful ones5. As opposed to the industrial economic perspective, the dynamic nature of markets is acknowledged in this study and therefore general environmental changes and elements of market dynamics are taken into consideration. Industry: An industry is defined as "a branch of commercial enterprise concerned with the output of related goods"6. Contrary to the notion of markets, industry aggregations are generally defined on the basis of similarities from a supply-side, rather than a demand-side perspective. Moreover, the more broadly defined term industry comprises companies that operate in several markets. Particularly large enterprises operate frequently in a large number of markets at the same time. In practice, both of the terms industry and market describe very similar phenomena when defining markets and industries based on a product dimension and both terms comprise demand and supply elements. In a more general market definition, the supply side of markets is explicitly included when markets are defined in a broader sense as a group of demanders including their needs, of goods as utility creating bundles of attributes and of suppliers with the instruments of the utility creation 7. Commonly,
3 4
Collins Dictionary of Business 1995: 388. Collins Dictionary of Business 1995: 389. 5 Mauri and Michaels 1998. 6 Collins Dictionary of Business 1995: 313. 7 Vahlens Groes Wirtschaftslexikon 1993: 1394 transl. from German Menge von Nachfragern samt ihren Bedrfnissen, von Gtern als nutzenstiftenden Eigenschaftsbndeln und von Anbietern mit den Instrumenten der Nutzenstiftung.
the term industry is applied to describe rather comprehensive aggregates on a narrow classification depth, while the term market is frequently applied for smaller, more specific aggregates at a deeper classification depth. The theoretical part of the study mainly refers to markets rather than industries, since the impacts of specific settings and conditions are investigated and the term industry could lead to misunderstandings with respect to the desired narrow aggregation level. The quantitative study, however, refers mainly to industry. Because no statistical data is normally available on market categories, the quantitative study is based on industry data collected from standard industry classifications. This seems to be legitimate since, in the context of SMEs, market and industry might capture very similar phenomena. SMEs frequently have a low degree of diversification and often focus on solely one market. 1.3.2 Market attractiveness The term market attractiveness stems from the business portfolio planning technique literature, which suggests that firms should invest in markets with certain attractive characteristics. The one most popular business portfolio planning technique is the Boston Consulting Group matrix8, which classifies businesses according to the two dimensions of market growth and profitability. In this simple matrix model, business profitability and market growth are considered independent of each other, and market growth is applied as the only external determinant for market attractiveness. However, the attractiveness of markets is influenced by many more factors than market growth. As is shown in the literature review, this limitation of the term market or industry attractiveness to one external market factor or a small number of factors has been very common in earlier research, neglecting the complexity and diversity of market environments. The term of environmental munificence has frequently been used in strategy literature as an aggregate for attractive market environments. Environmental munificence has been defined as "scarcity or abundance of critical resources needed by firms operating within an environment"9. However, the adoption of this definition for market
Hammond and Allan 1975, see also Pleitner 1983 and Rupp 1988 for in-depth discussion of portfolio matrices and product/market strategies. 9 Castrogiovanni 1991.
attractiveness has to be rejected, since it excludes relevant dimensions of attractiveness, including several aspects of industry structure and competitive setting. Within the context of this study, market attractiveness must, in a broader sense, comprise all characteristics that affect the organisational success of a collective group of organisations within one market and neither contribute on an individual level to the human characteristics within these organisations or characteristics of individual organisations, nor to characteristics that arise from a specific geographic context.
1.4
Delimitation of the study
In order to prevent a basic misunderstanding of the purpose of the study, it is important to stress that this study does not claim that new venture performance is solely a function of market characteristics. Previous research has provided ample evidence indicating that the performance of new ventures is not only dependant on environmental factors, but also on the individual profile of the entrepreneurs, the specific product or service concept of the venture, as well as the strategic postures adopted. Rather, the purpose of this study is to undertake a focused investigation regarding the impact of the market dimension on the success of new ventures. Focus on investigated variables: Market variables According to previous studies, market factors accounted for an average of only 20% of overall performance variance. It might therefore be assumed that this study explains a larger share of overall performance variance by taking into account some of the gaps in earlier studies by applying a highly comprehensive list of variables, by taking into consideration the contextual setting with regard to industry and market lifecycle stages, as well as by focusing on the service sector. Still, the impact of factors other than market factors might distort the findings. Therefore, the quantitative part of the study will apply averages of success measures among a large number of firms within an industry in order to level the unquestionably significant impact of management, venture concept and strategy. Sectoral focus: Mainly service industries The study will mainly focus on industries in the service sector. McGahan and Porter (1997) discovered that market characteristics account for far higher shares of performance variance in industries from the service sector than from the
manufacturing sector. A focus on service industries will therefore decrease distortions by contingent non-market factors. In addition, previous research has largely neglected the service sector, despite the fact that its volume exceeds the volume of the manufacturing sector in most developed countries and that it has a continuously growing share of the GNP. While the general theoretical model of market attractiveness will be independent of the industry sector, the quantitative part of the study will rely mainly on data from companies in the service sector. This reflects the dominant share of start-ups in the service sector among the overall number of startups. However, data from the manufacturing sector will not be excluded but incorporated into the analysis in order to allow cross-sector comparisons. Organisational focus: New venture perspective The study will focus on the evaluation of market constellations from the perspective of new ventures as organisational objects of analysis. New ventures have been defined as firms that have started operations no more than eight years ago. The empirical investigations can therefore only provide results for the success of market entry and retention within the first years of operation. The study will be limited with regard to a short- and medium-term development of success measures. Specifically, it will not be able to identify market structures that might favour a high sustainable long-term performance. The findings might also be limited to small firms, as ventures generally start at a limited organisational size. Overall, it has to be concluded that the findings claim no validity for the decisions of market diversification in large firms with a longterm performance expectation. Geographic focus: One national context (quantitative part), several national contexts (qualitative part) The quantitative data set will only include organisations within Germany. Otherwise, differences on the national macro level may distort the market effects. The findings might therefore be restricted to the investigated geographic context. However, while the importance of particular critical market factors can vary among different national contexts, the underlying more abstract relationships between market characteristics and venture success might be to a large extent transferable to other geographic contexts, at least among western European countries. The qualitative study will
consider cases from Spain and Germany in order to permit also cross-country comparisons.
performance
VARIABLES service
market
entrepreneur
strategy
SECTOR
manufacturing
ORGANISATION
new ventures
established companies
GEOGRAPHIC
Germany / Western Europe
rest of world
Figure 1: Delimitation of the study
1.5
Underlying assumptions and choice of general research
strategy
1.5.1 Assumptions about the nature of social science: Objectivist approach This study will be primarily grounded on assumptions about the nature of social science, as proposed by the objectivist approach. These assumptions will underpin the objectives and the design of the study. First, a realistic rather than a nominalist view on ontology will guide the assessment of market characteristics in specific market contexts. Even though it will be acknowledged that the environment is perceived by individuals differently, it is assumed in this study, that a real, objective market exists. The dimensions of the market are assumed to be measurable. The nominalist interpretation of markets as an individual mental construct is negated in this study. This would render the measurement of market characteristics rather difficult, if not impossible. Second, a positivist rather than an anti-positivist view on epistemology will guide the objectives of the study and the applied methods of data collection and analysis. In accordance with the positivist approach, the author strongly believes in the ability of
10
science to transmit knowledge among individuals. The experience of specific market settings might be transmittable to other market settings. The radical anti-positivist stance reduces the ability of knowledge acquisition to personal experience. Such a standpoint would basically negate the feasibility of explanatory research. Third, a nomothetic, rather than an ideographic view on methodology will guide the overall research design. The study aims at the identification of causal relationships between markets and venture success that could be generalisable in certain contexts. While maintaining a nomothetic view and the orientation towards generalisable causal relationships, the level of generalisability of the causal relationships will be critically discussed. In accordance with the ideographic critics of universal generalisations, causal relationships will be investigated on low industry aggregations levels within the quantitative study as well as in specific contexts as life-cycle stages. Within the qualitative part of the study, the proposal of ideographic research for further disaggregation on an individual level will be acknowledged. However, it is still assumed that different individuals might perceive the environments of specific markets similarly. Fourth, a deterministic rather than voluntaristic view on human nature will guide the purpose of the study and the method of data collection. It should be noted that this assumption should be solely considered as a simplifying model projecture. Especially in dynamic industries, individual market players can certainly impact the market environment in which they operate with radical innovations that change the "rules of the game" of the market or by the intentional instrumentalisation of their market power. Nevertheless, a deterministic view seems to be justified for several reasons. First, new ventures entering a market do not generally have the option of changing the environment by market power, only by radical innovation. Even in markets with low capital intensity, it can be observed that from the total number of new ventures that enter a market, only a very few are able to introduce radical innovations that change the "rules of the game". Moreover, most of these new ventures that are able to change the "rules of the game will do this only for a market niche and not for an overall market. Second, it is obvious, that market environments can certainly not be created at will by any individual organisation. Existing market settings impose clear limitations on the feasibility of venture concepts.
11
OBJECTIVIST APPROACH Realistic view Nominalistic view Market is not a mental construct but real Knowledge is transferable, not limited to personal experience
ONTOLOGY
Positivist EPISTOMOLOGY
Anti Positivist
METHODOLOGY
Nomothetic
Ideographic
Market-success relations generalisable Existing market settings not modifiable at will
HUMAN NATURE
Deterministic
Voluntaristic
Figure 2: Assumptions about the nature of social science: Objectivist approach
1.5.2 Type of study: Explanatory research The study aims to reach beyond the identification of relevant market characteristics and their descriptions. In the empirical part of the study, causal relationships between market characteristics and success measures will be investigated on the basis of several theoretical perspectives in the field of business and economic theory. Thus the study will be explanatory in nature. The combination of quantitative and qualitative methodologies within the study allows the consideration of both inductive and deductive modes of argument. Deductive elements will be applied in the initial stage of the study when aggregating market variables proposed by a broad scope of theories and empirical investigations within the fields of business and economics. These theories will guide the selection of relevant market variables to be measured in the later empirical stages of the study. In the second stage of the study, hypotheses are deduced for relationships between market factors and venture performance. In the third stage, the phenomena investigated within the case studies will be interpreted on the basis of explanations from scientific theories and the findings of the second stage.
12
1.5.3 General research approach: Triangulation In social science research, triangulation means using different methods10 in order to examine the combination of methodologies in the study of the same phenomenon. The rationale for the application of triangulation follows the argument of Wilson (1986): "qualitative and quantitative approaches are complementary rather than competitive methods. Each supplies a kind of information that is not only different from the other, but also essential for interpreting the other. Quantitative studies reveal patterns of regularities in situated actions, while qualitative investigations shed light on the concrete social processes by which particular patterns of situated actions are produced". Quantitative techniques will be applied in the first part of the empirical study in order to identify critical market characteristics with regard to venture performance. Qualitative techniques will then be applied in the second part of the empirical study. The case studies will produce insights into the processes and mechanisms by which market factors influence venture performance. The qualitative approach could especially supplement the explanation for barely measurable mechanisms of impact of market factors on new venture success. Both the use of multiple stages and triangulation are recommended by Hofer and Bygrave (1992) for research on entrepreneurship.
1.6
General structure of the study
Following the proposition of Hofer and Bygrave, several stages of research design will be applied: "The holistic nature of the entrepreneurial process combined with the number of antecedent variables involved, strongly argues for a multiple stage design, in which the initial stages are used to explicitly identify the factors to be studied in later stages, as well as the ways that will be used to study them"11. The study is structured along consecutive stages: STAGE 1: THEORETICAL PART The theoretical part leads to the development of a conceptual model of market attractiveness. A general introduction in chapter one is followed by a literature review of market-related research in the fields of entrepreneurship research and strategy in
10 11
In particular different types of data collection techniques or different types of measures. Hofer and Bygrave 1992: 93.
13
chapter two. In chapter three, a broad range of scientific research programs in business and economics are evaluated on their applicability to explain the relationship between markets and venture success. The different conceptual explanatory approaches are presented and the most important market factors of previous empirical research are identified. Finally, a new conceptual model for structuring market factors is developed. This model integrates former findings in different areas of research and guides the empirical part of the study that follows. STAGE 2: EMPIRICAL PART The empirical part of the study is introduced with an explanation of the applied methodology in chapter 4. It includes clarifications regarding the general research approach, success measures, and for each following substage, details on investigated variables, method of data collection, analysis and interpretation. Substage: Quantitative study In chapter five, those market factors for which applicable secondary data is available, are investigated within a quantitative study. The quantitative study is based on comprehensive cross-industry data sets, including data on new venture performance. As a result, critical market factors are identified and indications for variations among different contexts are obtained. Substage: Qualitative study The qualitative study is based on the findings of the former stages. In chapter six, the case study approach allows the inclusion of a broader range of relevant factors than the quantitative study, which is inherently limited by the availability of data. Moreover, the qualitative study should supplement the previous findings through insights into the underlying mechanisms of the market-performance relationship among new ventures. This part of the empirical study is focused on selected segments of the telecommunication and e-commerce industries. Finally, in chapter seven, conclusions and comments about the significance of the results as well as perspectives for future research are presented.
14
STAGE 1: THEORETICAL PART 1. INTRODUCTION 2. LITERATURE REVIEW - Entrepreneurship - Strategy 3. MARKET MODEL DEVELOPMENT - Additional research programs - Concepts for structuring markets NEW MARKET MODEL
STAGE 2: EMPIRICAL PART 4. METHODOLOGY 5. QUANTITATIVE STUDY: Analysis of impact of market factors on startups in Germany 6. QUALITATIVE STUDY: Case studies of the telecommunication and e-commerce industries from a start-up perspective
7. CONCLUSIONS, SIGNIFICANCE OF RESULTS AND PERSPECTIVE
Figure 3: General structure of chapters of study
CHAPTER 2 - LITERATURE REVIEW
15
Literature review
Within the literature review, studies from the two major research fields of entrepreneurship and strategy have been revised with the intention of achieving objective number one of this study (compare chapter 1.2) by aggregating relevant empirical findings on the marketfirm performance relationship. These findings are applied in chapter three for the development of a theoretical model. Within the entrepreneurship literature, the two areas of success factor research and VC decisionmaking research are reviewed. Within the strategy literature, research on success factors and research on measuring industry effects are revised.
2.1
Entrepreneurship research
2.1.1 Research on market success factors
An extensive body of literature can be found that deals with the identification of critical factors for venture success. In accordance with the general orientation of the whole field of entrepreneurship, most of the studies from the 1960s until the beginning of the 1980s are centred on factors relating to the entrepreneur. In the 1980s more comprehensive models were developed that included the market dimension, as well as strategy, organisation and industry-strategy interactions. This chapter discusses only those studies that examine the impact of market factors on venture success in terms of profitability or sales measures12: First, studies empirically investigating sets of market success factors, and second, studies investigating interactions between market success factors and strategy.
12
The whole area of research on firm survival will not be included. The purpose of this study is to investigate market attractiveness. Therefore the underlying expectation of venture success goes beyond venture survival only. For studies investigating the impact of market factors on venture success in terms of alternative measures compare especially Romanelli 1987 for impact of market growth and competitive concentration on venture survival, Dubini 1989 for the impact of a broad range of market variables on the motivation of entrepreneurs, and Dean and Meyer 1996 for a systematic investigation of the impact market variables on venture formations.
16
Studies of entrepreneurship research investigating sets of market success factors

Author Year Market factors investigated Significance (if investigated) # of Findings units investigated
Disregarding interactive effects, industry structure had a greater impact on new venture performance, than either strategy or the characteristics of the entrepreneur 17
Unit of analysis
Dependent variable
Sandberg and Hofer
1987
SECTOR OF THE ECONOMY INDUSTRY STAGE INDUSTRY STRUCTURE - concentration - product heterogeneity INDUSTRY DISEQUILIBRIUM BARRIERS TO SUBSEQUENT ENTRY p=0,016 (for heterogeneous products) p=0,025 (for disequilibrium) p=0,025 (barriers exist) p=0,05 (for first stages)
new ventures seeking venture capital
- ROE
Stuart and Abetti
1987
MARKET ATTRACTIVENESS - large market volume - predictable and quantifiable - early stage lifecycle - rapidly growing - favourable socio-political environment - clear customer identity - clear customer needs - few competitors MARKET DYNAMISM - rapid, chaotic evolution - numerous innovations - high number of competitors - low entry barriers - unclear product requirements - need for specialized products
p=0.01 (reverse impact on quantified success!!)
Market factors, in terms of market attractiveness and market dynamism were surprisingly found to have negative impact on venture performance. It appeared that one can achieve initial success more easily and rapidly in the more stable less dynamic markets.
24
new technical ventures
- quantifiable initial success - subjective initial success
p=0.10 (reverse impact on subjective success!)
Keeley, Roure et al.
1987
industry category low-tech competitor strength buyer concentration market stage Growth future barriers Segmentation
p=0,001(- for Japan) P=0,001(- for Japan) P=0,01(+ for US) P=0,05 (+ for US) P=0,001 (+ for US)
Industry effects have significant impact on venture success, beside founder's characteristics and strategy chosen. However influences vary geographically and over time.
127
VC backed ventures in computer industry in the US, Europe and Japan
- ROI for venture capitalists
Tsai, MacMillan and Low
1991
MUNIFICENCE - life cycle - buyer concentration - growth HOSTILITY - competitors Dependence - top three share
p=0,01 (on MS) p=0,01 (on MS) p=0,01 (on ROI) p=0,01 (on MS)
Ventures could achieve market share gains more easily in early life cycle stages, less fragmented markets with low competitor dependence. Market growth had no impact on market share and a negative impact on ROI, which might be related to high investments in growing markets.
161
Corporate startups from PIMS startup database
- market share (MS) - ROI
Brderl, Preisendrf er et al.
1996
rivalry competition on prices competition on quality competition on innovation concentration of competitors market dynamics change of customer base concentration of orders seasonal changes
p=0,05 (- on FS) p=0,05 (- on EG) p=0,05 (+ on FS) p=0,05 (+ on FS & EG) p=0,05 (+ on FS) p=0,05 (+ on FS) p=0,05 (- on EG) p=0,05 (+ on FS) p=0,05 (- on EG)
Venture growth in number of employees was high for low competition on prices in market, high competition on innovation in market, stabile customer bases, and low seasonality. Venture survival was high in industries with low rivalry, high competition on quality and innovation, high concentration of competitors, high market dynamics and high concentrations of orders. No factor was found to have significant effect on growth in sales.
1216
ventures in 46 industries in Northern Bavaria / Germany
- g growth in sales (SG), - growth in number of employees (EG), - firm survival (FS)
17
Wilson
1998
relative market share investment intensity industry growth rate revenue/employee
p=0,001
p=0,01
Relative market share and high revenue / employee were found to be positively related to profitability.
4006
firms of 8 service industries in US (Census of service industries data)
- pre-tax profitability
Robinson
1998
stage of market life cycle industry concentration entry barriers product differentiation
p=0,05
Life cycle has significant impact on profitability measures but not on change of sales. Entry into industries with high concentration and low product differentiation might be more difficult.
199
ventures in 71 SIC industries from Compustat
- change in sales, - sales level. Net profit, - EBIT, ROS, ROI, ROE
Table 1: Studies of entrepreneurship research investigating sets of market success factors
Among the studies that apply regression analysis to investigate sets of market factors, the study of Sandberg and Hofer13 is particularly noteworthy, since it was, at the time of publication in 1987, one of the first studies in entrepreneurship that provided a comprehensive and empirically tested model of success factor dimensions, including market factors. This study defines new venture performance as a function of the following dimensions: characteristics of the entrepreneur, industry structure and venture strategy. Based on data from 17 ventures seeking venture capital, the study found that by disregarding interactive effects, the industry structure had a greater impact on new venture performance than either strategy or the characteristics of the entrepreneur. In addition, strong interactions between these characteristics were identified. As a result, significant relations to new venture performance could be identified for heterogeneous industry structures, existing barriers of entry, high industry disequilibrium and an early stage of industry evolution. This basic model of new venture performance is widely referred to in later studies in the field. In the same year, Stuart and Abetti tested a comprehensive model of success predictors on 24 new ventures. The results were rather astonishing. Market attractiveness as a congregate of market growth, size and other market variables exhibited a significantly negative relationship with quantified initial success. In contrast with previous explanation models, startups in smaller or slower growing markets exhibited a higher quantifiable venture success than those in larger, faster growing markets. With regard to subjective initial venture success, a negative correlation was shown for market dynamism. The authors provided the following explanation for this unexpected phenomenon: It appears that one can achieve initial success more easily and rapidly
13
Sandberg and Hofer 1987.
18
in the more stable, less dynamic markets, by carving and keeping an appropriate market niche14. A study from Keeley et al.15 introduced an investigation of success factors in different geographical contexts. VC-backed ventures of the computer industry in the US, Europe and Japan have been analysed according to managerial, industry and strategy variables. The influence of these variables varied strongly by geographical contexts. For US firms, a high buyer concentration and a fast-growing overall market were significantly correlated with ROI. By contrast, in Japanese firms no correlation was found between those variables, but negative correlations with ROI were identified for high competition and non-technical industry sectors. Finally, for European firms, no significant correlations with industry variables could be identified. Even though the composition of the samples was quite different for each country, the study showed that the importance of individual industry effects may vary by geographic contexts. Tsai, MacMillan and Low16 investigated the impact of strategy and market variables on venture success on the basis of a sample of corporate ventures. The market environment was categorized into the dimensions of market munificence and hostility. They found out that ventures could achieve market share gains more easily in early life cycle stages and achieve less fragmented markets with low competitor dependence. Market growth had no impact on market share and had a negative impact on ROI, which could be related to high investments in growing markets. In Germany, Brderl17 investigated the effect of a broad range of variables on the different measures of venture success, on the basis of a very large sample of more than 1000 ventures. With regard to the market dimension, the significant empirical evidence for growth in terms of number of employees suggested that new ventures can achieve growth more easily in industries with a stabile customer base, low seasonality and markets characterised by competition on innovation. However, this evidence could only be found for growth in employee numbers. No significant relationship at all was found for growth in terms of sales. On the basis of the evidence on firm survival, the study comes to the conclusion that new ventures will more frequently survive in
14 15
Stuart and Abetti 1987: 226. Keeley et al 1987. 16 Tsai, MacMillan and Low 1991. 17 Brderl et al 1996.
19
industries that face rapid changes in market conditions. Dynamic markets frequently generate market gaps and niches that established companies cannot rapidly adapt to. Wilson18 investigated some of the most important findings of the PIMS study in the context of service industries. His investigation introduces the importance of a high revenue per employee ratio on profitability. Additionally, relative market share was found to be positively related to profitability. Even though industry growth was not statistically significant, a negative relationship between industry growth and profitability was identified, contrary to the initially expected positive relation. Robinson19 conducted a study focused on the market-venture performance relationship. He examined the influence of the stage of the market life cycle, industry concentration, entry barriers and product differentiation on eight different performance indicators, including both performance and sales measures. This research indicated that the stage of the market life cycle at the time of venture entry is the most important determinant of profitability. However, no statistically significant relationship could be shown for changes in sales, neither could any significant relationship be shown for the other industry factors.
Tsai, Sandberg and Hofer 1987 MARKET high market dynamism / disequilibrium* early industry life cycle stage* high market growth* high barriers to entry* + ROE + ROE + ROE - (ROI/SG etc) - (subjective) + ROI US + ROI US o ROI + MS + ROI o ROI o ROI (investment intensity) o ROI & SG + FS + ROI & o SG Stuart and Abetti 1987 Keeley, Roure et al. 1987 MacMillan and Low 1991 Brderl et al. 1996 1998 1998 Wilson Robinson
high product heterogeneity* low technology level of industry high buyer concentration* low segmentation high change of customer base high concentration of orders high seasonal changes high revenue per employee
+ ROE - ROI JP + ROI US o ROI - EG + FS - EG + ROI + MS
o ROI & SG
18 19
Wilson 1998. Robinson 1998.
20
COMPETITION high competition* high industry / competitor concentration* low competitor dependence competition on prices competition on quality competition on innovation * repeatedly investigated factors + positively related o ROE - ROI JP o MS & ROI + MS - EG + FS + FS & EG negatively related o not related - FS + FS o ROI & SG
MS=market share FS=firm survival EG=employee growth SG=sales growth ROI=return on investment ROE=return on equity
Table 2: Summary of market success factors
By aggregating the variables investigated in former studies on success factors in entrepreneurship, variables can be structured by the two major constructs of market and competition. Instead of an inclusion of competition and competitive settings as part of the market, a clear distinction can be found in most studies between these two concepts. Among the most frequently investigated factors related to the market structure are the variables market dynamism, life cycle stage, market growth, barriers to entry, product heterogeneity and buyer concentration. Of these factors, only the life cycle stage was consistently considered significant in relation to new venture success. All of the four studies that investigated industry life cycle demonstrated that entering an industry at an early life cycle stage was significantly related to venture success measures as diverse as ROE, ROI, market share and sales growth. More than any other individual factor, the life cycle stage has also been the subject of in-depth research in entrepreneurship20. Of particular note is the elaborated theoretical model of the effect of market life cycle stages on new venture success by Low and Abrahamson21. The authors concluded that fundamentally different processes may be at work at different stages of industry evolution22. They recommend that entrepreneurship research should pay more attention to the context of the life cycle stage. Empirical findings suggest that early life cycle stages provide better opportunities for new ventures than later stages. They might also benefit in the future from a superior competitive position in the market.
20
Compare e.g. Robinson 1998, Robinson and McDougall 2001 confirming the importance of the life cycle stage in their empirical research. 21 Low and Abrahamson 1997 analyse entrepreneurial networks, entrepreneurial behaviour, stakeholders and strategy/structure in the context of different market life cycle stages. 22 Low and Abrahamson 1997: 437.
21
The most contradictory finding may be related to market growth. Both early market stage and market growth may capture similar phenomena. However, the important distinction between the two is that life cycle also measures how long the market can be expected to last23. While Keeley, Roure et al., and Tsai, MacMillan and Low did find a significantly higher ROI for ventures in markets with high growth rates in accordance with conventional expectations, Stuart and Abetti came up with a negative correlation for market growth with a composite venture success measure of ROI and sales growth. Stuart and Abettis findings have received much recognition among entrepreneurship scholars. The diverging findings may result from varying impacts of market growth on ROI and sales growth24. On the other hand, the study by Stuart and Abetti was based on a relatively small sample and future research may show if similar results can be found for larger sample sizes. It could be expected that growing markets would also provide better growth opportunities for the individual venture, however, there might be other mechanisms associated with market growth as well, which, in turn, could moderate these opportunities. High growth markets may also attract numerous competitors to enter the market. Contradictory results are also found with regard to the influence of market dynamism and disequilibrium. While Sandberg and Hofer identified a positive correlation between high market dynamism and profitability, and Brderl et al. found a positive correlation with firm survival, Stuart and Abetti found a significantly negative correlation with a subjective firm success measure. A highly dynamic market was specified by Stuart and Abetti as a market in a stage of rapid, perhaps chaotic evolution, with numerous product and technological innovations, a high number of competitors and low entry barriers, unclear product requirements and the need for specialized as opposed to standardized products25. This concept of market dynamism is in many aspects related to a market in an early life cycle stage. Therefore, one might assume a positive correlation with venture performance in accordance with Sandberg and Hofer. Rapid evolution may often be associated to a high market growth. Consequently, Stuart and Abettis finding is consistent with their identification of a negative correlation with market growth. However, their finding has to be moderated
23 24
Tsai, MacMillan, and Low 1991: 15. Compare McDougall, Covin et al. 1994. 25 Stuart and Abetti 1987: 219.
22
by the fact that the correlation with market dynamism was weaker than correlation with market growth and that the correlation with market dynamism could only be identified for the subjective success measure and not for the objective success measure. Overall, one can deduce from the literature that market dynamism is a very crucial factor, although earlier studies do not provide clear insights due to very broad definitions of market dynamism and the application of different success measures. Following the importance that is attributed to barriers to entry in early strategy and population ecology research, barriers of entry have also been investigated in several of the studies on market success factors. However, only Sandberg and Hofer identified a significant correlation between barriers of entry and venture performance in terms of profitability. The findings on barriers to entry might vary strongly according to the evolutionary stage of a venture. A firm within the first years of existence could still struggle to overcome the existing barriers of the industry. This firm might be forced to invest heavily with negative consequences on the profitability of the company. In a later stage, once the firm has successfully overcome the barriers to enter, it may benefit from insulation from competition and thereby increase profitability. Potential competitors may be threatened by the required investment or the risk of failure resulting from the existing barriers of the market. High product heterogeneity may exempt a venture from engaging in competition on prices, with its assumed negative consequences on profitability. Brderl et al. demonstrated that competition on prices was negatively correlated to growth in terms of employee growth, however, the expected negative effect on ROI could not be demonstrated. On the other hand, Sandberg and Hofer did find a negative correlation between high product heterogeneity and profitability. A later study by Robinson, however, could not confirm this finding. Finally, high buyer concentration was associated with higher profitability for US ventures in Keeley, Roure et al. and was associated with higher growth in terms of market share in Tsai, MacMillan and Low. This confirmed the expectation that higher levels of fragmentation of immediate customers make it more difficult for the new firm to reach its end users and is therefore associated with lower munificence26.
26
Tsai, MacMillan, and Low 1991: 15.
23
Among the factors related to the structure of competition, the variables of high competition in the first years and the concentration of competitors have been the most frequently investigated. High competition in the first years was found to be negatively related to the profitability of Japanese firms by Keeley, Roure et al. While Brderl et al. could not confirm for their sample of German firms any impact of competition on profitability, they did relate high competition to a low rate of firm survival. One explanation for the relatively weak correlation may be that high competition will frequently be found in markets with an otherwise attractive market environment. Therefore, the competitive pressure may be moderated for those surviving new ventures by emerging market opportunities. A high competitive level may also challenge all market participants to superior performance. With regard to competitor concentration, none of the four studies found any relationship between the concentration among competitors and venture performance, neither in terms of profitability nor in terms of growth measures. The assumption that it may be more difficult for a venture to reap opportunities in a market that is dominated by a low number of established competitors could not be confirmed. In fact, Brderl et al. even identified a higher firm survival rate among industries with a higher concentration of competitors. Studies of entrepreneurship research investigating interactions between market success factors and strategy Following Sandberg's findings of the importance of interacting effects, several studies investigated the interacting effects of industry and strategy on venture performance. Within these studies the relationship between strategy and venture success was found to depend on environmental variables such as life cycle stages27, industry dynamics, heterogeneity and hostility28. These studies stressed the importance of a good knowledge of the market environment as a prerequisite for strategy formulation.
27
28
Covin and Slevin 1990 found that entrepreneurial strategies were most frequent and most successful in early industry life cycle stages. Low and Abrahamson 1997 developed a theoretical model to show the different contextual dimensions in each life cycle stage and stressed the importance of adapting venture strategy to the stage of the industry life cycle. Zahra 1996a showed that the success of technology strategies depends significantly on the dynamics, heterogeneity and hostility of the environment.
24
Market entry strategies29, competitive aggressiveness30, technology strategy31 in particular needed to be adjusted to environmental settings. Noteworthy are two studies in this field, which also investigate the direct impact of market variables on venture performance and survival. McDougall et al.32 presented a study that advanced the Hofer/Sandberg model by systematically investigating market growth and the strategy market growth interactions. The authors confirmed a positive correlation of market growth between both profitability and sales growth. This correlation was even higher for ventures pursuing broad strategies in high-growth markets. Stearns et al. investigated the direct impact of four industry sectors on firm survival, as well as the combined impact of industry sector and strategy on firm survival. The study tests the assumption that firms in retail and services, downstream in the industry value chain, have lower chances of survival. The assumption has been justified by the argument that downstream industries not only face more diverse competition but also operate in conditions where buyers and suppliers are more diverse and have greater levels of turnover. These conditions of downstream industries, in turn introduce higher levels of uncertainty reducing new firm survival chances33. Even though a direct relationship between value chain position and venture survival could not be confirmed, value chain position, which in this study is equal to the major industry sector, was found to have a significant influence on the choice of new venture strategies. Strategies focused on quality were positively related to venture survival in manufacturing, and yet showed a negative link to venture survival in retail industries. At first sight this may contradict the common recommendation of quality vs. price competition for the retail sector. However, low price retailers may more easily achieve a sufficient customer acceptance and income to maintain their business, while higher profitability may be more difficult to achieve in the long term.
29
MacMillan and Day 1987 concluded in their investigation of corporate ventures that the ventures most likely to be successful are those that enter a new market aggressively, with aggressive market share targets, and those that enter industries where rivalrous responses are less likely. 30 Covin and Covin 1990 came to the conclusion that competitive aggressiveness in hostile environments promises, in general, more success. However, competitive aggressiveness appeared to be less promising for young firms, especially in technologically sophisticated environments. 31 Investigated in Zahra 1996a and Zahra 1996b. 32 McDougall et al. 1992. 33 Stearns et al. 1995.
25
Author
Year
Market factors investigated
Significance (if investigated)
# of Findings units investigated Unit of analysis
Dependent variable
McDougall et al
1994
industry growth broad strategies vs. focus strategies broad strategies & high industry growth
p=0,1 (+ on sales growth) p=0,1 (+ on sales growth)
Ventures achieved higher sales growth in growing industries and highest sales growth for pursuing broad strategies in growing industries
123
New independent ventures in electronic computing equipment and radio and television transmitting industries
- ROS - sales growth
Stearns et.al.
1995
INDUSTRY INDUSTRY - STRATEGY - manufacturing quality - retail quality - retail price competitor - retail technology value - service niche purveyor - service technology value
p=0,1 (+) p=0,001 (-) p=0,05 (-) p=0,01 (+) p=0,05 (+) p=0,001 (-)
While no significant relation between four major industry categories and firm survival can be identified, survival strategies depend significantly on these major industry categories.
2653
New ventures in Minnesota and Pennsylvania
- firm survival
Table 3: Studies of entrepreneurship research investigating market-strategy interactions
Overall, these studies corroborate a general interaction between industry and strategy as found by Sandberg and Hofer and suggest for future research that strategy venture performance relationships should be investigated with regard to industry structure. 2.1.2 Research on VC deal evaluation criteria In addition to investigating the immediate factors influencing venture success, one stream of research in entrepreneurship attempts to identify the criteria that venture capitalists apply in order to select those ventures for which they will provide funding. This is justified by the observation that ventures, that receive venture capitalist backing exhibit higher success rates34. Moreover, it is assumed that venture capitalists possess a tacit knowledge that is honed from a decade-long experience of venture evaluations. With regard to this study, it might be of special interest to understand which criteria venture capitalists associate with attractive markets for a new venture.
34
Bruno and Tyebjee 1983.
26
Ranking Author Year Market factors investigated (if investigated) Findings
# of units investigated
Unit of analysis
Data collection
Tyebjee and Bruno
1981
MARKET FACTORS - market growth potential - market size - market access - freedom from regulation UNCONTROLLABLE RISK FACTORS - protection from competitive entry - resistance to economic cycles
Ranking only according to factor loadings.
VCs use six dimensions for evaluation of deals. Ranked by importance with investment decision these are 1) management quality, 2) profitability, 3) cash-out factors, 4) venture viability, 5) market factors, 6) uncontrollable risk factors
41
Venture capitalists
Phone survey and questionnaire
MacMillan, Siegel and Subbanarasimha
1985
MARKET FACTORS - market growth - potential to stimulate existing market - familiarity of VC with industry - threat of competition in first years - creation of new market
1 2 3 4 5
Among the top ten most important criteria that had been mentioned by VCs, five had to do with the entrepreneurs experience or personality, while only one was related to the market.
100
Venture capitalists
Questionnaire
MacMillan, Zemann and Subbanarasimha
1987
MARKET FACTORS - competition in first years - market growth - stimulation of existing market - access to distribution channel - familiarity of VC with industry - established distribution channels - creation of new market
1 2 3 4 5 6 7
The most important consistent criteria for venture success have been 1) insulation from competition in first years and 2) market acceptance of product
67
Venture capitalists
Questionnaire
Hall and Hofer
1993
long-term market growth and profitability favourable environment to new entrant access to distribution channels
2 of 18 (in screening stage) 2 of 18 (in assessment stage) 8 of 18 (in screening stage)
In initial screening key criteria include fit with venture firms lending guidelines, long-term growth and profitability of industry. In assessment stage a favourable industry environment and recommendations of ventures played an important role as well as formal aspects of business plan and entrepreneurs experience In general research should investigate criteria with regard to screening stage.
16
Venture capitalists
Semi structured questionnaires and verbal protocols
Zacharakis and Meyer
1998
MARKET FACTORS - competitor number - competitor strength - market size - market growth
1 of 8 (actual) / 7 of 8 (stated) 2 of 8 (actual) / 6of 8 (stated) 3 of 8 (actual) / 3 of 8 (stated) 4 of 8 (actual) / 2 of 8 (stated)
Venture capitalists do not truly understand their intuitive investment decisions. With the availability of more information importance shifted from the entrepreneur to the market.
51
Venture capitalist
Computerized Experiment
Table 4: Studies of entrepreneurship research investigating VC deal evaluation criteria
Early studies were conducted by Tyebjee and Bruno35 at the beginning of the 1980s. The following deal evaluation criteria were aggregated to the market dimension by factor analysis: (1) market growth potential, (2) market size, (3) market access, and (4) freedom from regulation. In addition, other market-related criteria such as (5) protection from competitive entry and (6) resistance to economic cycles were also
35
Tyebjee and Bruno 1981.
27
included. The factor analysis did not allow derivations about the weighting of individual criteria. Comparing the influence of the major criteria dimensions on the market, the entrepreneur and the product, the authors concluded that the entrepreneur was the one most important determinant of a positive investment decision from venture capitalists. Less emphasis was placed on the degree of innovation, product development or the market. In 1985, MacMillan, Siegel and Subbanarasimha published a study on venture capitalist evaluation criteria that intended to replicate the Tyebjee and Bruno study. With regard to market characteristics, venture capitalists determined the following ranking of criteria importance for their investment decision: (1) market growth, (2) potential of venture to stimulate existing market, (3) familiarity of venture capitalists with market, (4) threat of competition, and (5) creation of new market by venture. Again comparing the major dimensions for the deal evaluation, the study concluded that irrespective of the horse (product), horse race (market), or odds (financial criteria), it is the jockey (entrepreneur) who fundamentally determines whether the venture capitalist will place a bet at all36. Two years later, MacMillan, Zemann and Subbanarasimha analysed a more comprehensive model of evaluation criteria. Within this follow-up study they intended to go beyond identifying applied evaluation criteria and to determine how successful these criteria predict venture success. The study identified the following ranking of market-related evaluation criteria: (1) competition in first years, (2) market growth, (3) stimulation of existing market, (4) market access to distribution channels, (5) familiarity of VC with industry, (6) existence of established distribution channels, (7) creation of new market by venture. Among all investigated deal criteria in the study, only competitive threat and the degree of market acceptance of product were consistent predictors across several performance criteria. However, it turned out that these criteria, which have been good predictors of venture success, have not been frequently applied by venture capitalists, according to their own reports. Therefore, former studies might be limited in respect to their reliance on the data collection from venture capitalists own reports. As for the major criteria dimensions, it was deduced
36
MacMillan, Siegel and Subbanarasimha 1985: 119.
28
from the findings that venture capitalists might overestimate the importance of the entrepreneur compared with that of the market and the product. Hall and Hofer presented a new research design to avoid the two important limitations of former studies: Self-reporting of data and ex post facto data gathering. They collected data from semi-structured interviews and verbal protocols of real deal evaluations, addressing the errors and biases due to self-reported data found in the earlier studies. Venture capitalists might have been influenced by their perception of what is a desirable response. Moreover, the use of ex post facto data gathering could lead to distortions, since venture capitalists might not recall correctly the criteria that they applied to select ventures. In addition, they included the screening process stage as a mediating variable, stating that evaluation criteria might be very different at distinctive stages of the screening process. As a result, the market-related criteria long-term market-growth and profitability were found to be among the most important criteria during the initial screening stage. For the later assessment stage, a favourable industry environment was found to be of high importance. Overall, the assumption that criteria vary in different life cycle stages has been confirmed. On comparing the major dimensions, the authors concluded that the findings of this study also were surprising for the lack of importance venture capitalists attached to the entrepreneur/entrepreneurial team and the strategy of the proposed venture during these early stages of the venture evaluation process37. Zacharakis and Meyer conducted an in-depth investigation on these apparent differences between actual and stated deal criteria. The study found tremendous differences among the stated and actual evaluation criteria applied by venture capitalists. VCs lacked a strong understanding of how they made decisions38. Interestingly, VCs seem to rely only on a very small number of criteria in their actual evaluation process. According to the authors, the evaluation process might be improved by the application of larger criteria checklists. The study identified the following ranking of actually applied market-related evaluation criteria: (1) number of competitors, (2) competitor strength, (3) market size and, (4) market growth. Remarkably, the four market-related criteria have consistently ranked highest among
37 38
Hall and Hofer 1993: 26. Zacharakis and Meyer 1998: 57.
29
all eight evaluation criteria. The authors concluded that many of the [former] ex-post studies would lead entrepreneurs to believe that personal and team characteristics are the most important criteria, but this study coincides with Hall and Hofer (1993) in that the entrepreneur factor does not appear that important. Market characteristics might be better determinants of who gets funding and who does not 39. The results suggested that the importance shifted from the entrepreneur to the market, particularly with the availability of more detailed information.
Tyebjee and Bruno 1981 MARKET high market growth* high barriers to entry established distribution channels high seasonal / economical changes market size* access to market / distribution channels* freedom from regulation potential to stimulate market* creation of new market familiarity of VC with industry X X X X 2 (of 5) 5 (of 5) 4 (of 5) 3 (of 7) 7 (of 7) 5 (of 7) 4 (of 7) 8 (of 18) 3 (of 8) actual / 3 (of 8) stated X X 6 (of 7) 1 (of 5) 2 (of 7) 2 (of 18) 4 (of 8) actual / 2 (of 8) stated MacMillan et al. 1985 MacMillan et al. 1987 Hall and Hofer 1993 Zacharakis and Meyer 1998
COMPETITION high competition (in first years)* number of competitors
4 (of 5)
1 (of 7)
2 (of 18)
2 (of 8) actual / 6 (of 8) stated 1 (of 8) actual / 7 (of 8) stated
* repeatedly investigated factors
Table 5: Summary of VC deal evaluation criteria related to market
The aggregation of identified market-related deal evaluation criteria shows that consistently high market growth and a low competition within the first years have been identified as the most important criteria of VCs (venture capitalists) related to market attractiveness. Comparing the market criteria applied by VCs with those market factors that entrepreneurship research associated with higher venture success, there is only limited congruence. While empirical evidence from research on market success factors in entrepreneurship supports a negative relationship between high competition and venture performance. Empirical evidence for market growth has been found to be
39
Zacharakis and Meyer 1998: 72.
30
contradictory. Notably, the industry life cycle, which was identified among the studies on market success factors as the one most important factor for venture performance, was not identified in any of the studies as an evaluation criteria of venture capitalists. Similarly, market dynamism and buyer concentration, success factors that research has repeatedly related to venture performance, were not considered as deal evaluation criteria by venture capitalists. On the other hand, VCs mentioned some new market criteria that have not been investigated as market success factors in entrepreneurship research. These criteria are market size, distribution channels and the potential to stimulate or even create a new market. Unfortunately, most of the VC studies provide only a few details explaining the mechanisms of how individual evaluation criteria are assumed to affect venture performance. While Tyebjee/Bruno (1981) and Zacharakis/Meyer (1998) identify market size as an important deal evaluation criteria, neither can clarify which specific market size does favour a positive VC deal evaluation. Given the large share of VCbacked ventures in early market life cycle stages, a large market size has probably been considered as favourable for future growth potential. It has been shown that new ventures with appropriate resources may compete successfully with much larger established companies40. However, targeting relatively small market niches may also be favourable for venture growth41. Various studies stressed the importance of distribution channels to VC deal evaluation criteria. Rather than the degree to which distribution channels are established, VCs gave importance to the relative accessibility of distribution channels to a new venture. Considered particularly problematic were situations where established firms had proprietary distribution channels or they exerted pressure on protected existing distribution channels against new entrants. The importance of distribution channels has been widely neglected in market success factor entrepreneurship research. In contrast to most market success factor research, which in accordance with the industrial organisation perspective considers the market environment to be given externally, VC deal evaluation criteria also reflect the potential of individual new firms to actively stimulate existing markets or to create new markets. In both MacMillan
40 41
Cooper, Willard, and Woo 1986. David Storeys research on high growth SMEs in the UK (presentation at the EDP Workshop, March 21-22, 2002 in Barcelona/Spain).
31
studies, the potential to stimulate a market was among the most important VC deal evaluation criteria. Especially in early market life cycle stages, new ventures may stimulate markets by increasing the publicity and legitimacy of new products and services. Regarding the potential of new ventures to create new markets, VCs are apparently more sceptical. In both studies this criteria was attributed little importance and was ranked at the bottom end of all relevant criteria. Potential market stimulations by new ventures may be difficult to investigate in research that is based on large organisational populations, since this potential may be highly dependent on the individual ventures product and resource configuration. However, on performing an evaluation of market attractiveness on the individual firm level, the additional consideration of potential market stimulation by new ventures would lead to more accurate results. Looking beyond market-related criteria, the findings indicate that the venture capitalist decision process is strongly influenced by criteria that do not relate to the potential success of the venture. These include the venture capitalists familiarity with the industry, cash-out potentials, investment size and, most importantly, a match with the sectoral focus of the venture capital fund. Consequently, the attempt to deduce from VC deal evaluation criteria the factors that characterise attractive markets for ventures is limited to a certain extent by the VCs specific investment interests. In general, the capabilities of VCs in evaluating new ventures have to be considered more critically in the light of the widely VC-financed new economy bubble at the end of the 1990s. Similarly, Gartner et al.42 showed in their investigation of 27 start-ups that venture capitalists prediction accuracy for new venture success was significantly inferior to the prediction accuracy of industry experts and competitors. Overall, research on deal evaluation criteria makes a valuable contribution by suggesting additional market variables that could impact venture success and by demonstrating that markets may be actively changed to a certain extent by an individual venture.
42
Gartner et al. 1998 investigated the performance of new ventures that were previously evaluated as cases in the INC magazine. They concluded that successful new ventures were those that were flexible and that understood their competitors and customers. Factors related to the management team as experienced staff or organisational skills were of lower importance.
32
With regard to the undertaken study, the recent literature on VC deal evaluation criteria corrobates the importance of investigating market conditions. Contrary to popular belief and the self-reporting of VCs, market variables turned out to be of most importance. In the initial screening of new ventures business plans, which have been subject of most VC-related research, market factors seem to be considered more important than those related to the entrepreneur. However, it should be noted that there might be a bias due to the fact that business plans, as a primary information base for the VC deal screening, frequently provide more information on the market than on the entrepreneur. Moreover, only the first steps of the whole VC selection process have been investigated. At the end of the selection process and during face-to-face meetings with the management team, criteria related to the entrepreneur may receive more consideration. 2.1.3 Conclusions and implications for the study The results of research in the areas of both market success factors and VC deal evaluation criteria in the English and German language literature43 will be aggregated to give an overview of the current findings on market factors in the field of entrepreneurship research.
43
To undertake the literature review, both English-language and German-language literature was revised. However, hardly any empirical study concentrating on the impact of market factors on venture performance in Germany could be found. This is astonishing, although it should be noted that the field of entrepreneurship research in Germany has gained wide academic importance only after a certain time lapse compared with the US. Moreover, German language research in entrepreneurship has been very firmly centred on the characteristics of the entrepreneur, the characteristics of technology-oriented ventures and recently on topics related to entrepreneurship education. The most important empirical study that also covers market characteristics is the investigation of Brderl, Preisendrfer et. al about start-ups in the Munich area. Noteworthy is also Baakens theoretical framework of market factors for new ventures, which was not investigated empirically and will be discussed in detail within the development of a theoretical framework in chapter three.
33
1ST TIER FACTORS: USUAL SUSPECTS

EMPIRICALLY CONSISTENT - early life cycle (+ ROE / + ROI / + MS / o SG) - high competition (- ROI / - FS / - VC) - high buyer concentration (+ ROI / + MS) EMPIRICALLY INCONSISTENT - high market growth (+/o/- ROI / + VC) - high market dynamism/disequilibrium (+ ROE / - subjective / + FS)
EMPIRICALLY MAINLY NO RELATION - high product heterogeneity (+ ROE / o ROI/ o SG) - high barriers to entry (+ROE / o ROI / o SG) - high industry concentration (o ROE / o ROI / o MS / + FS / o SG)
ADDITIONAL IMPORTANT VC EVALUATION CRITERIA - market size - potential to stimulate market - access to distribution channels
2ND TIER FACTORS: LESS USUAL SUSPECTS

EMPIRICALLY CONFIRMED - high change of customer base (- EG) - high concentration of orders (+ FS) - high seasonal changes (- EG / -VC) - high revenue per employee (+ ROI) - low competitor dependence (+MS) - competition on prices (- EG) - competition on quality (+ FS) - competition on innovation (+FS / + EG) NOT CONFIRMED EMPIRICALLY - low segmentation (o ROI)
ADDITIONAL LESS IMPORTANT VC EVALUATION CRITERIA - number of competitors - freedom from regulation
+ positively related
negatively related
o not related
VC=venture capitalist criteria
MS=market share FS=firm survival EG=employee growth SG=sales growth ROI=return on investment ROE=return on equity
Figure 4: Aggregation of research on market factors in entrepreneurship
Among the 1st tier factors all those market factors that have been investigated repeatedly in at least two independent studies are mentioned. These frequently investigated factors are categorised into groups of factors with consistent directions of impact, inconsistent directions of impact and no impact on various success measures. Consistent factors will frequently affect different venture success measures such as growth and profitability in the same direction. Empirically consistent first tier factors include life cycle, competition and buyer concentration. Inconsistent factors might
34
have caused diverging results due to nonlinear relations or differing impacts on different success measures. These factors may have generated contradictory findings that affect profitability and growth measures differently. To this category of inconsistent factors belong market growth and market dynamism. In addition, there are the factors for which the majority of revised studies did not find any impact on venture success measures. Still, it could be that research designs or samples of former studies have just not been adequate enough in identifying a potential relationship with venture success for these factors. To this group of factors with empirically mainly no relation belong product heterogeneity, barriers to entry and industry concentration. Finally, there are additional market-related deal evaluation criteria that have been considered as important by VCs in independent studies. These factors include market size, potential to stimulate a market and access to distribution channels. Among the 2nd tier factors all those factors that have been investigated in just one study. Those factors are labelled empirically confirmed for which a statistical impact on a venture success measure could be demonstrated. On the other hand, there are also those factors for which an impact on venture success measures could not be confirmed. The overview is complemented by factors that have been mentioned by VCs as market-related deal evaluation criteria, but that have only been identified in one study or have been considered of minor importance. Especially for market-related factors it can be summarised in accordance with Gartner, Starr and Bat that entrepreneurship research on specific venture criterion indicates a mixed set of results with few consistent findings44. In the following paragraph the reasons for the limited findings will be evaluated. Deficits of studies in entrepreneurship An overall review of the literature on market success factors in entrepreneurship research reveals a quantitative lack of studies that empirically investigate the impact of sets of market factors on venture performance. Although numerous studies provide a focused analysis of solely the characteristics of the entrepreneur or new venture strategies on new venture success, studies focusing in-depth on the marketventure performance relationship are still relatively rare.
44
Gartner, Starr and Bhat 1998:218.
35
Apart from the restricted number of studies45, various other reasons can be identified for the limited results gained regarding the marketventure performance interaction. o Lack of an accepted framework. Results of former findings have only been considered to a limited extent in subsequent studies. Also attempts to aggregate the former findings into an integrated environmental framework are rare46. o Variety of dependent variables. The comparability of empirical studies is limited by a vast amount of different measures for the dependent variable of venture success. In contrast to strategy research, where ROI and alternatively market share of large-scale enterprises are commonly accepted as a standard measure of corporate performance, these measures are generally not available for new ventures, neither are they unavoidably be considered as meaningful representations of new venture performance. Dependent variables that have been applied in the context of market factors comprise: (1) objective performance measures such as ROI47, ROE48, ROS49, (2) objective growth measures such as sales growth50, employee growth51 and market share growth52, (3) new venture foundation53, (4) new venture survival54 and (5) subjective selfevaluations of success by entrepreneurs55 among others as ROI for venture capitalists56, export performance57, motivation of entrepreneur58, etc. Some recent studies have responded to this problem by applying sets of different measures of venture success at the same time.
45
A shortage of in-depth studies was already mentioned in the very comprehensive review of early studies in entrepreneurship until the mid 1980s by Wortman 1986. 46 See Cooper 1991. 47 Tsai, MacMillan and Low 1991, McDougall, Robinson et al. 1992. 48 Sandberg and Hofer 1987. 49 Hall and Fulshaw 1993, Zahra 1993a. 50 Hall and Fulshaw 1993, Zahra 1993a, Chandler and Hanks 1994a, Shane and Kolvereid 1995, Brderl et al. 1996, Davidsson 1991. 51 Shane and Kolvereid 1995, Brderl et al. 1996. 52 Tsai, MacMillan and Low 1991, McDougall, Robinson et al. 1992. 53 Dean and Meyer 1996, Low and Abrahamson 1997, Mitchell 1998. 54 Romanelli 1989, Stearns et al. 1995, Brderl et al. 1996. 55 Stuart and Abetti 1987. 56 Keeley et al. 1987. 57 Zahra, Neubaum and Huse 1997. 58 Dubini 1989.
36
o Limited number of variables applied. There is an apparent lack of studies with the main focus on market success factors59. As a consequence, research has tended to apply limited sets of variables in order to measure complex environmental phenomena where the inclusion of more variables might have been more meaningful. Frequently, market attractiveness has been measured as one sole aggregated factor60. o Small sample size. The review also confirms Robinsons criticism that prior industry structure studies examining independent new ventures have often utilized relatively small sample sizes61. As a general tendency it is noticeable that recent studies aim to provide a wider generalisability of findings by applying more comprehensive data sets. In contrast with data on large manufacturing firms, data on small firms, especially those in the service sector, is generally not publicly available. Therefore, researchers in the field had to collect their own primary data. Sample sizes have been limited by the research budget available. Fortunately, the availability of large data sets for SMEs, including the service sector may improve as legislative steps have been taken to improve statistics on the service sector. Moreover, several public and private organisations have started to build large databases on new ventures62. Overall, the current state of research in entrepreneurship can only provide limited insights into the direct impact of markets on venture performance. The literature review reinforces the need for studies that analyse the market-venture performance relationship in more detail and that integrate previous findings. Conceptual models that take into consideration contextual conditions such as life cycle stages and industry sectors, may lead to better results than those models that ignore systematic variations
59 60
Lack of focus is also criticised in Stearns et al 1995 and Low and Abrahamson 1997. E.g. Stuart and Abetti 1987, Chandler and Hanks 1994b, Low and Abrahamson 1997. 61 Robinson 1998:166. 62 In the US, the Kauffman foundation is, at the time of this study, setting up a database that includes several thousand small service firms, and in Germany the DtA periodically collects data on several thousand new ventures.
37
among these contextual conditions. The research design in chapter four of this study therefore reflects these weaknesses.
2.2
Strategy / Industrial organisation research

2.2.1 Research on measuring industry effects
Measuring the impact of industry versus firm effects on organisational success has been a central theme in strategy research. Both supporters of the industrial organisation perspective of strategy and the supporters of the resource-based perspective of strategy refer to studies on measurement of industry and firm effects for justifying the importance of their research. An early study on this topic was conducted by Schmalensee (1985). Using data from the Federal Trade Commission (FTC), he came up with the surprising result that firm effects were nonexistent, while industry effects were considered important, explaining 20% of variance in business unit profitability and a 75% share of the variance in industry returns. Later studies, as conducted by Hansen and Wernerfelt (1989) and especially Rumelt (1991), who applied the same FTC data, came up with very different findings. Hansen and Wernerfelt tested an economic and an organisational model of inter-firm variance in profit rates. The economic model represented industry effects and the organisational model the firm effects. As a result, the industry effects of the economic model explained a mere 14% of variance, while the firm effects of the organisational model were able to explain 36% of variance. In 1991, Rumelt replicated Schmalensees study using a longer time series of the same FTC data. He deconstructed firm and industry effects into stable and transient components. Although again a 20% share of variance was explained by industry effects, Rumelt argued that only stable industry effects that do not change over time should be included in the analysis. On eliminating the transient industry effects, only 8% of business unit performance and 40% of dispersion in industry returns could be explained by stable industry effects. Again, corporate effects from parent organisations were found to be negligible and accounted for less than 2% of business unit variance. In addition to industry and corporate effects, Rumelt also investigated business unit effects and demonstrated that stable business unit effects accounted for a 46% share in
38
business unit performance. However, the study lacked insights in the nature of these business unit effects. All of the three former studies were based on the same FTC data. As pointed out by Powell, the reliance on this data source does imply some weaknesses. In examining industry phenomena, one might hope to gather reliable financial data from a representative sample of non-diversified firms63. First, the FTC data focuses on highly diversified companies. Second, the sample of industries lacks representativeness since all small firms, all privately-held firms, and nearly all service firms are excluded from the sample. Business units of large-scale enterprises frequently can not independently determine their strategic posture and corporate accounting distortions impede the meaningful interpretation of financial business unit data64. Consequently, Powell investigated industry effects on the basis of a different data set of 54 U.S. firms. Even though his sample included a large share of singlebusiness firms, small firms were again systematically excluded from the sample, and the median number of employees per firm was 750. This is astonishing since the same author stressed the obvious advantages of SMEs for the study of industry effects. Without distinguishing between stable and instable industry effects, his findings coincided with the previous findings in explaining a 20% variance in firm performance due to overall industry effects. Several years later, McGahan and Porter published an empirical study on industry, corporate parent and business-specific effects. The study was based on data from the Computstat database, including data from 1981 to 1994. The coverage of a far more comprehensive time series and the inclusion of data from the service sector differentiated the analysis from previous studies. Industry effects were found to explain 19%, corporate parent effects 4%, and business-specific effects 32% of overall variance in profitability. More importantly, it was shown that the strength of impact of the respective effects differed substantially across broad economic sectors. Industry effects were found to account for a far larger share in the service sector than in manufacturing. Industry effects were found to account for over 40% of overall variance for the service sector. Contrary to Rumelt's findings of a high instability of
63 64
Powell 1996: 324. Powell 1996: 325.
39
industry factors, Porter and McGahan found industry effects more stable than corporate parent or business-specific effects, reinforcing the importance of industry effects, even in highly dynamic environments. A recent study by Chang and Singh investigated the industry, business unit and corporate parent effects, including the mediating variables of firm size and depth of industry classification. In accordance with earlier research on large manufacturing firms, their findings confirmed the dominant importance of business unit effects for the samples of large firms applying market share as a growth measure. In contrast, most previous studies had applied business unit profitability as the success measure. However, for medium-sized and small firms, industry effects turned out to be the one most important factor, explaining 41% of total variance for medium-sized firms and 54% for small firms. Comparing findings according to a 3-digit SIC industry classifications with those of a 4-digit SIC classifications, it was shown that the error margin with the unexplained variance nearly doubled to 50% when only using 3-digit SIC classifications. With the application of a more detailed 4-digit SIC classification, the absolute industry effects remained surprisingly stable while corporate and business unit effects increased significantly. The empirical results strongly corroborate the finding that industry effects increase in importance if the view is shifted from large, publicly traded, firms to medium and, in particular, small firms. Finally, Hawawini et al.(2003) elicited another important aspect by systematically excluding each industrys top two leaders and bottom two losers. They concluded that industry-specific factors may have different meaning for different types of firms within an industry. Industry factors may have a large impact on the performance of the also-ran firms, while for the industry leaders and losers it is firm factors that dominate. Without distinguishing among firm and business unit effects, industry effects increased by 100% or more when outliers within the industry were removed from the sample.
Author Schmalensee Year 1985 Findings 20% industry effects; no firm effects # of units investigated 1.775 business units of 456 companies Business units of large US manufacturing firms (FTC data) Business units of large US manufacturing firms (FTC data) Unit of analysis Dependent variables - business unit profitability - industry returns - business unit profitability
Hansen and Wernerfelt
1989
14% industry effects 36% firm effects
300 business units of 60 companies
40
Rumelt 1991 8% stable industry effect (20% overall industry effects) 2% stable parent organisation effect 46% stable business unit effect 20% industry effects 10.866 observations (2810 business units of 463 companies)

Business units of large US. manufacturing firms (FTC data) Non-diversified US manufacturing firms -business unit profitability - industry returns
Powell
1996
54 companies
McGahan and Porter
1997
Chang and Singh
2000
Hawawini et al.
2003
19% stable industry effects 4% stable parent organisation effect 32% stable business segment effects 1. large firms: 19% industry effects 48% business unit effect 10% corporate effect 2. medium size firms: 41% industry effects 9% business unit effect 16% corporate effect 3. small size firms: 54% industry effect 9% business unit effect 16% corporate effect 1. full sample 33% firm effects 11% industry effects 2. sample without outliers 17% firm effects 30% industry effects *results only for TMV/CE which had lowest error
58.132 observations (5.196 business segments /year in 628 industries) 20.161 observations (7800 business units in 444 industries)
- perceptions of profitability and sales growth Business segments of - accounting publicly traded US profitability companies (Compustat 19811994) Manufacturing firms - market share in US (Trinet 1981-1989)
5.620 observations (562 firms in 55 industries (3-digit SIC))
Very large manufacturing and service firms in US (Stern Steward 19871996)
- EP/CE - TMV/CE - ROA EP=economic profit, CE=capital employed, ROA=return on assets
Table 6: Empirical studies on industry effects
Despite the variation of the exact value of each effect, among all of the studies the strong influence of industry effects on profitability was demonstrated. The majority of the studies on large-scale firms in the manufacturing sector came to the conclusion that industry effects rank in importance right after firm or respectively business unit effects. Recent empirical evidence suggests that the importance of industry effects could increase if some of the weaknesses of previous studies, such as the data source and methodology, were resolved. First, the reliance on data from diverse large-scale enterprises may be inferior to data from SMEs. SMEs may have a clearer focus on one market and may therefore be more appropriate for studying industry effects, as pointed out by Powell. Even when the data is split down to business units, significant distortions resulted from shared overhead costs and transfer payments that were not taken into account65. The empirical evidence
65
Powell 1996.
41
from Chang and Singh confirms that industry effects gain substantially more importance for SMEs. It may be assumed that industry effects are smaller for largescale enterprises since these companies might partly possess the capacity to actively shape the immediate environment in their favour. Second, the focus on the manufacturing sector by most former studies, have led to systematic underestimations of industry effects, as shown by McGahan and Porter. The service sector is considered in all developed western countries as the most economically important sector. Therefore, it is desirable that this sector should no longer be excluded from studies on industry effects. Third, it may be assumed that industry effects have not been completely captured in earlier studies due to the application of limited or inappropriate indicators66. More comprehensive sets of indicators could increase the share of explained variance. Fourth, a few very successful and very unsuccessful firms might have generated a strong outlier effect, thereby leading to overestimated firm effects, as demonstrated by Hawawini et al. Finally, the need to rely on the SIC system for industry classification further diminishes the measured estimates of industry influence because SIC industries err primarily in being overly broad67. More in-depth industry classifications and more precise industry definitions might ensure that competing firms are aggregated under one industry definition, hence improving the accuracy of the results. However, it must be noted that Chang and Singhs findings did show only a small increase in absolute industry effects with a deeper industry classification. 1 2 3 4 5 Unit of analysis (firm size): SME vs. large scale enterprises Unit of analysis (sector): service sector vs. manufacturing Industry indicators: more comprehensive indicator sets vs. limited sets Intra-industry variance (outliers): control of outliers vs. no control of outliers SIC: revised 4-5-digit SIC vs. old 3-digit SIC
Table 7: Indicators for former underestimation of industry effects
66 67
Mauri and Michaels 1998: 214. McGahan and Porter 1997: 16.
42
Overall research on industry effects has clearly demonstrated the strong influence of industry on profitability and therefore sustains the importance of studying in detail how industry affects organisational success. Firm effects, which are emphasised by the resource-based strategy perspective, also reveal a strong influence on profitability. But focusing exclusively on the firm level and ignoring the external setting of competition and industry of a firm might lead to a limited explanation of organisational success. 2.2.2 Research on market success factors in strategy Since empirical studies in strategy research tend to be based on the data of publicly traded, large firms, it will be interesting to see which market factors are of importance independently of firm size, and which factors might be transferable to the new venture setting. Moreover, industrial organisation research could identify potentially important market success factors that were overlooked in previous entrepreneurship research. Even though empirical studies on market success factors are not as prolific as one might expect68, the literature review has to be limited to some of the most relevant empirical studies in the field.
Author Year Factor Significance (minimum) # of Findings units investigated Unit of analysis Dependent variable
Ravenscraft
1983
buyer concentration supplier dispersion supplier concentration ratio market share
p=0,10 p=0,10 p=0,10 p=0,10
buyer dispersion adjusted 4- firm concentration distance shipped exports / value of all shipments growth imports / value of shipment industry advertising LOB advertising industry assets LOB assets industry capacity utilization LOB capacity utilization industry diversification LOB diversification industry R&D LOB R&D industry vertical integration LOB vertical integration minimum efficient scale p=0,10 p=0,10 p=0,10 p=0,10 p=0,10 p=0,10 p=0,10 p=0,10 p=0,10 p=0,10 p=0,10 p=0,10 p=0,10 p=0,10 p=0,10 p=0,10
Statistically the most important variables were the positive effect of higher capacity utilization and industry growth and market share. A significant positive correlation of buyer concentration is contrary to Porter's projectures of bargaining power of buyers. Generally higher returns to advertising and assets for sellers with larger market shares appear to underlie the positive profit-market share relationship. Lower costs rather than collusion or barriers to entry seem account for positive returns of vertically or diversified lines of business.
3186
lines of business in 258 manufacturing categories
- profitability in terms of line of business profit (LOBP) - on the industry level price costs margin (PCM)
68
Powell 1996: 331 Although Porters Competitive Strategy (1980) is by far the most widely cited publication in the strategy literature (Hambrick, 1990) the books central feature the industry framework has attracted little empirical attention..
43
Buzzel (PIMS)
1987
high real market growth rate high rate of price inflation high purchase concentration low % unionization low purchase amount high % exports- imports low customized products low % new products low marketing, % of sales low R&D, % of sales low inventory, % of sales low fixed capital intensity high capacity utilization, % high employee productivity high vertical integration low purchase importance to customer
p=0,01 p=0,01 p=0,10 p=0,01 p=0,01 p=0,10 p=0,01 p=0,01 p=0,01 p=0,01 p=0,01 p=0,01 p=0,01 p=0,01 p=0,01 p=0,01
Based on this study the popular PIMS success factor model has been derived, stressing the overall importance of market share. Regarding the market dimension, the most important success factors are the ones indicated as "significant".
3000
SBU of large firms primarily US manufacturing firms
ROI
Marshall and Buzzell
1990
market share Industry concentration Fixed capital intensity (GBV/sales) industry growth inventory/sales marketing/sales P&E/sales R&D/sales vertical integration
p=0,000 p=0,000 p=0,000 p=0,000 p=0,000 p=0,000 p=0,051 p=0,007 p=0,000
The two independent datasets PIMS and FTC provide remarkably comparable results for the investigated industry factors.
902 observations (PIMS) 2537 observations (FTC)
SBU of large US firms (PIMS and FTC line of business data)
- ROA
Powell
1996
industry maturity entry barriers competitive power
p=0,05 (p) p=0,01 (sg)
Only the entry barrier and competitive power main effects explained significant performance variance.
54
firms with 50 or more employees (median 700 employees)
- sales growth (sg) - profitability (p) - overall financial performance (o)
Mueller and Rauning
1998
industry concentration advertising intensity R&D intensity import intensity market growth
p=0,10 p=0,01 p=0,05 p=0,01
Industry variables provide high explanation power in industries which are homogenous in terms of profitability and only low explanation power in heterogeneous industries.
912
US manufacturing firms (Compustat data)
- industry profit - price cost margin - firm profit
Table 8: Profiles of previous studies in industrial organisation/strategy research dealing with the impact of individual market factors
The one most influential research project on success factors was the PIMS (Profit Impact of Market Strategy) project, initiated mid 1970s by the Strategic Planning Institute. The underlying PIMS database contains detailed, annually updated, data from the business units of large international enterprises. The ROI of individual business units was compared with descriptive business unit data on product/services, customers, distribution channels, production processes, market and competition. The result of this study became widely known as the PIMS model of success factors. This model stressed the dominant significance of market share for profitability. The following factors also showed strong influences on profit69:
69
Buzzell 1987: 53.
44
o Real market growth o Rate of inflation in selling prices o Supplier concentration o Typical customer purchase amounts and importance of the product or service to the customer o Extent of employee unionisation o Magnitude of exports and imports from and to an industry The PIMS database has received considerable criticism due to sample composition and measurement methodologies. The main criticism relates to the sampling issue of selfselection, which leads to an overrepresentation of market leaders and large industrial parent enterprises70. At the end of the 1970s, Porters widely known five forces industry model71 provided a theoretical reference for the PIMS research and the whole field of research on market factors. Some years later, Ravenscraft72 published a study on the relationships between industrial structure and performance. The data set applied was extraordinarily comprehensive, covering more than 3,186 different lines of business. Data was taken from the Federal Trade Commission (FTC), which collected financial data disaggregated to the line of business on a vast number of large-scale manufacturing companies in the US. In accordance with the findings of the PIMS study, high market share and high industry growth were found to be among the most important profit influences. The study also confirmed the positive impact of exports and the negative impact of supplier concentration. Similar to the positive influence of high average customer purchases found in the PIMS study, Ravenscraft identified a positive relationship between high buyer concentration and profit. This finding, however, contradicted other popular explanation models such as the Porter five forces model, which predicted negative profitability impacts due to buyers higher bargaining power.
70 71
Addressed in Marshall and Buzzell 1990. Porter 1979. Porters conceptual five forces industry model will not be discussed further at this point, since the concept is not based on empirical research. The model will be treated in detail in chapter three within the conceptional part of the development of a theoretical model of market attractiveness. 72 Ravenscraft 1983.
45
High capacity utilisation was identified as the most important factor. Furthermore, the existence of economies of scale was confirmed by the positive impact of larger minimum efficient scales. The variables advertising intensity, diversification and asset intensity showed different findings if variables were measured on the basis of industry averages rather than the data from individual lines of business. Also, an alternative model of industry profitability, which excluded the strong market share effects, led to contradictory results. The study was unable to explain why these differences occurred and simply referred to the strong influence of the market share variable. Overall, the Ravenscraft study did confirm some of the most important findings of the PIMS model on the basis of an independent data set. Marshall and Buzzell (1990) systematically compared the influence of industry factors based on both the PIMS and FTC datasets and also found remarkably comparable results for the investigated industry factors. Among the previously discussed studies that measured industry versus firm effects, it was only Powell who took into consideration the influence of individual industry factors on profitability. He came to the conclusion that high entry barriers relate positively to profitability. High competitive power in terms of bargaining power with customers and suppliers, low excess capacities and low threats of substitutes were shown to relate positively to sales growth. Mueller and Rauning (1998) examined the impact of some of the most frequently applied variables of the structure-conduct-performance model on industry and firm profitability. Differentiating industries by the homogeneity of their profit structures, they concluded that industry variables provide high explanatory power for industries that are homogenous in terms of profitability and only low explanatory power for heterogeneous industries.
Ravenscraft 1983 MARKET early industry life cycle stage high market growth* + LOBP + PCM + ROI + ROA o ROI o SG -FP o INP (- for homogeneous industries) o PCM + ROI o SG - ROI + LOBP - PCM - LOBP - PCM Buzzell 1987 Marshall and Buzzell 1990 Powell 1996 Mueller and Rauning 1998
high barriers to entry / minimum efficient scale* high product customization / heterogeneity* high buyer concentration* high segmentation (suppliers)
+ LOBP + PCM
46
high concentration of orders long distance shipped high export rate high import rate high industry advertising high industry fix capital / assets intensity high industry capacity utilization high industry R&D high vertical integration high supplier concentration high inflation rate of selling prices low unionization inventory intensity asset newness low purchase importance low # of new product introductions high employee productivity - LOBP - PCM + LOBP PCM - LOBP PCM - LOBP + LOBP + PCM - LOBP lb + LOBP + PCM + LOBP lb + LOBP + PCM - LOBP lb - LOBP- PCM + LOPBP lb - LOBP PCM - LOBP PCM
lb

+ ROI
+ ROI - ROI - ROI - ROI + ROI - ROI + ROI - ROA + ROA +FP + INP + PCM - ROA - ROA - FP INP - PCM + FP + INP + PCM
+ ROI + ROI - ROI + ROI + ROI + ROI + ROI - ROA - ROA
COMPETITION high competition* high industry / competitor concentration* high industry members diversification high competitive power - LOBP + PCM o LOBP + PCM o ROI + SG + ROI o ROA +/- FP +/- INP +/- PCM
market share * repeatedly investigated factors ROI=return on investment

lb
+ LOBP
+ ROI
+ ROA + positively related negatively related o not related
based on line of business data SG=sales growth
ROA=return on assets
LOBP=line of business profit
PCM=industry price cost margin
FP=firm profit INP=industry profit
Table 9: Summary of market success factors in industrial organisation/ strategy research
The aggregation of the investigated variables shows that there is a wide acceptance of the use of profitability indicators for measuring firm performance. This increases the comparability of results compared to research in entrepreneurship. The approach to investigating markets in strategy research is, in many aspects, different to the approach in entrepreneurship research. Some of the most important factors of entrepreneurship research, such as life cycle stage and market dynamism, have received hardly any attention in strategy research. These factors, which are particularly related to the opportunity context of new ventures, may be of less importance for established large companies. On the other hand, data restrictions may also have led to less attention to these factors, as it may have been difficult to deduce these variables from the Compustat and FTC data sets.
47
The one factor which has been consistently considered of high or even dominant importance is market share. The positive impact of a high market share on profitability is attributed to economies of scale, superior purchase prices and exercise of monopoly73. Taking into account the tendency of the data sets applied to include only large-scale companies with high market shares, the importance of market share in the context of SMEs might be different, as the average market shares will be very low. With regard to the operational measurement there is the potential problem that many SME managers, especially in the service sector, might not be able to quantify their market share. Nevertheless, it can be assumed that achievable market share may be a critical factor for the success of a new venture, particularly in industries with high economies of scale. High capacity utilisation is the second market factor that has consistently shown a strong positive impact on profitability. Excess capacities frequently push companies to cut prices and, in turn, decrease profitability. While capacity utilisation is an indicator mainly applied in manufacturing, it may also be adopted for companies in the service sector. However, measurement and data collection might be more difficult in the service sector as firms in the service sector may frequently be unaware of their current capacity utilisation. Import rate was also consistently related to profitability, even though its importance was, in general, not considered as high as market share or capacity utilisation. High import rates reflect strong international competition. A high import rate may result from a general competitive disadvantage compared with foreign competitors. These competitors may benefit from better resource configuration or cost structure in their national context. Finally, a high inventory intensity was associated with a negative impact on profitability as high inventories generate high costs and decrease the ability to react dynamically to changes from the demand side. The 1st tier factors that have been investigated in two or more independent studies have been classified into the categories: consistent, mainly consistent and inconsistent. This new category of mainly consistent factors has been introduced because the factors
73
Marshall and Buzzell 1990.
48
export rate, fix capital and vertical integration have shown comparable impact on profitability among several independent studies with inconsistencies only for the industry profitability measure (PCM) and in a limited industry equation model in the Ravenscraft study. Ravenscrafts findings for these factors, based on a more comprehensive equation model led to results that were consistent with the PIMSrelated studies. Analogous with the discussed impact of imports on profitability, a high export rate may indicate competitive advantages for firms in the home market compared with foreign companies and could indicate additional sales potentials in foreign markets. High fixed-capital intensity is mainly related negatively to profitability, as high fixedasset intensity has been found to be related to later market life cycle stages, higher unionisation, vulnerability to decreases in capacity utilisation and an increase in exit barriers74. By contrast, traditional industrial organisation theory would suggest that high fixed capital could lead to higher profitability by imposing high barriers to entry. According to the empirical evidence, the negative impact of fixed capital intensity seems to be stronger than the positive impact of increasing barriers to entry. In terms of vertical integration, the majority of the studies confirmed the expected positive influence on profitability. The positive impact was sustained by presumably lower transaction costs in vertically integrated firms. To the contrary, modern strategy concepts that emphasise concentration on core competences and outsourcing, may suggest opposite impacts of vertical integration. Furthermore, transaction cost economics only relates profitability gains by vertical integration to markets that exhibit unfavourable characteristics, such as a small number of transaction partners and a high risk of opportunistic behaviour. In strategy research, findings for market growth have not been unanimous. While the majority of the studies confirm a positive impact for market growth on profitability, the more recent study by Mueller and Rauning found no impact for the overall sample and a weak negative impact for the sample of homogenous industries. Nevertheless, the majority of the empirical evidence confirms the prevalent assumption that market
74
Marshall and Buzzell 1990.
49
growth does positively affect profitability by facilitating company growth, which must not be at the expense of competitors but may be driven by increasing demand. For barriers to entry, industry advertising, industry R&D and asset newness, the empirical evidence is inconsistent and several studies did not sustain the expected positive impact on profitability. Coinciding with the findings on industry fix capital, high barriers to entry / minimum efficient scale may not solely have positive impacts on profitability. Both advertising and R&D are traditionally related to markets with high product differentiation, which is assumed to lead to less price pressure. However, both advertising and R&D intensity have been negatively related to profitability in both the PIMS-related studies and the LOB-based Ravenscraft model. The contradictory findings have led to an alternative explanation in which high advertising and R&D expenses are considered as responses to high competitive pressure. Moreover, Ravenscraft stated that R&D investments in particular may lead to visible profitability impacts only after a considerable lapse of time. Probably the most contradictory evidence was found for the variable of industry concentration. Mueller and Rauning suggested that the relationship between concentration and profitability may not be linear but S-shaped.. Profitability may increase with industry concentration, but at varying rates of increase. Industry concentration may be an indicator for high economies of scale, which would give big market players a costs advantage compared with smaller players. On the other hand, a highly concentrated market may be more transparent for buyers and therefore may increase the intensity of competition. 2.2.3 Conclusions and implications for the study Similar to the previous chapter of literature in the field of entrepreneurship, the following figure summarises the findings of strategy research on the impact of market factors on organisational success measures.
50
1ST TIER FACTORS: USUAL SUSPECTS

EMPIRICALLY CONSISTENT high market share (+LOBP + ROI + ROA) high industry capacity utilisation (+ LOBP lb + LOBP + PCM + ROI) high import rate (- LOBP PCM ROI FP -IP PCM) inventory intensity (- ROI ROA) EMPIRICALLY MAINLY CONSISTENT high export rate (+LOBP + ROI but PCM) high industry fix capital / asset intensity ( - LOBP lb - ROI - ROA but + LOBP + PCM) high vertical integration (+ LOPBP lb + ROI + ROA but - LOBP PCM) high market growth (+ LOBP + ROI + ROA +/o PCM but FP INP) EMPIRICALLY INCONSISTENT high barriers to entry / minimum efficient scale (-LOBP + PCM + ROI +ROA FP o IP o PCM) high industry advertising (- LOBPlb + LOBP + PCM ROA ROI + FP + INP) high industry R&D (- LOBPlb - LOBP PCM ROI ROA + FP + IP + PCM) asset newness (+ROI ROA) high industry concentration (- LOBP +/- PCM +ROI o ROA +/- FP +/- INP)
2ND TIER FACTORS: LESS USUAL SUSPECTS

EMPIRICALLY CONFIRMED high product customization / heterogeneity (- ROI) high buyer concentration (-LOBP PCM) high segmentation of suppliers (-LOBP PCM) high concentration of orders (+ROI) long distance shipped (- LOBP PCM) high supplier concentration (- LOBP PCM) high inflation rate (+ROI) low unionization (+ROI) low purchase importance (+ROI) low # of new products introduced (+ROI) high employee productivity (+ROI) high industry member diversification (o LOBP + PCM) high competitive power (o ROI + SG) NOT CONFIRMED EMPIRICALLY early life cycle stage (o ROI o SG)
lb
based on line of business data
+ positively related
negatively related
o not related
ROI=return on investment ROA=return on assets SG=sales growth LOBP=line of business profit PCM=industry price cost margin FP=firm profit INP=industry profit
Figure 5: Summary of research on market factors in strategy
Among the first tier factors, which comprise those factors that were investigated in at least two empirical studies, three groups of factors are distinguished. The group of empirically consistent factors comprises market share, capacity utilisation, import rate and inventory intensity. As mainly consistent have been categorised export rate, industry fix capital, vertical integration, and market growth. The group of empirically inconsistent factors comprises barriers to entry, advertising, R&D, asset newness and industry concentration.
51
Finally among the second tier factors all those factors are listed which have been just investigated in a single study among the revised literature. Research on market factors in strategy can be considered, in several aspects, further advanced than research in the field of entrepreneurship. Early studies by Ravenscraft and the PIMS project related studies from Buzzell and Marshall already provide focused investigations on the market environment that include very comprehensive factor sets that are still missing in entrepreneurship research. Moreover, the widely accepted use of profitability measures for company success leads to a higher comparability of research results. The validity of the findings benefits from the very large data sets that were applied in most studies. On the other hand, all of the studies were very limited with regard to the dimensions of company size and industry sector. The PIMS, Compustat and the FTC databases contain data on solely large-scale enterprises primarily in the U.S. manufacturing sector. The applicability of the findings for SMEs and for firms in the service sector has not been examined. Research in industrial organisation has been facilitated by the public availability of large data sets. The identification of appropriate measures of firm performance was also an easier task for researchers in strategy. The widely applied profitability measure is a far better success indicator in the context of established firms than in the context of new firms, which have high investments in future growth. Therefore, research in strategy has not had to face several of the key impediments that researchers of entrepreneurship have been confronted with, and which have led to the gaps in entrepreneurship research, as mentioned above. During the search of relevant literature in the strategy field, a strong emphasis on research on resources internal to the firm as the principal driver for growth and profitability has been noticeable. This tendency was spurred by the publication of studies on industry effects by Hansen and Wernerfelt and later by Rumelt at the end of the 1980s, which attributed higher importance of firm and business unit effects versus industry effects on firm performance. As Sampler (1998) noted, in the current debate it seems as if the resource-based stream is dominating today75. However, industry effects might have been systematically underestimated in previous studies due to the limited data source on large manufacturing firms. The investigation of industry effects
52
in the contexts of SMEs and the service sector might supplement earlier findings. It may be of interest to compare the market success factors as identified by PIMS and Ravenscraft with the market success factors in the context of SMEs in primarily nonmanufacturing sectors. In general, the empirical studies have shown that there is little awareness about which market variables are relevant and which variables are critical. A model of market attractiveness, which is developed in the following chapter, may guide future research by enabling a more systematic selection of variables.
CHAPTER 3 - DEVELOPMENT OF A THEORETICAL MODEL OF MARKET ATTRACTIVENESS
53
Development of a theoretical model of market attractiveness
3.1
Approach
Within this chapter, a model of the new venture market environment is developed on the basis of contemplative theory building and the formerly discussed results of empirical research. This model guides the subsequent empirical analysis in the following chapters. In the first step, objective number two of this study76 will be achieved by discussing those economic theories and research programmes that particularly contribute to the understanding of the market-venture performance relationship. The underlying explanatory concepts of each of these research programmes are discussed in the context of the investigated market-new venture performance relationship. For each research programme the critical market variables are identified and discussed under the light of the empirical evidence of the literature review. In the second step, different approaches towards structuring the complexity of environments and markets are discussed. For each structuring approach, the strengths and weaknesses are evaluated with respect to the undertaken study. Finally, in the third step, objective number three of this study77 will be achieved by proposing a new proprietary model of market attractiveness from the perspective of new ventures. Independent variables of the model contain market factors with a hypothetical influence on the dependent variable of new venture performance. Departing from a comprehensive list of environmental variables, the number of variables is narrowed by the elimination of variables that do not seem to be relevant in the context of new ventures and variables that describe highly related phenomena under different labels.
76 77
See chapter 1.2, p.3. See chapter 1.2, p.3.
54
3.2
Additional applicable research programs for the theoretical framework
Following Coopers claim (1991: 250) for better theoretical frameworks and more theorydriven empirical research theoretical concepts of related research fields in economy are incorporated in the process of developing the theoretical model of market attractiveness. As Cooper (1991: 250) stated, our understanding may be advanced by borrowing constructs and theoretical frameworks from other fields. 3.2.1 Selection of research programs The undertaken study is primarily related to the research field of entrepreneurship. However, other adjacent economic research fields may also provide valuable insights into explaining the interactions between market variables and organisational success. The lack of integrating former research and the ignorance regarding important market dimensions has been identified earlier as a major shortcoming in entrepreneurship research. Therefore, it is the intention of this study to integrate knowledge from a wide range of research fields in order to expand the understanding of market effects. Those research programmes that either explicitly postulate a causal relationship between market factors and organisational success, or that provide concepts that can be applied to explain such a causal relationship will be included in the theoretical framework. For the purpose of this study, the presentation of each relevant research programme will be limited to presenting the basic argument, the identification of the most critical marketrelated variables and an evaluation of the proposed mechanisms of market effects. 3.2.2 Industry economics Objective and basic concept The structure-conduct-performance paradigm, which has been developed in the end of the1930s by Edward S. Mason78 at Harvard university, proposes that the market structure determines the organisational conduct in terms of strategy, which in turn determines the economic results. This basic paradigm has been extended by Scherer and Ross79 to include a group of variables labelled basic conditions, which determine
78 79
Mason 1939. Scherer and Ross 1990.
55
the market structure from the demand and supply perspective, respectively. In another subsequent expansion of the model, public policy has been included as additional factor of influence on both structure and conduct. Apart from the principal direction of causation from structure to conduct and from conduct to performance, it is acknowledged that a firms conduct can also affect market structure and the basic conditions. Not only dominating large firms may affect the market structure, also small firms may be able to affect the market structure for example by registering patents which impact directly the barriers to entry on the market structure level. These lower importance feedback causalities are indicated in the dotted arrows of the model. Because in a perfect market environment conduct will primarily be determined by market structure and its underlying conditions, the structure-conduct-performance model legitimises an approach that investigates performance directly based on market structure. The model stresses the importance of market choice as one of the most important strategic decisions.
Basic Conditions
! ! ! ! ! ! ! Supply Raw materials Technology Unionization Product durability Value-weight Business attitudes Legal framework Demand Price elasticity Substitutes Rate of growth Cyclical and seasonal character ! Purchase method ! Marketing Type ! ! ! !
Market Structure
Number of sellers and buyers Product differentiation Barriers to entry Cost structures Vertical integration Diversification
Public Policy
Taxes and subsidies International trade rules Regulation Price controls Antitrust Information Provision
Conduct
Pricing behavior Product strategy and advertising Research and innovation Plant investment Legal tactics
Performance
Production and allocative efficiency Progress Full Employment Equity
Figure 6: Structure - conduct - performance paradigm (source Scherer and Ross 1990:5)
56
Industry economics has frequently been applied to justify governmental intervention in highly concentrated markets in the interest of overall economic performance. The findings of industrial economics had a strong impact on the field of business strategy at the end of the 1970s when Porter transferred the findings to the field in the widely known five forces model80. In the ideal model, all firms within one industry would be expected to apply the same strategies in terms of pricing and investments, and would have similar profit structures. The model received criticism as apparently firms within one industry differ widely both in the strategic postures adopted and profitability. Scholars of industry economics argued that changes could be attributed to differences in information, random disturbances and organisational inertia. Moreover, some industries could have provided sufficient profit potential so as to allow suboptimal strategies. Contribution to assessing market attractiveness According to industry economics theory, an attractive market is characterised by: o high barriers of subsequent entry with special attention to scale economies and product differentiation o low seller and buyer concentration o high industry concentration o high vertical integration o high diversification In the past, industry economics probably provided the most important theoretical concept for empirical research on market-performance relationships. However, empirical evidence for the critical market factors proposed by industrial economics is highly inconsistent, as shown in the literature review. None of the above-mentioned factors could provide consistent evidence in either entrepreneurship or in strategy research. Entrepreneurship research even suggests that high buyer concentration could have a positive impact on profitability, contrary to the proposed causalities. The empirical research in industry economics itself, which has frequently investigated
80
A more detailed discussion of the model is given in chapter 3.3.1, p.67ff.
57
market factors related to firm survival, also revealed inconsistent results, which have been attributed to diverging operationalisations of key variables81. 3.2.3 Organisation ecology The roots of organisation ecology were planted in Hannan and Freeman's article82 on the population ecology of organisations in the 1970s. Objective and basic concept Organisation ecology questions the adaptability of organisations to their environment. Large organisations especially are seen as being characterised by strong inertial forces impeding both organisational change within the company and adaption to new environmental settings. This inertia arises due to internal and external factors. Internal factors comprise sunk costs of firms, communication structures, internal politics and the dominance of institutional norms. The external environmental factors that lead to inertia comprise barriers to entry and exit, bounded rationality and social legitimacy83. Consequently, organisational change occurs as a result of the mechanisms of environmental selection and replacement of existing organisations by new organisations rather than by internal adaptation within one organisation. Organisation ecology focuses not on the individual organisation but predicts the probability of births and deaths within a population of firms in a given industry niche over time. Patterns of organisational foundings and mortality are investigated as the visible outcomes of selection processes84. Contribution to assessing market attractiveness The complete negation of an organisations capacity of internal adaptation may be difficult to justify, due to the fact that over the last few decades, large companies have put great effort into improving their responsiveness to environmental changes. Moreover, small companies are generally considered to be highly flexible with regard to environmental responsiveness. Still, it might be important to note that degrees of adaptability vary significantly among organisations and the capabilities of adaptation
81 82
Woywode 1998, Geroski et al. 1990. Hannan and Freeman 1977. 83 Hannan and Freeman 1977. 84 Hannan and Carroll 1992.
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processes are not unconstrained. Empirical research identified that organisational mortality is significantly higher for firms that are new and firms of small size, which is frequently referred to as liability of newness and liability of smallness. However, these two most popular findings of organisation ecology only contribute a little to the evaluation of attractive markets. More relevant for the purpose of this study are the concepts of carrying capacities and organisational density85. According to the idea of carrying capacities, the availability of resources within a market is restricted. Late market entrants will be confronted with a limited availability of resources and are therefore likely to be less successful. The idea of organisational density, however, clarifies that in early market life cycle stages with a low number of competitors, new ventures will suffer from a lack of legitimacy. Therefore, the entrance of additional firms in early market life cycle stages increases legitimacy with potential client groups and consequently increases the market potential. Once a satisfactory level of legitimacy has been achieved, the entrance of additional firms in later market life cycle stages will however lead to decreasing firm success due to increasing competitive forces and limited resources. Consequently organisation ecology theory suggests that attractive markets for new ventures are characterised by: o earlier market life cycle stages o high degree of technological innovation or changes in regulation that discriminate established organisations due to organisational inertia o existence of competing firms to increase legitimacy with potential clients o abundant availability of remaining resources in markets o competitors of small size and rather young age, which can be ousted more easily than long-established large firms While the theoretical concept and empirical work in the field deals only with survival and mortality of organisational populations, these factors may also be important for analysing markets from the perspective of individual firm profitability. The proposed factors of market life cycle, innovation and regulation, coincide with the most important empiric findings in entrepreneurship research. The phenomenon of liability
85
Hannan and Carroll 1992.
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of smallness can be related to the factor of market share in strategy research, as both factors may be highly determined by economies of scale. Overall, empirical research does confirm some of the most important factors of organisational ecology. In addition, organisational ecology proposes an interesting framework for structuring environmental variables, which might prove to be useful for the development of the theoretical model of market attractiveness. Environmental variables are categorised in the three main areas of task environment, institutional environment and political environment. Task environment comprises all factors that are directly related to the tasks that a firm has to carry out, such as competitive setting and customer structure. Institutional environment comprises not only the macroeconomic conditions that affect the firm but also the socio-cultural developments. Finally, the political environment comprises current economic and tax policies and developments in jurisdiction. 3.2.4 Transaction costs economics The establishment of transaction cost economics as a scientific research programme dates back to the publication of "Markets and Hierarchies: Analysis and Antitrust Implications" by Williamson in 197586, which evolved from the New Institutionalists criticism of traditional micro theory. Objective and basic concept Transaction cost theory aims to explain the boundaries of the firm. Consequently, firm size is determined by the efficiency of vertical integration versus market allocation. Transaction cost theory focuses on the single transaction as a unit of analysis and is based on the following three key assumptions87: o Transaction costs occur when goods or services are transferred across technologically separable interfaces and determines the use of appropriate governance structures. o Transactions vary with respect to the three critical dimensions of frequency, uncertainty and asset specificity.
86 87
The basic idea dates back to Coases famous article about the nature of the firm in 1937. Compare Williamson 1979.
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o Human factors such as bounded rationality and opportunistic behaviour have to be taken into consideration when dealing with economic problems. Casson (1996) complemented this theory by adding the component of information costs, in order to explain processes within the boundaries of the firm. Casson argues that as the complexity of the information flows handled by a firm increases, information costs will occur that will increase transaction costs. Contribution to assessing market attractiveness Transaction costs theory defines clear conditions that are proposed to increase opportunistic behaviour and consequently increase transaction costs. These conditions can be applied to evaluate the most efficient governance structure, whether it be market allocation or vertical integration. Since ventures in markets with less exposure to opportunistic behaviour may face less difficulty in achieving customer acceptance, one may assume that those markets are more attractive for new ventures from a transaction cost perspective. In markets with high transaction costs, involving a high risk of opportunistic behaviour and only few participants, the large vertically integrated firm is considered as the most efficient governance structure. Exposure to opportunistic behaviour is greater if the number of potential transaction partners is limited and at the same time one transaction partner is in a position to exert power on the basis of asymmetrical dependencies, often related to conditions of high asset specificity. By contrast, markets with a larger number of players participating in the market involve a low risk of opportunistic behaviour. In these markets the price mechanism is more efficient than vertical integration, since the risk of opportunistic behaviour is less serious. Therefore, these kinds of market conditions may be considered more favourable by new ventures and small-sized companies. It may be deduced from transaction cost theory that attractive markets for new ventures are characterised by: o a large number of potential transaction partners in terms of low concentration of buyers and low concentration of suppliers
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o low asset specificity to minimise the risk of opportunistic behaviour in transaction partners o little uncertainty within transaction processes in market o an existing degree of vertical integration which is higher than justified from a transaction costs efficiency perspective o the existence of competing companies offering similar products, which will decrease risk exposure of potential buyers and therefore reduce their inclination for vertical integration o inefficient organisation structure of competing firms with high information costs It has to be noted that the above characteristics of attractive markets are mainly limited to the business to business sector and are less applicable to the business to consumer sector. Empirical evidence related to organisational success in the field of transaction cost economics is scarce88. Entrepreneurship research suggests that high buyer concentration opposed to low buyer concentration will lead to higher venture success. Since asset specificity has led to ambiguous results in strategy research, the transaction costs approach could reveal that product heterogeneity does not necessarily lead to higher profits through less exposure to price competition, but might well increase the reluctance of potential buyers. The positive impact of a high degree of vertical integration coincides with the empirical evidence from strategy research. Transaction cost economics has received considerable attention within the last decade, most visibly with the Nobel award for Economics being given to Ronald Coase for his work on transaction costs. Even though the empirical evidence for the suggested market characteristics in transaction cost economics is relatively weak, the importance of transaction costs may be particularly significant in the context of new ventures as smaller firms face higher transaction costs because they are more sensitive to uncertainty, are more vulnerable to opportunism, yield a greater risk of unintended
88
See Picot, Schneider and Laub 1989 for one of the few applications of transaction costs theory in empirical entrepreneurship research on innovative new ventures.
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discontinuity for their partners and raise higher suspicions of opportunism89. Moreover, transaction costs theory provides an alternative explanation for the impact of some frequently investigated market characteristics and may explain inconsistent findings in empirical research which cannot be explained by conventional business theory. 3.2.5 Contingency theory Objective and basic concept Contingency theory was established by Lawrence and Lorsch (1969) at the end of the 1960s. The basic argument is that organisational structure is affected by different context variables such as environment, organisational size and technology. Contingency theory in the context of environment claims that different environments place differing requirements on organisations. Organisational design decisions therefore depend - are contingent- on the environmental conditions. Those organisations whose internal features best match the demands of their environments will achieve the best adaptation and consequently the best performance90. Contrary to the population ecology theory, which assumes limited adaptability for organisations, contingency theory stresses the importance of adapting organisations to dynamically changing environmental conditions in order to reach an optimum fit with environment and therefore a maximum effectiveness. Even though Scott stated: "contingency theory is dead. There is no longer any widespread interest in its progress or development"91, it has to be acknowledged that the basic ideas had a strong impact on the later economic theories of transaction cost economics, population ecology and industrial economics. The basic causality of the structure-conduct-performance model was derived from contingency theory. Contribution to assessing market attractiveness Contingency theory in the context of the environment stresses the importance of environmental dynamism. Depending on the degree of environmental dynamism, either a bureaucratic or organic organisational structure is considered more successful.
89 90
Noteboom 1993: 291. Scott 1992: 88. 91 Carroll 1988: 1.
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Elements of environmental dynamism comprise uncertainty, technological change, and change of the market structure. From a new venture perspective, markets with a high degree of dynamism may be more attractive as established firms will need time to adapt to changing environments and will therefore have lower efficiency. Consequently, contingency theory suggests that an attractive market for new ventures is characterised by: o a high degree of environmental uncertainty, which impedes established companies in preparing for future developments o a high degree of technological change, requiring established companies to undertake comprehensive organisational adaptation processes o a high degree of change in the market structure as demand, customer demographics or competitive structures may change All these factors lead to a relatively lower efficiency level within a given market as the fit between the environment and the organisation will in general be lower. Established firms will not be able to rely on continuous decade-long optimisation of their processes. Market dynamism has been investigated in several empirical studies of entrepreneurship with diverging results. A high degree of market dynamism and uncertainty may, however, not only provide opportunities but it may also increase the risk of failure. New ventures with limited resources at the time of start-up may run out of capital and be more likely to fail if dynamic and uncertain market environments develop unexpectedly. For this study, the concept of dynamic rather than static environmental settings is considered important and will be adopted. 3.2.6 Game theory Objective and basic concept Game theory has had a major impact on economics and its related disciplines in recent times. The transfer of its findings to the field of business gained most attention with the publication of Nalebuff and Brandenburger's book on "co-opetition" (1996). In the field of economics game theory had strong influence on recent research in the field of industrial economics. Game theoretical thinking is based on anticipating responsive actions from other participants. The degree of irreversibility of decisions and investments is considered as the key element to determining the sequence of the game
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process. Irreversibility is related to a higher competitive threat and higher barriers to entry. Explanation models from game theory in business and economics are primarily geared towards understanding and analysing the complex structures and dynamics of competitive processes. Contribution to assessing market attractiveness Game theory is of particular interest for evaluating market attractiveness, since a core application of game theory is the modulation of market entry situations. Especially for start-ups, it is of great relevance to anticipate the competitive response to their entry into a new market. This might not only be decisive for the choice of an appropriate market entry strategy, but also for the appraisal of start-up success in the targeted market. Game theory cannot provide a theory of market entry, but it can identify individual critical aspects with regard to interdependences at market entry. Thus, scholars have proposed that markets with highly differentiated products might provide higher profit margins as differentiated products reduce the necessity of immediate competitive reactions. It is even suggested that it may be better to provide an inferior product than an identical product92. Also, game theory argues that legitimacy in terms of the existence of competitors will increase the probability of customer acceptance of a product93. The irreversibility of investments has been found to be a crucial factor for anticipating competitive responses to the impact on entry and exit barriers94. Although game theory is limited, in terms of a lacking closed theoretic model as provided by traditional micro theory, scarce empirical research95, the assumption of perfect rational decision making and frequently vague and diverse behaviour options, game theory makes a valuable contribution to broaden strategic planning by incorporating the perspective of competitors and anticipating future competitive responses. From a game theory perspective, attractive markets for new ventures are characterised by: o high product heterogeneity, since identical products induce strong price competition
92 93
McAfee and McMillan 1996: 267. McAfee and McMillan 1996. 94 The applicability of game theory for explanations of firm foundation and market entries has been discussed extensively in Schulz 1995. 95 Porter, R.H. 1991.
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o low fixed costs, which will decrease incentives of competitors to sell close to variable costs o low capital requirements and a low degree of irreversibility of investments decrease the exit barriers and the dependence of competitors on a market o low competitive responsiveness and low aggressiveness While empirical research in entrepreneurship consistently confirmed the negative impact of high competitive pressure on new venture success, the impact of product heterogeneity has been less consistent in both entrepreneurship and strategy research. The variables of fixed costs and capital requirements have been investigated in entrepreneurship under the broader term barriers of entry, and have been found to have only a small impact on venture success. Similarly, empirical studies in the field of strategy also gave inconsistent results regarding barriers of entry and minimum efficient scale. Solely the related variable of inventory intensity showed the expected negative relationship with organisational success. Although empirical research in entrepreneurship and strategy cannot confirm the importance of the postulated market variables, game theory considerations may offer valuable insights for understanding competitive interactions. 3.2.7 Summarising consideration of contributions in different fields The discussed research programs are mainly rooted in economics. The field of economics tends to provide more comprehensive theoretical postulations and explanation models than the more fragmented and less theory-guided research in business administration. The presented theories frequently lack a profound empirical foundation of research, which might be directly applicable to confirm the impact on venture success. Also, the identified key market variables will only coincide to varying degrees with empirical research in entrepreneurship and strategy. The explanation models frequently adopted parts of another theory or emerged from another. However, each model concentrated on distinct aspects of the market context. The primary contribution of these research programmes is seen in the provision of alternative models for explaining the mechanisms through which market characteristics may affect venture success.
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For each of the chosen research programmes, the following figure will summarise the most important market factors that have been associated with market attractiveness from a new venture perspective.
RESEARCH PROGRAMS industry economics population ecology transaction costs economics contingency theory game theory KEY MARKET FACTORS
1. barriers of entry 2. seller and buyer concentration 3. industry concentration 4. vertical integration 5. diversification
1. market life cycle stage 4. resource availability 2. existence of competitors 5. age & size of competitors 3. technological innovation / change in regulation
1. seller and buyer concentration 4. vertical integration 2. asset specifity 5. existence of competitors 3. uncertainty within transaction process
1. uncertainty 2. technological change 3. change in market structure
1. product heterogeneity 4. competitive responsiveness 2. fix costs 3. capital intensity / irreversibility of investments
Figure 7: Key market factors in research programs
Overall, the review of relevant research programmes has identified additional market characteristics that should be considered in an evaluation of market attractiveness, and it provides insights into potential ways of explaining the interaction between market characteristics and venture success.
3.3
Alternative conceptual approaches towards structuring and classifying the market environment
Different approaches have been developed to structure the complexity of environmental factors on the market level with regard to organisational success. Most of these approaches have only been applied in the context of individual investigations. The one notable exception is Porters five forces model, which has dominated analysis of industry and market environments throughout the last two decades. Both practitioners and researchers in the business field have relied heavily on the conceptional framework given by Porter. In the following chapter, the Porter model
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and other detailed conceptual approaches towards structuring the market environment are presented and discussed on the basis of the following criteria96: o Comprehensiveness: Are the major factors on the market level included? Does the first hierarchy of the frameworks lead to meaningful classifications of the overall market environment? o Empirical support: Is the importance of the main criteria confirmed by empirical research? o Applicability to new venture context o Accuracy in explaining interactions: Does the framework go beyond listing and classifying variables by explaining relationships and interactions among variables. 3.3.1 Model of Porter: Five forces model In his classic book "Competitive Strategy: Techniques for analysing industries" Porter (1980) transferred the findings of industrial economics to strategy research. The book introduced two related models. First, a complex model of industry analysis and, second, a more simplifying model of generic strategies. The industrial organisation approach in strategy puts industry structure at the centre of strategic choice and the subsequent organisational success. Porters five forces model of industry analysis can be considered as the focal point of industrial organisation. Within the last two decades, numerous studies have adopted Porters model of industry analysis to investigate market environments. The model has become one of the most widely used tools of strategic planning. Porters concept of industry analysis develops a model of five sources of competitive pressure that should guide strategic positioning.
96
In entrepreneurship research several frameworks have been developed which centre on entrepreneurial infrastructure such as financial and non-financial assistance to new ventures, education systems, private financial system, incubators and others. See e.g. Mller-Bling and Klandt 1990, Gnyawaii and Fogel 1994. These frameworks shall not be discussed here as most of these infrastructure variables may affect new ventures independent of industry membership and will only to a limited degree contribute to evaluate market attractiveness.
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Threat of new entrants

Rivalry among existing firms
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitute products
Figure 8: Porters model of five competitive forces
According to Porter, knowledge of these underlying sources of competitive pressure will reveal the positioning of a company within its industry, and highlight opportunities and threats. The understanding of competitive forces will be the groundwork for a strategic agenda. The strongest of the five forces determines the industry profitability and has to be the foundation for further strategic action. The five main forces are complemented by sets of elaborated second order determinants:
1. Threat of new entrants Barriers to entry Low economies of scale Low product differentiation Low capital requirements Low cost disadvantages independent of size Free access to distribution channels Government policy impose no direct or indirect restriction to entry Expected reaction of established rival companies Incumbents with low resources to fight back Incumbents unlikely to cut prices Low industry growth High buyer concentration / High purchase volumes (especially in combination with high fix costs) Low product differentiation High share of total buyer costs represented by industry product Low profitability of buyers Low importance to the quality of the buyers products Low costs saving potential of product for buyer Potential threat of backward integration High supplier concentration High differentiation of purchased good No obligation to contend with other products Potential threat of forward integration Unimportance of industry for suppliers Improving price-performance trade-off of substitute Substitutes offered from high-profit industries
2. Bargaining power of buyers
3. Bargaining power of suppliers
4. Threat of substitute products

5. Rivalry among existing firms Large number of equal competitors Slow industry growth Low product differentiation High fixed costs Capacity augmentation in large increments High exit barriers Diversity of rivals
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Table 10: Porters five competitive forces framework including second order determinants
The framework was originally geared towards analysing competition from the perspective of one individual organisation. However, Porter explicitly states that the framework can also be applied to predict industry profitability in general. The Porter model is extraordinarily comprehensive when taking into consideration the 30 second-order determinants that are beyond the five competitive forces. The majority of the first tier market factors that have been identified within the review of the entrepreneurship and strategy literature are covered by the model. The model lacks consideration of the following variables, which have been considered as important in former empirical research: Life cycle stage, market dynamism, market size and import/export ratios. These variables, however, are treated in Porters complementary concepts of generic environments97, value chain98 and competition of nations99. Even though factors such as market growth and product differentiation are repeatedly mentioned as second order determinants, the classification of market and industry variables from a competition perspective is consistent and clear. Direct empirical support for the importance of the competitive forces is rendered difficult due to the inherent operationalisation and measurement problems related to competition. In general, competition or competitive forces can only be measured indirectly via variables of industry and market structure in quantitative research, which will then be related to competition. The second-order determinants of Porters model are highly consistent with the factors suggested by industrial economics. Consequently, for Porters model the empirical results of the proposed factors of product differentiation, barriers to entry, buyer and supplier concentration, remain widely inconsistent in both strategy and entrepreneurship research.
97
Porter 1980. Generic industry environment comprise: Fragmented, emerging, mature, declining and global industries. 98 Porter 1985. 99 Porter 1990.
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The applicability of the model to the context of new ventures may be limited to some degree. A bias of Porters work towards large companies has been observed by several scholars100. Some of the determinants of the model may be less relevant in contexts of non-manufacturing, non-business-to-business industries from a new venture perspective and other factors that have not been considered may be of importance. Nevertheless, both the five competitive forces and all the underlying determinants of the framework can also be applied in the new venture context. One particular strength of the Porter model is the explanation of interactions between competition and industry structure within an integrated model. Clear causalities are drawn from specific industry factors to changes in competition intensity. At the same time, the five competitive forces provide a clear structure of the phenomenon of competition. The focus on the competition dimension also imposes, however, a weakness of the classification, because the interactions between industry factors are not explained and the underlying drivers that lead to changes in the industry structure are not integrated.
Comprehensiveness 30 second order determinants cover majority of first tier factors, however lacking some important variables. Empirical Support Inconsistent findings regarding factors, which are primarily derived from industrial economics. Applicability for New Venture Context Explaining Interactions Despite large manufacturing firm background, widely applicable. Consistent explanation of interaction of competition and industry/market structure, however lacking explanation of interactions among industry structure and underlying drivers of change. Table 11: Evaluation of Porter's "five forces model"
While Porters model of generic strategies has been strongly criticised, the underlying five forces model for industry analysis has received very little criticism101 and is still widely in use among both practitioners and researchers. The criticisms concentrate on the models assumption of a static, rational industry structure.
100 101
De Wit 1997. E.g. Miller and Dess 1993 who empirically tested the Porter model of generic strategies on the PIMS database, acknowledged the five forces industry model, but criticized the shortcomings of the oversimplifying model of generic strategies.
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Moreover, some researchers have argued that in todays highly dynamic industry environments, the applicability of the model might be limited due to blurring industry structures102, high degrees of uncertainty103 and increasing rates of change in the market environment104. By contrast, one may argue that in todays business environment, opposing trends towards the limitation on core businesses and outsourcing may also mark industry borders more than ever before. It should also be noted that the Porter model is not completely static, as the two determinants improving price-performance trade-off of substitute and slow industry growth take into account inter-temporal dynamics. Nevertheless, the integration of drivers of change on the underlying industry structure and industry dynamics has been neglected to a large extent. Overall, Porters five forces model provides a rather comprehensive framework with a convincing structure according to the distinctive competitive areas represented by the five forces. Although the model is still frequently applied, it has to be noted that Porter's model, developed about two decades ago, exhibits several weaknesses. It has already been mentioned that industry dynamics were neglected. In addition, the model is oriented towards large scale manufacturing companies. Several market factors such as life cycle stage and market dynamism are missing in the model, which have been proven to be of importance in recent research in entrepreneurship and strategy105. The explanations on interactions are limited to the causalities related to competition without providing explanations for the industry variables themselves. 3.3.2 Baakens market framework
One of the most detailed new venture related frameworks of market environments in the German language literature was developed by Baaken (1989). He developed a comprehensive model of criteria to evaluate technology-oriented new ventures, including relevant variables of the three main dimensions entrepreneur, technology and market. The market dimension consists of two primary categories of market attractiveness and competitive position.
102 103
Levenhagen and Thomas 1993. Coyne and Subramaniam 1996. 104 Sampler 1998 even attributes the recent transition from industrial organisation to a resource-based view of strategy to the problems of defining industry boundaries as well as a dramatically increasing rate of change. 105 Compare chapter 2.1 figure 4, p.33.
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I. MARKET ATTRACTIVENESS 1. Market growth High growth in industry of customers Low increase of productivity of own products (increasing productivity of products could compensate increasing demand) 2. Risk of sales 3. Market size Expansion of potential market Low risk of substitute products or processes Early market life cycle stage High dispersion Low dependence on economic situation Niche represents sufficiently high market volume with respect to firms potential Total market size is sufficiently high, but allows a relevant market position of firm 4. Attractiveness of procurement market Low economic risks (related to increase in factor prices) High supply security with low dependence on individual suppliers Rapid technological developments (availability of standard components may decrease costs of formerly proprietarily manufactured parts) 5. Resistance to market entry Low newcomer phenomenon in terms of customer loyalty Existence of early adopters Low intensity of manufacturer-customer relationship prevalent in industry in terms of frequency of orders, intensity of consultation, intensity of service, switching costs Low price elasticity of demand side induces readiness to switch to lower price supplier 6. Competitive situation Competition on quality vs. competition on price Small number and small size of competitors (or potential competitors)
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II. COMPETITIVE POSITION 1. Potential relative market share Potentially growing attainable relative market share within product/market of range Potentially growing attainable relative market share concerning the product group 2. Firm strengths High readiness to learn Procurement: Good relationship with suppliers and procurement flexibility Sales: Strong advertising/promotion, qualified sales team, efficient and customized order administration, acceptable shipping times, efficient complaint management Services: Comprehensive services Product range: Ease of product application for user, training concepts, management of after sales service and replacements, strong synergy effects in procurement, production and sales, product range adjusted to market needs, high sales flexibility Customer preferences: High brand potential, high identification of product with firm, high expert recognition, close relationships to customers 3. Product strengths Functions and characteristics: High utility for client needs, technologically up-to-date concept with high reliability, additional features Variety of types and variants: Variety of products for different needs, low starting costs with options for expansion Costs of integration: Low costs of integration, acceptable price, low operating costs Table 12: Baakens framework of the market environment
In order to evaluate the probability of success of a technology-oriented new venture, the two dimensions of market attractiveness and competitive position are integrated into an evaluation matrix:
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MARKET ATTRACTIVENESS
Chances Chances Chances
+
o
++ +
o
--
COMPETITIVE POSITION
Figure 9: Portfolio matrix of Baaken
Similar to the Boston Consulting Group business portfolio matrix, the Baaken model suggests that the fit of market attractiveness and the competitive position of the individual firm will determine venture success. The variables of the framework have been theoretically derived and, in a further step, compared with strategic success factors identified from three case studies. All of the variables for the dimension of market attractiveness and competitive position have been found valid for the context of the case study firms and have been related to the identified strategic success factors. As in Porters five forces model, Baakens model is also geared towards the evaluation of the market environment from the perspective of an individual firm. The whole set of competitive position dimension criteria, as well as the market size criteria from the market attractiveness dimension, can only be applied in the context of an analysis on the individual firm. In terms of comprehensiveness, the model contains six primary criteria for the market attractiveness dimension and three primary criteria for the competitive positioning dimensions. In total, 28 sub-criteria are considered. Of these 28 sub-criteria, 15 can also be directly applied for an evaluation in an aggregated industry context. Among the first tier factors from the literature review106, the following factors are missing in the framework: Industry capacity utilisation, import/export ratios, capital intensity, capital intensity and vertical integration.
106
Compare figure 4, p.33 and figure 5, p.50 at end of chapter 2.1 and 2.2.
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Empirical research in entrepreneurship and strategy research consistently confirms the importance of criteria such as life cycle, market size and market share. The findings for other proposed criteria such as market growth are, in the context of entrepreneurship, less consistent and there are indications for an opposite impact of buyer concentration than that suggested by this model. The model has been developed specifically for the evaluation of innovative technology-oriented new ventures. This is reflected in the selection of criteria for the framework. The products of these innovative technology-oriented ventures have been assumed to exhibit a high degree of differentiation and even uniqueness. Therefore, this factor is not applied in the framework. At the same time the framework is geared towards a business rather than a consumer market, with products that tend to require an intensive client relationship, which is particularly reflected in the sub-criteria concerning market growth and barriers to entry. Apart from this sectoral limitation, the organisational focus of the framework is in coherence with this study on new ventures. In contrast to Porters classification, which categorises market factors according to the area of competition that is affected, Baaken classifies, in the first step, according to the aggregation level in market attractiveness and relative competitiveness. In the second step, the main criteria are identified, which are, in the third step specified by subcriteria. The framework explains a causation from the sub-criteria to the main criteria and from the main criteria to the main categories of market attractiveness and relative competitiveness. The explanation of relationships is limited to the grouping of related sub-criteria under subordinate criteria. Interactions among sub-criteria or among main criteria are not explained. Moreover, the relationship between market attractiveness and competitive position in the simplified matrix model remains vague. It is unclear how individual factors of the competitive position dimension affect or interact with individual factors of the market attractiveness dimension. Also, contingent variables are not considered in the framework.
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Comprehensiveness
28 criteria with 15 criteria applicable for analysis on the industry level. Several important variables missing.
Empirical Support Applicability for New Venture Context
Inconsistent findings regarding many suggested factors. Framework reflects orientation towards technologyoriented new ventures, with overrepresentation of factors related to technology-oriented business-to-business market. Majority of factors of framework applicable to new venture context in general.
Explaining Interactions
Structuring of factors in three hierarchical levels. Further explanations of interactions are lacking.
Table 13: Evaluation of the market framework of Baaken
A notable shortcoming of Baakens framework is related to the limited consideration of dynamics and changes in the environment, which are reflected only in relation to technological development on the procurement market. Especially in the context of technology-oriented firms, the emergence and acceptance of new technologies in the overall economy, changes in governmental regulations, and general shifts of consumer demands may significantly affect the potential and attractiveness of a market. The area of opportunity recognition is excluded from the model. 3.3.3 Dean and Meyers model
Dean and Meyers model (1996) is, in several aspects, distinct from the other models. First, it focuses on firm formation instead of firm performance, and second, it places a strong focus on environmental dynamics as facilitators of opportunities. Third, it has been validated in a quantitative empirical investigation, and fourth, it is geared towards an analysis on an aggregate industry level. The model was developed to perform a focused analysis of the effects of industry environments on new venture formations in US manufacturing industries. The selection of relevant market variables and the overall structure of the model are firmly grounded on the theoretical concepts of industrial economics and population ecology. The effects of the three major industry determinants (1) industry dynamism, (2) constraints on new ventures (entry barriers) and (3) constraints on existing firms (inertia), are tested regarding their effect on new venture formation. The authors stress the importance of dynamic industries as drivers for opportunities of entrepreneurial activity. Entry barriers constrain the formation of
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new ventures by prohibiting new ventures from taking advantage of emerging opportunities. Finally, the inertia of existing firms represents their incapability to seize new opportunities and thereby increase the potential for new ventures. The following figure represents the model and includes the variables that were used to measure each of the four major determinants:
INDUSTRY DYNAMISM Demand growth Niche dynamism Technological intensity CONSTRAINTS ON NEW VENTURES (ENTRY BARRI ERS) Advertising intensity Excess capacity Capital requirements Industry concentration CONSTRAINTS ON EXISTING FIRMS (INERTIA) Age of existing firms Vertical integration Extent of unionization Failure to invest in new capital source: Dean and Meyer 1996: 120
+ +
NEW VENTURE FORMATION
+
INDUSTRY SIZE
Figure 10: Model of determinants of new venture formations by Dean and Meyer (1996)
The results of the regression analysis confirm a statistical significance for each of the three factors of industry dynamism: Sales growth, niche dynamism and R&D intensity. All three showed a significant positive relationship to venture formation. Two of the entry barrier factors, namely industry concentration and capital requirements, showed a strong negative correlation with venture formations. Associated with inertia, both vertical integration and failure to invest in new capital are positively related to venture formation. Overall, the industry variables have a strong predictive power, explaining up to 69% of variance in new venture formations. In terms of comprehensiveness, the model is, with its four main factors and eleven second-order effects, less comprehensive than the former models. Nevertheless, it is noteworthy that the majority of the first-tier factors of the literature review107 are reflected in the model. Missing factors include those such as: industry life cycle,
107
Compare summarizing tables at end of chapter 2.1 and 2.2.
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import/export, buyer concentration, access to distribution channels and, most importantly, factors related to intensity and type of competition. Empirical support of the model factors is provided by the authors themselves. A comparison with the findings of the literature review is not valid as the literature review concentrated on studies on firm performance and explicitly excluded studies on firm formation and mortality. The model has been developed for the new venture context. However, it should be noted that a limitation on firm formation may have led to an overrepresentation of factors related to immediate market entry. Factors that could lead to sustainable longterm success may have received less consideration. Factors like product heterogeneity, intensity of competition and focus of competition, which have frequently been applied in this respect, are missing in the model. Additionally, one has to take into consideration that the study exhibits a sectoral orientation towards manufacturing firms. The Dean and Meyer model does not provide explanations of the interactions among factors, and the categorisation within the two hierarchies of factors gives only a limited explanation.
Comprehensiveness 11 market factors with high congruence with first-tier variables, however particularly competition-related factors are missing. Empirical Support Applicability for New Venture Context Study provides empirical support for theoretical model. Despite orientation towards venture formation instead of venture performance and the given sectoral focus on manufacturing, the model seems widely applicable. Explaining Interactions Apart from the basic structure of two levels of hierarchy, no relations of interactions among factors are explained. Table 14: Evaluation of the model of Dean and Meyer
3.3.4 Hinterhubers framework Hinterhuber (1995) developed an extraordinarily comprehensive scheme of environmental factors as a cornerstone for conducting an industry analysis. In accordance with the industrial organisation theory, Hinterhuber considers industry analysis as a starting point for strategic planning. The framework is structured around
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the three main categories of developments related to a supra-industry level, structure and developments on the industry level and the positioning of a company within its industry. The latter are highly related to the dimensions of market attractiveness and competitiveness from the portfolio matrix, which has also been applied as a primary means of classification by Baaken (1989).
I. ANALYSIS OF SOCIO-POLITICAL, ECONOMIC, AND TECHNOLOGICAL DEVELOPMENTS 1. International economic system, national economic structures- and policies 2. Governmental intervention in economy 3. Political, and socio-demographic developments (protection of environment, population growth, labour market etc.) 4. General technological developments (as far as they concern the present or future markets of the company) II. ANALYSIS OF INDUSTRY 1. Demand for products or services Product function and utilisation, market requirements, social needs Stability of demand (substitution, complementarity, sustainability etc.) 2. Supply of products or services 3. Competition Market life cycle stage Market dimension and market growth Segmentation / individualization of demand Bargaining power and behaviour of buyers Average degree of capacity utilisation in industry Capital intensity Labour costs, material costs Stability of supply with raw materials and energy Market segmentation, distribution channels Taxation Bargaining power and behaviour of suppliers Number, size, financial strengths, experience, management systems, and behaviour of established competitors Risk of entrance of new competitors, and/or substitution products Behaviour of employees and their organisations Organisation of industry sector and its development
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4. Conclusions
Governmental intervention, incentives etc. Public opinion about industry sector and production processes Profit- and growth perspectives Critical factors for success of a company in industry
III. POSITION OF COMPANY IN MARKET 1. Market position of company 2. Analysis of competition Market share (in relation to market size and largest competitor) Quality and characteristics of products and / or services Core competences Alternative structures of products or services Innovation potential (product or process innovations) Sources of competitive advantages Identification of strongest competitor Analysis of competitive differences in relation to strongest competitor (core competences, quality, resources, quality of strategies etc.) Analysis of competitive instruments (price, quality, design etc.) Strengths / weaknesses, present / future strategies, motivation and self-evaluation of each competitor Probability of reaction and capacity to react of each main competitor 3. Costs structure of firm Analysis of location in relation to supply with energy and raw material, labour market, sales market Relative efficiency of product- and distribution system (economy of experience) 4. Specific competitive advantages 5. Conclusions Relative financial strength of firm Relative capacity of management team Critical resources of success for firms in market Starting point for analysis of strengths and weaknesses of firm related to critical success factors for companies in industry in general and for the specific case of the firm Table 15: Structure for environmental analysis and forecast by Hinterhuber
The framework is strongly centred on the application in practice as guiding structure for conducting an industry analysis. The conclusions at the end of the industry and
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competitive positioning analysis reflect the fact that individual critical success factors may vary among different industries. According to Hinterhuber, industry analysis should not be limited to the collection of data, but also requires critical interpretation and evaluation related to the specific firm and industry context. The positioning of the individual company should be evaluated in relation to the strongest competitor in the respective market. Such a reduction of the competitive environment will increase the feasibility of competitive positioning analysis, especially for the implementation of an industry analysis in practice. With three main categories, 13 second-order categories and 38 third-order criteria, the framework comprises a larger number of variables than any of the other discussed frameworks. Hinterhuber states that the quality of the conclusions will increase with the number of data, phenomena, relationships and their evolution that are investigated108. The vast majority of first-tier factors of the literature review109 are considered in the model. Among the few missing variables are product heterogeneity, vertical integration and import/export intensity. However, the roots of import/export intensity are considered in the relative costs structure regarding to the location of the firm. Hinterhubers framework frequently omits to specify the direction of causation between a variable of the framework and an expected influence on organisational performance. In contrast with the models formerly discussed, which specify the impact of each factor on organisational success, the Hinterhuber framework is solely intended to serve as a structuring scheme without further specification of generic directions of causations independent of industry. Therefore, no evaluation of consistency with former empirical research can be given. The framework is part of Hinterhubers book on strategy. Even though the framework is geared towards conducting portfolio planning in the context of larger firms, the framework also seems to be widely applicable to the new venture context. However, some variables, which are of particular importance in the new venture context are, to a lesser degree, considered as barriers to entry and the dynamics of opportunity creation through changes within the industry and its external determinants.
108 109
Hinterhuber 1995: 116. Compare summarizing tables at end of chapter 2.1 and 2.2.
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As has already been mentioned, the Hinterhuber framework is primarily intended to serve as a structuring scheme. No interactions among variables are explained.
Comprehensiveness Empirical Support
38 criteria cover most aspects of the industry level. Not applicable, since frequently directions of causations are missing.
Applicability for New Venture Context
Although primarily developed for larger firm context, widely applicable also to new venture context. Some particularly important areas for new ventures missing.
Explaining Interactions
No relations of interactions among factors are explained.
Table 16: Evaluation of the framework of Hinterhuber
3.3.5 Summarising consideration of critical aspects for developing structured models of market environments The approaches discussed for structuring the market environment provide suggestions related to content and structure with respect to the development of a proprietary model of the market environment. In terms of the content dimension, the different approaches vary significantly in the number of applied variables. The importance of individual factors within the frameworks varies among different industries. In some cases the direction of impact may even be reversed in different industry contexts. As different variables may be critical in different industry contexts, Hinterhubers proposition for including a wide range of potentially important variables is, in the authors opinion, appropriate, as it reflects the complexity of market environments. One frequent proposition of quantitative research is to limit statistical models, particularly in regression analysis, to variables with considerable additional explanation power, thereby leading to the consideration of only a limited number of variables. In the new venture context, the framework dimensions of opportunity creation and barriers of entry may be of particular importance. Changes both in the supra-industrial environment and in the industry itself will create opportunities for new ventures. The dynamics within the industry have been well reflected in the Dean & Meyer model with the application of the model dimensions of industry dynamism and inertia.
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The explanation power of a model increases with the degree to which interactions and relationships are specified. Porter, Baaken, and Dean and Meyers models specify the direction of impact of each factor on organisational success or venture formation. However, interactions or contingent dependencies among variables of the same level are not taken into account in any of the models. While most of the presented frameworks just serve as a structuring scheme to group related factors, Porters model goes beyond this by relating the primary structuring categories of competitive forces to each other and by relating market factors to the five competitive areas. In order to develop the model, it is desirable to specify also relationships and interactions among variables. In terms of structure, the models suggest that analysis of the market-related environment has to be conducted on different aggregation levels. On a global or national level there are various dimensions such as economic, technological, sociopolitical and demographic changes that affect a wide range of industries at the same time. On an industry level there are other factors related to competitive structure and market structure that specifically affect the companies within one particular industry. Finally, on the company level, there are market-related factors that have to be evaluated with respect to the relative competitive strengths of the individual company. In the Hinterhuber framework these three levels of aggregation are clearly distinguished as the primary categories of 1.) analysis of socio-political, economic and technological developments, 2.) analysis of industry and 3.) position of the company in the market. The latter two levels coincide with the dimensions of the portfolio matrix structure of market attractiveness versus the competitive position of the individual company, which has been applied as primary structuring element in both the Hinterhuber and Baaken frameworks. The market attractiveness dimension comprises all factors that affect all companies within a given industry. The aggregated industry is the unit of analysis. Changing the perspective to the individual firm as the unit of analysis means that critical characteristics of an individual firm will be compared with and related to characteristics of the market and their competitors.
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CONTENT - Comprehensiveness Different variables may be important in different industries, therefore a model should include a wide range of potentially important variables. - New venture context Environmental dynamics and barriers to entry are two dimensions that seem to be particularly important for a framework in the new venture context. - Relationships/ Interactions Frameworks that reflect relationships and interacting effects provide higher explanation power and are desirable. STRUCTURE - Levels of aggregation Market related factors should be investigated on distinctive levels of aggregation. National/global, industry and firm levels should be distinguished. Table 17: Critical aspects for developing frameworks of market environments
3.4
Development of an integrated model for analysing market attractiveness from a new venture perspective
3.4.1 Objective of model
Within this and the following chapter, a proprietary model for analysing market attractiveness is developed. The model will reflect the results of the literature review and potentially relevant variables that have been suggested by different theoretical concepts. The major objectives in terms of content and structure for the development of a proprietary model of market environments have been outlined in the summarising table of the last chapter. Furthermore, the objective is to integrate previous approaches to market analysis, which dealt with different market dimensions, into one common structure, which may be relevant for both entrepreneurship and strategy research. The model considers the specific perspective of new ventures that has been adopted for this study. However, the overall structure and also the majority of the model variables should be applicable to evaluate market attractiveness in the context of established firms as well. For those variables that are assumed to affect the opportunity structure of established firms and new ventures in a different way, the framework will specify as a short-term effect the implication from the new venture perspective at the
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time of market entry and as a long-term effect the implication from the perspective of established firms. It is important to understand that surviving new ventures will transform over time into established industry members. The barriers that a new venture has to face upon market entry may increase the probability of failure in the short run, however, once the venture has successfully overcome the barriers of entering the market, it may benefit from higher profit potentials in the long run. For the subsequent empirical investigation the model will serve as guidance for conducting a structured empirical analysis of the market environment. Even though the overall relevance of individual factors within the model regarding venture success might vary greatly, the model does not specify any weighting of individual factors. Ex-ante weightings of factors are impeded for several reasons. On the one hand the existing theoretical and empirical basis for justifying even a basic weighting is considered too weak. On the other hand, it is assumed that the importance of factors depends on contextual conditions. 3.4.2 Basic structure of the model: Five environmental levels of analysis The need to investigate market environments on distinctive aggregation levels has become evident within the review of alternative approaches towards structuring the market environment110. Variables of a framework to evaluate market attractiveness may either be applied to all companies in a global or national environment, all companies within one specific industry or just within the context of one particular firm. Baaken (1989) structures the variables of his framework into those which can be applied to evaluate the whole industry population without information on specific firms111 and those that can only be applied from the perspective and with information of one particular firm112. Hinterhuber (1995) made the same distinction, labelling these two levels clearly as analysis of industry and position of company in market. Moreover, Hinterhuber extended the perspective by also including a higher-order level of what he called analysis of socio-political, economic and technological developments.
110 111
See table 17, p.84 regarding critical aspects for developing frameworks. Baaken (1989) labels this industry level as market attractiveness. 112 Baaken (1989) labels this firm / venture level as competitive position.
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The distinction among different aggregation levels is decisive since the choice of an appropriate level of analysis depends on the aggregation level of the unit of analysis. If data broken down to the aggregation level of the individual firm is not available, it is not possible to conduct an analysis on the firm level. Because on the firm level the characteristics of one particular firm are compared with one competitor or a group of competitors, it is not possible to analyse variables like reachable market share, innovation potential or relative product strengths if data is only available for industry populations. On the other hand, if data is available on a lower aggregation level, the additional consideration of higher levels may enrich the analysis. The industry level variables of economies of scale or average gross margin may for example add to the understanding and evaluation of certain variables like relative growth aspirations on the firm level. The importance of individual variables on the firm level may vary according to different industry contexts. The general criteria by which to determine the level on which a variable is located, is the highest aggregation level of the unit of analysis to which the variable can be meaningfully applied. If a variable can be applied to characterise a country as a unit of analysis, then it should be grouped in the national level. If a variable cannot be applied to characterise a whole nation, but a whole industry, it should be grouped in the industry level and, finally, if the variable requires information of a specific firm it should be grouped on the firm level. Given this basic classification, it is important to state that higher level analysis will not be conducted without the consideration of the respective firm or industry context. Rather, the specific firm and industry contexts will serve to filter and focus on those variables among the multitude of potentially important factors with relevance in the particular context. MACRO LEVEL INDUSTRY LEVEL VENTURE / FIRM LEVEL
Figure 11: The three aggregation levels of environment
Different aggregation levels of analysis do not only differ with respect to the aggregation level of the unit of analysis, but also with respect to the underlying
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research question that is addressed by the particular level of analysis. The analysis of market attractiveness suffers from conceptual ambiguity113 as researchers frequently use different labels such as resource scarcity, hostility, industry attractiveness, capacity and munificence when referring to attractive markets. This indicates that there might be different aspects of market attractiveness associated to specific underlying research questions. In order to reflect the differences in the underlying research questions, the three basic aggregation levels of firm, industry and macro level are complemented with two additional levels of analysis. First, analysis of national competitiveness is included. This allows distinction between variables related to general changes in the macro environment and variables related to the competitiveness among different countries. Second, analysis of related industries is included between national competitiveness and the industry levels, reflecting the impact that members of related industries can have on the industry under investigation. In addition, barriers to entry are positioned as a separate section between the industry and firm levels. Barriers to entry are generally variables that belong to the market structure of the industry level. However, it is not possible to evaluate whether a barrier to entry has a positive or negative impact without information on the individual firm. The particular characteristic of barriers to entry is that they create impediments for firms that want to enter a market, but at the same time provide benefits and higher attractiveness for those firms that are able to overcome the barriers to entry as they subsequently benefit from less competition. A market that is, for example, characterised by high asset intensity may prevent new firms without the necessary minimum capital from entering the market, or may doom them to failure. If, however, a firm with a relatively high financial strength enters such a market and can overcome this barrier, it could benefit from higher profitability as only those potential subsequent entries will be able to enter the market, which also have at their disposal the required minimum capital. Therefore, the impact of barriers to entry on market attractiveness
113
See Castrogiovanni 1991 for a detailed review of the problem of conceptual ambiguity.
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cannot be evaluated and interpreted on the industry level, even though this is where barriers to entry are generally measured. The following table summarizes the five levels of analysis of the developed model:
MACRO LEVEL INTER-COUNTRY LEVEL INTER-INDUSTRY LEVEL INTRA-INDUSTRY LEVEL
BARRIERS TO ENTRY MARKET & DEPENDENCIES & COMPETITORS OPPORTUNITIES & THREATS FROM RELATED INDUSTRIES NATIONAL COMPETITIVENESS OPPORTUNITIES IN GLOBAL & NATIONAL ENVIRONMENT
VENTURE / FIRM LEVEL
RELATIVE POSITIONING TO COMPETITION
Figure 12: The five environmental levels of the model
Each level of analysis is characterised by specific research questions and the minimum aggregation level required for the unit of analysis:
level of analysis minimum aggregation of unit of analysis macro level none Opportunities in global & national environment Does the global and national environment provide a high degree of changes with relevance to the targeted industry? Do these changes have a positive impact on the opportunity structure? Is this a good moment to start? inter-country level country National competitiveness What is the level of competitiveness for a company of the targeted industry in the targeted country compared to other countries in the global economy? research questions
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inter-industry level
industry
Opportunities & threats from related industries How can the current state and expected activities in other related industries affect opportunities and threats for the targeted industry?
intra-industry level
industry
Market & dependencies & competition Are the structure and dynamics of the market and competitors favourable in terms of profit and growth expectations? Does the industry pose risks associated to specific dependencies? Which are the industry variables, which are of critical importance within the industry?
venture / firm level
firm
Relative positioning to competition How is the product, the firm, the management team, the strategy and the location positioned to the strongest competitor or a group of main competitors? What is the potentially reachable market share of the new venture?
Table 18: Minimum aggregation level and research questions for five levels of analysis
Each of the five main levels of analysis is divided into five dimensions. Again, for each dimension, a list of relevant evaluation variables is given. In total, the conceptual model consists of more than 100 variables. The expected impact of each variable on the three most frequently applied venture success measures of growth, profitability and survival will be specified, and positive as well as negative consequences on venture performance will be summarised in the tables of the conceptual model. In general, the specific directions of impact of the individual variables on venture performance have been derived from the literature review and the theoretical concepts presented.
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MACRO LEVEL
OPPORTUNITIES IN GLOBAL & NATIONAL ENVIRONMENT macroeconomic legislative technological socio-cultural demographic changes changes changes changes changes NATIONAL COMPETIVITY production factors stability & distance to industry new venture taxation sales market infrastructure infrastructure
INTER-COUNTRY LEVEL
INTER-INDUSTRY LEVEL
OPPORTUNITIES & THREATS FROM RELATED INDUSTRIES complementary threat of forward cooperation substitution integration backward threat of other integration new entries
INTRA-INDUSTRY LEVEL
MARKET & DEPENDENCIES & COMPETITORS market structure market dependencies dynamics competitor dynamics competitor structure
BARRIERS TO ENTRY RELATIVE POSITIONING TO COMPETITION products/ services firm resources management team
strategy location
Figure 13: The 5 x 5 model of market attractiveness
In the following chapters details of each level of analysis are presented.
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3.4.3 Macro level: Opportunities in global & national environment Within the analysis on the macro level, the following research questions are addressed. MACRO LEVEL: Does the global and national environment provide a high degree of changes with relevance to the targeted industry? Do these changes have a positive impact on the opportunity structure? Is this a good moment to start?
In order to answer these questions, the five most important sources of changes on the macro level are analysed. These changes may sometimes radically redefine the conditions of competition within an industry. Examples of such radical changes on the macro level include the legislative deregulation of telecommunications for firms in the telecommunication market or the increasing popularity of the internet for mail order businesses.
OPPORTUNITIES IN GLOBAL & NATIONAL ENVIRONMENT
MACRO LEVEL
macroeconomic legislative technological socio-cultural demographic changes changes changes changes changes
Figure 14: Macro level - Opportunities in global & national environment
The following table of the individual variables on the macro level points to a wide range of potentially relevant sources of change within an industry. Early recognition of such sources of change will make it possible to identify evolving opportunities for start-ups114 and to initiate adaption processes for established firms.
114
Sexton and Bowman-Upton 1991 identify changes in technology, governmental regulations, and in consumer preferences among the principal sources of entrepreneurial opportunities (p. 92).
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I. MACRO LEVEL OPPORTUNITIES IN GLOBAL & NATIONAL ENVIRONMENT

VARIABLE OPPORTUNITY RISK MAJOR IMPACT 1. macro-economic changes a) former economic growth
115
INFLUENCED BY
potential supply gap (G) increase in demand (G) increase in demand (G) increase of investment costs particularly for new ventures in capital intensive industries (P)
v p v p v p v p
b) economic growth expectations

116
c) propensity to consumption
117
- interest rates
d) interest rates118
e) devaluation of home currency

119
increasing exports increasing of final products (G) costs if reliance on imported resources (G,P)
v p
115 116
CIA world fact book: GDP real growth rate http://www.cia.gov/cia/publications/factbook/index.html. World Economic Forum (Global Competitiveness Report): Growth competitiveness and microeconomic competitiveness index ranking http://www.weforum.org/ and the deducted indicator of the general national framework in the GEM report. 117 The World Bank (World Development Indicators): Final consumption expenditure and household final consumption expenditure http://www.worldbank.org/data/. 118 The World Bank (World Development Indicators): Deposit interest rate, lending interest rate, real interest rate http://www.worldbank.org/data/. 119 Oanda corporation: International historic currency tables http://www.oanda.com.
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2. political / legislative changes a) environmental protection regulations120 established firms are forced to changes in equipment and processes and may have less advantage in efficiency (P) b) market regulations
121
increasing production costs (P)
v p v p
ST
LT
inertia of adapt to new regulations (P)
restrictions development (G) decreasing flexibility in personnel planning (G,P)
v p
established firms to in venture
c) labour market regulations

122
v p
d) public spending123
increasing demand (G)
v p
e) international trade increasing export deregulation

124
increasing foreign competition (G)
potentials (G)
v p
3. technological changes a) impact of internet usage

125
access to new distribution channel and inertia
risk of subsequent entry of new
v p v p
ST
of established firms competitors in to adapt in the short the long run run (P,S) (P,S)
LT
120
The World Bank (World Development Indicators): CO2 emissions per capita in relation to state of economic development http://www.worldbank.org/data/. 121 World Economic Forum (Global Competitiveness Report): Openness rating http://www.weforum.org/ and the deducted indicator of openness in the GEM report. 122 World Economic Forum (Global Competitiveness Report): Labour market flexibility rating http://www.weforum.org/ and the deducted indicator of labour market flexibility in the GEM report. 123 The World Bank (World Development Indicators): General government final consumption expenditure http://www.worldbank.org/data/. 124 The World Bank (World Development Indicators): Taxes on international trade, export duties, import duties http://www.worldbank.org/data/. 125 GEM internet user per capita.
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b) impact of internal IT applications
inertia of implement new applications (P)
increasing requirements (P,S) increasing requirements (P,S)
v p
established firms to investment
c) impact of new production technologies
inertia of implement new production technology (P)
established firms to investment
v p
4. socio-cultural changes a) volatility of consumption preferences inertia of longer term

v p v p
established firms to risk of venture adapt to changes of sustainability demand in the short and run (P) investment risk (S)
ST
LT
b) individualisation
venture opportunities in niche markets (S)

v p
5. demographic changes a) population growth

126
increasing potential demand (G)
v p
b) population age127
increasing demand for older consumer market (G)
decreasing demand for younger consumer market (G)

v p
- population growth
success indicators: G=growth, P=profitability, S=survival figure: v=variable, p=performance, ST=short-term, LT=long-term Table 19: Model of market attractiveness: Macro level
126 127
US Census IDB: Population growth, growth expectation, age for over 227 countries in May 2003 http://blue.census.gov/ipc/www/idbnew.html. US Census IDB: Age pyramid, age pyramid expectation for over 227 countries in May 2003 http://blue.census.gov/ipc/www/idbnew.html.
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Most of the mentioned variables of change are relevant for both new ventures and established firms. Comparative statistical data on basically all variables is available without any costs from public data sources for a wide range of countries. 3.4.4 Inter-country level: National competitiveness On this level, factors related to the competitiveness of industries are compared between one country and another country or a group of other countries that provide favourable conditions for firms in the respective industry. The following research question is addressed on the inter-country level of analysis: INTER-COUNTRY LEVEL: What is the level of competitiveness for a company of the targeted industry in the targeted country compared with other countries in the global economy?
The competitiveness of a country is analysed with respect to the five main sources of national competitiveness from the perspective of the respective industry. Depending on the typical geographic extension of the sales market of firms within the industry, the importance of the analysis of the national competitiveness may vary. Industries with firms typically operating on a local or regional level within a short distance to their clients will be less affected by the national competitiveness than industries where firms typically compete within a global market place.
INTER-COUNTRY LEVEL
production factors
NATIONAL COMPETITIVENESS stability & sales market industry new venture infrastructure infrastructure taxation
Figure 15: Inter-country level - National competitiveness
Understanding national competitiveness does not only provide useful information for the decision on where to locate a company, but will also be decisive for make or buy decisions and decisions of strategic positioning in relation to foreign competitors. A wide range of variables that could affect national competitiveness is given in the following table.
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II. INTER COUNTRY LEVEL NATIONAL COMPETITIVENESS

VARIABLE OPPORTUNITY RISK MAJOR IMPACT 1. production factors a) availability of qualified labour
128
INFLUENCED BY
capacity for startup and growth (G,S)
v p
b) costs of qualified labour

129
relative cost disadvantage (P)
v p
c) availability of resources
v p
d) costs of resources
130
v p
+ tax burden - competitiveness of supplying industries
2. political stability & taxation a) tax burden131 relative cost disadvantage and decreasing shareholder returns (P) b) stability of economical political environment decreasing risk of investment (S)
v p v p
128
CIA world fact book: Unemployment rate and labour force; GME: Management education (item D.5. in 1999 questionnaire). 129 International Labour Office Bureau of Statistics: International wages and labour costs. http://laborsta.ilo.org. 130 The World Bank (World Development Indicators): Consumer price index http://www.worldbank.org/data/. 131 GME - politics: regulation and taxation (item B.4 in 1999 questionnaire); The World Bank (World Development Indicators): Taxes on goods and services, net taxes on products, taxes on income, profits and capital gains http://www.worldbank.org/data/.
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3. sales market a) distance to main customer markets for export industries relative cost disadvantage and difficulty in maintaining customer relationship (P) b) size of national market
132
v p
growth potential (G)
v p
4. industry infrastructure a) development of transportation and telecommunication infrastructure133 b) existence of dependent supplying and buying industries134 c) competitiveness of dependent supplying and buying industries
135

v p
v p
relative cost advantage (P)

v p
5. new venture infrastructure a) availability of debt funding

136
decreasing barriers to entry and growth and decreasing costs of financing (G,P,S)
risk of entry of subsequent competitors (P)
v p v p
ST
LT
132
CIA world fact book: GDP http://www.cia.gov/cia/publications/factbook/index.html; The World Bank (World Development Indicators): International gross net income per capita http://www.worldbank.org/data/. 133 CIA world fact book: Telephone lines per capita, telephones mobile cellular per capita, internet service providers, length of railways tracks, length of highways, airports, internet users. GEM: Physical infrastructure, costs of communication, accessibility of communication (items H.1, H.2, and H.3 in 1999 questionnaire). 134 GEM: Availability of high-quality subcontractors, suppliers, and consultants (items F.1 and F.3 in 1999 questionnaire). 135 GEM: Costs for subcontractor, suppliers and consultants (item F.2. in 1999 questionnaire). 136 GEM: Availability of debt funding (item A.2. in 1999 questionnaire).
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b) availability of equity funding (VC, business angels/private investors)137
decreasing barriers to entry and growth (G,S)
v p v p
ST
LT
c) financial assistance decreasing for new ventures

138
v p v p
barriers to entry and decreasing costs of financing (S)
ST
LT
d) non-financial assistance for new ventures139
decreasing
risk of entry competitors (P)
v p v p
barriers to entry (S) of subsequent
ST
LT
=> Total entrepreneurial activity per country140 (increasing level of competition) => General international competitiveness level (CIA world fact book imports, imports commodities, exports, export commodities) success indicators: G=growth, P=profitability, S=survival
high entrepreneurial activity increases risk of imitation and entry of subsequent competitors (P)
v p
figure: v=variable, p=performance, ST=short-term, LT=long-term Table 20: Model of market attractiveness: Inter-country level
The variables of the last dimension of new venture infrastructure relate directly to barriers to entry. A very supportive venture infrastructure will decrease barriers to
137
GEM: Availability of equity funding (item A.1 in 1999 questionnaire); GEM: Business angel prevalence index (item A.4 in 1999 questionnaire), VC supply (item A.5. in 1999 questionnaire). 138 GEM: Public subsidies for new ventures (item A.3 in 1999 questionnaire). 139 GEM: Public spending in favour of new firms (item B.1 in 1999 questionnaire), GEM: Governmental policy emphasis on entrepreneurship (item B.2 in 1999 questionnaire), GEM: Incubator organisations (item C.2 in 1999 questionnaire). 140 GEM: Entrepreneurial activity per country; GEM: National culture - entrepreneurial orientation.
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entry. This will be considered positive for all those firms that benefit from the venture infrastructure and might otherwise not have been capable to enter the market. On the other hand, established firms or ventures that do not benefit from the offered venture infrastructure are necessarily faced with more intense competition because of this easier accessibility. Therefore, data on the industry, but also on the individual firm is necessary in order to perform a complete analysis of national competitiveness. Most variables at the inter-country level can be analysed without costs based on publicly available national and international statistics. 3.4.5 Inter-industry level: Opportunities & threats from related industries On the inter-industry level, the perspective of analysis is lowered to the industry level. Starting from the industry under investigation, other industries are identified that could pose future threats or opportunities for firms within the investigated industry. The research question on the inter-industry level of analysis is as follows: INTER-INDUSTRY LEVEL: How can the current and expected activities in other related industries affect opportunities and threats for the targeted industry? The potential sources of threats and opportunities outside the investigated industry coincide to a large extent with the major determinants of Porters five forces model of industry analysis. The four dimensions threat of substitution, forward integration (=bargaining power of suppliers), backward integration (=bargaining power of clients) and threat of other new entries are identical to the forces in Porters model. However, other industries may not only pose potential threats, they might also provide opportunities. Opportunities can be reaped by identifying potentially attractive cooperations and alliances with firms in other industries. These firms may offer products or services that are complementary to the products of the investigated industry.
OPPORTUNITIES & THREATS FROM RELATED INDUSTRIES complementary threat of forward cooperation substitution integration backward threat of other new entries integration
Figure 16: Inter-industry level Opportunities & threats from related industries
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A specific industry may gain attractiveness if firms within this industry have not yet taken advantage of complementary cooperations with related industries. On the other hand, an industry may lose attractiveness if threats of an increased intensity of competition are eminent from related industries. The following table specifies the dimensions that could lead to threats or opportunities from related industries. III. INTER INDUSTRY LEVEL OPPORTUNITIES & THREATS FROM RELATED INDUSTRIES
VARIABLE OPPORTUNITY RISK MAJOR IMPACT 1. opportunity of complimentary cooperation 2. threat of substitution marketing and sales potential (G) risk of investments and higher intensity of competition (P,S) 3. threat of forward integration higher intensity of competition (P) 4. threat of backward integration higher intensity of competition (P)
v p v p v p v p
INFLUENCED BY
- all variables of barriers to entry + former market growth
- all variables of barriers to entry + former market growth - all variables of barriers to entry + former market growth, buyer concentration, average order volume
5. threat of other new entries
higher intensity of competition (P)
v p
- all variables of barriers to entry + former market growth
success indicators: G=growth, P=profitability, S=survival figure: v=variable, p=performance, ST=short-term, LT=long-term Table 21: Model of market attractiveness: Inter-industry level
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The identification of potential threats and, in particular, opportunities is a creative entrepreneurial process guided by the five main dimensions. The analysis on the interindustry level is facilitated by a broad knowledge of other industries. 3.4.6 Intra-industry level: Market, dependencies & competitors At this level, the analysis centres on the investigated industry itself as unit of analysis. INTRA-INDUSTRY LEVEL: Are the structure and dynamics of the market and competitors favourable in terms of profit and growth expectations? Does the industry pose risks associated with specific dependencies? Which are the industry variables that are of critical importance within the industry? The analysis on the intra-industry level is divided into the market on the demand side and the competition on the supply side of the industry. For both market and competitors the current structure as well as recent developments have to be analysed. As a fifth dimension, dependencies are analysed on the intra-industry level. An awareness of the dependencies that industry members are confronted with provides important insights into the negotiation power of industry members within the value chain, and may reveal potential risks affecting the long-term sustainability of entrepreneurial opportunities within an industry.
MARKET, DEPENDENCIES & COMPETITORS market structure market dependencies dynamics competitor dynamics competitor structure
Figure 17: Intra-industry level Market, dependencies & competitors
The following table comprises, with about 50 individual variables, the central part of the analysis of market attractiveness. Most of these variables have been discussed in the literature review and have been applied in the approaches presented previously towards a classification of the market environment (chapter 3.3) at the intra-industry level. Also, the quantitative empirical study to follow will concentrate on the intraindustry level.
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IV. INTRA-INDUSTRY LEVEL MARKET, DEPENDENCIES & COMPETITION

VARIABLE OPPORTUNITY RISK MAJOR IMPACT 1. market structure a) market size growth potential (G)
v p
INFLUENCED BY
+ number of competitors (legitimacy), former market growth
b) heterogeneity of products
tendency to higher margins in market (P)
production and transaction costs (P)
v p
+ need for specialised products
c) branding potential
potential for higher margins (P)
v p
+ heterogeneity of products
d) distance to clients of sales market)
extension of base (G)
higher market transparency (P)

v p
(geographic extension potential client
e) economies of scale
threat of competitors in the long run (P)
cost or need for high investments for the new venture (P,S)
v p v p
- variable costs ST
subsequent entry of disadvantage
LT
f) export-import balance g) need for specialised products (niche potential)
export potential (G) tendency to higher margins and potential for new venture to start by competing on a limited arena (P,S)
v p v p
+ national competitiveness
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h) buyer concentration
easier accessibility of sales market ventures and tendency to lower transaction costs (G,P,S)
high buyer purchasing power and (P)

v p
particularly for new lower margins
i) average order volume
decreasing transaction costs (P)
v p
+ buyer concentration
j) seasonal change of demand
tendency to lower margin due to low capacity utilization in low season (P)
v p
k) intensity of price bargaining from clients
tendency to lower margin particularly in case of low price elasticity (P)

v p
+ average order volume, dependency on clients
l) market transparency
tendency to lower margins due to price sensitivity in transparent markets (P)
v p
- number of competitors, heterogeneity of products
m) advertising intensity
indication for high-margins and potential costs advantages for less advertising intensive strategies (P)
high capital requirements and high risk of investment (G,P,S)

v p
+ branding potential - heterogeneity of products
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n) R&D intensity
indication for high margins and potential costs advantage for less R&D intensive strategies (P)
high capital requirement and high risk of investment (G,P,S)

v p
+ number of new products introduced
2. market dynamics a) former market growth b) rel. expected of the life cycle) c) entries to industry induce market growth (G) threat of increasing competition (P) d) exits from industry indication of low margins (P,S)
v p v p
potential supply gap (G) growth potential
v p
+ overall economic growth + industry impact
market growth (stage (G,S)
v p
of changes on the macro level + sales growth - all variables of barriers to entry + industry impact of changes on the macro level, entries to industry, diversification level in industry - former market growth, dependency on maintenance on industry
e) balance of entries and exits
growth and survival potential (G,S)
v p
+ sales growth - all variables of barriers to entry
f) degree of uncertainty about future development
higher initial venture growth potential as established firms have to adapt and can rely less on former experience(G)
higher risk of investment (P,S)

v p
+ changing customer needs + market growth
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g) customer loyalty
stability of customer base and lower price elasticity in the long run (P)
difficulty to establish initial customer base for new venture in the short run (G,S)
v p v p
+ intensity of relationship to ST clients
LT
h) changing customer higher initial needs venture growth potential as established firms have to adapt and can rely less on former experience(G) 3. dependencies a) on clients
higher risk of investment (P,S)

v p
+ economic, technological, socio-cultural and demographic changes on the macro level
instability of demand and risk of high bargaining power of clients (P,S)

v p
+ buyer concentration - competitiveness of dependent buying industries - competitiveness

v p
b) on suppliers
instability of supply and low bargaining power of firm (P,S)
of dependent supplying industries
c) on key employees, employee institutions, and key knowledge
instability and limitation of growth (G,S)

v p
+ R&D intensity
d) on legislation
risk of investment (S)
v p
+ regulations on the macro level + labour market regulations

p
e) on business cycle
low capacity utilization during recessions (P,S)
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f) on maintenance in industry (barriers to exit)
irreversibility of investment decisions lead to higher risk of investment and higher competition particularly in decreasing markets (P,S)
v p
+ degree of diversification, barriers to entry related to capital intensity
g) relative dependency compared to earlier and later value chain members 4. competitor dynamics a) inertia of established firms due to organisational structure opportunity for firms with more flexible organisational structure (P) b) inertia of established firms due to legislative restrictions opportunity for smaller firms which may be less affected by legislative restrictions (P) c) inertia of established firms due to cost structure opportunity for firms with more flexible cost structure (P)
bargaining power (P)

v p
+ dependency on clients, dependency on suppliers
+ size of
v p
competitors
v p
+ regulations on the macro level
v p
- economies of scale, employee productivity level + technological changes, labour costs intensity
d) aggressive responsiveness of established firms
risk of price war and abuse of market power (P,S)

v p
- level of capacity utilisation, market growth, variable costs
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e) inflation rate in selling prices
potential for high margin products (P)
increasing intensity of competition (P)
v p
+ aggressive responsiveness of established firms, number of new products introduced
f) number of new products introduced
costs for product development and instability of demand (P,S)
v p
+ aggressive responsiveness of established firms, changing customer needs
g) investment in new assets
indication for frequent change in production technology which leads to lower advantages of established firms (P)
high capital requirements and high productivity level (P,S)

v p
+ technological change on the macro level
5. competitor structure a) concentration niche potential in large competitors of low dynamics (P,S) indication for
v p
+ economies of scale, barriers to entry
industries with very high economy of scale, with difficulty to survive for small firms and particularly new ventures (S)
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b) number of industry members
pressure on margin by high competition (P), however in very new niche markets increasing number of firms increases legitimacy
v p
- barriers to entry, number of entries + market size, number of exits
c) heterogeneity of industry members (variance of profitability, size, strategies, age etc.) d) general efficiency level among industry members
indication for higher margins as also suboptimum firm survive (P,S)

v p
- general efficiency level among industry members
high competitive pressure and lower margins (P,S)

v p
- gross margins + competitor dynamics
e) prevalence of on other than price
higher margins market entries for new venture (P,S)

v p
+ heterogeneity of products, branding potential, level of capacity utilisation
competitive strategies and diversity of
f) capacity utilisation level
low price pressure (P)

v p
- seasonal change of demand, dependency on business cycle + market growth
g) employee productivity level
low pressure of personnel costs on margin (P) and facilitation of growth management (G)
v p
+ investments in new assets
h) labour costs intensity
high pressure on margins (P)
v p
+ costs of qualified labour in country
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i) gross margin (added value)
higher profitability (P)
v p
- dynamics of competitors + barriers to entry
j) vertical integration
vertically integrated competitors may be more flexible and more efficient, in particular new ventures will start with low vertical integration (P)
v p
+ dependency on clients, dependency on suppliers
k) degree of diversification l) average age of industry members
decreasing barriers to exit (P) older firms may and dynamism (P) older firms
v p
- market size
- firm entries,
v p
lose responsiveness may have established more powerful competitive position (P)
aggressive responsiveness
m) average size of industry members
larger firms may and dynamism especially in respect to niche markets (P)
larger firms more powerful competitive position (P)
v p
+ economies of scale
lose responsiveness may have a
n) variable costs
decrease propensity to price war and lead to higher margins (P)

v p
+ fixed asset intensity
success indicators: G=growth, P=profitability, S=survival figure: v=variable, p=performance, ST=short-term, LT=long-term Table 22: Model of market attractiveness: Intra-industry level
Depending on the context, the given scheme of intra-industry analysis can be either applied with regard to the whole overall industry or with regard to a specific market as part of the industry. For an analysis on the overall industry level, data can be obtained on a number of variables from publicly available statistics. Within the quantitative
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empirical part it is specified in detail for which intra-industry variables data has been available from public statistical sources in Germany. Additional industry-specific data may be obtained from publications in the press and industry magazines, as well as from industry associations.
BARRIERS TO ENTRY
Figure 18: Intra-industry level including barriers to entry
As mentioned before in the discussion of the overall levels of analysis, barriers to entry generally comprise variables that belong to the market structure dimension of the intra-industry level. However, they have been separated from the intra-industry level, since it is not possible to evaluate whether a barrier to entry has a positive or negative impact without information on the resources of the individual firm. Further details on the variables of barriers to entry are specified in the table below.
BARRIERS TO ENTRY VARIABLE OPPORTUNITY RISK MAJOR IMPACT a) inventory intensity barrier to the long run (P) high capital and high risk of investment in the shortrun for new venture (S) b) fixed asset and other capital requirements barrier to subsequent entry run for ventures that can raise minimum required capital (P) high capital requirement of investment for new venture (S)
v p v p v p
INFLUENCED BY + heterogeneity of products
subsequent entry in requirement
ST
LT
+ technological changes, economies of scale
already in the short and high risk
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c) minimum organisational size & complexity
barrier to subsequent entry already in the short run for ventures that fulfil minimum size requirement (P)
high requirement of organisational skills (S)

v p
+ R&D intensity, advertising intensity
d) accessibility of distribution channels
barrier to the long run (P)
capacity to in the shortrun for new venture (S)
v p v p
- buyer concentration ST
subsequent entry in reach market
LT + intensity of
e) loyalty of customers
difficulty to initial customer base for new venture in the short run (S)
v p v p
subsequent entry in establish
relationship to ST clients
LT
f) legislative barriers
capacity to requirements for new venture (S)
v p v p
+ regulations on the macro level ST
subsequent entry in fulfil legal
LT + R&D intensity
g) product sophistication
capacity to knowledge requirements for new venture (S)
v p v p
subsequent entry in fulfil
ST
LT
success indicators: G=growth, P=profitability, S=survival figure: v=variable, p=performance, ST=short-term, LT=long-term Table 23: Model of market attractiveness: Barriers to entry
The very nature of barriers to entry implies contrasting consequences on market attractiveness for different groups of firms. For established firms and new ventures that possess the resources and capacity to overcome the barriers to entry, the existence of barriers to entry will increase attractiveness of a market since impeding the entry of other firms entry may lead to a lower level of competition. For new ventures without
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the necessary resources and capabilities, the existence of barriers may force the venture to operate on a sub-efficient level and will increase the risk of failure. It is therefore essential for a new venture to compare the state of their resources with the requirements of the industry in order to avoid failures. 3.4.7 Venture / firm level: Relative positioning to competition Finally, on the firm level the unit of analysis centres on the individual firm, its strengths and weaknesses compared with the most relevant competitor firms. The questions that are addressed on this level are: VENTURE / FIRM LEVEL: How are the product, firm, management team, strategy and location positioned against those of the strongest competitor or group of main competitors? What is the potentially achievable market share of the new venture?
The analysis on the firm level starts with an evaluation of the actual products and services offered. In order to evaluate the future potential of the firm within the competitive setting, firm resources, management team and strategy must also be taken into consideration as they are crucial to further development. As a final dimension, location is analysed for the aspects of production costs and accessibility to the client market.
RELATIVE POSITIONING TO COMPETITION products/ services firm resources management team strategy location
Figure 19: Venture / firm level - Relative positioning to competition
In order to perform an analysis on the firm level, as the first step the most relevant competitors have to be identified. Usually one may choose competitors with the highest market shares in the relevant market and with the most prosperous growth dynamics. If there is no one dominant competitor in the market, it seems advisable to perform the analysis taking into account up to three of the most relevant competitors. The following table summarises the evaluation criteria on the firm level:
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V. VENTURE / FIRM LEVEL RELATIVE POSITIONING TO COMPETITION VARIABLE OPPORTUNITY RISK MAJOR IMPACT 1. products / services a) relative price higher relative price generally impedes market penetration , in particular in markets of low elasticity of price (G) b) relative quality higher relative quality facilitates market penetration and higher margins in particular in markets of high elasticity of price (G,P) c) relative design better relative design facilitates market penetration and higher margins in particular in markets of high aesthetic impact (G,P) d) innovation potential of product increasing potential to stimulate market or create new market (G,P)
v p v p v p v p
INFLUENCED BY
- strategic growth aspirations
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2. firm resources a) relative financial strengths capacity to manage capital requirements and to threaten competitors from aggressive response to entry (P,S) b) rel. knowledge / patents capacity to satisfy demand (G,P,S)
v p v p
+ availability of debt and equity funding on the national level - barriers to entry related to capital requirements
+ relevant industry experience of management
3. management team a) rel. capability of management team capacity to build competitive organisation (G,P,S) b) relationships key partners integration and legitimacy of firm particularly in areas where relationships are difficult to establish (S) c) relevant industry experience capacity to know client requirements and adapt firm to requirements (S) 4. strategy a) rel. distinction in strategic key dimensions b) relative growth ness avoiding direct confrontation with competitors (P) earlier critical size (G)
v p v p v p v p v p
+ relevant industry experience
+ gross margin
+ economies of scale
aspirations/aggressive achievement of
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5. location (regional) a) rel. distance to clients relative cost disadvantage and difficulty in maintaining customer relationship (P,S) b) availability of labour and production factors capacity for startup and growth (G,S)
v p v p
+ distance to clients in export industries
+ availability of labour and production factors on the national level
c) rel. costs of labour and production factors

v p
+ costs of labour and production factors on the national level
=> Potentially reachable market share competitive position and cost advantage (P) success indicators: G=growth, P=profitability, S=survival figure: v=variable, p=performance, ST=short-term, LT=long-term Table 24: Model of market attractiveness: Venture / firm level
v p
One of the most critical and most difficult to predict variables within each business plan of a new venture is the specification of a potentially achievable market share. With the background information of the higher level analysis and the results of the firm level analysis, a sustained estimation of an achievable market share can be given by the end of the firm level analysis. 3.4.8 Summary The developed model distinguishes itself in several characteristics from former approaches towards structuring the market environment. Deriving from the critical aspects that were outlined in the review of former approaches141 the particular areas of differentiation will be pointed out.
141
See chapter 3.3, p.66ff.
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CONTENT OF THE MODEL: - Comprehensiveness 106 variables in 25 dimensions and 5 levels plus 1 sublevel. - New venture context Consideration of environmental dynamics on different levels and barriers to entry which are of particular importance in the new venture context. Inter-temporal established firms. - Relationships / interactions Major relations among variables are specified by the hierarchical structure of environmental levels of analysis and the classification according to five main dimensions. Interactions with other variables are specified as well. - Direction and detail of impact For each variable the major impact on venture / firm performance is specified. Details are given on how each variable may impact the opportunity / risk structure. Also the possibility of opposing directions of impact is considered. - Applicability in practice Data sources for most variables on the macro and intercountry level shall facilitate the application of the model in practice. - Performance measure specification Distinction among impact on performance measures growth, profitability and firm survival. specification of impacts ensures
applicability of model for both new ventures and
STRUCTURE OF THE MODEL: - Levels of aggregation 5 different aggregation levels of environment under separate analysis. Table 25: Summary of the unique characteristics of the developed model of market attractiveness
In terms of comprehensiveness, the developed model considers with a total of more than 100 variables, a larger number of relevant market variables than the other previously discussed approaches. The objective was to include a wide range of potentially relevant variables, since it is assumed that different variables are important in different industry settings. The multitude of variables also ensures the applicability of the model in a wide range of contexts, minimising the risk of missing important market variables for certain contextual settings. In the context of market analysis from the new venture perspective, the variables barriers to entry and environmental dynamics have been considered of particular
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importance. On different levels of analysis, dynamics both internal and external to the industry of investigation are considered. The specific characteristics and importance of barriers to entry are reflected in their prominent placement as a specific sublevel between the intra-industry and firm level. In contrast to the other models, the developed model distinguishes between short- and long-term effects, which ensures the applicability of the model for both new ventures and established firms, and takes into consideration opposing directions of impact in the different contexts. While most previous models were limited in the extent of their explanation of relationships and interactions among the variables of the model, one of the main objectives of this model was to go beyond a pure listing of relevant variables. Relationships and interactions have been pointed out using the following measures: First, the basic structure of the model divides the total number of variables into five main levels and one sublevel of variables that belong to a similar perspective of environmental analysis. These environmental levels of analysis are ordered hierarchically. Second, for each environmental level of analysis, variables are related to five main dimensions of impact. Therefore, the actual market variables are located on the third hierarchical level, grouped with related variables and situated in an overall framework that specifies its impact in relation to the other variables of the framework. Third, interactions among individual variables of the model are specified. Each variable of the model has been evaluated to detect if it is influenced by another variable on the same or a higher level of environmental analysis. In those cases where such an influence has been assumed, the respective impacting variable and the direction of impact have been specified. Former models frequently only specify the direction of impact of a variable on organisational success. Within the developed model, not only the direction of impact has been specified, but also a short explanation on how this variable influences risks and opportunities of an organisation has been given. It is recognized that variables can, on some occasions, not only affect organisational success in one direction, but may actually affect organisational success in opposing directions. Depending on the context, the variable may impact organisational success positively or negatively. In
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contrast to all other models, such opposing directions of impact are also considered in the model. Special attention has been given to the applicability of the model in order to perform a market analysis in practice. Where relevant public data sources could be identified, a reference to the data source has been given together with the associated variable of the model. For the macro and inter-country level in particular, references for public data sources have frequently been identified. Some market variables may have a varying impact on different measures of organisational success. The impact on growth and profitability may frequently go in opposite directions. Therefore the model specifies whether the success measure of growth, profitability or survival will be affected. Within the other models either only one measure of organisational success has been applied or a specification of the measure of organisational success has been completely absent. Finally, with regard to the structure of the model, five aggregation levels of analysis have been clearly distinguished. Other models have also made distinctions among analyses on the global, industry and firm level. In the developed model, the consideration of national competitiveness and the impact of related industries broaden the comprehensiveness of the phenomenon of market attractiveness investigated.
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MACRO LEVEL - OPPORTUNITIES & NATIONAL ENVIRONMENT - demographic macro-economic legislative IN GLOBAL technological socio-cultural changes changes changes changes changes
former economic growth economic growth expectations propensity to consumption interest rates devaluation of home currency environmental protection regulations market regulations labour market regulations public spending international trade deregulation impact of internet usage impact of internal IT applications impact of new production technologies volatility of consumption preferences individualisation population growth population age
INTER-COUNTRY LEVEL
distance to sales production factors stability & taxation - NATIONAL COMPETIVITY - industry infrastructure market
availability of qualified tax burden distance to main development of labour customer s for export transportation and stability of economical industries telecommunication costs of qualified political environment infrastructure size of national market labour existence of dependent availability of supplying and buying resources industries costs of resources competitiveness of dependent supplying and buying industries
new venture infrastructure

availability of debt funding availability of equity funding financial assistance for new ventures non-financial assistance for new ventures
complementary threat of & THREADS backward threat of other new forward integration - OPPORTUNITIES FROM RELATED INDUSTRIES cooperation integration substitution entries
market structure
market size heterogeneity of products branding potential distance to clients economies of scale export-import balance need for specialised products buyer concentration average order volume seasonal change of demand intensity of price bargaining market transparency advertising intensity R&D intensity
competitor market dynamics dependencies& COMPETITORS - MARKET & DEPENDENCIES dynamics

former market growth rel. expected market growth entries to industry exits from industry balance of entries and exits degree of uncertainty about future development customer loyalty changing customer needs on clients on suppliers on key employees, employee institutions, and key knowledge on legislation on business cycle on maintenance in industry (barriers to entry) relative dependency compared to earlier and later value chain members inertia of established firms due to organisational structure inertia of established firms due to legislative restrictions inertia of established firms due to cost structure aggressive responsiveness of established firms inflation rate in selling prices number of new products introduced investment in new assets
competitor structure
concentration number of industry members heterogeneity of industry members general efficiency level among industry members prevalence of competitive strategies on other than price capacity utilisation level employee productivity labour costs intensity gross margin vertical integration degree of uncertainty average age of industry members average size of industry members variable costs
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BARRIERS TO ENTRY
Inventory intensity Fixed asset intensity Minimum organisational size & complexity Accessibility of distribution channels Loyalty of customers Legislative barriers Product sophistication

products/ services management firm resources POSITIONING - RELATIVE TO COMPETITION strategy team
Relative capability of management team Relationships key partners Relevant industry experience
location
Relative price Relative financial strength Relative quality Relative knowledge Relative design Innovation potential of patents product
Relative distinction in Relative distance to strategic key clients dimensions Availability of labour Relative growth and production factors aspirations/aggressiven Relative costs of labour ess and production factors
Figure 20: The 5 x 5 model of market attractiveness including variables
The above figure summarises the basic structure of the developed model of market attractiveness specifying the five aggregation levels of analysis and for each level of analysis the respective five major dimensions of impact. For each dimension the individual variables are specified.
CHAPTER 4 - METHODOLOGY
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Methodology
Starting from the problem142 stated initially and the research questions that have arisen, seven specific objectives143 have been derived that will serve as orientation for the design of the methodology. The whole research design is divided into two stages144. The first stage corresponds to the theoretic study and the literature review. It addresses objectives one to three of the study. This first stage culminates in the proposition of a new model of market attractiveness. The second stage contains the empirical study. In stage 2.1, a quantitative study is conducted in order to achieve objectives four to six. This part of the study investigates the impact of industry variables on venture success on the basis of hypotheses that are derived from the model proposed in the first stage. The quantitative study represents the main part of the empirical study. In stage 2.2, the mechanisms of market effects are investigated for several new venture cases, guided by the proposed theoretic model of the first stage. This part comprises the qualitative study, which will allow achieving the seventh objective of the study.
142 143
See chapter 1.1, p.2f. See chapter 1.2, p.3f. 144 See figure 21, p. 122.
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STAGE 1: THEORETICAL STUDY (preparation) Objective 1: Former empirical results Objective 2: Theoretical perspectives on market effects (culmination) Objective 3: Model of market attractiveness Ad objective 1: Literature review (chapt. 2) Ad objective 2: Discussion of research programmes (chapt. 3.2) Ad objective 3: Development of model (chapt. 3.4)
STAGE 2: EMPIRICAL STUDY SUBSTAGE 2.1: Quantitative study Objective 4: Identify markets of highest venture success Objective 5: Relationship between industry variables and venture success Objective 6: Impact of contingent variables Objective 7: Mechanisms of impact of industry factors on new ventures Ad objective 4: DtA sample description on industry level (chapt. 5.4.2.2) Ad objective 5: Hypotheses -guided correlation and regression analysis (chapt. 5.5.2) Ad objective 6: Correlation and regression analysis for industry contexts (chapt. 5.5.3) Ad objective 7: Case study analysis (chapt. 6)
SUBSTAGE 2.2: Qualitative study
Figure 21: Orientation of research design
Given this general overview, the methodology chapter will concentrate on the empirical study. First, in chapter 4.1, alternative measures of venture success are discussed and evaluated. In chapter 4.2, the chosen methodology of the quantitative investigation is presented, industries and standard industry classification codes as the unit of analysis are discussed, indicating the applied variables, the method of data collection and the methods of data analysis. In chapter 4.3, the chosen methodology of the qualitative case study is presented, and the variables applied, the method of data collection and the method of data analysis are indicated. Finally, in chapter 4.4, general considerations of validity and reliability are discussed.
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4.1
Measurement of venture success on the industry level
The question of appropriate measures of organisational success has received considerable attention over the last decade145. The use of appropriate success measures is particularly critical in the context of new ventures. A lack of appropriate success measures has been attributed to frequently conflicting results in entrepreneurship research146. The inherent reasons for the difficulty in assessing objective financial success indicators for new ventures are the following147: o Lack of availability of data. Since the majority of new ventures are privately held and do not adhere to regulations of publicly announcing their financial performance, the availability of this data is highly limited. Data on business success is considered highly sensitive and most business owners are unwilling to share this information voluntarily. o Inappropriateness of some traditional success measures. Due to a small starting base, the growth rates of new ventures are often erratic, producing extreme outliers that pose difficulties for further statistical analysis. Moreover, common profitability measures such as ROE, ROI or ROA can be highly distorted by relatively high levels of investment, typically found in fast-growing ventures. o Different dimensions of success. Different success indicators might capture very different dimensions of success, which might often exhibit no direct correlation. As indicated by Venkatraman and Ramanujam (1986), variables correlated with firm performance change as the definition of success changes. o Industry-dependence. Absolute performance scores are found to be highly affected by industry-related factors148. Gross margin, for example, might be a good indicator of profitability of firms within one industry, however, it will hardly lead to any meaningful results when comparing firms from different industries.
145
See Brush and Vanderwerf 1992, Chandler and Hanks 1993, Robinson and McDougall 1998, Robinson 1998 in the field of entrepreneurship research and also Venkatraman and Ramanujam 1986 in the field of strategy research. 146 Robinson and McDougall 1998. 147 Compare Chandler and Hanks 1993. 148 Miller and Toulouse 1986.
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In order to determine the most appropriate success measures, different categories of potential measures are discussed with special attention to their applicability in the context of new ventures and cross-industry analysis. Measures of venture performance can be broadly classified according to the following structure:
new venture success measures objective subjective
growth
volume
profitability
performance (not relative to competitors)
performance relative to competitors
- cash flow change - market share change - sales growth - employee growth
- sales - employees - net worth - market share - survival / failure
- cash flow - earnings (EBIT, net profit) - ROI, ROE, ROA, ROIC - ROS, gross margin - time to break even
Figure 22: Alternative measures of new venture success
Subjective new venture success measures are highly influenced by the individual expectations and targets of the founder. Moreover, subjective interpretations on the meaning of measures may lead to distortions. Therefore, firm data may not be accurately comparable149 on the firm level. Subjective measures have been found to provide a lower reliability and validity than objective measures150. One advantage of subjective success measures for cross-industry analysis is that they are affected to a lesser extent by different industry characteristics than most objective measures. Objective new venture success measures are less readily available for non-publicly traded new ventures and founders might be more reluctant to provide this information. More importantly, objective firm success measures often reflect different
149 150
Chandler and Hanks1993. Steinkhler 1994.
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characteristics of the industry. Therefore, industry data on some objective success measures may not be directly comparable among firms in different industries. With regard to the growth measures mentioned, the following limitations have to be taken into consideration. Changes in cash flow are probably one of the most appropriate measures of growth in profitability in the new venture context. Investment activities in the early stages reflected opposing results to other profitability measures such as profit or EBIT. The application of measures based on cash-flow is, however, limited to the availability of data, as many small venture founders will not know their cash flow and it will also be limited due to differing definitions of the term cash-flow. Market share has been frequently applied in strategy research as a performance measure, however, in the context of small ventures, market shares are generally very low and in hardly any case will a small venture founder be able to give accurate information about their market share. Sales growth is the most popular measure of venture growth. Compared with growth of employees, it is more accurate as, especially in small firms, increasing firm performance will only be reflected in changes of employee levels after a certain time lapse. When calculating data on sales growth, it is important that only data of full calendar years is analysed. Therefore, when dealing with new ventures, the year of foundation cannot generally be considered when calculating sales growth, since it is not equal to a full calendar year. Moreover, in early stages of the venture, growth rates are generally higher than in later stages, as growth rates are calculated on the basis of a lower absolute level. Among the volume measures, the level of individual key firm characteristics is measured after a specific number of years of venture operation. To undertake a crossindustry analysis, volume measures of sales, employees and net worth suffer from distortions due to the different amounts of initial capital investments, and varying firm sizes at the time of foundation in different industries. New ventures in the manufacturing sector may frequently start at a larger size with higher capital investments than new ventures in retailing, for example. Consequently, they will also have, after three or four years of operation, significantly higher levels of volume measures, which can hardly be related to performance differences within different industries.
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The dichotic variables of survival and failure are frequently found in entrepreneurship research. However, survival rates are not a very differentiated estimate of performance. Furthermore, they have to be used with caution, since generally no data is available on the reason of failure. Firm exits may occur for various reasons which should not be interpreted as failure, as for example, mergers or acquisition by another company may have taken place. Moreover, the performance aspirations of founders may play an important role. Founders in industries that require little qualification may be willing to continue ventures at minimum profits, while founders in hi-tech industries with attractive alternative career perspectives may tend to close ventures with low profit levels. In strategy research, relative profitability measures such as ROI are an accepted standard for measuring firm performance. In the new venture context, this information is not only frequently unavailable, it also provides a less reliable indication of firm performance. The salaries of the founder managers represent an important source of distortion in the new venture context for all measures that are based on reported data on earnings. For tax reasons, founder managers will frequently try to minimise reported firm profits by increasing their salaries. Moreover, the high level of initial investments at the start-up stage affects the applicability of profitability measures. Probably the most problematic aspect of profitability measures is the negative relationship to venture growth. Successful fast-growing ventures with sustainable growth expectations will find it beneficial to invest earnings into further expansion and exploitation of market opportunities, while firms with reported higher early profits may lack opportunities to invest these early profits in further venture growth. Therefore, most profitability measures are only applicable to a limited degree in the context of early stage ventures with high growth. Outside of the new venture context, most profitability measures are good indicators of firm efficiency when comparing firms within one industry. The ROS measure, however which is very industry specific, is unlikely to serve as an applicable measure of success in the context of cross-industry analysis. One indicator that is less affected by industry characteristics in a crossindustry analysis is the time to break even measure, even though this suffers from the same negative relationship to venture growth as the other success measures. The following table summarises the evaluation of the applicability of different measures of venture success.
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Accuracy of measurement SUBJECTIVE Performance Performance relative to competitors GROWTH Cash-flow change Market share change Sales growth Employee growth VOLUME Sales Employees Net worth Market share Survival / failure PROFITABILITY Cash-flow Earnings (EBIT, profit) ROI, ROE, ROA, ROIC ROS, gross margin Time to break even + high , o medium, - low + + + + o + o + + + + + o o
Applicability to new venture context
Applicability for cross-industry analysis
+ +
+ -
+ + o
o + + +
o o o +
o o o
Table 26: Evaluation of alternative measures of venture success
The first criteria Accuracy of measurement evaluates how accurately small changes in organisational performance are captured by the respective measure. Financial measures provide a higher accuracy than measures based on number of employees, subjective measures, or the dichotic measure of firm survival. The second criteria Applicability to new venture context evaluates whether a measure is applicable to evaluate success of new ventures within the same industry. Here especially, the applicability of most profitability measures is limited. Finally, the criteria
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Applicability for cross-industry analysis evaluates whether measures in different industries can legitimately be interpreted as differences in venture performance. This criteria reflects the degree to which measures vary according to characteristics of the industry in terms of average firm size, average capital intensity or average margins, for example. In general, all volume measures and growth measures that are based on absolute numbers are considered highly sensitive to these industry-specific characteristics. In general, it is desirable to apply a multitude of these success measures in order to cover the different facets of success and to facilitate the comparability with previous studies that were based on a variety of venture success measures. Overall, for this study, the most appropriate subjective measure of venture success appears to be the subjective measure of performance without relation to competitors. Among the growth category, sales growth seems to be the most appropriate volume growth measure and cash-flow growth the most appropriate profitability growth measure. Among the different volume measures firm survival seems to be the only measure which can be legitimately applied for cross-industry analyses. Finally among the profitability measures time to break even seems to be most appropriate for measuring venture profitability during the first years of firm operation.
4.2
Quantitative empirical study: Impact of industry factors on
the success of new ventures in Germany

The quantitative part of the empirical study addresses objectives four to six, and deals with the identification of the most successful markets, the study of industry-venture performance relationships and the impact of contingency variables. Unit of analysis Within the quantitative empirical study, the dependent variables of venture success will be analysed at the individual firm level. In order to avoid distortions from industries where only a small number of firms are represented in the sample, both correlation and regression analysis will be performed at the firm level. The interpretation of the results refers, however, to the industry as a unit of analysis151. The
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Only the analysis of the contextual variable of venture performance refers to the firm as unit of analysis.
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independent variables, which represent industry factors, are all aggregations at the industry level with industries defined by standard industry classification codes. Standard industry classification schemes The application of standard industry classification schemes in order to group firms of related economic activity imposes certain limitations. Within the quantitative part of the study, data from various sources on the 4-digit WZ93 industry classification have been used. The WZ93 is the official current industry classification scheme for Germany, which has had to be used from 1995 onwards for all public statistics containing industry classifications152. The WZ93 directly corresponds to the European NACE Rev.1 classification, which is the official reference industry classification for all member states of the European Union. The NACE Rev. 1 was developed in 1990 from the international reference industry classification ISIC Rev. 3, which was developed by the United Nations. These international standardisations of industry classifications have dramatically increased the comparability of inter-country data, but also the comparability of different data sources within one country, as one single classification scheme is now applied for basically all statistics. The WZ93 is divided on the 1-digit level into 17 sections, on the 2-digit level into 31 sub-sections and 60 departments, on the 3-digit level into 222 groups, on the 4-digit level into 503 classes and on the 5-digit level into 1062 subclasses. The one to four digits levels correspond to the NACE Rev.1 classification, which is expanded by the more detailed national differentiation on the 5-digit level. With regard to the application of standard industry classifications, it is important to consider the following aspects: o Lack of consideration of firm diversification. Diversified firms with economic activity in various industry classification codes are generally classified solely to the industry code of their one main economic activity, measured in added brut value. Each firm is classified to only one industry code. o Susceptibility of accuracy of data collection. The quality of the classification greatly depends on the accuracy of the information that is provided by the firm about their activity and the qualification of the person who performs the
152
Regulation (EWG) No 3037/90 from October 9th 1990.
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codification of the activity in the industry classification scheme. For firms that are active in various industry codes, identification of the one main economic activity is frequently difficult. Firms in Germany, for example, have an incentive to give a very broad definition of their economic activity at the time of registering their company, in order to avoid the bureaucratic efforts of future reports related to modifications of their activity. o Incongruence of industries with demand-side perception. Firms that are perceived by customers to act in a wide variety of markets with highly heterogeneous characteristics are frequently aggregated under one industry code. Therefore, firms under one industry code do not necessarily represent an aggregation of firms that offer similar goods from the demand-side perspective. Goods may not be close substitutes for each other. Therefore industry codes only represent industries to a limited degree and only according to a conceptual definition of industries. The deeper the applied industry classification scheme, the higher the assumed congruence of goods and the accuracy of aggregation. However, even at a 5-digit industry classification, industry classifications may frequently be too broad to represent meaningful market categories. Moreover, dynamic developments in industry niches will hardly be reflected in industry classifications. o Lack of reflection of developments in hi-tech industry segments. Developments in hi-tech industries are only to a limited degree reflected in the industry classification, as industry categories even on the 5-digit level are generally too broad to make reasonable groupings of dynamic and evolving hitech industry segments. Furthermore, industry classifications omit to take into account emerging new industry segments, since classifications are only revised after long intervals. o Differing methods of aggregation of industry classification. Depending on the process of data collection of a specific data source, higher level industry classifications may be the sum of the corresponding lower level classifications or they may include firms that could not be classified to any of the lower level classifications. Therefore, for every data source, the method of aggregation has to be identified. This is particularly important when comparing absolute numbers of different data sources.
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These underlying aspects of industry classifications have to be taken into consideration when applying data categorized by industries. For large populations of firms errors within the industry classification process will be of less importance than for small populations of firms, where individual misclassifications can have a major impact on the overall value for the whole industry segment. 4.2.1 Variables under investigation The selection of variables has been conducted on the basis of the evaluation of venture success measures (chapter 4.1) and the previously developed theoretical model of industry attractiveness (chapter 3.4). It is important to stress that within the quantitative part of the study, the selection of variables is limited with regard to the availability of statistical data. Among the numerous industry variables that have been included at the intra-industry level of the theoretical model, only those variables for which statistical data has been available have been chosen for the quantitative study. This selection does not consider any ranking of importance for these chosen industry variables. Detailed operationalisations of each variable are specified in the subsequent chapter of the quantitative study. Dependent variables: Average success of new ventures in Germany In order to determine industry success in terms of industry attractiveness, data has to be collected on the level of individual organisations. Within the quantitative study the following four dependent variables of venture success are investigated: o absolute venture performance as a subjective measure o venture growth in sales as a measure of growth o venture profit level as a measure of profitability o time-to-break even as an additional measure of profitability These four dependent variables cover many of the venture success measures that have been identified previously in chapter 4.1 in the evaluation of venture success measures as the most appropriate for the context of this study. Because earlier research provided strong evidence that the effect of environmental variables varies significantly or might even have opposite effects with respect to
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different success measures, it is desirable to apply a set of success measures within the quantitative study. The additional inclusion of the measure of new venture survival has been considered appropriate. However, such data on survival with regard to the applied sample of new ventures could not be obtained. Neither could applicable data on firm survival specific to new ventures be obtained. Data on survival of the whole firm population independent of the age of firms has been considered inapplicable as a measure of new venture success. Independent variables Departing from the previously developed model of market attractiveness (chapter 3.4), those market characteristics for which applicable data is available are included in the quantitative study as independent variables. Only a fraction of the models variables can be operationalised with secondary data. Therefore, the quantitative model only allows the testing of individual variables, and not of the model as a whole. The following independent industry variables are investigated in the study: o Market size o Economies of scale o Export balance o Distance from clients o Previous market growth o Entry to industry o Exit from industry o Balance of entries and exits (net entries) o Degree of uncertainty about future development o Concentration o Number of industry members o Heterogeneity of industry members o Employee productivity o Gross margin
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o Average size of industry members o Capital requirements o Investment intensity These independent industry variables cover a broad range of dimensions at the intraindustry level and the barriers to entry of the theoretical model. Control variables Apart from the dependent variables of venture success and the independent variables of industry, another four control variables are applied to indicate the characteristics of the sample that may represent potential sources of distortions in both dependent and independent variables. The following control variables are applied: o Number of ventures per industry in the sample o Average age of ventures per industry in the sample o Average number of employees of venture per industry in the sample o Average venture sales per industry in the sample The inclusion of these control variables ensures that results that depend on differences in the composition of the sample are identified. Contingency variables Finally, four contingency variables are included to investigate to what degree the relationship among independent and dependent variables vary in different contexts. The following contingency variables are considered: o General industry sector o Intra-industry profitability variance o Market growth o Venture growth The contingency variables serve to split the sample into three to four groups of industries. For the general industry sector, individual data analysis is performed for four broad industry sectors independently. For the other three contingency variables, the overall sample is divided into three groups by the respective contingency variable.
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Individual data analysis is then performed for the upper third, middle third and lower third ventures according to the value of the contingency variable. 4.2.2 Selection of data sources and sampling criteria For the undertaken study, applicable data from a wide range of sources has been identified, complemented, filtered and finally accumulated to a common data file of coherently comparable variables. Selection of data sources In order to analyse the impact of industry factors on new venture performance on the basis of statistical data, two specific types of data are required. First, data that provides performance indicators of new ventures. Second, data that provides industry indicators that characterise all new ventures within one industry or all firms within one industry. The criteria to select appropriate data sources for each of these types of data are discussed. The following criteria were applied when selecting an appropriate data source for the performance indicators of new ventures: o Provision of data on year of firm foundation o Provision of data on relevant success measures of individual firms o Provision of data on a 4-digit industry classification code of individual firms o Provision of data for representative scope of new ventures o Provision of data on ownership at date of foundation153 o Sufficient consideration of small- and medium sized firms o Sufficiently high number of new ventures per industry classification code o Sufficient scope of service markets covered Basically all publicly available data sources with financial data on an individual firm level are based on data of publicly traded firms. Because new ventures do not normally publish financial data, data sources on performance indicators of new ventures are generally not publicly available. With the establishment of new stock exchanges
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In order to exclude dependent derivative startups.
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focusing on young fast-growing firms during recent years, detailed financial data has become publicly available for an increasing number154 of young firms. However, publicly traded new ventures are exceptions from the whole population of new ventures and consequently allow hardly any generalisations on the whole new venture phenomenon or the whole industry. Publicly traded new ventures have a strong bias towards extraordinarily high growth rates. They are generally much larger in size than average new ventures in the industry and are frequently from hi-tech industries. A major limitation with respect to undertaking this study is the concentration of publicly traded new ventures on a very limited scope of 4-digit industry codes. Moreover, common industry classification schemes are limited in their capacity to aggregate hitech firms into groups of similar firms. Although accurate growth and profitability measures as well as a wealth of additional information are readily available on these firms, the application of data of publicly traded new ventures has to be rejected for this study. After extensive research on non-public data sources the Existenzgrnderpanel of the DtA has been identified as the most appropriate data source for the derivation of the new venture performance indicator with regard to the selection criteria defined. This data source contains data from several thousands of new ventures that have received funding from governmental support programmes in Germany. For general industry indicators, the following criteria have been applied to select appropriate data sources: o Provision of data according to the 4-digit industry classification code that was applied for the new venture performance data source, or an industry classification that is transformable into such an industry classification. o Provision of data from a representative scope of firms, including SMEs o Coverage of a broad scope of industries including the service sector o Relevance for variables of the model of market attractiveness at the industry level o Data for the same country as provided by data source of venture performance
154
At the end of 2001, the German Neuer Markt stock exchange listed, at its climax, 327 firms. Even after the dissolution of this stock exchange in 2003, most of the formerly listed firms remained publicly traded.
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The lack of data on the service sector turned out to be a primary obstacle. Despite the passing of a European regulation for the establishment of a statistics on service industries155, the national statistics of service industries in Germany and most other EU countries are still scarce and provide data on only a limited range of industries. Therefore, data on individual segments of the service sector is highly fragmented and incomplete in current statistics from the EU156. At the same time, industry indicators for a complete range of manufacturing industries are readily available. Since the majority of new ventures relates to the service sector, the lack of service sector data implied difficulties for carrying out the study. The unavailability of data on the service sector also explains the dominant orientation of previous studies in entrepreneurship and strategy research towards the manufacturing sector. Because of incomplete industry coverage, a large number of statistical data sets from market research institutes, public institutions and industry associations relating to specific industry segments have had to be excluded. These data sets do not allow comprehensive cross-industry comparisons. Moreover, all data sets that lacked the required depth of a minimum 4-digit industry classification system157 had to be excluded. Finally, the following data sources have been considered most appropriate for the derivation of industry indicators: DtA (Grnder- und Mittelstandspanel), ZEW (indicators of firm foundation), Creditreform (industry risk indicators), Statistisches Bundesamt (value-added tax statistics). A detailed discussion of each data source is given in chapter 5.1. Sampling criteria applied to DtA dataset of new ventures The data on new venture performance is based on survey data from the DtA. The data source contained data of 6,246 firms which received governmental funding and responded to a questionnaire that was sent in June 2001. For further investigation, a
155
Regulation (EG,EURAKOM) No 58/97 from December 20, 1996. This regulation was implemented in Germany only in December 2000, with the law for the introduction of service statistics. 156 A sample extracted from the structural business database from Eurostat, the reference database for corporate data within the EU, has shown that for more than 70% of all 4-digit service industry codes, not even data on the most frequent indicator of turnover was available. 157 The application of the balance sheet database of the German federal bank could have provided averages for the main items of the balance sheet and the income statement per market. Unfortunately, the data is only available for four major economic sectors.
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sample was extracted from the DtA data. The following selection criteria were applied to generate the final sample: Selection of new ventures: Firms with a date of foundation of less than seven years prior to the date of the data report. As the survey was conducted in June 2001, 586 firms have been excluded because they reported a year of foundation prior to the year 1995. An additional 212 firms have been excluded for which no data on the year of foundation was available. Exclusion of firms with apparently incorrect data: In order to verify the plausibility of the respondents data, the profit margin was calculated as profit per turnover for any year from 1998 until 2001. As a consequence, a total of 129 firms with a margin above 100% for any given year were excluded from the sample. As it was considered highly unlikely that a firm earns profits higher than their turnover, it can be assumed that most of these respondents were confused about the scale of the turnover and profit items in the questionnaire. Exclusion of firms in industries with insufficient number of ventures: From the resulting sample of 5,448 new ventures, the total number of firms per industry category was computed. Industry categories with less than three remaining entities were eliminated resulting in a data set of 5,159 new ventures in 164 industries. After this sample, the industry segment 9500, which represents private households, was eliminated, and one venture was eliminated because it indicated its year of foundation as 2002. This left a total of 5,117 new ventures in 163 industries to comprise the final sample to be investigated in the study. 4.2.3 Method of data analysis and interpretation: Analysis of correlation and multivariate regression The data analysis is guided by hypotheses about the impact of independent industry variables on different dependent variables of new venture success (chapter 5.2.), as derived from the previously developed theoretical model. Various steps of data analysis were performed in order to achieve objective four (see chapter 1.2) of the study. First, an analysis of correlation according to Pearson was applied independently for each variable of venture success with all available industry variables. On the basis of a
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significance level of 0.05, the results of the analysis of correlation either lead to a confirmation or a rejection of the suggested relationship between industry and venture success variables. Correlated control variables industry aggregates of the average age of ventures in the sample, average sales level of ventures in the sample, average employee numbers of ventures in the sample, and the number of ventures in the sample. The correlations between the control variables indicate the sensitivity of variables to factors related to the composition of the sample, which may be potential sources of distortions. These control variables are not included in later regression analyses. Second, a multivariate regression analysis was performed independently for each dependent variable in order to elicit additional information on the strength of impact of those industry variables that have been identified previously as correlating to a dependent variable of venture success. The strength of impact is derived from the interpretation of the beta coefficient, with special attention given to possible distortions due to multicollinearity among the independent variables. Third, the impact of contingency variables such as industry growth, average venture growth per industry, profit variance in industry and industry sector was investigated. Consequently, industries were split into groups by the contingency variable and an independent analysis of correlation and regression was performed for each group. The results of the different groups per contingency variable were compared with each other and also compared with the results of the overall correlation and regression analysis. This allowed an analysis on how the impact of industry variables on venture success varies in the context of different contingency variables. Among the various techniques of multivariate analysis, multiple regression is applied for the analysis of the quantitative data. Hair et al. state: Multiple regression is the appropriate method of analysis when the research problem involves a single metric dependent variable, presumed to be related to two or more metric independent variables 158. The independent as well as the dependent variables are available on a metric scale or alternatively are transformed to a metric scale by dummy variable coding. Regression analysis is performed independently for each dependent variable.
158
Hair et al. 1998: 14.
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Following Hair et al: The objective of multiple regression analysis is to use independent variables whose values are known to predict the single dependent variable. Each independent variable is weighted by the regression analysis procedure159. In the context of this study, the correlation analysis based on the Pearson coefficient was applied to investigate whether the assumed impact of independent variables on dependent variables of venture success exists. The regression analysis provides additional information regarding the importance ranking of individual industry variables with regard to different variables of venture success. Apart from the condition of the appropriate variable scale, the feasibility of multiple regression analysis rests on general assumptions about the underlying variables and the nature of their relationships. In general, the relatively large size of the applied sample favours a lower sensitivity to deviations from the general assumptions of regression analysis. Linearity: Each independent variable of the regression model was evaluated to verify whether a linear relationship between the independent variable and the dependent variable could be justified. The linearity of the assumed relationship between independent and dependent variables is examined by partial regression plots for each independent variable in the regression analysis. Normality: Potential violations of normality were to be revealed by normal probability plots. Throughout the analysis of the residuals, studentised deleted residuals were applied. This facilitated the identification of potential violations of the basic assumptions. Investigating the above-mentioned assumptions allows corrective transformations of the data to be made, and increases awareness of potential inaccuracies. The significance of the overall regression model was examined by the F-test. The Ftest tests the hypothesis that the amount of variation explained by the regression model is more than the variation explained by the average. Finally, the regression coefficients are interpreted. This interpretation considers the effects of multicollinearity that occur when independent variables are correlated. Multicollinearity lowers the levels of unique variance and thus should be minimised.
159
Hair et al. 1998:148.
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4.3
Qualitative empirical study: Case studies of ventures in
telecommunication and e-commerce industries

The qualitative part of the empirical study focuses on objective number seven, which deals with the underlying mechanisms by which market characteristics impact venture performance. Even though for the case studies the most relevant market characteristics are also identified in the context of each individual case, the focus lies in explaining how and why market characteristics have had an impact on venture success in specific industry and firm contexts. 4.3.1 Industrial focus on cases from the telecommunications and e-commerce sectors The case studies will be chosen from the telecommunication and e-commerce industries. Both industries are, for various reasons, particularly interesting for the qualitative study: o Dynamic changing market environments and strong competition ensure that a larger part of the variables from the model of market attractiveness is relevant in the context of the cases studied. o A large number of company foundations within recent years ensures a multitude of case candidates and relevant findings for a large interest group. o Both industries are particularly important for future new venture activities. o The relatively short existence of these industries leads to limited knowledge on general recipes of firm success. o Market environments are characterised by a high degree of complexity. o Both industries provide a diversity of segments to study. It is acknowledged that the industry settings of ventures from the telecommunication and e-commerce industries may be different from the majority of industries in several aspects. The market environment is assumed to be more rapidly changing and more competitive than in many other industries. Competitive positions show greater changes compared with more traditional industry sectors.
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For the same reasons telecommunication and e-commerce industries may be more interesting to study since the effects of market variables on venture success, which are the subject of this study, may be stronger in these industry settings. As it is not the objective of the case studies to reveal generalisations on the industry-venture success interactions identified in all industries, the focus on telecommunication and ecommerce industries appears adequate in order to give examples and details on how industry variables affect ventures in the given case contexts. 4.3.2 Variables under investigation One of the major advantages of the qualitative study is that the selection of variables is to a far lesser extent restricted beforehand. Practically all of the market factors from the model of market attractiveness are considered. Such a highly comprehensive list of independent variables is applied to measure the market setting in depth. Highly aggregated indirect measures are often not sufficiently rich to describe or predict the phenomena themselves. In-depth data gathering is therefore needed160. As the use of only a few aggregate variables lends itself to convenience in data collection and analysis, it often fails to provide insights in more complex phenomena. In order to evaluate the impact of industry factors within the case studies, measures of overall venture performance do not appear very appropriate, since overall firm performance is influenced by a multitude of factors and it will not permit investigation into the impact of individual industry factors. Instead, within the case studies the effect of industry factors is evaluated from the subjective perception of the founder with regard to their venture. 4.3.3 Selection of case studies The selection of case studies has been guided by the general focus of the study on market variables and the new venture context. The case studies should be selected from a range of different industry segments within the telecommunication and ecommerce sector, ensuring the coverage of a broad heterogeneity of market settings. The following compulsory criteria were therefore applied for a first screening of potential case candidates:
160
Hofer and Bygrave 1992.
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o Corporate activities focus on the telecommunication or e-commerce industries161 o Low degree of diversity among the offered range of products/services o Date of foundation within the last 2 to 7 years162 o SME with less than 10 million Euro of turnover Firms from both Germany and Spain have been considered for screening. The selection of cases from different national origins has been intended to ensure a high heterogeneity of contextual settings. Cases from Spain are especially interesting due to the fact that the complete annual financial reports of also non publicly traded firms are published by the commercial register and may provide additional insight in the performance of competitors of the case study firms. After the initial screening of potential candidates, ten firms have been selected under consideration of a high heterogeneity in terms of additional key venture and industry dimensions: o Heterogeneity regarding stage of life cycle of the respective market segment o Heterogeneity regarding market segments o Heterogeneity regarding venture success o Heterogeneity regarding firm size These ten firms have been contacted and three of them have been willing to cooperate in the study. The following table indicates relevant characteristics of the three firms which are investigated in the qualitative study and their industry:
161 162
Compare chapter 4.3.1. Firms should be seven years old or younger, since founders must still be able to remember the market entry phase of their venture. At the same time, firms should already have been operating for at least two years in order to report on experienced impacts of industry factors on their firm.
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Case Industry
Imente online news aggregation
Open House online vacation apartment rental 1997
Tele-Ruf payphone operation
Date of foundation Size - number of employees - sales in Euro (est. 2003) Profitability
2000
1997
11 250,000 not profitable break-even projected for next year
7 1,000,000* high
16 >6,000,000 high
Market - former growth - life cycle Competition Location slow positive growth early very weak Girona / Spain Interesting case features TECHNOLOGY INNOVATIONS - technology-oriented venture perspective - business-to-business market - market in state of emergence fast positive growth medium very strong Barcelona / Spain POPULAR AND EASY TO ENTER INDUSTRY - low market sophistication with very low barriers to entry and easy to replicate business concept - large number of competitors offering similar services negative growth late very weak Bonn / Germany RADICAL ENVIRONMENTAL CHANGES - presumably very unattractive market due to penetration of mobile phones - deregulation of telecommunication market - dominant presence of former state monopolist * data not provided by firm, own estimation Table 27: Profile of firms from case study
4.3.4 Method of data collection After the respective case study companies have been identified, in-depth data has to be gathered. According to Yin (1989), an overriding principle when examining case studies is that multiple sources of evidence are vital in the data collection effort.
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Initially, publicly available information about the markets and the case study companies was collected. Moreover, the investigated firms were asked to provide the market analysis part of their initial business plan and other publications about their market. Documentation from other sources such as annual reports, analysts reports, online discussion groups and online consumer ratings, information of company, competitor websites and press releases supplemented the documentation collected initially. After the review of these documents it has been assumed that the author had sufficiently familiarised himself with the respective markets in order to proceed with subsequent interviews. Interviews can be conducted as (1) open-ended interviews, (2) focused interviews or (3) structured interviews. For this study, interviews started with a first part of some open-ended questions about the attractiveness of the market. In the second part, interviewees were asked to fill in a questionnaire on ratings of market effects, which was guided by the developed theoretical model of market attractiveness. While filling in the questionnaire interviewees had to comment on their ratings. The questionnaire serves two purposes. On the one hand it enables the interviewer to capture data on the broad range of variables that are given by the underlying model in a limited amount of time. On the other, it helps the interviewee to reflect on further dimensions of potential market factors. In a third part, the interview focussed on those market factors that were considered as most important from the founders perspective and on those factors that have been shown to be most relevant within the quantitative study. Although the interviewer had a set of questions worked out in advance, he was free to eliminate, add and modify questions on the basis of his perception of what seemed most appropriate in the context of the interview. The complete questionnaire outline is presented in appendix G. For each case an initial interview of about four hours was conducted with the leading founder of the firm. The usage of the questionnaire was limited to these initial interviews with the founder, while subsequent interviews with additional members of the management focused more on phenomena specific to the case.
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4.3.5 Method of data analysis and interpretation: Pattern-matching and explanation-building The analysis and interpretation of case study evidence is grounded on a general strategy. This strategy might either be explanatory oriented towards theoretical propositions, or explorative oriented towards the description of a basic framework. Among these two basic strategies, Yin favours the one based on theoretical propositions, since clearly defined propositions help to focus attention on certain data and to organize the entire case163. Within this study, the theoretical propositions as given by the model of market attractiveness guide further data analysis. After the general research strategy has been chosen, there are three dominant analytical techniques that, according to Yin, should be used for analysing case study evidence: (1) pattern matching, (2) explanation building and (3) time series analysis. Pattern matching has been identified as one of the most desirable techniques for case study analysis164. In the theoretical stage of this study, patterns for the industry characteristic-venture success relationship have been proposed. These model proposals are used to predict the patterns that might be found in the markets investigated within the case studies. If the empirical pattern widely coincides with the predicted pattern, the internal validity of the empirical findings is strengthened. However, the use of this pattern-matching analysis is limited. Due to the lack of precision of case study methods, "investigators are cautioned not to postulate very subtle patterns"165. Since one of the main purposes of the study is to identify exactly these more subtle patterns of the market-venture success relationship, the use of pattern-matching analysis might be limited to the validation of a few significant gross patterns. In addition to pattern matching, the case study can also be used to investigate and enrich the understanding of the underlying mechanisms of causal relationships, following an explanationbuilding mode of analysis. The case studies provide examples of how market environment affects venture performance. Also, the explanation-building technique compares the model propositions with the case study evidence. Special attention is paid to contradictory or highly unexpected patterns of variables.
163 164
Yin 1989: 107. Yin 1989: 109. 165 Yin 1989: 113.
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4.4
General considerations of validity and reliability
The major criteria for evaluating measurement tools are validity and reliability. Validity External validity refers to the degree to which findings are generalisable. This issue has been already discussed within chapter 1.4 delimitations of the study. The quantitative study aims at an external validity among a broad range of industries, especially in the service sector in Germany, under the specific perspective of new ventures. The qualitative study does not claim that the variables that are identified for the individual case are transferable to other industries. Rather, it aims at providing examples on how industry effects affect ventures. Content validity refers to the degree to which the content of items adequately represents the universe of all relevant items under study. Obviously it is impossible to measure all the relevant aspects that comprise environments or even markets. Since the framework of variables to be investigated within this study integrates a broad scope of interdisciplinary studies on the market-success relationship, a very broad scope of markets dimensions is covered. Moreover, the framework is very comprehensive in terms of the large number of variables that have been assessed. Within the qualitative study, the breadth of model variables that are included in the investigation will ensure content validity to a sufficient extent. Within the quantitative study, the availability of data sources restricts the number of variables that can be considered. Here, content validity for the main sources of market attractiveness might be difficult to sustain due to the limited number of variables that can be included. Therefore, in the quantitative study the impact of variables is interpreted with regard to the applied individual variables and not for the whole model. Construct validity refers to the degree to which the underlying constructs are measured. This refers particularly to the problem of operationalising variables for the quantitative study. The extent to which the operationalised measures capture the construct of the variables they are supposed to measure is carefully evaluated (see chapter 5.3.2). Moreover, for each operationalisation potential limitations have been discussed.
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Reliability Equivalence refers to the degree to which alternative forms of the same measure produce the same or similar results. In the quantitative stage, mainly unproblematic objective quantitative data is used. The quantitative data is frequently numeric financial data, which is generated by the companies reporting systems and should therefore be largely objective. In the qualitative part, the evaluations of market characteristics in case study interviews will inevitably vary to a certain degree among the raters. This might be attributed both to different degrees of knowledge among the raters, but also to contradictory perceptions of market variables. In order to ensure a high degree of equivalence within the case studies, more than one person was interviewed regarding the most influential market factors. Another important issue concerning the reliability of the data is the respondents motivation to give accurate answers. This may be critical, especially when interview questions touch areas that are considered sensitive by the interviewee or if answers require the reference to archival data. A large part of the statistical data has been collected on the basis of a compulsory survey, where firms have been obliged to give accurate information, such as in tax reports. Participation in the DtA survey, from which the performance measures have been derived, was not compulsory. However, as will be further explained in the following chapter 5.1, there was a high willingness to provide even sensitive information in the DtA survey.
Risk explanation Validity External Measures for reducing risk
Results not generalisable, but only Consideration of broad range of context specific industries Consideration of broad range of context variables
Content
Relevant variables missing
Inclusion of broad range of theories and literature Large number of relevant variables in model (for quantitative study restriction regarding availability of data)
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Construct
Operationalisation of variables not Operationalisation from large adequate data sources Careful evaluation of applicability and potential limitations of operationalisations
Reliability
Equivalence
Respondents provide different evaluations of phenomenon
Case interviews with more than one person Reliance on objective numeric data
Accuracy of responses
Respondents provide inaccurate data
Reliance on reliable data sources Provision of an industry analysis and strategic recommendations as incentive for providing accurate information in case study interviews
Table 28: Measures to minimise area of concern regarding validity and reliability
CHAPTER 5 - QUANTITATIVE EMPIRICAL STUDY
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Quantitative empirical study: Impact of industry factors on new venture performance in Germany
Three of the initial objectives of this study will be achieved throughout this chapter. After the specification of the applied data sources (chapter 5.1), the hypotheses (chapter 5.2), the operationalisations of variables (chapter 5.3), various analyses are performed with the data set. In chapter 5.4 the descriptive analysis of the sample will respond to objective number 4 of this study (compare chapter 1.2) by identifying those markets in which new ventures have been most successful. In chapter 5.5 the relation between industry variables and measures of new venture success is dealt with. Objective number 5 of this study will be achieved by correlation and regression analysis on the overall sample (chapter 5.5.2). Objective number 6 of this study will be achieved by also taking into consideration various additional contingency variables, which may impact the relationship between industry variables and venture success (chapter 5.5.3).
5.1
Applied data sources
Within this chapter, background information on the process of data collection and a discussion of its applicability is provided for each data source. Grnder- und Mittelstandspanel of Deutsche Ausgleichsbank (DtA) The DtA is a public institution, which consults and distributes funding programmes for established firms and startups in Germany. In 2001, more than 43,000 loans were granted, with a total volume of 3,780 million euros. Every one to two years, the DtA conducts a survey among a large sample of those firms that have received funding. For the 2001 survey, a 21-item questionnaire was sent to 18,745 firms who received funding within the years 1996, 1998, 1999 or 2000. Of these firms, 6,247 responded. The resulting response rate was with 33%, compared with general response rates of questionnaire surveys very high. The firms contacted were apparently highly inclined to return the questionnaire and also to provide sensitive financial information about their firms, despite the fact that participation in the survey was not compulsory. This may be influenced by the fact that the DtA is known to all firms and all of the respondents have received funding from the DtA. Moreover, firms already had to
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CHAPTER 5 QUANTITATIVE EMPIRICAL STUDY
reveal their financial data within the loan application process, and may therefore be less suspicious to reveal this information to a bank than to another third party. About half of the firms contacted received loans for startups, and the other half received loans for growth or takeover. Each firm is classified according to the 4-digit WZ93166 industry classification scheme, which is the most frequently used industry classification scheme in Germany and is related to the international NACE classification scheme. Already in 1999, a comprehensive questionnaire draft had been prepared by the author and presented to the DtA. Even though the main purpose of the 2001 survey was to evaluate the quality of the DtAs funding service, several questionnaire items were included that allowed a specific assessment of venture performance and industry environment. Among these items were questions regarding the geographic sales market, the geographic supply market, the development of the firm according to plan, number of employees (1998-2001), sales (1998-2001), investments (1998-2001) and profit (1998-2001). From these questions the dependent variables of subjective venture performance, venture growth, profit level and time to break even were derived. Moreover, the independent variables of export balance, distance to clients, degree of uncertainty, heterogeneity of industry members, gross margin and minimum organisational size could be deduced. The DtA data source may be biased as it only contains firms that have successfully received governmental funding. Within the selection process to grant the governmental funds, the competence of the entrepreneur and the quality of the venture concept were evaluated. Additionally, 15% private capital resources were required. Therefore, the funded ventures may over-represent firms with qualified entrepreneurs, feasible venture ideas, a high share of private capital after successful funding and a high need for capital as firms which do not require funding are not covered in the data source. However, the DtA does not require a high minimum investment. In fact, there are special programmes targeted at providing funding of less than 25,000 Euro, therefore firms with relatively small capital requirements are also covered in the data source. Given the large number of firms that actually received governmental funding, the rejection rate of funding applications and the related bias of the sample are relatively low. Apart from this potential bias, the DtA data is an excellent source for the
166
Wirtschaftszweig Klassifizierung von 1993 transl. classification of industries of 1993.
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indicators of new venture performance. The high number of loans that are granted by the DtA ensures that an important share of startups in Germany is covered. The sample size of the survey encompasses over 6,000 returned questionnaires and is extremely comprehensive. Furthermore, due to the special trust relationship between the DtA and the firms contacted, the potential biases due to self-selection are minimised and data on sensitive financial information is available. A wide range of industries, especially from the service sector is covered. Statistics of value-added tax167 of Statistisches Bundesamt The Statistische Bundesamt is the federal statistical office in Germany. It publishes the statistics of value-added tax, which is an annual aggregate of the monthly and quarterly value-added tax reports. All those firms in Germany that had a turnover of more than 16,617 Euro in the previous year or that have an estimated yearly turnover of more than 51,129 Euro in the current year168, have to submit monthly or quarterly value-added tax reports, Small firms with a turnover of less than 16,617 Euro are excluded from the statistics, even though many of these firms submit on a voluntary basis a yearly value-added tax report. For the year 2000, the value-added tax reports of more than 2.9 million firms are included in the statistics. Since 1996, the statistics of value added taxes have been published annually, and before that they were published in intervals of two years. For privacy purposes, data on those industry categories that contain less than three firms or that are highly dominated by one firm is eliminated. For this study data, from the value-added tax statistics from 1998 to2001 is analysed. The value-added statistics provides information about the number of firms and the aggregate yearly net turnover169 per industry classification category. The data on net turnover also includes turnover regarding sales to clients outside of the national fiscal territory both inside and outside the European Union, despite the fact that these sales are frequently not subject to value-added tax. For this study, a dataset has been applied that categorises the number of firms and their total net turnover by a 4-digit WZ93 industry classification for each year from 1998 to 2001. An additional datasheet has been applied that categorises the number of firms and their total net turnover for each 4-digit industry classification into ten classes of firm size for the year 2000. The first
167 168
Transl.: Umsatzsteuerstatistik. 19 UStG (Umsatzsteuergesetz transl. German law for value-added tax). 169 Turnover excluding value added tax.
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class of firm size starts at 16,617 Euro of yearly net turnover. The last class of firm size starts at 250,000,000 Euro of yearly net turnover. The data of the value-added tax statistics serves to deduce the independent variables market size, minimum efficient scale, previous market growth, net entries, number of industry members and average size of industry members. The exclusion of very small firms minimises distortions due to firms without actual economic activity, which have been established by individuals for the main purpose of obtaining favourable wholesale purchasing conditions or tax benefits. Other statistics on firm numbers are often distorted by the impact of such irrelevant firms170. The value-added tax statistics covers only to a limited degree the first and second fiscal year of new firms, due to the exemption of many small firms from submitting monthly and quarterly value-added tax reports. New firms with an estimated net turnover of less than 51,129 Euro generally do not appear in the statistics. The value-added tax statistics therefore covers small new ventures only with a time lapse of one to two years. This may lead to distortions in industries with temporarily high rates of smallsize firm formations. However, since the data is applied in the rather broad 4-digit industry classification scheme, this distortion may be less relevant for the undertaken study. Unusually, temporarily high rates of small-size firm foundings may generally occur for certain niches but not among a whole 4-digit industry segment. Therefore this distortion may be weak on a 4-digit industry classification scale. The value-added tax statistics is the only public statistics in Germany that provides data on a financial indicator for the complete range of 4-digit industry segments based on the aggregated data of a majority of relevant active firms in Germany. Even though net turnover is the only relevant financial indicator published in this statistics, the value-added tax statistics is of high relevance for this study as source for the volume of the industry. Industry risk (insolvency) statistics of Creditreform Creditreform is a private organisation that primarily provides firm information for the purpose of informing their clients about the risk of bad debts in business relationships. According to its own sources, Creditreform maintains the most comprehensive business database on German firms with continuously updated data on more than 3.5
170
Compare Kirchhoff et al. 1995: 251ff for a discussion of several statistics of firm foundations in Germany.
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million companies. Due to the business area of Creditreform, data associated with insolvency risk is a primary focus in their investigation and collection of firm data. The industry risk statistics that is applied in this study provides information about the absolute number of insolvencies per WZ93 industry segment, as well as a relative insolvency risk indicator calculated as the number of insolvencies per total number of firms in each WZ93. The data is collected by systematically analysing the commercial register, newspapers, business reports and published balances. In the case of enquiries from clients Creditreform additionally complements the firm information in interviews with representatives of the firm or interviews with associated firms. Annually Creditreform receives about 10 million enquiries. The response rate to enquiries from Creditreform is relatively high, as enquiries are generally initiated by business partners who might be reluctant to continue their business relationship in cases where a firm is unwilling to provide information. Additional data is collected by the encashment service provided by Creditreform itself, and the encashment experience of more than 130,000 associated member firms. Firms are counted as insolvent if one or more of the following criteria apply: o committal order for the insurance in lieu of an oath o insurance in lieu of an oath o request for initiating settlement proceedings o initiation / completion of settlement proceedings o request for initiating / initiation of bankruptcy proceedings o completion of bankruptcy proceedings o bankruptcy refusal due to lack of resources o auction by court order o bankruptcy of an estate o connection bankruptcy initiated o bankruptcy proceedings by obligation comparison waived o abolition of the bankruptcy proceedings o business insolvency o consumer insolvency
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o insolvency of an estate For this study, the number of firms and the number of insolvencies per 4-digit WZ93 industry classification for each year from 1998 to 2001 is analysed. The insolvency rate is applied as a proxy indicator for economically forced firm exits. Firm exits can occur for various reasons, including lack of successor, company takeover, aggregation of firms within restructuring programmes, change of legal form, health problems of the entrepreneur, death of the entrepreneur, changing personal preferences of the entrepreneur or missing economic sustainability and insolvency. For the purpose of this study, firm exits unrelated to the economic situation of a firm, are considered as potential distortions and may lead to incorrect conclusions when investigating interactions on an industry aggregation level. In this context, insolvencies are a good indicator to filter economically forced firm exits. One should keep in mind that there are also many firm exits resulting from an economically motivated firm closure where the company or the owners have still been still able to pay any outstanding debts or where the creditors did not take any legal actions to claim their outstanding debt. Particularly in industries with high capital requirements, economically forced exits might more frequently lead to insolvencies. For the purpose of this study, the insolvency statistics of Creditreform has been considered superior to the insolvency data of the Federal statistics department, since the data collection involved more information sources. Additionally the statistics on firm exits from the federal statistics department could not be applied since data is only available for a 2digit industry classification and the numbers are highly distorted by non-economically active firms. The insolvency data of Creditreform can be purchased for individual industries. The ZEW indicators of firm foundation171 The ZEW (Zentrum fr europische Wirtschaftsforschung172) is a non-profit research institute engaging in economic research and economic consultancy. Based on data from creditreform the ZEW provides a database on firm foundations in Germany.The ZEW performs a number of corrections of the Creditreform data. Firms that are presumed to be repeatedly included in Creditreforms data set are identified and
171 172
Gewerbemeldestatistik. Transl. Centre for European Economic Research.
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repeated entries are excluded. Derivative foundations and foundations that are associated to changes in legal form, changes of shareholder structure, takeovers and mergers are identified and excluded. Since foundations are only reflected in the Creditreform database at the time of inclusion in the commercial register or when a client of Creditreform enquires about a firm, the Creditreform data underestimates the number of firm formations, particularly for firms where an inclusion into the commercial register is not required. About 68% of all economically active firm foundations are included in the Creditreform database 12 months after the date of foundation173. Taking into consideration the industry, the legal form, the regional area and the age of foundations in the Creditreform database, the ZEW estimates the actual number of firm foundations in the current year. The longer a firm is in business the higher the probability that it is included in the Creditreform database. Therefore, the Creditreform database already includes nearly 90% of all economically active firms that have been founded 36 months before the creation of the dataset. The accuracy of the number of firm formations has consequently increased for previous years. For this study, data on firm foundation for each year from 1998 until 2001 has been applied in order to derive the independent variable of entries to industry. The data is classified by the 4-digit WZ93 industry classification. Industry segments in agriculture, forestry, holding companies and segments related to non-private institutions are not covered. Therefore, eleven of the investigated industries had missing values for the number of firm formations. The overall under-representation of small-size foundations leads to a decreasing estimation accuracy for very recent firm foundations. Since the applied ZEW data set includes only firm foundations of one year or more before the creation of the ZEW data set, a relatively high level of accuracy can be ensured. Compared with alternative data sources of new venture foundations, the ZEW database is the only database that provides data on a 4-digit industry classification level. The statistics on firm foundations from Germanys federal statistics department publishes firm registrations only on a 2-digit level, while the employment statistics from the Bundesanstalt fr Arbeit publishes the number of new establishments with at least one employee on a 3digit level. Neither of these alternative sources excludes derivative foundations. Their
173
Engel and Fryges 2002.
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applied unit of analysis is either firm registrations or establishments with at least one employee. The number of economically active foundations is overestimated in the case of the statistics on firm registrations. The number of economically active foundations is underestimated in statistics of establishments with at least one employee. The phenomenon that a large share of firm registrations is actually not intended to become economically active and the fact that many firms are founded only by the owner without contracting additional employees, render it more difficult to apply these alternative data sources as indicators for venture foundations in the undertaken study. The accuracy of the ZEW estimation for the total number of economically active firm foundations has been confirmed by Fritsch and Grotz (2002) who compared different data sources for firm foundations. Hauptgutachten174 of Monopolkommission The Monopolkommission is a federal commission with the legally regulated obligation of monitoring the status and development of firm concentration in Germany175. In order to fulfil this obligation, the Monopolkommission has to publish a biannual report on firm concentration, the so-called Hauptgutachten. For the undertaken study, the most up-to-date report, from August 28th 2002, has been applied, which is based on data from the year 1999. The report publishes indicators related to the evaluation of firm concentration for most 5-digit WZ93 industries within the broad industry sectors of manufacturing, trade and transportation. The applied data is primarily based on the official federal statistics, which is maintained by the Statistische Bundesamt. Moreover, interviews are conducted with some of the largest firms and additional private firm databases are analysed. For the official federal statistics a questionnaire was sent to a sample of firms in different industry sectors in Germany. The sample is generated according to a division of the overall firm population into counties, each county is divided into industry groups and within each industry group into groups of firms with similar turnovers. Firms with higher turnover are included at a higher probability in the sample. Starting from a certain amount of turnover, all large firms are included in the sample. The data of smaller firms is estimated based on the information from the respective sample. In contrast to the value-added tax statistics,
174 175
Monopolkommission 2002. Compare 44 GWB (Gesetz gegen Wettbewerbsbeschrnkungen transl. law against restrictions of competition.).
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firms that provide only annual value-added tax reports are also considered as part of the total population. In the manufacturing and construction industries, all firms with more than 20 employees are surveyed. Firms with fewer employees are excluded. For most transportation sectors, all firms are surveyed without any minimum size limit. Overall, about 50,000 firms in trade, 38,000 firms in manufacturing, 19,000 firms in construction, 12,500 firms in catering and 20,000 firms in transportation are included in the annual survey. For this study, the Herfindahl index is applied as a measure of industry concentration. Additionally, Monopolkommission data on turnover, investment, number of firms and employees is applied in order to derive the independent variables of employee productivity level and investment intensity. The indicators of firm concentration consider only to a limited degree common ownerships of legally independent firms. However, interviews and the analysis of private firm databases are applied additionally to reveal vinculations among independent firms. One important limitation of the concentration indicators is that the data is based solely on the national production output without consideration of foreign trade balances. Therefore, the statistics exhibit a high concentration indicator for industries with dominant foreign producers and only few national manufacturers176. The concentration data, particularly for the manufacturing industries, has therefore to be considered with caution. Another weakness of the Monopolkommission data is its availability for only a limited number of industries. While basically all industries in manufacturing, trade, construction, catering and transportation are included, the following 2-digit WZ93 industry codes are missing: o 01-05 agriculture, forestry, fishery o 11-13 mining industries for uranium, ore o 40 power supply o 41 water supply o 60-95 other private and public services
176
For many years a monopoly has been shown in the Monopolkommission data for the motorcycle manufacturing industry in Germany, with BMW being the only large producer. In fact, BMWs market share for motorcycles has been relatively low in Germany due to the high number of BMW motorcycles that have been produced for export and the high market shares of foreign manufacturers in Germany.
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In particular, the missing information of the industry codes 60-95 poses a major weakness for the undertaken study since data of 64 industries are missing from the 163 industries to be investigated. Despite the limitations mentioned, the Monopolkommission data appears to be the most appropriate data source in Germany, providing indicators of industry concentration for a broad range of industries. The following table summarises the details of data collection and details on the applied data set that have been derived from each data source:
DtA Grnder und Mittelstandspanel Statistisches Bundesamt Statistics of value added tax DATA COLLECTION Population Firms that received governmental funding between 1996 and 2001 Firms required to submit monthly or quarterly value-added tax reports and with net turnover of more than 16,617 Euro Sample size Response rate 18,745 firms 33% > 2.9 million firms approx. 100% > 3.5 million firms information not available Number of available sample firm data: Mean of data collection Questionnaire Monthly and quarterly value-added tax reports Industry classification APPLIED DATA SET Applied industry classification scheme Applied years Applied indicators 1998-2001 Geographic sales market, development of firm according to plan, number of employees (19982001), sales (19982001), investments (1998-2001), profit (1998-2001) 1998-2001 Number of firms (1998-2001), volume of net turnover (19982001), number of firms per class of firm size (2000(, volume of net turnover per class of firm size (2000) 1998-2001 Number of firms (1998-2001), number of insolvencies (19982001) 1998-2001 Number of firm foundations (19982001) 1999177 Herfindahl index of industry concentration, number of firms, turnover, investment, employees 4-digit WZ93 4-digit WZ93 4-digit WZ93 4-digit WZ93 4-digit WZ93 4-digit WZ93 5-digit WZ93 5-digit WZ93 5-digit WZ93 5-digit WZ93 Commercial register and interviews Same as Creditreform Questionnaire 6,247 firms > 2.9 million firms > 3.5 million firms Same as Creditreform approx. 140,000 firms Same as Creditreform Same as Creditreform approx. 140,000 firms approx. 100% Firms included in the commercial register or firms for which Creditreform received an enquiry Same as Creditreform Firms subject to valueadded taxes Creditreform Industry risk / insolvency statistics ZEW indicators of firm foundations Hauptgutachten Monopol kommission
Table 29: Data sources - Data collection and applied data sets
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Published on 28.8.2002.
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The different underlying definitions of industry populations and the differences in aggregating data on higher level industry codes pose limitations on the application of absolute values. Derivations of indicators combining absolute values from more than one data source are considered particularly problematic. Therefore, the application of variables based on relative values is considered superior. Apart from the treatment of very small firms, the underlying data sources of Statistisches Bundesamt, ZEW, Creditreform and Monopolkommission are quite similar and extraordinarily comprehensive in size. Therefore, a general comparability of the different data sources is given.
5.2
Hypotheses on impact of industry variables on venture success
In this chapter, hypotheses about the impact of industry variables on venture success are formulated, which are examined within the quantitative empirical study. All hypotheses have been derived directly from the conceptual model of market attractiveness developed in chapter 3.4. They cover variables located at the intraindustry level and barriers to entry. The model specifies the main direction of impact for the success measures venture growth, venture profits and venture survival. As no empirical data is available for venture survival, hypotheses are formulated only with regard to venture growth and venture profits. No hypotheses are formulated for the additional success measures of the data set, time to break even and subjective performance evaluation. Not only that these success measures have not been specified in the model, but also results of former research do not provide sufficient evidence regarding the relation between industry factors and these success measures. The underlying main assumption that is implied in the following list of hypotheses is that there are certain industry variables that affect growth and profitability for the overall sample of ventures and not only in limited contextual settings. All hypotheses are related to objective five of the study, which intents to study the relationship between industry variables and new venture success. Market structure Within the market structure dimension, hypotheses are formulated for market size, economies of scale, export balance and distance to clients.
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The size of the market may determine the potential growth of a new venture178. In a small market, the growth dynamics of a new venture may already be affected in early years by the limited size of the market179. In a large market, ventures may maintain longer-term growth by simply multiplying one successful concept, while in a small market the growth potential for a successful concept may be limited to a short period of time. In small markets, ventures are forced to continuously develop new concepts to ensure ongoing growth and they cannot rely on the multiplication of one concept. Hypothesis 1- market size: The growth rate of new ventures will be positively related to the size of the overall market. Porter (1979) has proposed within the five forces model that high economies of scale will have a positive impact on organisational performance, since new entrants may be discouraged from entry. Ravenscraft (1983) empirically confirmed the positive impact of economies of scale on the line of business profits and also on the industry price-cost margin. From the new venture perspective, which has been chosen for this study, the assumed impact of economies of scale is contrary to the previously investigated impact on large established firms. From the perspective of new ventures, a high level of economies of scale will lead to a costs disadvantage compared with established industry members, given the fact that ventures generally start at a lower scale. Even though surviving ventures may, in the long run, benefit from the protection from subsequent entries associated to high economies of scale, there may be only a few ventures that grow to the minimum efficient scale level within their first years of operation. Hypothesis 2- economies of scale: The profit level of new ventures will be negatively related with economies of scale of the industry.
178
Compare Baaken 1989, Chandler and Hanks 1994a, Dean and Meyer 1996, Zacharakis and Meyer 1998, Hinterhuber 1995. 179 Baaken 1989.
161
The export balance is a good indicator of the national competitiveness of a specific industry180. As the variable of economies of scale, the export balance has been primarily investigated in strategy research181. Due to local know-how, the availability of resources, costs advantages, or strong national competition, an industry may achieve a high level of exports. At the same time, high export rates demonstrate that foreign markets are accessible by the industrys products. Therefore, high export rates may increase venture growth, expanding the potential geographical sales market and providing opportunities for serving export markets. Hypothesis 3- export balance: The growth rate of new ventures will be positively related to the export balance of the industry. Similar to the export balance, the distance to clients is an indicator of the geographic extension of the sales market182. However, in contrast to the export balance, the distance to clients also reflects differences in the geographic extension of the sales market within the national context, since local, regional and national sales markets are distinguished. Accordingly, it is assumed that a larger sales market, as indicated by the longer distance to clients, will expand the potential sales market and imply venture growth opportunities. Within the boundaries of one national context, it may be assumed that the transparency of the market and prices may increase for industries that compete on a larger geographic basis, with a resulting negative impact on profits. In local sales markets, criteria other than price may be more frequently applied by clients. Convenience and social contacts may often be, in the local context, more decisive than price.
180
The export balance is located on the intra-industry level of the theoretic model of market attractiveness and not on the inter-country level as it is an indicator of national competitiveness for a specific industry and not necessarily for a whole economy. 181 Compare Ravenscraft 1983, Buzzell 1987. 182 Compare Ravenscraft 1983, Davidsson 1991, Shane and Kolvereid 1995, Baaken 1989.
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Hypothesis 4- distance to clients: a) The growth rate of new ventures will be positively related to the average distance to clients in an industry. b) The profit level of new ventures will be negatively related to the average distance to clients in an industry. Market dynamics Within the dimension of market dynamics hypotheses have been formulated for previous market growth, entries to industry, exits from industry, net entries and the degree of uncertainty. Growth of the overall market is one of the most frequently applied variables of research on the market environment183. It is assumed that a growing overall market will also facilitate the growth of the individual venture. For a new venture it will be easier to grow driven by the dynamics of a growing market than having to grow at the expense of market shares of other industry members. Moreover, a strong growing demand may even lead to temporary supply gaps. Even though high market growth will also attract a higher number of new firm entries, it is assumed that the growth stimulation by the overall market development is stronger than the potentially negative impact of additional industry entrants. Hypothesis 5- market growth: The growth rate of new ventures will be positively related to the growth of the overall market. The number of firms entering an industry has been frequently treated not as a separate variable184, but has been included in the variable of life cycle stage, assuming that early life cycles are associated with a high number of firm entries and an increasing total firm population while late life cycle stages are associated with a low number of firm entries and a stable or decreasing total firm population. As indicated before, firm
183
Compare Stuart and Abetti 1987, Keeley, Roure et al. 1987, Tsai MacMillan and Low 1991, Tyebjee and Bruno 1981, MacMillan et al. 1985, MacMillan et al. 1987, Hall and Hofer 1993, Zacharakis and Meyer 1998, Ravenscraft 1983, Buzzell 1987, Marshall and Buzzell 1990, Mueller and Rauning 1998, Dean and Meyer 1996, Porter 1979, Zahra 1993a, Baaken 1989, Davidsson 1991, Hinterhuber 1995. 184 Shane and Kolvereid 1995 and Zahra 1993a are among the few studies that deal with firm entries separately.
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entries will be strongly related to the rate of market growth, since previous and expected market growth may be the most important attractors of firm entry. Therefore it will be assumed according to the former hypothesis that venture growth will be more impacted by the growth of market dynamics than the number of additional firm entries. The number of entries, however, may affect directly the profit level. With an increasing number of new firms entering the market and struggling for a share of the market, profit margins of all firms may be exposed to higher pressure. Hypothesis 6- entries to industry: a) The growth rate of new ventures will be positively related to the number of firm entries into an industry. b) The profit level of new ventures will be negatively related to the number of firm entries into an industry. As with firm entries firm exits have rarely been investigated185 as a separate variable. However, the number of firm exits provides very crucial information about the associated risks of a particular industry. Firm exits are caused by insufficient profitability. Therefore, a high exit rate may indicate a decreasing level of profit margins within an industry. Decreasing profitability may, in turn, result from increasing competition. On the other hand, a high number of firm exits may also indicate that an industry is strongly affected by environmental changes and established firms may be forced to exit because they lack the ability to adapt to the new environment186. Such industries in a transformational state may be attractive industries for ventures with the knowledge on how to adapt to the new environment. Overall, only a few industries will face an extreme degree of transformation and therefore it is assumed that the impact of decreasing industry profitability is stronger than the opportunities in the context of industries in states of great transformation.
185
Among the literature that has been reviewed for this study, not a single investigation including the variable of venture exits could be found. 186 Compare the discussion of contingency theory in chapter 3.2.5.
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Hypothesis 7- exits from industry: The profit level of new ventures will be negatively related to the number of firm exits from an industry. Corresponding to the number of firm entries, the number of net entries is also assumed to relate positively to venture growth. A high rate of net entries indicates the sustainability of an industry environment, providing sufficient growth and profit potential for new industry entrants. For venture profits, no hypothesis has been formulated as a high venture survival rate may indicate a high profitability. This effect may be compensated by the pressures on profit margins induced by an increasing number of competitors. Hypothesis 8- balance of entries and exits (net entries): The growth rate of new ventures will be positively related to the number of net firm entries to an industry. Several studies in entrepreneurship have stressed the importance of uncertainty and market disequilibrium for the opportunity structure of new ventures187. A high degree of uncertainty may reduce the competitive advantage of established firms. These established firms may be impeded by inertia in adapting to new developments. Therefore, new ventures may grow more rapidly in uncertain environments where they can benefit by filling new market niches. However, uncertainty about the future development of a market increases the risk of investment and the risk of failure for new ventures. Profitability may therefore be reduced by investments that turn out to be unprofitable. Hypothesis 9- degree of uncertainty about future development: a) The growth rate of new ventures will be positively related to the degree of uncertainty within an industry. b) The profit level of new ventures will be negatively related to the degree of uncertainty within an industry.
187
Compare Sandberg and Hofer 1987, Keeley, Roure et al. 1987 for positive impacts on venture performance. Stuart and Abetti (1987) found a negative impact, but only on the basis of a very small sample size.
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Competitor structure With regard to the competitor structure dimension, hypotheses have been formulated for industry concentration, number of industry members, heterogeneity of industry members, employee productivity, gross margin and average size of firms within an industry. Industry concentration has led to inconsistent results in previous research188. From the new venture perspective it may be assumed that a high degree of concentration has a positive impact on venture profitability as new ventures may find attractive market niches outside the core business of the dominant industry players. This positive effect on venture profits is considered stronger than the potentially negative impact of high economies of scale, which may correlate with a high degree of industry concentration. Hypothesis 10- concentration: The profit level of new ventures will be positively related to the degree of concentration within an industry. The number of industry members is related to the variable of concentration, as markets of low concentration ratios may also frequently have more industry members189. An industry with a large number of members will frequently have a low industry concentration. Predominantly smaller firms may already have occupied market niches. Competition on the level of smaller firms may be stronger and lead to pressure on profit margins. Moreover, Zacharakis and Meyer (1998) found that number of industry members has been the most important actual deal evaluation criteria applied by venture capitalists. Hypothesis 11- number of industry members: The profit level of new ventures will be negatively related to the number of members of an industry.
188
No relationship between performance and concentration was found by Sandberg and Hofer 1987, Tsai, MacMillan and Low 1991, Robinson 1998, Marshall and Buzzell 1990. A positive relationship was found by Brderl et al. 1996, Buzzell 1987. Opposing directions of impact for different success measures were found by Mueller and Raunig 1998 and Ravenscraft 1983. A negative relationship was proposed in the Dean and Meyer model 1996. 189 Compare Zacharakis and Meyer 1998, Porter 1979, Baaken 1989, Hinterhuber 1995.
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The importance of heterogeneity has been particularly highlighted by Mueller and Raunig190. Heterogeneity of industry members is analysed individually for the measures of heterogeneity in profits, heterogeneity in sales growth and heterogeneity in the sales volume. A high heterogeneity of industry members indicates that the industry provides high profit margins, which allow a wide range of diverse firms to survive. Even firms that deviate greatly from an optimum efficiency level survive in such an industry. Hypothesis 12- heterogeneity of industry members: a) Heterogeneity in profits: The profit level of new ventures will be positively related to the heterogeneity of profitability within an industry. b) Heterogeneity in sales growth: The profit level of new ventures will be positively related to the heterogeneity of firm growth within an industry. c) Heterogeneity in sales volume: The profit level of new ventures will be positively related to the heterogeneity of the firm sales volume within an industry. Employee productivity has been mainly neglected in entrepreneurship research, even though it has been identified to be of major importance in the PIMS study191. In the context of growing new ventures with less developed organisational structures, employee productivity may be even more important than in the context of established firms. A high level of employee productivity implies that increases in sales involve less organisational preparation with respect to recruiting, training and integration of new employees. Therefore, it is assumed that venture growth will be positively affected by a high level of employee productivity. With regard to venture profits, a positive impact is assumed, since a relatively low share of personnel costs may result in high gross margins.
190
Mueller and Raunig 1998 stressed the importance of firm heterogeneity as a contingency variable in studies that apply industry aggregates. Compare also Porter 1979, Sandberg and Hofer 1987 and Chandler and Hanks 1994b. 191 Buzzell 1987, Wilson 1998.
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Hypothesis 13- employee productivity: a) The growth rate of new ventures will be positively related to the employee productivity within an industry. b) The profit level of new ventures will be positively related to the employee productivity within an industry. The average gross margin of an industry may be a major driver of venture profits. However, because data on industry gross margin is generally not publicly available, it has not been dealt with in any of the studies reviewed. A high gross margin may be the result of a relatively low intensity of competition on prices192. Hypothesis 14- gross margin: The profit level of new ventures will be positively related to the gross margin within an industry. Industries with a high average size of firms may be attractive for dynamic new ventures193, since large industry players may be inferior in terms of responsiveness and dynamism. On the other hand, larger firms may have a more powerful competitive position in order to protect the industry from new entrants and will benefit from a costs advantage in industries of high economies of scales. Overall it is assumed that the positive impact on venture profit from the inertia of large firms will be more relevant to the profit level of new ventures. Hypothesis 15- average size of industry members: The profit level of new ventures will be positively related to the average size of firms within an industry. Barriers to entry The above mentioned hypotheses regarding the intra-industry level of the conceptual model are complemented by two hypotheses on the barriers to entry level relating to
192 193
Brderl et al. 1996. Compare Davidsson 1991, Hinterhuber 1995.
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minimum organisational size and investment intensity. In empiric research barriers to entry are frequently studied as one variable194. The minimum organisational size defines the smallest firm size at which a venture can start within an industry. This size will be much smaller than the minimum efficient scale that defines the average size of those largest industry members that comprise 50% of the total industry sales. Minimum organisational size refers to the number of employees and the organisational complexity of a new venture. Industries that require - a large organisational size at startup will be better protected from subsequent firm entries. Therefore firms in these industries may benefit from a higher profit level. It is assumed that the majority of the ventures that have entered a market do this after ensuring that they possess the minimum size and resources required by an industry. Therefore new ventures may benefit similarly to established firms from a higher profitability resulting from restricted access to the industry. Hypothesis 16- minimum organisational size: The profit level of new ventures will be positively related to the minimum organisational size at startup within an industry. The impact of investment intensity corresponds to the impact of minimum organisational size, with a focus on the minimum capital requirements instead of the minimum number of employees. A high investment requirement will protect those ventures that possess the required capital from subsequent venture entries, inducing a higher profit level for all firms within the industry195. Hypothesis 17- investment intensity: The profit level of new ventures will be positively related to the investment intensity within an industry. For the other dimensions of the intra-industry level within the conceptual model, namely dependencies and competitor dynamics, no appropriate indicators can be
194
Compare Sandberg and Hofer 1987, Keeley, Roure et al. 1987, Wilson 1998, Robinson 1998, Tyebjee and Bruno 1981, Ravenscraft 1983. 195 Compare Ravenscraft 1983, Porter 1979, Dean and Meyer 1996, Davidsson 1991, Hinterhuber 1995.
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derived from the data sources available. These other dimensions therefore cannot be studied in this quantitative study.
5.3
Operationalisation of variables
5.3.1 Operationalisation of venture success
Subjective absolute venture performance measure A subjective venture performance measure can be derived from the item in the DtA questionnaire where respondents are asked whether their venture performed better than plan, according to plan or less well than plan. Since most ventures had prepared a financial plan within the funding process, respondents generally should have been able to give a knowledgeable response to this item. Moreover, by relating the subjective performance to the initial plan, the risk of distortions due to personal, non-monetary aspects of subjective venture success are reduced, which otherwise would make it more difficult to compare results. The measure is limited with regard to the extent to which differentiations are reflected. The three possible response categories capture only a general state of performance. For the statistical analysis the three possible response options are converted into dummy variables from -1 for performed less well than plan to +1 performed better than plan, and with 0 for all ventures that indicated that they performed according to plan. This ordinal scale dummy variable transforms into a metric scale variable when performing the aggregation of the venture data on the industry level. In order to decrease distortions from firm-specific outliers, the value is excluded for all industries where data on less than three ventures has been available. Subjective performance:= d d dummy variable for performance according to plan
Only within the descriptive analysis in chapter 5.4.2. the performance measures are aggregated on the industry level. For this aggregation on the industry level the dummy variable coding from -1 to +1 is not applicable. Instead an alternative coding has been applied in this context with 0 for performed less well than plan to +1 performed better than plan and with +0,5 for all ventures that performed according to plan.
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Objective growth measure - venture sales growth Both growth of employees and growth of sales were available as measures of venture growth from the DtA data. Due to the relatively small size of the new ventures in the DtA sample, growth of employees may be a less accurate measure than growth of sales. An increase in the number of employees only occurs after the sales volume has increased by a large increment. Since both measures are strongly related, only the more accurate measure of sales growth will be applied. Values of turnover from the year of foundation are excluded since they do not generally cover a full twelve-month period and are therefore not directly comparable to other years. Moreover, in the first months after foundation, ventures may be dedicated to preparational tasks before they can actually start their economic activity and generate turnover. The differences in the age of the ventures in the sample pose a potential weakness. In general it can be assumed that in early years of venture activity a higher percentage growth can be achieved more easily as the absolute level of sales is relatively low. Moreover, a step-wise development of the venture concept facilitates early venture growth in sales. However, the distribution of firm age is assumed to be approximately equal for all industries. Therefore, the extent of potential distortions is limited. The venture growth measure is calculated as the mean of the annual percentage growth in sales per venture. Data on sales was available for the years 1998 until 2001. The data from 2001 is an estimate of the respondents for the year of the survey. Sales from the year of foundation have been eliminated before calculating the sales growth rate, since most ventures will not have operated for a full calendar year in the year of foundation.
2000 j =1998
x j +1 xj a
Venture sales growth:= xj a sales in year j
number of years for which data on growth rate is available
The value is only given for industries where at least three ventures have provided information on this item.
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Objective volume measures - venture sales level and number of employees In the context of the measurement of venture size, other aspects of the absolute sales and employee measures have to be considered. Volume measures on absolute sales are highly distorted by the margins within an industry. Volume measures on absolute numbers of employees are highly impacted by employee productivity and an industrys labour intensity. In both cases this poses an important limitation for a crossindustry analysis. In addition, the inter-industry differences in initial firm size and capital investment make it difficult to deduce venture performance from levels of firm size. Within the data set, both the indicators of venture sales level and the number of employees per venture are correlated to the average age of the venture. The differences in venture age lead, therefore, to distortions in the volume indicators. As a result of these weaknesses and limitations, the volume measures will not be applied as measures of venture success. Rather, they will be calculated as control variables in order to investigate possible venture volume-related dependencies.
2001
Sales level:=
j =1998
x
a
2001
Employees (incl. owners):= x e o a
j =1998
(e + o )
a
sales corrected by sales of year of foundation number of employees number of owners number of years for which data is available
Data for industries with less than three venture observations are excluded. Objective profitability measures venture profit level & breakeven Venture profit and time to break-even are applied as objective profitability measures, since both indicators measure different dimensions of profitability.
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Venture profit level The level of venture profits can be derived form the DtA questionnaire item on profits. This question did not, however, specify whether the profits given were before or after taxes. Moreover, many small venture owners are able to manipulate to a large extent the generated taxable profits by varying their own salaries in the first years of the venture. For tax reasons, owners of capital corporations in Germany have an incentive to decrease profits by increasing their own salaries. However, some owners may also decide to grant themselves lower salaries during the first years in order to increase the liquidity of the venture. The accuracy of the data on profits may therefore be limited to a certain extent. Another possible source of distortion is the range of venture age. One may assume that profits increase more rapidly within the first years of operation after firm foundation. Despite the acknowledged limitations, venture profits were identified in the evaluation of success measures (chapter 4.1) as one of the most appropriate measures. The profit level is calculated as the average annual profit per venture from 1998 until 2001. The data of 2001 is based on respondents estimates for the year of the survey. The year of foundation is excluded, since most ventures did not operate for a full calendar year in their year of foundation.
2001
Profit level:= p a
i =1998
p
a
profit of venture number of years for which data is available
Data for industries with less than three venture observations is excluded. Time to break even The break-even indicator applied here refers to operational break-even, which is measured as the number of years from foundation until the first year of positive earnings. This indicator does not give any information on the time that is needed until the initial investments are recovered. Nevertheless, the operational time to break even is a useful indicator on how rapidly a stable economic situation can be achieved. Industries in which ventures need a long time to reach operational break-even, may
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indicate a higher risk of failure and more difficulty to enter the market. Since the measure of time to break even is based on the profit measure, the same limitations that were mentioned for profits could also apply for the break even indicator. However, the possible impact of manipulation of owner salaries and other tax-related reasons is far less important for time to break even. The impact of taxes does not generally turn a profit into a loss, due to the progressive system of taxation with exemptions for small earnings, but does lower positive earnings. For the calculation of the break-even indicator, a sub-sample of the DtA sample had to be generated. First, ventures with a year of foundation before 1998 had to be excluded. After this exclusion of older ventures 4,006 of the previous 5,117 ventures remained. Another 766 ventures had to be excluded as they did not provide data on profits for any year. Of the remaining 3,240 ventures, 532 ventures equalling about a 16% rate, did not have positive results until the year 2001. 46 ventures had to be excluded due to contradictory data. The break-even indicator was finally calculated as the average time from the year of foundation until the first year of profits from the remaining 2,662 ventures with positive profits. Time to break even:= Yp - Yf Yp Yf first year of positive earnings (profit) year of firm foundation
The fact that ventures of different years of foundation are included in the sample may lead to a decreased time to break even for industries with ventures of a lower average age. The correlation analysis between the break-even indicator and the average age of ventures does not, however, confirm such a dependency. D data for industries with less than three venture observations was excluded.
Indicator Computation of indicator SUBJECTIVE Absolute performance Subjective performance in relation to plan Subjective performance dummy variable DtA 163 of 163 industries Differentiation of success limited to three response categories. GROWTH Sales growth Venture sales growth Average annual growth of venture sales DtA 135 of 163 industries Different years of venture foundation. Data source Availability Limitations
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VOLUME * (not applied as dependent variable) Sales Venture sales level Average annual venture sales DtA 156 of 163 industries Different years of venture foundation. Distortions by margin. Impact of industry conditions as minimum organization size, firm size, margin level. Employees Number of employees Average annual number of employees DtA 146 of 163 industries Different years of venture foundation. Impact of industry conditions as minimum organization size, firm size, employee productivity and labour intensity. PROFITABILITY Profit Venture profit level Average yearly venture profits DtA 152 of 163 industries Missing specification whether profits are before taxes. Potential manipulations of taxable profits by owner salaries. Different years of venture foundation. Time to break even Year of venture break even Year of foundation until first year of positive venture profit DtA 121 of 163 industries Only ventures founded between 1998 and 2001 considered. Different years of venture foundation.
Table 30: Operationalisation of dependent variables of venture success
5.3.2 Operationalisation of industry variables on the intra-industry level and barriers to entry The measures of venture success mentioned are investigated in relation to a number of industry variables that are located on the intra-industry level of the conceptual model.
175
MACRO LEVEL INTER-COUNTRY LEVEL INTER-INDUSTRY LEVEL INTRA-INDUSTRY LEVEL
OPPORTUNITIES IN GLOBAL & NATIONAL ENVIRONMENT NATIONAL COMPETITIVENESS OPPORTUNITIES & THREADS FROM RELATED INDUSTRIES MARKET & DEPENDENCIES & COMPETITORS
market structure (1) Market size (2) Economies of scale (3) Export balance (4) Distance to clients market
dynamics
(5) Market growth (6) Entries to industry (7) Exits from industry (8) Net entries (9) Uncertainty
depen -dencies
competitor dynamics
competitor structure (10) Concentration (11) Number of firms (12) Heterogeneity of industry members (13) Employee productivity (14) Gross margin (15) Average firm size
BARRIERS TO ENTRY
(16) Minimum organisational size (17) Investment intensity
RELATIVE POSITIONING TO COMPETITION
Figure 23: Investigated independent variables on the intra-industry level
The number of investigated variables was restricted by the availability of data. For the intra-industry dimensions of dependencies and competitor dynamics, no statistical data was available. 5.3.2.1 Operationalisation of variables of market structure
Market size Market size is operationalised by the turnover in 1,000 Euro per industry as defined by the industry classification segment. The turnover is derived from the average yearly turnover per industry of the value-added tax statistics. It has been mentioned in the methodology part that firms under one industry code do not necessarily represent aggregations of firms that offer similar goods from the demand-side perspective. Each industry code may include a variety of markets. Therefore, indicators based on absolute numbers per industry code have to be interpreted with caution and pose
176
important limitations. Nevertheless, the turnover on a 4-digit industry classification gives an indication of the size of the broader industry category.
2001
Market size:= Xi j
j =1998
X
4
turnover of all firms within an industry year
Economies of scale One of the most commonly used indicators of economies of scale is minimum efficient scale. Minimum efficient scale is defined as the average turnover of the largest firms that comprise 50% of the turnover of a given industry. The minimum efficient scale indicator has been estimated on the basis of data from the value-added tax statistics classified by groups of firm size. The statistics from the year 2000 has been applied, which was the latest year for which data with differentiation of groups of firm size was available. The value-added tax statistics differentiates the number of firms and turnover by twelve classes of firm size. The smallest class comprises firms with less than 50,000 Euro of turnover and the largest class firms with more than 250 million Euro of turnover. In order to define the minimum efficient scale, the size of individual firms within exactly one class of firm size had to be estimated for each industry. Assuming an even distribution of firms within the class of firm size, individual firms were distributed at a constant interval from the bottom of the class size to the top. Even though the assumption of evenly distributed firms within one class size may not be highly accurate, this will not generally greatly affect the resulting indicator of minimum efficient scale, as possible distortions from estimation of firm distribution is limited to exactly one class of firm size per industry. The number of largest firms that account for fifty percent of total turnover had to be calculated. As a first step, the size class variable z has to be derived for each industry from an iterative summation of the total turnovers per size class before 50% of the total industry turnover is reached, starting from the class of largest firms.

z
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Derivation of the last class of firm size z from
X
k =0
<
X 2
Once this last class of firm size has been identified, the 50% turnover is split in the following equation. In an iterative process, the number f of firms in the last class of firms has to be augmented until 50% turnover is reached.
X :2 Bz + 1 z Xi (B B z + 2 ) = X k + B z +1 f * z +1 2 k =0 N z +1 f =0
Once the number of firms f in the last class of firms is identified, the number of largest firms that accounts for 50% of turnover is calculated by the sum of firms in the highest firm classes until firm class z, plus the additional number of firms in the last class of firm size f.
z N i 50% X = N k + f k =0
Finally, the average turnover of these firms is calculated by dividing 50% of turnover by the above-calculated number of firms, which account for this 50% of turnover. MES:= Ni50%X Ni X k B f
0,5 * X i N i 50% X
number of largest firms in industry accounting for 50% of total turnover total number of firms in industry total turnover in 1,000 Euro class of firm size starting with 0 for size of largest firms bottom border of class of firm size in turnover per firm number of firms included from last class of firm
The program that was applied to calculate the minimum efficient scale indicator is given in appendix A. In 22 industries, the class of highest firm size already accounts for more than 50% of the industrys total turnover. In these cases, the MES is estimated by calculating the average size of firms in the class of highest firm size. Even though the estimate in these cases slightly underestimates the actual MES, the estimate seems to be legitimate, since the estimated value is generally much higher
178
than the average MES over all industries, reflecting the concentration of firms in the highest class of firm size. Export balance Data on foreign trade from the Federal Statistical Office in Germany is not available for a wide range of the industries that are investigated in this study. Therefore data on the extension of the sales market in the DtA survey is applied as a proxy indicator for export intensity. Within the DtA questionnaire, new ventures were asked whether their main sales market is regional, national, European or worldwide. The indicator is then calculated by the number of new ventures that indicate that their sales market is European or worldwide in relation to the total number of new ventures. Since new ventures engage in export activities to a lesser extent than larger, more mature firms, the absolute number of the proxy indicator is a poor estimate of the export intensity of a specific industry. For the purpose of a cross-industry comparison, however, this does not necessarily pose an important problem, as only relative numbers are compared. Moreover, a focus on the export activities of new ventures prevents the export activities of very large firms from leading to distortions. A weakness of the indicator is that the number of new ventures that indicated their overall sales market to be European or worldwide was relatively low, only about 5% of all ventures. Therefore, the indicator is sensitive on a small number of ventures with a European or worldwide sales market. Export balance:= Niex Ni
N iex Ni
number of new ventures that specified their main sales market as European or worldwide per industry total number of ventures per industry
Distance to clients The distance to clients is given by the same question on the extension of the sales market of the DtA survey. The four ordinal categories, regional, national, European and worldwide sales markets are converted into dummy variables from one to four.
179
Distance to clients:= d
d
Ni
dummy variable of distance to client of each venture measured in extension of sales market per industry
Ni
total number of ventures per industry
The operationalisation of the variables related to market structure are summarised in the table below.
Indicator Computation of indicator MARKET STRUCTURE (1) Market size (2) Economies of scale Taxable turnover Minimum efficient scale Not needed Average turnover of largest firms with 50% of industry code turnover New ventures with mainly European and worldwide sales market divided by total number of new ventures Sum of dummy variables of distance to client divided by total number of new ventures Value-added tax statistics Value-added tax statistics 163 of 163 industries 163 of 163 industries 4-digit industry code is a very broad market definition Small inaccuracies since distribution of firms within one size classification has to be estimated Relative low number of new ventures in export category Data source Availability Limitations
(3) Export balance
Extension of sales market of new ventures
DtA
163 of 163 industries
(4) Distance to clients
Distance to clients (dummy)
DtA
Data is limited on new ventures in DtA sample
Table 31: Operationalisation of market structure
5.3.2.2
Operationalisation of variables of market dynamics
Previous market growth Market growth is operationalised by the change of turnover from 1998 to 2001 based on the value-added tax statistics per industry. Markets are defined by the industry classification code. The inherent limitation of industry codes in representing markets has been discussed before. Since relative growth rates and not absolute numbers are applied, distortions resulting from the industry classification are not critical. Market growth:=
X i1998 X i2001
Xi1998 turnover of all firms in industry i in 1998 Xi2001 turnover of all firms in industry i in 2001
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Entries to industry The entries to an industry are measured on the basis of the ZEW indicator of firm foundation. In order to receive an indicator that serves for cross-industry analysis, the absolute numbers of firm foundation per industry from the ZEW data source have to be related to the absolute number of firms in the respective industry. First, the average absolute number of yearly firm foundations per industry from 1998 until 2001 is calculated from the ZEW data. Afterwards, this number of firm foundation per industry is related to the total number of firms in 1998 from the Creditreform database. As the ZEW data is also based on the Creditreform data and consists of similar firm populations (see chapter 5.1), the data of firm numbers from the Creditreform has been chosen instead of the data of firm numbers from the value-added tax statistics because the accuracy of the Creditreform data increases for past years. The 1998 data should include data of more than 80% of firm foundations in the same year. In general, the derivation of a time series based on absolute numbers of the Creditreform database is problematic, as the total number of firms in the database is influenced by the extent of data collection. The total number of firms in the Creditreform database has increased by over 22% for the time period of 1998 to 2001. For the same time period, the valueadded tax statistics indicates an increase in the number of firms of only 1.8%. Therefore, the Creditreform time series heavily overestimates growth rates on the basis of the absolute number of firms. For the ZEW data, the time series analysis is, however, applicable, as the corrections and estimates that were made by the ZEW correct the observed distortions related to the extent of data collection.
2001
Entry ratei:= Fi
j =1998
4 * N i1998
firm foundations in industry i
Ni1998 total number of firms in 1998 in industry i j year
Exits from industry Exits from an industry are measured according to the insolvency industry risk indicator, which is calculated as the average yearly relationship between bankruptcies and total number of firms for the years 1998 to 2001 on the basis of the Creditreform
181
data. Even though the Creditreform database applies a very broad definition of bankruptcy, bankruptcies comprise just a part of total firm exits, as discussed in chapter 5.1. Nevertheless, the exit of small firms may be slightly underrepresented and there could be distortions as insolvencies could increase with the investment intensity of an industry. Overall, the Creditreform bankruptcy indicator appears very adequate for a cross-industry analysis, since firm exits due to reasons other than financial performance are excluded.
Ii j =1998 N i Insolvency rate:= 4
2001
Ii Ni j
bankruptcies in industry i total number of firms in industry i year
Balance of entries and exits (net entries) Due to the discussed deficits of the Creditreform data with regard to inter-temporal analysis and the fact that insolvencies do not cover all firm exits, the value-added statistics is considered a more appropriate source for the operationalisation of net entries. Net entries are calculated as the division of the number of firms in 2001 by the number of firms in 1998. Net entries:= N
N 2001 N 1998
total number of firms per industry
Degree of uncertainty about future development The level of uncertainty is measured on the basis of an item in the DtA survey. Firms were asked whether they considered venture performance had gone according to plan, better than plan or worse than plan. Even though this indicator provides only little differentiation and is limited to the new venture perspective, the comparison of previous plans with actual performance may offer a good reflection on how far the development of the market and the development of individual firm performance can be
182
planned within a market. It can be assumed that all ventures had to provide a financial plan within the funding process. Uncertainty:= n+ nN
n+ + n N
number of ventures that performed better than plan number of ventures that performed worse than plan total number of ventures
Operationalisation of variables regarding the dimension of market dynamics are summarised in the table below:
Indicator Computation of indicator MARKET DYAMICS (5) Previous market growth (6) Entries to industry Growth in turnover per industry Entry rate Turnover in 2001 divided by turnover in 2001 Average number of annual firm foundations from 1998 to 2001 divided by total number of firms Average annual number of insolvencies from 1998-2001 related to total number of firms Number of firms in 2001 divided by number of firms in 1998 Sum of share of ventures that performed better than plan plus share of ventures that performed less well than plan Value-added tax statistics ZEW & Creditreform 163 of 163 industries 150 of 163 industries Application of two data sources Data source Availability Limitations
(7) Exits from industry
Insolvency rate
Creditreform
The term insolvency does not cover all exits
(8) Balance of entries and exits (net entries) (9) Degree of uncertainty about future
Net entries
Value added tax statistics DtA
Deviation of venture performance from plan
Data is limited to the number of ventures in the DtA sample
Table 32: Operationalisation of market dynamics
5.3.2.3
Operationalisation of variables of competitor structure
Concentration The Monopolkommission data on industry concentration provides a variety of indicators of industry concentration. Among these are the Herfindahl index, the coefficient of variation and the market share of the top 3, top 6, top 10, top 25, top 50 and top 100 firms in each industry. There is a strong correlation among all mentioned concentration indicators. In the end, the Herfindahl index was chosen as the most appropriate indicator, since it gives more weight to larger firms, reflecting more accurately those industries that are dominated by one firm or a small group of firms.
183
These cases of extreme industry concentration are most likely to have a strong impact on the level of competition. The Herfindahl index is also used by the US Anti Trust Department to decide the competitive impact of mergers. The Herfindahl index is defined as the sum of the squares of the market shares of each individual firm. As such, it can range from 0 in an industry with a very large amount of small firms to 10,000 in an industry with a single monopolistic producer. The Department of Justice considers Herfindahl indices between 1,000 and 1,800 moderately concentrated and indices above 1,800 concentrated.
n Xi HI := i =1 X 2
n Xi X
number of firms in industry turnover of firm i sum of turnover of all firms in industry X:=
(X
i =n
Number of industry members Several of the applied data sources provide data on the number of firms per industry classification code. The value-added tax statistics is chosen as the most appropriate source, since the data is based on the overall population and not only on a sample. Moreover, there are only little inter-temporal distortions. Similar to the variable of market size, it must be noted that absolute numbers per industry classification code imply weaknesses, as the 4-digit industry classification is a very broad aggregation criteria and firms may not necessarily offer close substitute products. Number of industry members:= N i Heterogeneity of industry members In order to derive indicators of the heterogeneity of firms within one industry, the data of individual firms has to be consulted. The DtA data source provides performance indicators on the level of individual firms. When grouping this information by industry code, the indicators for venture heterogeneity in terms of profitability, sales growth and sales per industry can be derived.
184
First, intra-industry standard deviation of venture gross margins is applied as an indicator of the profitability heterogeneity of industry members. Second, intra-industry standard deviation of venture sales growth is applied as an indicator of growth heterogeneity among industry members. Third, intra-industry standard deviation of the venture sales level is applied as an indicator of size heterogeneity among industry members. For all indicators it is important to note that data is only based on new ventures and not on all firms within one industry. Therefore, over all industries the absolute extent of heterogeneity may be underestimated since new ventures as a group may have more commonalities than all the firms within one industry. Since it may be assumed that this underestimation occurs for all industries, this problem may be less critical for the undertaken cross-industry comparison. Moreover the data is based on a limited sample of new ventures within one industry. In order to minimise the impact of outliers and to increase the validity of the indicator, several corrections have been made. Sales of the first year of operation have not been considered for calculation of the sales and sales growth indicators. For all three indicators those industries have been eliminated where data of less than three firms was available for the calculation of the indicator. Standard deviation of venture profitability per industry with venture profitability calculated as follows:
2001
Venture profitability:=
j =1998
p x
Standard deviation of venture growth per industry with venture growth calculated as follows:
2001 ( x j +1 x j ) j =1998 Venture growth:= t 1
Standard deviation of venture sales level per industry with venture sales level calculated as follows:
2001
Venture sales level:=
j =1998
(x
t
185
p x j t
venture profit excluding year of foundation venture turnover excluding year of foundation year number of years for which data on venture turnover is available
Employee productivity level Employee productivity can be computed directly from the data on employees and sales in 1,000 Euro, as given in the Monopolkommission data source. The data refers to the year 2000 and is based on large samples of the federal statistics. Since employee productivity does not vary greatly among different years, the application of solely data of the year 2000 seems legitimate. Employee productivity:= E X
Ei Xi
total number of employees in industry i total number of turnover in industry i
Gross margin The gross margin level of the industry is estimated from the DtA data on profit and turnover. It must be noted that new ventures frequently have lower profits than established firms in the same industry in their early years. Therefore, the gross margin indicator is derived solely from the ventures own forecasts of profit and turnover in the year 2001 as the last available year. For the gross margin indicator the same limitations apply that have been mentioned before regarding the profit indicator of the DtA sample. Distortions may occur due to the impact of taxes and owners salaries. Gross margin per venture:=
p 2001 x 2001
p2001 profit of venture in 2001 x2001 turnover of venture in 2001 The gross margins per venture are finally aggregated on the industry level by calculating an unweighted average of the venture values. In those cases where a
186
minimum of three venture values per industry is not given, the indicator is excluded from the respective industry in order to minimise firm-specific distortions. Average size of industry members The average size of industry members can be calculated easily and accurately from data on turnover in 1,000 Euro and the number of firms in a given industry from the value-added tax statistics of the year 2000. Average size of industry members:= Xi Ni
Xi Ni
total turnover in 1,000 Euro of all firms in industry i total number of firms in industry i
In the following table the operationalisations of variables regarding competitor structure are summarised.
Indicator Computation of indicator COMPETITOR STRUCTURE (10) Concentration (11) Number of industry members Herfindahl index Firms per 4-digit industry code Sum of squares of market shares of all firms Monopolkommission Value-added tax statistics 99 of 163 industries 163 of 163 industries Large number of missing industries Absolute numbers per industry codes are sensitive to fact that firms within one industry code are not necessarily competitors Heterogeneity of ventures and not all firms is measured. Data is limited to the number of ventures in the DtA sample Data source Availability Limitation
(12) Heterogeneity of industry members
a) Standard deviation of intra-industry venture profitability b) Standard deviation of intra- industry venture growth c) Standard deviation of intra- industry sales level
a) Standard deviation of sum of profits 1998 to 2001 divided by sum of turnover 1998 to 2001 b)Standard deviation of average annual turnover growth 1998 to 2001 c) Standard deviation of average annual sales level 1998 to 2001 Turnover divided by number of employees in 2000 Average turnover in 2001 divided by average profit in 2001 Total industry turnover divided by number of firms in industry
DtA
a) 150 of 163 industries b) 135 of 163 industries c) 155 of 163 industries
(13) Employee productivity level (14) Gross margin
Turnover per employee Profit per venture turnover Average turnover of firm
Monopolkommission DtA
99 of 163 industries 135 of 163 industries
Large number of missing industries Possible distortions of profit by owner salaries and impact of taxes -
(15) Average size of industry members
Value-added tax statistics
Table 33: Operationalisation of competitor structure
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5.3.2.4
Operationalisation of variables of barriers to entry
Minimum organisational size Data on the minimum organisational size is measured on the basis of the number of employees on startup. The DtA data allows the calculation of the number of employees at the end of the year of foundation.
Number of employees on startup:= es n
e
i =1
number of employees, including the owner, in year of startup number of ventures in industry
Investment intensity Investment intensity can be calculated directly from the Monopolkommission data on investment and turnover. The industry investment intensity can be calculated as follows: Investment intensity:= Ii Xi
Ii Xi
total investments of all firms in industry i total turnover of all firms in industry i
The key profile of the two operationalised variables related to barriers to entry is shown below.
Indicator Computation of indicator BARRIERS TO ENTRY (16) Minimum organisational size (17) Investment intensity Employees in year of start up Investment rate Sum of number of employees on startup divided by number of ventures Investments per industry divided by turnover per industry DtA 155 of 163 industries Data is limited to the number of ventures in the DtA sample Large number of missing industries Data source Availability Limitations
Monopolkommission
Table 34: Operationalisation of barriers to entry
5.3.2.5
Operationalisation of additional control variables
In the correlation analysis four additional control variables are analysed. All four control variables are characteristics of the sample derived from the DtA data, which
188
may represent potential sources of distortions in both dependent and independent variables. Number of ventures per industry in sample It is important to consider the number of ventures per industry in the sample, as industry aggregates based on a small number of firms are more sensitive to outliers. The number of ventures per industry has been automatically generated within the aggregation of the ventures into industries, by counting the number of ventures for each industry aggregate generated. Average age of ventures in sample It is important to consider the age of ventures per industry in the sample, as it might be assumed that ventures achieve higher percentages growth rates more easily in early years. In fact, however, the profit level may be lower for young ventures, as they operate on a lower sales level and have to cover initial startup costs. The average venture age is calculated as the average of the difference between the last reported year of 2001 and the year of foundation for all ventures in the respective industry.
Venture age:= f n
(2001 f )
i =1
year of venture foundation number of ventures in industry
Average number of employees per venture in sample Venture size can be assessed by looking at the average number of employees per industry. Variables may be distorted with regard to size in terms of the ventures number of employees. The number of employees per venture is calculated as the average of the number of employees throughout the years for which data is reported for all ventures in the respective industry.
2001 n
Venture number of employees:=
(
i =1
j =1998
e
a n )
189
e a n
number of employees in year j number of years for which data on employees is available number of ventures in industry
Average sales per venture in sample The average sales of ventures per industry is applied as another indicator of venture size. Variables may be distorted with regard to the ventures sales level in the sample. Average venture sales are calculated as the average of sales in Euros throughout the years for which data is reported for all ventures in the respective industry.
2001 n
Venture sales:= x a
(
i =1
j =1998
x
a n )
venture sales in year j (excluding year of foundation) number of years for which data on sales is available (excluding year of foundation)
number of ventures in industry
Indicator
Computation of indicator
Data source
Availability
Limitations
CONTROL VARIABLES (C1) Number of ventures per industry (C2) Age of venture (C3) Employees per venture Number of ventures per industry Average venture age Average number of employees of venture Average venture sales Not needed Sum of venture age divided by number of ventures Sum of average number of employees divided by number of ventures Sum of average sales excluding year of foundation divided by number of ventures DtA DtA DtA 163 of 163 industries 163 of 163 industries 145 of 163 industries Not applicable Not applicable Not applicable
(C4) Sales per venture
DtA
Not applicable
Table 35: Operationalisation of control variables
There are no important limitations of the control variables with regard to their purpose of measuring the sensitivity of other variables to possible sources of distortions.
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5.4
Characteristics and performance of new venture activity based
on the DtA sample

Within this chapter, a descriptive analysis is performed for the sample of new ventures that has resulted from the sampling process196. The sample includes 5,117 new ventures in 163 industries. First, the non-aggregated sample of ventures is described, addressing the structural characteristics of ventures, means of venture success variables and finally intertemporal developments of success measures for relevant venture sub-samples. Second, the data on the 5,117 ventures of the sample is aggregated on an industry level and structural characteristics of industries and their means of success measures are described, which leads to the presentation of industries according to various success measures. 5.4.1 Sample description on venture level The DtA sample offers the rare opportunity to get financial information on a large number of over 5,000 new ventures in Germany. The applied dataset of the 2001 survey is the only recent DtA dataset which collects data on the development of new venture financial profit over time. Even though taking into consideration potential distortions in the selection process of ventures which have been discussed in the methodology part, the DtA sample reflects a great part of new venture activity in Germany. Therefore the following descriptive analysis may provide unique insights into the volume distribution, evolution processes, and performance of new venture activity in Germany. The descriptive analysis concentrates especially on performance measures and financials of ventures which are otherwise not available from any public source. 5.4.1.1 Structure
Year of foundation The range of years of foundation has been limited to the time span of 1995 to 2001. About 60% of the ventures in the sample were founded in the years 1999 and 2000, the
196
See chapter 4.2.2, p.136f.
191
two years prior to the date of the survey. The mean age of the ventures is 3.4 years at the time of the survey, which corresponds to a date of foundation between 1998 and 1999.
2000
1658
1500
1379
frequency
1000
835 609
500
323 179 134
1995
1996
1997
1998
1999
2000
2001
ye ar of founda tion
n=5117
Figure 24: Years of foundation of ventures in sample
Size of ventures at startup by number of employees For the majority of the ventures founded between the years 1998 and 2001, it has been possible to derive the number of taxable employees at the year of foundation, as is shown in the following table.
Cumulative Frequency no employees 1 employee 2-3 employees 3-4 employees 5-9 employees 10-19 employees 20-49 employees 50-99 employees 100-199 employees Total Missing Total 1555 802 505 548 367 133 68 9 4 3991 1126 5117 Percent 30.4 15.7 9.9 10.7 7.2 2.6 1.3 .2 .1 78.0 22.0 100.0 Valid Percent 39.0 20.1 12.7 13.7 9.2 3.3 1.7 .2 .1 100.0 Percent 39.0 59.1 71.7 85.4 94.6 98.0 99.7 99.9 100.0
Table 36: Venture size in employees at year of start up
192
Ventures of the sample started with a mean of 1.5 employees. It is notable that a large share of 39% started their business without any taxable employees. Less than 15% of all ventures started with more than four employees. Venture sales volume The distribution of sales is analysed on the basis of the average sales volume per venture. The years 1998 until 2001 are considered as far as data has been provided. Sales within the year of foundation have not been included for the calculation of the average sales volume, as sales within the year of foundation do not cover a complete calendar year.
Valid Sales in 1,000 Euro <10 10< &=>50 50< &=>100 100< &=>250 250< &=>500 500< &=>1,000 1,000< &=>2,500 >2,500 Total Missing Total Frequency 53 532 770 1347 818 509 273 145 4,447 670 5,117 Percent 1.0 10.4 15.0 26.3 16.0 9.9 5.3 2.8 86.9 13.1 100.0 Percent 1.2 12.0 17.3 30.3 18.4 11.4 6.1 3.3 100.0 Cumulative Percent 1.2 13.2 30.5 60.8 79.2 90.6 96.7 100.0
Table 37: Distribution of average venture size in average ventures sales in 1,000 Euro
The average venture sales level is 533,000 Euro with a median of 179,000 Euro. Two thirds of all ventures had an average sales volume in the range of 50,000 Euro to 500,000 Euro. On the upper edge only about 20% of all ventures reached more than 500,000 Euro in average sales. Industry sectors The following figure shows the distribution of the ventures in the sample among four broad industry sectors. The division has been made based on the NACE industry classification. All industries within NACE codes below 4,000 are aggregated to the category of the manufacturing sector. NACE codes from 4,000 to 4,999 are aggregated
193
to the construction category. NACE codes from 5,000 to 5,499 are aggregated to the retail sector and finally NACE codes of 5,500 and higher are aggregated to the service sector. The majority of the sample belongs to the service sector, accounting for 2,677 ventures. Both sectors, service and trade account for over 78% of all ventures. The manufacturing sector, which has been frequently investigated in previous research, accounts for a mere 8.2% share of all ventures in the sample.
manuf acturing 8,2% construction 13,4%
serv ices 52,3% trade 26,1%
Table 38: Distribution of ventures among four major industry sectors
5.4.1.2
Success measures
The key characteristics of the applied venture success measures are summarised in the table below.
dep subjective N Valid Missing Mean Median Std. Deviation Range 5049 68 .00 .00 .71 2 dep growth 2920 2201 1.26 1.10 1.22 50.00
dep profit average 3883 1234 30.11 22.39 223.29 14.452.53
dep years to break even 2663 2454 1.55 1.00 .69 3
194
Minimum Maximum
-1 1
.00 50.00
-12.982.54 1.469.99
1 4
Table 39: Summarising descriptive analysis of success measures
In the following paragraphs each success measure is treated independently. Subjective evaluation of performance relative to plan The measure of subjective venture performance (dep subjective) is available for 99% of all of the ventures in the sample.
Valid Subjective performance evaluation Valid -1 (performance below plan) 0 (performance according plan) 1 (performance over plan) Total Missing Total Frequency 1261 2534 1254 5049 68 5117 Percent 24.6 49.5 24.5 98.7 1.3 100.0 percent 25.0 50.2 24.8 100.0 Cumulative percent 25.0 75.2 100.0
Table 40: Frequency table of subjective performance measure
As shown in the above table, the value is normally distributed with about 25% of all respondents performing less well than plan, 25% of all respondents performing better than plan and 50% of all respondents performing according to plan.
0,08 0,06 0,04 subjective 0,02 0 performance -0,02 -0,04 -0,06 0,08 0,05 0,01 -0,01 -0,03 -0,05 -0,05 1995 1997 (N=177) (N=322) 1999 (N=1365) 2001 (N=119) (N=5085)
year of venture foundation
Figure 25: Average subjective performance measure by years of venture foundation
Overall, the mean of the subjective performance measure fluctuates very little among different years of venture foundation. There is a small tendency of a more negative subjective performance with increasing venture age. This is astonishing as ventures in
195
their early years are generally expected to face more serious problems in the development of their activity and generate lower profits. Apparently, however, this does not affect subjective performance evaluations or it may be outweighed by low expectations for the first years after venture foundation and disappointment of managers of older ventures about decreasing growth dynamics with increasing venture age. It is important to stress that the above figure does represent in each category of year of venture foundation different ventures and does not provide information about the performance of the same ventures over time. The item of subjective performance was just evaluated once at the time of filling out the questionnaire. Sales growth The measure of venture sales growth (dep growth) is available for only 57% of all ventures in the sample. The operationalisation of the measure requires that sales of a minimum of two years have to be available. At the same time the sales data for the year of foundation has been excluded since it did not represent a full calendar year. This leads to the exclusion of 1,792 ventures which have been founded in the years 2000 or 2001. An additional 408 ventures have to be excluded since data on sales has been missing.
Cumulative Sales growth rate Valid <1 1 1< &=>1.05 1.05 < &=>1.10 1.10< &=>1.20 1.20< &=>1.40 1.40< &=>1.60 1.60< &=>2.50 2.50< &=>5.00 >5.00 Total Missing Total Frequency 487 175 393 379 534 486 203 198 37 25 2917 2200 5117 Percent 9.5 3.4 7.7 7.4 10.4 9.5 4.0 3.9 .7 .5 57.0 43.0 100.0 Valid percent 16.7 6.0 13.5 13.0 18.3 16.7 7.0 6.8 1.3 .9 100.0 percent 16.7 22.7 36.2 49.2 67.5 84.1 91.1 97.9 99.1 100.0
Table 41: Frequency table of venture sales growth
196
The average venture growth among all ventures in the sample is 26% in annual sales. As can be seen in the table above, a 16.7% share of all respondents reported a negative average growth. Another 6% of respondents reported that their ventures stagnated at an average for the reported period of time. The remaining 73.3% reported increases in their average sales with 8.9% of all ventures reaching an average sales growth of more than 60%.
1,4 1,35 1,3 venture growth 1,25 1,2 in sales 1,15 1,1 1,05 1,37 1,28 1,16 1,18 1,18
1995 (N=166)
1997 (N=305)
1999 (N=1134) N=2916
Figure 26: Average venture growth in sales measure, by years of venture foundation
The measure of venture sale growth varies greatly among groups of different years of venture foundation. The above figure suggests that the sales growth level decreases with venture age. In the following chapter 5.4.1.3 the inter-temporal development is investigated in more depth for a sub-sample of ventures. Profit level The measure of profit level (dep profit average) is available for 76% of all ventures in the sample. It has also been decided to exclude data on venture profit for the year of foundation. Consequently, 139 ventures, which were founded in 2001 are automatically excluded. Another 1,095 ventures did not provide applicable information on profits. Considering the reluctance of small business owners to reveal information on profits, the response rate to this item is surprisingly high.
Valid Profits in 1,000 Euro Valid < -100 -100<= & >-50 -50<= & >-25 -25<= & >-12.5 -12.5<= & >0 Frequency 22 38 66 112 409 Percent .4 .7 1.3 2.2 8.0 percent .6 1.0 1.7 2.9 10.5 Cumulative percent .6 1.5 3.2 6.1 16.7
197
0<= & >12.5 12.5<= & >25 25<= & >50 50<= & >100 >=100 Total Missing Total
748 797 903 548 240 3883 1234 5117
14.6 15.6 17.6 10.7 4.7 75.9 24.1 100.0
19.3 20.5 23.3 14.1 6.2 100.0
35.9 56.5 79.7 93.8 100.0
Table 42: Frequency table of average venture profits in 1,000 Euro
The average venture achieved a profit level of about 30,000 Euro. As seen in the above table, a share of 16.7% of all respondents reported a negative average level of profits from 1998 to 2001. Of the remaining 83.3% of ventures with positive profits, 20.3% achieved profits of over 50,000 Euro.
50 40 venture profit in 30 1,000 Euro 20 10 0 1995 (N=155) 1997 (N=289) 1999 (N=1116) N=3883
40 21
33
40 26 31
Figure 27: Average venture profit (in 1,000 Euro) by years of venture foundation
There is no clear recognisable pattern regarding the distribution of average profits among groups of different age of venture foundation. It has been the intention within the research design to minimise the effect of venture age on profits by using the average profit numbers from the years 1998 to 2001. The inter-temporal effect of profits in individual years is investigated in the next chapter 5.4.1.3 for a sub-sample of ventures. Break even (first year of break even) For 63% of all ventures data is available that specifies whether or not they were able to break even before the year 2001. For 2,663 ventures, equaling 52% of all ventures in the sample, information on the actual year of break-even is available. The break-even measure can only be calculated for ventures that were founded between 1998 and 2001
198
since no information on profits was available for previous years. Therefore, 1,111 ventures, which were founded between 1995 and 1997, are not considered. A share of 11% of the overall sample, corresponding to 499 ventures, did not manage to break even until the year 2001. Of the remaining ventures, 844 did not provide any information about their profits. Taking into account that only ventures founded between 1998 and 2001 are considered, the share of 16% of all valid respondents that did not break even until 2001 appears very low.
Cumulative Year of break-even Valid 1 2 3 4 Subtotal No Break even Total Missing Total 3162 1955 5117 63.0 37.0 5117 100.0 499 11.0 15.8 100.0 Frequency 1470 947 218 28 2663 Percent 28.7 18.5 4.3 .5 Valid percent 46.5 29.9 6.9 0.9 percent 46.5 76.4 83.3 84.2 -
Table 43: Frequency table of years to break even success measure
Apart from the low share of ventures that did not break even until 2001, the average time period that is needed to break even appears very short. After an average of 1.55 years the ventures of the sample reached break-even. According to the above table, 46.5% of the ventures had already reached break-even within the year of foundation, and 76.4% reached break-even at the end of the year after their foundation.
199
2 1,5 years to break even 1 0,5 0
1,7
1,72 1,32 1
1998 (N=646)
1999 (N=958)
2000 (N=996)
2001 (N=63) N=2663
Figure 28: Average years needed to break even by years of venture foundation
Splitting the mean of years to break even into groups of ventures with the same year of foundation, the duration of time to break even seems to stabilise for the ventures founded in 1998 and 1999 at about 1.7 years, as indicated in the above figure. For the group of ventures founded in 2001, the value has to be 1 since the year of their foundation is also the last year for which data was reported.
25 20 % of ventures 15 without break10 even 5 0 16 7 23 20
1998 (N=52)
1999 (N=184)
2000 (N=244)
2001 (N=19) N=672
Figure 29: Average share of ventures in % without breaking even until 2001 by years of venture foundation
The distribution of shares of ventures that did not break even contrasts with the development of the years to break even. Of the firms that were founded in 1998, only a 7% share did not break even until their fourth year of operation, in 2001 (see figure above). It can be assumed that unsuccessful older ventures that closed down before 2001 did not respond to the questionnaire, which may have led to an underrepresentation of unsuccessful older ventures in the sample. However, even for the group of ventures that was founded in 2001, only 23% of ventures did not break even in their year of foundation. Comparing this value with the average time-to-break even among all ventures, the group of ventures founded in 2001 broke even much faster.
200
Overall, the relatively little time needed for the ventures of this sample to break even may result from the low level of investment intensity, the relatively small venture size and the large share of firms in the service sector. 5.4.1.3 Inter-temporal development of success measures for sub-samples
For the described success measures of venture sales growth, venture employee growth and venture profit, data is available for each individual year from 1998 to 2001. It is of particular interest to look at the inter-temporal developments of these measures as they can give valuable information on the evolution patterns and growth dynamics of new ventures. Time series can not be analysed in the context of the venture level since different ventures are included in each year. For the data on the year 1998, only those 1,946 ventures that were founded in 1998 or before can provide information . For the data on the year 2001, however, all 5,117 ventures can provide applicable information. In order to ensure inter-temporal comparability, sub-samples of ventures have to be generated for each individual success measure. Sales growth The sub-sample of ventures for the investigation of venture sales growth consists only of those 913 ventures for which information on sales was given for each year from 1998 to 2001. Ventures founded in 1998 have been excluded, since the indicated sales number can not be expected to represent a full calendar year and can therefore not be applied for inter-temporal analysis. Consequently, only ventures that were founded between 1995 and 1997 are considered. These ventures had been operating at the beginning of 1998 for an average of about 1.7 years.
201
1750
1500
1250
sales in 1000 Euro
1000
750
500
250
0
N= 913 913 913 913
1998
1999
2000
2001
Figure 30: Development of venture sales 1998-2001
The above figure shows the interquartil boxplots without outliers, indicating the median with a horizontal line in the box. The median of sales increases by 30% from 256,000 Euro in 1998 to 332,000 Euro in 2001. From 1998 to 2001, the level of sales increased by 46 % from an annual mean of 647,000 Euro in 1998 to a mean of 950,000 Euro in 2001. As can be observed, venture growth dynamics decrease with higher venture age. The annual growth rate of the sales mean decreases from 22% during 1999 as the second full calendar year of operation for the average venture in the sample, to 16% during 2000 as the third full calendar year of operation and to only 4% during 2001 as the fourth full calendar year of operation.
25 20 annual sales 15 growth in 10 percent 5 0 year 2 (19981999) year 3 (19992000) 22 16
year 4 (20002001)
N=913
Figure 31: Sales growth of ventures in percent for years of operation
The development in number of employees per year is only meaningful for ventures where data for 1998-2001 is available.
202
45 40 35 30 25 20 15 10 5 0 1999 2000 2001
annual growth of venture sales in %
ventures founded in
1995 (N=151) 1996 (N=491) 1997 (N=271)
Figure 32: Annual growth of number of employees by year of venture foundation
Comparing the growth rate of ventures of different years of foundation reflects the assumption that ventures grow more rapidly in their early years. For all ventures, however, the rate of sales growth drops significantly in the year 2001. In order to estimate the impact of macro-economic factors on the development of the venture growth rates, the value-added tax statistics gives information about the development of sales and rates of sales growth for the whole German economy.
3,5 3,5 3 2,5 annual sales growth 2 in % Germany 1,5 1 0,5 0 3
1,4
1998-1999
1999-2000
2000-2001 N > 2.9 million
Figure 33: Annual growth in taxable sales for Germany from the value-added tax statistics
The ventures of the sub-sample increased their level of sales at growth rates that were a multiple of the growth rate of the overall economy. At the same time, growth rates of ventures follow the pattern of the overall economy and are highly sensitive to changes in the growth dynamics of the overall economy. The data suggests that apart from macro-economic factors, growth rates are highest in the first years after foundation and decrease over the years in operation.
203
Growth in number of employees Corresponding to the description of venture sales, only those ventures where data on the number of employees is given for each year from 1998 to 2001 are considered for deriving information on the employee growth rate. Data from ventures founded in 1998 could also be applied, thereby including another 1,939 ventures, which lead to a more comprehensive sub-sample than the sub-sample for venture sales growth. Ventures in the sub-sample were founded between 1995 and 1998. A 43% share of these ventures was founded in 1998, the first year of data reporting.
12 11 10 9
number of employees
8 7 6 5 4 3 2 1 0
N= 1939 1939 1939 1939
1998
1999
2000
2001
Figure 34: Development of the number of employees 1998-2001
After eliminating outlying values, the above interquartil boxplots indicate that the median increases from 2 employees in 1998 to 3 employees in 2001. For the same time span the mean number of employees increases by 38% within the three years, from 3.87 employees in 1998 to 5.46 employees in 2001.
204
25 20 annual employee 15 growth in percent 10 5 0
21 15
2 1998-1999 1999-2000 2000-2001
N=1939
Figure 35: Annual employee growth rates1998-2001 in percent
The annual growth rate of the mean number of employees decreases from 21% annual growth during 1999, as the first full calendar year of operation for the average venture in the sample, to 15% annual growth during 2000 as the second full calendar year of operation. Later the figure stagnates at only 2% annual growth during 2001 as the third full calendar year of operation. The figure shows that the growth rates in number of employees are nearly identical to the growth rates in sales. In comparison with the growth rate for ventures of different years of foundation, the impact of the year of venture foundation is not as strong as it was for sales growth. However, there is a trend for ventures with a more recent date of foundation to achieve higher employee growth rates.
35
30
annual growth of employees in %
25
20
15
ventures founded in
1995 (N=177) 1996 (N=606)
10
1997 (N=321) 1998 (N=835) 1999-2000 2000-2001
0 1998-1999
Figure 36: Annual growth of number of employees by year of venture foundation
205
Profit level Corresponding to the description of venture sales, only those ventures where data on the number of employees is given for each year from 1998 to 2001, corrected by the year of venture foundation, were considered for deriving information on the profit growth, . Since profit data was less frequently provided in the questionnaire, the subsample for the description of the profit development contains only 767 ventures. Ventures in the sub-sample were founded between 1995 and 1997.
150
100
profit in 1000 EURO
50
-50
-100
N= 767 767 767 767
1998
1999
2000
2001
Figure 37: Development of the venture profits 1998-2001
After eliminating outlying values, the above interquartil boxplots indicate that the median increases by 46%, from 24,500 Euro in 1998 to 35,800 Euro in 2001. For the same time span, the mean venture profit of the sub-sample increases by 830%in three years, from 7,300 Euro in 1998 to 60,620 Euro in 2001. For illustrating the development of profits, they have been related to the development of sales for the same time period.
206
100 80 60 40 20 0 7 1998 9 1999 60 43 74
87 61
89
mean profit in 1,000 Euro mean sales in 10,000 Euro
2000
2001
Figure 38: Mean of venture profits compared with sales
In comparison, sales of the ventures in the sub-sample increase steadily at a rate of only 33%, from 600,000 Euro in 1998 to 800,000 Euro in 2001. The large increase of profits from the year 1999 to the year 2000 is striking, and will be investigated in more detail by looking at the developments between ventures of different years of foundation.
80 70 60 50
Average venture profit in 1000 Euro
40 30 20 10 0 -10 -20 1998 1999 2000 2001
ventures founded in
1995 (N=121) 1996 (N=423) 1997 (N=223)
Figure 39: Development of average venture profits by year of venture foundation
While the increase in venture profits is extraordinarily linear for ventures founded in 1995 and 1997, the average for ventures founded in 1996 remains negative for both 1998 and 1999, increasing afterwards much more rapidly to the highest level of profits in 2001. The annual growth rate remains relatively stable for the first two years among those ventures founded in 1995 and 1997, at about 15% annual growth for ventures founded in 1995 and 33% annual growth for those founded in 1997. The growth pattern of
207
ventures founded in 1996 is different. These ventures show increasing losses for the first years and then making an exceptional recovery in the last year. No value can be calculated for the growth rate from 1999 to 2000 for ventures founded in 1996. Venture profits increase within this year from a negative level of 14,000 Euro to a positive level of 30,000 Euro. Due to this missing value the development of profit growth is presented in a bar diagram instead of a line diagram.
80 60 40 20 0 -20 -40 -27 1998-1999 1999-2000 16 32 14 33
68 ventures founded in 1995 (N=121) ventures founded in 1996 ((N=423) ventures founded in 1997 (N=223) 2000-2001
20 1
Figure 40: Annual venture profits in 1000 Euro 1998-2001
It must be assumed that new venture performance measures are also affected by the development of the overall macro-economic environment. Within the 1998 to 2001 time span, the growth rate of the overall economy slowed down, which may have reinforced the decline in growth development. For the same time span, there are clear indications of an evolutionary pattern of a strong growth dynamics for new ventures during the first three years of operation accompanied by a very low profit level. After the first three years of operation, venture sales volume stabilised and the level of profits greatly increased, since startup investments and investments in further growth decreased. Also the larger size may have led to a better profit structure after the first three years of operation. 5.4.2 Sample description on aggregated industry level In the following chapter, the perspective is changed from the venture as unit of analysis to the industry as unit of analysis. The data sets of the 5,117 individual ventures are aggregated by industry codes into 163 industries. The structure of this aggregated industry data set will be revealed and the industries in which new ventures have been particularly successful will be identified.
208
5.4.2.1 Sector
Structure
The shares of the service, trade and manufacturing sectors are more evenly distributed on the aggregated industry level than on the venture level.
services 36,8%
manufacturing 25,8%
construction 9,2%
trade 28,2%
Figure 41: Distribution of industries among four major industry sectors
The service sector, which represented over half of all ventures in the sample, also comprises the largest share of all industries, with 36.8%. The 28% share of trade sector industries corresponds to a 26% share of ventures. Industries in manufacturing are over-represented with over 25%, while manufacturing counted for only 8% of all ventures in the sample. The smallest sector on the industry level is construction, with a 9.2% share of industries accounting for 13% of all ventures in the sample. On average, each industry contained data of about 31 ventures. According to the industry sector, the average number of ventures per industry is 45 in the service sector, 29 in the trade sector, 46 in the construction sector and only 10 in the manufacturing sector. Start-up activity per industry Since the industry code was not applied as sampling criteria within the process of data collection, the sample reflects the industry distribution of all ventures that have been funded by the DtA. The following table ranks startup activity per industry based on the sample applied in the study.
209
Rank 1 2 3 4 5 6 7 8 9 10 11
NACE code
Industry
# ventures 333 315 258 236 195 190 158 151 151 125 119
8512 Medical practice activities 8514 Other human health activities 5248 Other retail sale in specialised stores 9305 Other service activities n.e.c. 9302 Hairdressing and other beauty treatments 7484 Other business activities n.e.c. 4545 Other building completion 5530 Restaurants 8513 Dental practice activities 7411 Legal activities 7420 Architectural and engineering activities and related technical consultancy
12 13 14 15 16 17 18 19
4533 Plumbing 5020 Maintenance and repair of motor vehicles 4534 Other building installation 5212 Other retail sale in non-specialised stores 5231 Chemists 4531 Installation of electrical wiring and fittings 5241 Retail sale of textiles 7412 Accounting, book-keeping and auditing activities; tax consultancy
109 103 98 90 77 75 73 73
20
5227 Other retail sale of food, beverages and tobacco in specialised stores
67
21 22 23
4542 Carpentry 5511 Hotels and motels, with restaurant 5244 Retail sale of furniture, lighting equipment and household articles
66 62 60
24
5211 Retail sale in non-specialised stores of food, beverages or tobacco
57
25
7414 Business and management consultancy activities
57
Table 44: Top 25 industries with most business startups in Germany according to the DtA sample
210
Among the 25 industries with most venture startups in the sample, there are four large groups of industries. First, there are the professional industries such as doctors, lawyers, architects and consultants, with an outstanding accumulation of ventures related to health professionals. Second, there is a large group of industries in the retail sector. Third, there is a high representation of ventures in the hotel and catering industries. Fourth, there are typical craftsmen industries such as plumbing, vehicle repair, electrical installation and carpentry. A comparison of the numbers of ventures with the overall number of firms in the value-added tax statistics and the ZEW data on firm foundations permits specifying of whether the above-mentioned groups also represent the largest share of firms and startup activity in Germany. The industry groups retailing, hotel and catering and craftsmen industries coincide with both the overall firm distribution in Germany, according to the value-added tax statistics, and with the most frequent industries in the ZEW data. However, the first group of professional people, especially the industries of medical practice and human health services, seem to be overrepresented in the DtA sample. This might be the result of preferences in the DtA funding process. The complete ranking of industries according to the number of ventures per industry in the sample is attached in appendix B. It is of interest that many of those industries that account for large numbers of firm foundations receive only very little attention in entrepreneurship research. The frequently investigated segments of hi-tech ventures in the manufacturing sector only account for a very small fraction of entrepreneurial activity in a given economy. 5.4.2.2 Success measures
For both investors and future entrepreneurs, the identification of attractive markets is of primary interest. Analysis of the DtA data allows the identification of those industries where ventures have been particularly successful, and which may also provide a positive opportunity structure for future new venture foundations. In the following paragraphs, the industries with the highest average success of new ventures
211
in Germany are identified on the basis of four success measures: subjective performance, sales growth, profit level and years to break even. Most successful industries by venture sales growth In the table below, a ranking of those industries where new ventures achieved the highest average sales growth is shown.
Rank Sales growth rate 1 2 3 4 5 6 7 8 9 10 11 12 13 5.38 2.56 2.33 2.03 1.84 1.76 1.75 1.71 1.65 1.65 1.63 1.56 1.54 NACE code 5261 Retail sale via mail order 7260 Other computer-related activities 9234 Other entertainment activities n.e.c. 7484 Other business activities n.e.c. 7483 Secretarial and translation activities 5274 Repair n.e.c. 7414 Business and management consultancy activities 7230 Data processing 5170 Other wholesale 4525 Other construction work involving special trades 7031 Real estate agencies 1513 Production of meat and poultry products 5040 Sale, maintenance and repair of motorcycles and related parts 14 1.53 2923 Manufacture of non-domestic cooling and ventilation equipment 15 16 17 18 1.49 1.44 1.43 1.41 6024 Freight transport by road 4544 Painting and glazing 7032 Management of real estate on a fee or contract basis 9000 Sewage and refuse disposal, sanitation and similar activities 19 20 1.41 1.40 7220 Software consultancy and supply 6330 Activities of travel agencies and tour operators; tourist assistance 17 32 39 56 7 3 4 5 24 5 190 8 11 57 26 28 7 11 27 22 Industry # ventures
212
21 22 23 24 25
1.40 1.40 1.40 1.38 1.36
7411 Legal activities 5119 Agents involved in the sale of a variety of goods 8042 Adult and other education n.e.c. 7470 Industrial cleaning 9305 Other service activities n.e.c.
125 4 35 12 236
Table 45: Top 25 industries by venture sales growth
New ventures in the service sector comprise 64% of the top 25 industries, giving them much more representation than corresponds to their 37% share of all considered industries. At the same time, ventures in manufacturing are underrepresented in this list of industries with the highest venture growth rates. Only 8% of the industries in the top 25 ranking are from the manufacturing sector, compared with a 26% share of the total number of investigated industries. The higher frequency of the service sector may derive from the generally smaller venture size and the higher growth dynamics in this sector. The complete ranking by subjective performance evaluation for all 163 industries is given in appendix D. Most successful industries by achieved level of venture profits The following table shows all those industries where new ventures reached the highest profit level.
Rank Profit in 1000 EUR 1 2 3 4 350.12 205.76 144.23 135.52 NACE code 4532 Insulation work 3162 Manufacture of other electrical equipment n.e.c. 4525 Other construction work involving special trades 2666 Manufacture of other articles of concrete, plaster and cement 5 6 7 8 9 118.62 110.52 100.13 85.78 85.14 2862 Manufacture of tools 9261 Operation of sports arenas and stadiums 4511 Building demolition ; and digging 8513 Dental practice activities 2840 Forging, pressing, stamping and roll forming of metal; powder metallurgy 10 13 4 151 11 1.115 409 611 318 558 Industry # ventures 5 8 7 6 Sales in 1,000 EUR 2.324 1.451 3.426 3.780
213
10
80.83
2521 Manufacture of plastic plates, sheets, tubes and profiles
1.883
11
80.55
2875 Manufacture of other fabricated metal products n.e.c.
25
1.158
12 13
80.42 76.81
7220 Software consultancy and supply 3310 Manufacture of medical and surgical equipment and orthopaedic appliances
17 11
2.001 1.886
14 15
76.27 71.74
5231 Chemists 7412 Accounting, book-keeping and auditing
77 73
850 412
activities; tax consultancy 16 70.93 4523 Construction of highways, roads, airfields and sport facilities 17 18 19 70.88 68.60 65.41 8512 Medical practice activities 5512 Hotels and motels, without restaurant 3340 Manufacture of optical instruments and 333 6 8 262 653 338 5 1.574
photographic equipment 20 21 64.83 58.99 2222 Printing n.e.c. 7410 Legal, accounting & auditing activities; 5 12 810 242
consultancy; market research 22 23 24 57.93 56.67 55.03 2900 Manufacture of machinery and equipment n.e.c. 3663 Other manufacturing n.e.c. 7420 Architectural and engineering activities and related technical consulting 25 53.77 4540 Other construction 4 340 4 6 119 3.827 286 493
Table 46: Top 25 industries by achieved level of venture profits
It can be assumed that ventures in industries of a larger average venture size and higher average venture sales also achieve a higher level of venture profits. Therefore, the average annual sales volume per venture is given in addition in the above table. While the average sales level of the top 25 industries is at 1.240,000 Euro, about double the average sales level of all industries in the sample, the impact is noticeable, but not as strong as was assumed. As expected, a large share of manufacturing industries can be found in the top 25 ranking, due to the tendency towards higher sales volume and venture size in this sector. A 44% share of all industries in the top 25 derives from the manufacturing sector, while an extraordinarily low share of only 4%
214
derives from the trade sector. The construction sector represents 20% of the top 25 ranking, but only 9% of all investigated industries. The complete ranking by venture profits for all 163 industries is given in appendix E. Most successful industries by years needed to break even The 25 industries where new ventures needed the shortest time to break even are shown below.
Rank Years to break even 1 1.00 NACE code 4523 Construction of highways, roads, airfields and sport facilities 2 3 4 5 6 7 8 1.00 1.00 1.00 1.07 1.07 1.09 1.17 2924 Manufacture of other general purpose machinery n.e.c. 141 Agricultural service activities 2851 Treatment and coating of metals 1513 Production of meat and poultry products 4522 Erection of roof covering and frames 6603 Non-life insurance 7412 Accounting, book-keeping and auditing activities; tax consultancy 9 10 1.17 1.20 4541 Plastering 3340 Manufacture of optical instruments and photographic equipment 11 12 13 1.20 1.20 1.24 5240 Other retail sale of new goods in specialised stores 5147 Wholesale of other household goods 5211 Retail sale in non-specialised stores with food, beverages or tobacco 14 15 16 17 18 19 1.25 1.25 1.25 1.29 1.29 1.30 9261 Operation of sports arenas and stadiums 2745 Other non-ferrous metal production 5222 Retail sale of meat and meat products 2225 Other activities related to printing 5243 Retail sale of footwear and leather goods 4544 Painting and glazing 13 6 21 16 15 56 11 12 57 10 8 11 4 4 27 47 18 73 5 Industry # ventures
215
20 21
1.33 1.33
2862 Manufacture of tools 1581 Manufacture of bread; manufacture of fresh pastry goods and cakes
10 40
22 23 24
1.33 1.33 1.33
7031 Real estate agencies 9212 Motion picture and video distribution 5153 Wholesale of wood, construction materials and sanitary equipment
11 4 6
25
1.33
6321 Other supporting land transport activities
Table 47: Top 25 industries by years needed to break even
Similar to the ranking of venture profit, both the manufacturing and construction sectors are much more frequently mentioned in the ranking than corresponds to their share among the investigated industries. The complete ranking by subjective performance evaluation for all 163 industries is given in appendix F. Most successful industries by subjective venture success evaluation Finally, those 25 industries are listed where new ventures achieved the highest average subjective performance evaluation.
Rank Subjective rating NACE (0 to 1) 1 2 3 4 5 6 7 8 9 10 0,9 0,88 0,8 0,8 0,75 0,75 0,75 0,73 0,73 0,71 code 4523 Construction of highways, roads, airfields and sport facilities 2923 Manufacture of non-domestic cooling and ventilation equipment 4532 Insulation work activities 8531 Social work activities with accommodation 2862 Manufacture of tools 6321 Other supporting land transport activities 7310 Research and experimental development on natural sciences and engineer 9261 Operation of sports arenas and stadiums 2924 Manufacture of other general purpose machinery n.e.c. 8532 Social work activities without accommodation 5 4 5 5 10 4 4 13 11 7 Industry # ventures
216
11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0,71 0,7 0,69 0,68 0,67 0,67 0,67 0,67 0,67 0,67 0,67 0,67 0,66 0,64 0,64 7470 Industrial cleaning

12 5 18 11 6 12 3 3 3 12 12 3 25 150 330
2625 Manufacture of other ceramic products 6603 Non-life insurance 2811 Manufacture of metal structures and parts of structures 2745 Other non-ferrous metal production 5030 Sale of motor vehicle parts and accessories 5262 Retail sale via stalls and markets 7140 Renting of personal and household goods n.e.c. 7250 Maintenance and repair of office, accounting and computing machinery 7481 Photographic activities 9262 Other sporting activities 9271 Gambling and betting activities 2735 Other first processing of iron and steel n.e.c.; production of non-ECS 8513 Dental practice activities 8512 Medical practice activities
Table 48: Top 25 industries by subjective venture success evaluation
With respect to the industry sector, it is remarkable that only two industries from the trade sector are among the top 25 industries according to the subjective success measure, even though retailing accounted for about 28% of all industries in the sample. At the same time, ventures in the service sector are listed with a much higher frequency among the top 25 than corresponds to their share of investigated industries. The complete ranking by subjective performance evaluation for all 163 industries is given in appendix C.
217
5.4.3 Summary of characteristics and performance of new ventures in sample The descriptive analysis provided information on the characteristics of the ventures in the DtA sample, and may also give more general indications about entrepreneurial activity in Germany, due to the comprehensiveness of the sample. Sample characteristics on venture level The characteristics of the new ventures in the DtA sample can be summarised as a majority of ventures being founded within the three years before the date of survey between 1998 and 2000, employing less than two employees, reaching less than 250,000 Euro in sales per year and belonging to the service sector. Sample success measures on venture level In terms of success measures, the new ventures in the DtA sample performed on average according to plan, with about 25% of ventures performing better and 25% of ventures performing worse than plan. On average, the ventures achieved 26% annual growth in sales, 30,000 Euro of profit within the last year, and had already broken even within their second year of operation. Sample success measures development on venture level The dynamics of venture success measures is, to a large extent, influenced by the macro-economic business cycle. For the years from 1999 to 2001, the average growth in sales and employees started with an initial growth rate of over 20% in 1999, which decreased in 2000 by 6%, until stabilising in 2001 at nearly zero growth. At the same time, the profit level increased steadily, with a big leap around the fourth year of venture operation, increasing from 9,000 Euro in profits in 1999 to 43,000 Euro in profits in 2000. On average, the first three years of operation were characterised by high growth rates which slightly decreased over time. During these years, the funds generated were used to finance venture growth. After the first three years, the size of the ventures stabilised and profits greatly increased. Sample characteristics on the industry level The sample reveals a concentration of startup activity in the areas of retail, hotel, catering, craftsmen and professionals.
218
Sample success measures on industry level For the venture growth and subjective venture performance measures, ventures in the service sector have been found much more frequently among the top 25 industries than corresponds to their share of all industries. For the venture profit and years to break even measures, ventures from manufacturing and construction have been found much more frequently among the top 25 industries than corresponds to their share of all industries. The retail sector has been underrepresented for all four measures of venture performance.
5.5
Analysis of the impact of industry factors on new venture
performance
After the description of venture performance in different industries, this chapter analyses why ventures performed better in some industries than in others. According to the initial objective 5197 of the study, the impact of industry factors on new venture performance is investigated. Particular attention is given to variations of the impact of industry factors in different contexts. The identification of industries with high venture success rates provides a first indication of the potential attractiveness of an industry for the startup of a new venture. However, the applied 4-digit industry categories are relatively broad. If it is possible to understand which industry factors are actually relevant for venture performance, the attractiveness of small niche markets in the individual venture context can also be analysed more accurately. 5.5.1 Dependencies among variables As a preparational step of the analysis of the impact of industry factors on venture performance, it is important to understand how the dependent and the independent variables are related among themselves. Apart from being a methodological prerequisite for conducting regression analysis, understanding interactions among the variables is necessary for the interpretation of results later on.
197
See chapter 1.2, p.4.
219
5.5.1.1
Dimensions of venture success
A correlation analysis among the applied dependent variables of venture success was conducted in order to identify whether different dimensions of venture success are related to each other. The following analysis is based on the DtA data set on the venture level. The aggregation on the industry level would have led to distortions because extreme cases and outliers would have levelled out the results. Therefore, the more complete venture data set is applied. The table below shows the Pearson correlation among the dependent variables of venture success. The subjective measure of venture performance correlates significantly with both profitability measures. Subjective performance is rated higher for increasing venture profits and shorter for time to break even.
dep subjective dep subjective Pearson Correlation Sig. (2-tailed) N dep growth Pearson Correlation Sig. (2-tailed) N dep profit in EURO Pearson Correlation Sig. (2-tailed) N dep years to break even Pearson Correlation Sig. (2-tailed) N ** Correlation is significant at the 0.01 level (2-tailed). 1 . 5049 .029 .119 2885 .107(**) .000 3844 -.153(**) .000 2626 dep growth .029 .119 2885 1 . 2917 -.032 .101 2626 .117(**) .000 1474
dep profit in EUR .107(**) .000 3844 -.032 .101 2626 1 . 3883 -.181(**) .000 2520
dep years to break even -.153(**) .000 2626 .117(**) .000 1474 -.181(**) .000 2520 1 . 2663
Table 49: Correlation table of dependent variables of venture performance
Both profitability measures also correlate significantly with each other, with high profits being related to a short time to break even. While venture growth is not significantly related to the profit level, it is significantly related in a positive direction to the time to break even. Fast-growing ventures
220
therefore need longer to break even as they may use their generated funds to finance further venture growth. 5.5.1.2 Dimensions of independent industry variables
All independent industry variables are necessarily collected on the industry level. Even the independent variables that are based on the DtA data of individual firms are only considered on the industry level, aggregated by industry classification codes. Most previous studies that investigated industry variables, concentrated on the relationship between industry variables and organisational success. The interactions among industry variables themselves were not investigated in most of these studies. Therefore, the reviewed literature does not provide explanations for the results of the correlation analysis among industry variables. The independent industry variables correspond to the variables for which formerly hypotheses regarding the impact on venture success have been formulated198. Market size (v1) is significantly correlated with the number of firms (v11). It can be assumed that larger industries, measured in overall sales, also tend to have more industry members. At the same time, the market size variable is also positively correlated with various variables of firm size, such as minimum efficient scale (MES) and average firm sales levels. Other significant correlations comprise negative correlations with investment intensity (v17) and a positive correlation with employee productivity (v16). Minimum efficient scale (v2) is positively correlated to market size (v1) and average firm sales volume (v15). A high average sales volume per firm may lead to a higher overall sales volume of an industry. Therefore, the correlations identified can be explained by the fact that a high average firm sales level may be the result of a high minimum efficient scale, because firms of low sales levels were not able to survive. Export balance (v3) correlates positively with the distance to clients (v4), as both variables have been derived from the same questionnaire item and measure, at different scales, the geographic extent of the sales market.
198
Compare chapter 5.2, p 159ff.
221
The distance to clients (v4) is as indicated before correlated to the export balance (v3). The correlation with the average sales volume per firm (v15) suggests that industries with a larger average firm size in terms of sales tend to have a client base of a geographically wider expansion. At the same time, relatively low gross margins (v14) may indicate a high level of national competition, which may have forced firms to expand abroad. Moreover, with an increasing distance to clients, transparency of the supply market may also increase and lead to decreasing gross margins. Other significant correlations include positive correlations with the heterogeneity of sales growth (v12b) and investment intensity (v17). The correlation with investment intensity indicates that in industries with firms operating on a larger geographic basis, investments are also higher. Total market growth (v5) is positively related to both absolute number of firm entries (v6) and net entries (v8). On the one hand growing markets attract new ventures and, on the other, an increasing number of new ventures leads to higher sales in the overall industry. The significant correlation with the degree of uncertainty (v9) shows that in high growth industries, future firm development can be planned less accurately than in industries with low growth rates. Higher total market growth has been found in industries with less heterogeneous profit levels (v12a), indicating that a relative coherent range of firm profits within one industry induces higher total growth. A negative correlation has been found for gross margin (v14). Apparently lower gross margins pressure firms to achieve higher sales growth. A positive impact of investments on growth is demonstrated by the positive correlation with investment intensity (v17). The average firm size (v15) is positively correlated with market growth. One might have expected that it is easier to achieve a higher percentage growth for firms on a lower sales base. However, smaller firms may have lower growth aspirations199 and therefore industries with a smaller average firm size may have achieved a lower total market growth. Entries to the industry (v6) correlate positively with the number of net entries (v8). There are more entries in industries with high heterogeneity of firm size in sales (v12c). Entries have been more frequent in industries with smaller initial investment
199
Compare Davidsson 1991.
222
requirement measured in the number of employees on startup (v16), as the possibility to start at a low scale increases startup activity. The variable of exits from industries (v7) does not correlate significantly with any other independent variable. The theory of organisational ecology would have suggested that the exit rate correlates with the variable of entries to industry (v6) due to the concept of liability of newness200. However, this could not be confirmed on the given 5% significance level. Net entries (v8), which are calculated as the balance of entries and exits to an industry, are correlated to market growth (v5) and also correlate to the variable of entries to industry (v6). The degree of uncertainty (v9) is positively correlated with market growth (v5), as has been pointed out before. At the same time it is, as is market growth, negatively correlated with the heterogeneity of profitability (v12a). Regarding heterogeneity of the sales level (v12b), there is a positive correlation, indicating that large firm size differences within an industry relates to higher uncertainty. Furthermore, a higher level of uncertainty is related to a lower gross margin (v14). Uncertainty is also higher in industries with a higher average firm size (v15), which might indicate that the behaviour of large firms is more difficult to anticipate. The Herfindahl index of industry concentration (v10) is not related to any other industry variable. The number of industry members (v11) correlates positively with market size (v1), which seems understandable as one may assume that an industry with a large total sales volume may contain more firms than an industry with a low total sales volume. The number of industry members correlates negatively with the average firm size (v15). The three independent variables of heterogeneity correlate individually with different industry variables. Heterogeneity of profitability (v12a) correlates negatively with both market growth (v5) and uncertainty (v9). It correlates positively with gross margin (v14). The latter
200
See chapter 3.2.3, p.57ff on organisational ecology.
223
can be understood as the average profit level increases with higher gross margin, which in turn increases the potential heterogeneity of profitability. Heterogeneity of sales growth (v12b) correlates positively with the distance to clients (v4). Equivalent to the market growth variable, the heterogeneity of sales growth also correlates positively with entries to industries (v6) and uncertainty (v9). Heterogeneity of sales volume (v12c) correlates positively to market size (v1), average firm size (v15) and average number of employees on startup (v16). All of these variables are related to each other since they are directly impacted by firm size per industry. Higher average firm size per industry will have a positive impact on market size, average firm size in sales and also the number of employees on startup. Employee productivity (v13) measured in sales per employee correlates positively with market size (v1). Employee productivity is negatively correlated to investment intensity (v17). One may have assumed, however, that it is one of the main purposes of investments to increase the level of employee productivity, which might therefore have led to higher employee productivity for higher investment intensity. Yet it seems that industries with low employee productivity provide the highest incentives for individual firms to increase investments. The improvements in employee productivity that result from investments might be lower than the differences in employee productivity in comparison to other industries. Gross margin (v14) is negatively correlated with the distance to clients (v4) and uncertainty (v9). A positive correlation can be found for the heterogeneity of profitability (v12a), which may be explained by the higher levels of profits that may relate to industries with high gross margins. Finally, gross margin also correlates positively to investment intensity (v17) since high investment requirements may limit the extent of competition. The average firm size in sales (v15) per industry is probably one of the most influential variables among the set of industry variables under investigation, as the average firm size is related to more than half of all applied industry variables. Average firm size in sales is positively correlated to market size (v1), minimum efficient scale (v2), heterogeneity of sales (v12c), average venture size in number of employees on startup (v16) and investment intensity (v17). The impact of firm size on all these variables is explained in the other paragraphs on the respective variables. Other
224
variables that correlate with the average firm sales level are distance to clients (v3), the degree of uncertainty (v9) and the number of industry members (v11). The startup size in number of employees (v16) positively correlates with the three variables of average heterogeneity of sales (v12c), average firm size in sales (v15) and investment intensity (v17), which are all related to higher average firm size. Furthermore, there is a negative correlation with net entries (v8), which suggests a higher rate of surviving startups for industries where ventures can start from a lower scale. Finally, investment intensity (v17) is positively correlated with the firm size-related variables of startup size in employees (v16) and average firm sales level (v15), while it is negatively correlated with market size (v1) as another firm size-related variable. Higher investment intensity in an industry relates to higher gross margins (v14), as more financial resources may remain after costs for investments in industries with a high gross margin. At the same time, investment intensity correlates negatively to employee productivity(v13) and positively with distance to clients (v3), which has been already indicated in the previous paragraphs on employee productivity and distance to clients, respectively. In the following correlation table, significant correlations among the independent industry variables at the 0.05 level (2-tailed) are marked with * and significant correlations at the 0.01 level (2-tailed) are market with **.
225
v7 exits from industry
v4 distance to clients
v6 entries to industry
v3 export balance
v5 market growth
v1 market size
v1
v2
v3
v4
v5
v6
v7
v8
v9
v10
v11
v12a
v12b
v12c
v13
v14
Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N
1 . 163 ,231(**) 0,003 163 0,1 0,205 163 0,094 0,233 163 -0,104 0,188 163 -0,07 0,393 150 0,043 0,591 161 -0,149 0,057 163 0,052 0,507 163 -0,045 0,659 99 ,614(**) 0 163 -0,004 0,962 149 0,002 0,98 134 ,373(**) 0 155 ,363(**) 0 99 -0,121 0,164 133 ,208(**) 0,008 163 0,134 0,104 148 -,220(*) 0,032 96
,231(**) 0,003 163 1 . 163 0,047 0,547 163 0,058 0,463 163 0,061 0,439 163 -0,026 0,752 150 0,017 0,83 161 0,015 0,85 163 0,025 0,749 163 0,103 0,312 99 -0,034 0,67 163 -0,003 0,974 149 0,07 0,421 134 0,043 0,598 155 0,007 0,948 99 -0,089 0,307 133 ,274(**) 0 163 -0,035 0,674 148 -0,046 0,659 96
0,1 0,205 163 0,047 0,547 163 1 . 163 ,874(**) 0 163 0 0,996 163 0,082 0,319 150 -0,016 0,839 161 0,014 0,859 163 -0,001 0,992 163 -0,076 0,452 99 -0,012 0,875 163 -0,043 0,605 149 0,068 0,435 134 0,079 0,326 155 0,056 0,583 99 -0,144 0,099 133 0,149 0,057 163 -0,003 0,97 148 0,167 0,104 96
0,094 0,233 163 0,058 0,463 163 ,874(**) 0 163 1 . 163 0,058 0,466 163 0,144 0,078 150 -0,021 0,796 161 0,093 0,239 163 0,032 0,685 163 -0,079 0,439 99 -0,044 0,576 163 -0,055 0,506 149 ,191(*) 0,027 134 0,08 0,325 155 0,059 0,564 99 -,171(*) 0,049 133 ,198(*) 0,011 163 -0,033 0,691 148 ,203(*) 0,047 96
-0,104 0,188 163 0,061 0,439 163 0 0,996 163 0,058 0,466 163 1 . 163 ,342(**) 0 150 -0,128 0,106 161 ,382(**) 0 163 ,211(**) 0,007 163 -0,028 0,784 99 -0,091 0,249 163 -,187(*) 0,023 149 0,109 0,211 134 -0,09 0,266 155 0,055 0,591 99 0,027 0,758 133 ,156(*) 0,047 163 -0,104 0,208 148 -0,002 0,986 96
-0,07 0,393 150 -0,026 0,752 150 0,082 0,319 150 0,144 0,078 150 ,342(**) 0 150 1 . 150 0,157 0,056 150 ,598(**) 0 150 0,107 0,191 150 -0,034 0,744 94 0,05 0,541 150 -0,107 0,208 140 ,196(*) 0,028 125 -0,016 0,845 144 -0,048 0,646 94 -0,086 0,342 124 -0,109 0,184 150 -,206(*) 0,015 139 -0,172 0,103 91
0,043 0,591 161 0,017 0,83 161 -0,016 0,839 161 -0,021 0,796 161 -0,128 0,106 161 0,157 0,056 150 1 . 161 -0,065 0,41 161 0,102 0,196 161 -0,093 0,361 98 0,005 0,952 161 0,026 0,756 147 0,029 0,744 132 0,133 0,101 153 -0,009 0,932 98 -0,145 0,097 131 -0,069 0,385 161 0,054 0,516 146 -0,12 0,247 95
-0,149 0,052 0,057 0,507 163 163 0,015 0,025 0,85 0,749 163 163 0,014 -0,001 0,859 0,992 163 163 0,093 0,032 0,239 0,685 163 163 ,382(**) ,211(**) 0 0,007 163 163 ,598(**) 0,107 0 0,191 150 150 -0,065 0,102 0,41 0,196 161 161 1 0,132 . 0,093 163 163 0,132 1 0,093 . 163 163 0,03 -0,032 0,769 0,755 99 99 -0,084 0,074 0,289 0,348 163 163 -0,138 -,236(**) 0,094 0,004 149 149 0,139 ,237(**) 0,109 0,006 134 134 -0,059 0,009 0,468 0,916 155 155 -0,033 -0,003 0,743 0,979 99 99 -0,007 -,250(**) 0,937 0,004 133 133 -0,1 ,167(*) 0,205 0,033 163 163 -0,067 0,053 0,422 0,523 148 148 0,098 0,074 0,344 0,473 96 96
v15
v16
v17
Table 50: Correlation table of independent industry variables (part 1)
v9 uncertainty
v8 net entries
v2 MES
226
v11 number of industry members
v12a heterogeneity - profitability variance
v10 concentration - herfindahl
v12b heterogeneity - sales growth variance
v12c heterogeneity - sales variance
v13 employee productivity
v1
v2
v3
v4
v5
v6
v7
v8
v9
v10
v11
v12a
v12b
v12c
v13
v14
Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N Pearson Corr Sig. (2-tailed) N
-0,045 0,659 99 0,103 0,312 99 -0,076 0,452 99 -0,079 0,439 99 -0,028 0,784 99 -0,034 0,744 94 -0,093 0,361 98 0,03 0,769 99 -0,032 0,755 99 1 . 99 -0,045 0,659 99 0,074 0,484 92 0,023 0,835 85 -0,002 0,981 96 -0,025 0,809 99
-0,004 ,614(**) 0 0,962 163 149 -0,034 -0,003 0,67 0,974 163 149 -0,012 -0,043 0,875 0,605 163 149 -0,044 -0,055 0,576 0,506 163 149 -0,091 -,187(*) 0,249 0,023 163 149 0,05 -0,107 0,541 0,208 150 140 0,005 0,026 0,952 0,756 161 147 -0,084 -0,138 0,289 0,094 163 149 0,074 -,236(**) 0,348 0,004 163 149 -0,045 0,074 0,659 0,484 99 92 1 -0,039 . 0,639 163 149 -0,039 1 0,639 . 149 149 0,021 -0,103 0,812 0,245 134 130 0,037 0,021 0,65 0,796 155 147 0,04 -0,009 0,693 0,935 99 92 ,771(**) 0 133 0,127 0,122 149 0,02 0,812 139 0,206 0,052 89
0,002 0,98 134 0,07 0,421 134 0,068 0,435 134 ,191(*) 0,027 134 0,109 0,211 134 ,196(*) 0,028 125 0,029 0,744 132 0,139 0,109 134 ,237(**) 0,006 134 0,023 0,835 85 0,021 0,812 134 -0,103 0,245 130 1 . 134 0,007 0,933 134 0,028 0,797 85 -0,095 0,294 123 -0,026 0,762 134 -0,112 0,219 123 -0,154 0,161 84
,373(**) 0 155 0,043 0,598 155 0,079 0,326 155 0,08 0,325 155 -0,09 0,266 155 -0,016 0,845 144 0,133 0,101 153 -0,059 0,468 155 0,009 0,916 155 -0,002 0,981 96 0,037 0,65 155 0,021 0,796 147 0,007 0,933 134 1 . 155 0,187 0,067 96 -0,129 0,138 133 ,168(*) 0,037 155 ,308(**) 0 142 -0,098 0,349 93
,363(**) -0,121 ,208(**) 0 0,164 0,008 99 133 163 0,007 -0,089 ,274(**) 0,948 0,307 0 99 133 163 0,056 -0,144 0,149 0,583 0,099 0,057 99 133 163 0,059 -,171(*) ,198(*) 0,564 0,049 0,011 99 133 163 0,055 0,027 ,156(*) 0,591 0,758 0,047 99 133 163 -0,048 -0,086 -0,109 0,646 0,342 0,184 94 124 150 -0,009 -0,145 -0,069 0,932 0,097 0,385 98 131 161 -0,033 -0,007 -0,1 0,743 0,937 0,205 99 133 163 -0,003 -,250(**) ,167(*) 0,979 0,004 0,033 99 133 163 -0,025 0,102 -0,07 0,809 0,36 0,494 99 82 99 0,04 -0,012 -,215(**) 0,693 0,891 0,006 99 133 163 0,127 -0,009 ,771(**) 0,935 0 0,122 92 133 149 0,028 -0,095 -0,026 0,797 0,294 0,762 85 123 134 0,187 -0,129 ,168(*) 0,067 0,138 0,037 96 133 155 1 -0,047 0,167 . 0,677 0,099 99 82 99 -0,047 0,677 82 0,167 0,099 99 0,071 0,505 90 -,231(*) 0,024 96 1 . 133 0,043 0,621 133 -0,098 0,271 127 ,251(*) 0,025 80 0,043 0,621 133 1 . 163 ,246(**) 0,003 148 ,202(*) 0,048 96
0,134 0,104 148 -0,035 0,674 148 -0,003 0,97 148 -0,033 0,691 148 -0,104 0,208 148 -,206(*) 0,015 139 0,054 0,516 146 -0,067 0,422 148 0,053 0,523 148 -0,095 0,373 90 -0,07 0,4 148 0,02 0,812 139 -0,112 0,219 123 ,308(**) 0 142 0,071 0,505 90 -0,098 0,271 127 ,246(**) 0,003 148 1 . 148 ,262(*) 0,014 88
-,220(*) 0,032 96 -0,046 0,659 96 0,167 0,104 96 ,203(*) 0,047 96 -0,002 0,986 96 -0,172 0,103 91 -0,12 0,247 95 0,098 0,344 96 0,074 0,473 96 0,03 0,769 96 -0,168 0,103 96 0,206 0,052 89 -0,154 0,161 84 -0,098 0,349 93 -,231(*) 0,024 96 ,251(*) 0,025 80 ,202(*) 0,048 96 ,262(*) 0,014 88 1 . 96
v15
v16
v17
0,102 -0,012 0,36 0,891 82 133 -0,07 -,215(**) 0,494 0,006 99 163 -0,095 -0,07 0,373 0,4 90 148 0,03 -0,168 0,769 0,103 96 96
** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).
Table 51: Correlation table of independent industry variables (part 2)
v17 investment intensity
v16 average number of employees at startup
v15 average firm size
v14 brut margin
227
5.5.2 Analysis of overall sample A multivariate analysis is performed for each performance measure201 based on the overall sample of new ventures. First, a correlation analysis will identify those industry variables that relate to the respective performance measure. Second, a regression analysis is performed in order to identify the relative strength of impact and explanation power of relevant correlated industry variables with significant t values. 5.5.2.1 Sales growth
The following correlation table indicates that several industry variables significantly correlate with the new venture growth measure, independently of the industry context.
dependent: venture growth v1 market size in 1,000 Euro Pearson Correlation Sig. (2-tailed) N v2 MES in 1,000 Euro of sales Pearson Correlation Sig. (2-tailed) N v3 export balance Pearson Correlation Sig. (2-tailed) N v4 distance to clients Pearson Correlation Sig. (2-tailed) N v5 market growth Pearson Correlation Sig. (2-tailed) N v6 entries to industry Pearson Correlation Sig. (2-tailed) N 0.013 0.475 2.917 -0.009 0.630 2.917 0.048 0.010 * 2.917 0.083 0.000 ** 2.917 0.031 0.093 2.917 0.082 0.000 ** 2.772
201
Compare discussion of success measures in chapter 4.1, p. 123-128 and selection of dependant variables in chapter 4.2.1, p. 131.
228
Pearson Correlation Sig. (2-tailed) N
-0.008 0.657 2.836 0.040 0.032 * 2.917 0.068 0.000 ** 2.917 0.005 0.834 1.517 0.010 0.576 2.917 -0.028 0.131 2.889 0.187 0.000 ** 2.869 0.012 0.526 2.905 0.011 0.673 1.517 -0.012 0.518 2.852 0.003 0.891 2.917
v8 net entries
v9 uncertainty
v10 concentration - Herfindahl index
v12a heterogeneity - profitability Pearson Correlation Sig. (2-tailed) N v12b heterogeneity - sales growth Pearson Correlation Sig. (2-tailed) N v12c heterogeneity - sales Pearson Correlation Sig. (2-tailed) N v13 employee productivity in 1,000 Euro Pearson Correlation Sig. (2-tailed) N v14 gross margin Pearson Correlation Sig. (2-tailed) N v15 average firm size in 1,000 Euro Pearson Correlation Sig. (2-tailed) N
229
v16 average number of employees on start up
-0.032 0.084 2.873 -0.040 0.122 1.507
Table 52: Correlation of industry factors with subjective venture performance
For the regression analysis all those variables that are significantly correlated with venture growth or for which a correlation has been assumed within the initial hypotheses are considered for inclusion.
Hyp Significant Correlation v1 market size v3 export balance v4 distance to clients v5 market growth v6 entries to industry v8 net entries v9 uncertainty v12b heterogeneity sales growth + + + + + + + + + + + directly influenced by dependent variable + + collinearity with v4 Exclusion
Table 53: Variables considered for inclusion in regression analysis (venture growth overall sample)
The highest correlation is found for heterogeneity of sales growth (v12b). However, this correlation has little explanation power, since v12b is calculated directly from the dependent variable as the average standard deviation of venture growth within an industry. Especially in industries with only a low number of ventures in the sample, the dependent variable may strongly distort v12b. The variable export balance (v3) had to be eliminated from the regression analysis due to high collinearity with distance to clients (v4). This is understandable since both export balance and distance to clients are codifications of the same item of the DtA questionnaire.
230
All significant correlations apart from v12b correspond in their direction of impact on venture growth to the initial hypotheses. The hypothesis of a positive correlation with market size (v1) and market growth (v5) cannot be confirmed.
Coefficients: Hyp Unstand. B (Constant) v9 uncertainty v4 distance to clients + + 0.591 0.631 0.226 Std. Er. 0.125 0.196 0.072 Stand. Beta 4.739 0.086 3.223 0.084 3.134 0.000 0.001 0.002 0.976 1.025 0.976 1.025 t Sig. Collinearity Toler. VIF
Model Summary: R2 R2 adj. F F Sig 0.017 0.015 11.957 0.000
Table 54: Regression table of overall sample for venture growth
After eliminating all variables without significant t values, the regression analysis showed that uncertainty and the geographic extension of the sales market measured in distance to clients are the most influential among all industry variables that have been included in the regression analysis. The standardised beta coefficient indicates an approximately equal strength of impact on venture growth for both variables. The observed directions of impact correspond to the initial hypotheses. Among the reviewed literature, no other empirical study has investigated uncertainty (v9) or distance to clients (v4) in relation to sales growth. The explained variance of venture growth by the two variables is, despite being significant, relatively low. This is not of major concern, since it has not been the intention of this study to build a complete model to explain venture growth. Rather, it has been acknowledged that firm-specific factors are also important in explaining venture growth and only a small share of all industry variables of the conceptual model could be included in this quantitative study.
231
5.5.2.2
Profit level
Correlations among the industry variables and the dependant variable of venture profit are shown in the correlation table below.
dependent: venture profit in Euro v1 market size in 1,000 Euro Pearson Correlation Sig. (2-tailed) N v2 MES in 1,000 Euro of sales Pearson Correlation Sig. (2-tailed) N v3 export balance Pearson Correlation Sig. (2-tailed) N v4 distance to clients Pearson Correlation Sig. (2-tailed) N v5 market growth Pearson Correlation Sig. (2-tailed) N v6 entries to industry Pearson Correlation Sig. (2-tailed) N v7 exits from industry Pearson Correlation Sig. (2-tailed) N v8 net entries Pearson Correlation Sig. (2-tailed) N v9 uncertainty Pearson Correlation Sig. (2-tailed) N -0.011 0.488 3.883 -0.006 0.714 3.883 -0.010 0.520 3.883 -0.006 0.709 3.883 0.023 0.146 3.883 -0.033 0.045 * 3.682 -0.042 0.010 ** 3.767 0.041 0.011 * 3.883 -0.035 0.027 ** 3.883
232
0.000 0.999 1.967 -0.019 0.234 3.883 0.066 0.000 ** 3.857 0.003 0.858 3.803 -0.039 0.014 * 3.868 0.001 0.965 1.967 0.074 0.000 ** 3.816 0.009 0.576 3.883 0.008 0.606 3.841 0.038 0.090 1.952
v12a heterogeneity profitability
v12b heterogeneity - sales growth
v12c heterogeneity - sales
v13 employee productivity in 1,000 Euro
v14 gross margin
v15 average firm size in 1,000 Euro
Table 55: Correlation of industry factors with venture profits
233
All those variables with significant correlations in the above table or in previous hypotheses regarding venture profits are considered for inclusion in the regression analysis.
Hyp Significant Exclusion Correlation v2 MES v4 distance to clients v6 entries to industry v7entries from industry v8 net entries v9 uncertainty v10 concentration v11 number of industry members v12a heterogeneity profitability v12b heterogeneity sales growth v12c heterogeneity sales + directly influenced by dependent variable v14 gross margin + + directly influenced by dependent variable v15 average firm size v16 average number of employees on start up v17 investment intensity + + + + + + directly influenced by dependent variable + + + + -
Table 56: Variables considered for inclusion in regression analysis (venture profit overall sample)
The highest correlation is found for gross margin (v14). However, this variable has to be excluded from the regression analysis since it is also calculated on the basis of a profit indicator from the DtA sample and may therefore be influenced by the dependent variable. Correspondingly, heterogeneity of profitability (v12a) has to be excluded since it also has been calculated on the basis of a venture profit indicator from the DtA sample. The variable heterogeneity of sales (v12c) will be excluded
234
because it can be assumed that, to some degree, the sales level will be related to the profit level. Overall, only three of the initial hypotheses regarding the profit level of new ventures can be confirmed.
Coefficients: Hyp Unstand. B (Constant) V9 uncertainty 72.899 -85.710 Std. Er. 19.681 38.765 -0.035 Stand. Beta 3.704 0.000 -2.211 0.027 1.000 1.000 t Sig. Collinearity Toler. VIF
Table 57: Regression table of overall sample for venture profits
After eliminating all variables without significant t values, only the variable of uncertainty (v9) remains for inclusion in the regression model. The direction of impact of uncertainty on venture profit is negative, as expected in hypothesis 9 and in congruence with the findings of Stuart and Abetti (1987), who applied a subjective measure of venture success. The explained variance of venture growth is very low. The F-test however is significant on the 5% level. 5.5.2.3 Time to break even
Correlations between the industry variables and the dependent variable of time to break even are indicated in the following correlation table.
dependent: years of ventures to breakeven v1 market size in 1,000 Euro Pearson Correlation Sig. (2-tailed) N -0.010 0.614 2.663
235
v2 MES in 1,000 Euro of sales
0.005 0.797 2.663 0.064 0.001 ** 2.663 0.075 0.000 ** 2.663 0.055 0.005 ** 2.663 0.079 0.000 ** 2.530 -0.035 0.076 2.588 0.051 0.008 ** 2.663 0.060 0.002 ** 2.663 0.004 0.881 1.270 0.018 0.358 2.663 -0.096 0.000 ** 2.645
v3 export balance
v5 market growth
v8 net entries
v9 uncertainty
236
0.036 0.065 2.597 -0.006 0.777 2.651 0.004 0.887 1.270 -0.050 0.011 * 2.618 -0.032 0.102 2.663 -0.086 0.000 ** 2.646 -0.016 0.568 1.260
v14 gross margin
Table 58: Correlation of industry factors with years to break even
For the success measures years to break-even and subjective performance, no initial hypotheses were formulated. Therefore, in a first step all variables with significant correlations are considered for inclusion in the regression analysis. In a second step, all those variables with significant t values are inspected for collinearity and validity. In cases where the variables had to be removed, additional variables were considered for inclusion.
Significant Correlation v3 export balance v4 distance to clients + + collinearity with v4 Exclusion
237
v5 market growth v6 entries to industry v8 net entries v9 uncertainty V12a profitability v14 gross margin v16 average number of employees on start up
+ + + + -
Table 59: Variables considered for inclusion in regression analysis (years to break-even overall sample)
A relatively large number of variables has been found to correlate significantly with the measure of years to break even. Only v3 had to be excluded for the regression analysis due to collinearity with v4 distance to clients.
Coefficients: Corr Unstand. B (Constant) v12a profitability v16 employees on start up v4 distance to clients v8 net entries + + 1.201 -0.371 -0.026 0.147 0.235 Std. Er. 0.121 0.090 -0.084 0.007 -0.077 0.049 0.094 0.061 0.050 Stand. Beta 9.903 0.000 -4.112 0.000 -3.873 0.000 2.998 0.003 2.512 0.012 0.887 1.127 0.942 1.062 0.906 1.104 0.925 1.081 t Sig. Collinearity Toler. VIF
Table 60: Regression table overall sample for years to break even
After eliminating all variables without significant t values, four variables remained in the model. The standardised beta coefficients indicate that the strongest impact on years-to-breakeven was from heterogeneity in profits (v12a), followed by number of employees on startup (v16), distance to clients (v14) and net entries (v8). Ventures
238
reached break-even earlier in industries with heterogeneous profit levels and a larger number of employees on startup. This second relationship is surprising, as one might have assumed that ventures that start on a larger scale may require more initial investment and consequently may need longer to break even. A possible reason for the identified relationship may be the higher profitability of industries, which require higher initial firm size. In contrast, the larger the geographic sales market, measured in distance to clients, and the larger the increase in the total number of firms of an industry, the longer ventures need to break even. Distance to clients is positively related to the variables of firm size and investment intensity, which may explain the longer time needed to break even. The explained variance of years to break even is higher than the one for venture growth or venture profits. 5.5.2.4 Subjective absolute venture performance
The correlation analysis shows a very large number of significant correlations between industry variables and subjective venture performance.
dependent: subjective venture performance to plan v1 market size in 1,000 Euro Pearson Correlation Sig. (2-tailed) N v2 MES in 1,000 Euro of sales Pearson Correlation Sig. (2-tailed) N v3 export balance Pearson Correlation Sig. (2-tailed) N v4 distance to clients Pearson Correlation Sig. (2-tailed) N v5 market growth Pearson Correlation Sig. (2-tailed) N -0.085 0.000 ** 5.049 -0.031 0.025 * 5.049 -0.024 0.090 5.049 -0.045 0.001 ** 5.049 0.060 0.000 ** 5.049
239
-0.054 0.000 ** 4.785 -0.135 0.000 ** 4.896 0.112 0.000 ** 5.049 -0.050 0.000 ** 5.049 -0.017 0.386 2.590 -0.098 0.000 ** 5.049 0.136 0.000 ** 5.002 -0.013 0.348 4.927 -0.057 0.000 ** 5.024 0.015 0.458 2.590 0.160 0.000 ** 4.940
v8 net entries
v9 uncertainty
v14 gross margin
240
0.009 0.503 5.049 -0.015 0.293 4.998 0.003 0.899 2.573
Table 61: Correlation of industry factors with subjective venture performance
A total of twelve variables have been identified as being significantly correlated with subjective venture performance. The following table summarises these significantly correlated variables, which are considered for the regression analysis.
Significant Correlation v1 market size v2 MES v4 distance to clients v5 market growth v6 entries to industry v7 exits from industry v8 net entries v9 uncertainty v11 number of industry members v12a heterogeneity profits v12c heterogeneity sales v14 gross margin + + + + Exclusion
Table 62: Variables considered for inclusion in regression analysis (subjective venture performance overall sample)
241
None of the considered variables had to be excluded for reasons other than the significance of the t-value.
Coefficients: Corr Unstand. B (Constant) v7 exits from industry v12a heterogeneity profits v8 net entries + + -0.243 -6.670 0.445 0.314 Std. Er. 0.085 1.168 -0.088 0.063 0.070 0.103 0.067 Stand. Beta -2.866 0.004 -5.712 0.000 7.035 0.000 4.489 0.000 0.850 1.176 0.926 1.080 0.901 1.110 t Sig. Collinearity Toler. VIF
Table 63: Regression table of overall sample for subjective performance
Among the three variables with significant t values, exits from industry (v7) has the highest correlation with subjective venture performance. However, heterogeneity in profits (v12a) has the strongest impact as measured by the standardised beta coefficient. Entrepreneurs evaluated their performance more positively in industries with higher heterogeneity in profits. Of interest is the relationship with exits from industry, which indicates that a high number of exits from an industry represents unattractive industry conditions, which also affect the subjective venture performance. If, on the other hand, the total number of firms within an industry increases, a munificent industry environment relates also to increasing subjective venture performance. Overall, the highest share of explained variance with respect to the investigated industry variables is provided for the venture success measure of subjective venture performance.
242
5.5.3 Impact of contingency variables It has been one of the main objectives of the study to investigate if and how the impact of industry factors on venture performance varies in different industry contexts. Corresponding to the analysis of the overall sample, multivariate analysis is performed for sub-samples, which are defined by the context variables of industry sector, market growth and industry profit heterogeneity. Moreover, the sub-samples are distinguished based on venture success measured in sales growth, in order to investigate whether industry variables impact successful ventures differently. 5.5.3.1 Industry sector
Research in strategy202 has suggested that industry effects are higher for the service sector than for any other industry sector. Before investigating the strengths of impact of industry factors for each sector, the descriptive analysis highlights structural differences among the four industry sectors.
1 - manufacturing Mean dep venture growth dep venture profit dep years to break even dep subjective v1 market size in 1,000,000 Euro v2 MES in 1,000 Euro of sales v3 export balance v4 distance to clients v5 market growth v6 entries to industry v7 exits from industry v8 net entries v9 uncertainty 1.209 44.455 1.549 0.010 11.482 Std Dev. 0.657 2 - construction Mean 1.201 Std Dev. 0.660 77.867 0.606 0.700 12.169 Mean 1.189 9.546 1.561 -0.095 31.285 3 trade Std Dev. 0.901 4 - service Mean 1.328 Std Dev. 0.707 1.518 87.492 0.678 15.808
85.916 32.936 0.742 0.704 1.388 -0.053
420.026 36.857 0.723 0.696 1.582 0.057
18.288 14.024
31.086 13.962
164.706 0.079 1.414 1.049 0.048 0.017 1.044 0.493
356.820 0.115 0.390 0.218 0.030 0.005 0.139 0.164
6.365 0.018 1.177 0.969 0.080 0.030 1.069 0.492
19.228 0.025 0.127 0.108 0.025 0.008 0.113 0.070
420.851 0.049 1.249 1.085 0.071 0.019 0.989 0.492
1.289.323 48.926 0.058 0.243 0.124 0.027 0.005 0.068 0.100 0.048 1.288 1.216 0.097 0.013 1.137 0.503
201.853 0.072 0.316 0.210 0.056 0.008 0.161 0.075
202
McGahan and Porter 1997.
243
v10 concentration Herfindahl index v11 number of industry members v12a heterogeneity profitability v12b heterogeneity sales growth v12c heterogeneity sales v13 employee productivity in 1,000 Euro v14 gross margin v15 average firm size in 1,000 Euro v16 average number of employees on start up v17 investment intensity v control - venture age in sample v control - venture sales in sample
687
2.983
21
28
280
492
43
125
6.927
6.652 28.515
14.383
36.802
39.060 41.568
40.569
0.082
0.102
0.092
0.022
0.004
0.075
0.057
0.208
0.396
0.010
0.615
0.318
0.412
0.628
0.928
1.239
1.214
974
800
1.914
1.873
641
809
238
44
164
25
390
945
76
11
0.135 2.304
1.549 11.482.4 39 164.705. 507 0.079
0.136 469
0.032 279
0.061 1.091
0.060 1.093
0.187 475
0.133 963
5.295
2.615
1.129
3.085
2.163
2.285
1.658
0.044
0.022
0.006
0.017
0.006
0.043
0.012
3.667
1.414
3.598
1.704
3.416
1.513
3.318
1.439
1.615
1.082
2.562
1.726
5.397
597
2.055
Table 64: Correlation of industry factors with venture performance measures by industry sector
Clear differences can be observed in the above table with regard to venture success measures among the four industry sectors. Ventures in the service sector had a much higher growth rate than ventures in other sectors. This may have been affected by the relatively small sales volume of ventures in the service sector. In terms of profit, ventures in the retail sector earned much lower profits than ventures in other sectors, going hand in hand with remarkably low gross margins (v14). Also, with regard to subjective performance, the trade sector receives by far the lowest evaluations, and in terms of venture growth the trade sector again has the lowest venture success among all sectors. As expected, size-related industry factors like MES (v2), average firm size (v15) and average number of employees on startup (v16) are much higher for the manufacturing sector. The service sector grows faster than any other sector (v5) with
244
more new firm entries (v6) than any other sector and at the same time the lowest exit rate (v7) among all sectors. The following table summarises the correlations among each industry variable and each independent variable of venture performance for all four industry sectors.
dependent: venture growth industry sector v1 market size in 1,000 Euro Sig. N v2 MES in 1,000 Euro of sales Sig. N v3 export balance Sig. N v4 distance to clients Sig. N v5 market growth Sig. N v6 entries to industry Sig. N v7 exits from industry Sig. N v8 net entries Pears Sig. N v9 uncertainty Sig. N v10 concentration - Herfindahl index v11 number of industry members Sig. N 0.645 272 0.731 389 0.141 760 0.539 1496 0.224 326 0.029 528 0.852 974 Pears Sig. N Pears 0.934 272 0.003 0.961 249 0.028 0.719 389 -0.061 0.231 385 0.017 Pears 0.821 269 0.012 0.841 272 0.005 0.396 389 -0.056 0.271 389 0.018 0.513 760 0.122 0.188 1418 0.018 0.498 1496 0.061 0.150 322 0.039 0.481 326 0.013 0.809 326 -0.032 0.583 293 -0.068 Pears 0.813 245 0.014 0.155 385 -0.043 Pears 0.522 272 0.015 0.670 389 -0.073 0.128 760 0.137 0.953 1496 0.072 0.288 326 0.029 0.621 289 -0.080 0.070 528 0.156 0.520 974 0.001 0.973 963 -0.032 0.319 974 0.013 0.675 974 -0.059 0.064 974 0.009 0.790 959 0.006 0.366 2055 -0.184 0.817 213 -0.027 0.709 187 0.082 0.234 210 0.008 0.909 213 0.076 0.269 213 -0.013 0.860 188 -0.165 0.291 327 -0.029 0.599 325 -0.028 0.619 327 0.005 0.926 327 0.043 0.437 327 0.020 0.724 325 0.003 0.957 327 Pears 0.634 272 0.039 0.880 389 -0.022 Pears 0.530 272 0.029 0.583 389 -0.008 Pears 0.963 272 0.038 0.832 389 0.028 0.625 760 0.143 0.226 1496 0.033 0.196 1496 0.069 0.442 326 0.100 0.071 326 0.120 Pears 0.584 272 -0.003 0.771 389 0.011 0.110 760 -0.018 Pears 1 0.033 2 0.015 3 -0.058 4 0.079 1 0.028 0.617 326 0.043 dependent: venture profit in Euro 2 -0.067 0.126 528 0.385 3 0.016 0.623 974 0.006 0.847 974 -0.016 0.628 974 -0.010 0.757 974 0.021 4 -0.021 0.346 2055 -0.020 0.375 2055 -0.080 1 -0.055 0.427 213 -0.006 0.932 213 0.061 0.374 213 0.100 0.144 213 0.016 dependent: years to breakeven 2 0.041 0.455 327 0.058 0.299 327 0.126 3 -0.033 0.406 638 -0.003 0.935 638 0.083 4 0.007 0.793 1485 0.017 0.502 1485 0.036 0.169 1485 0.044 1 0.020 0.689 417 0.090 0.067 417 0.154 dependent: subjective performance 2 0.008 0.839 674 0.081 3 -0.027 0.320 1313 -0.037 0.186 1313 -0.019 0.487 1313 -0.047 0.088 1313 -0.040 0.152 1313 -0.061 4 -0.132
0.002
1496 0.031
0.000
2645 -0.004 0.827 2645 -0.087
0.000
528 0.341
0.035
674 0.034 0.375 674 0.012 0.757 674 0.053 0.173 674 -0.016 0.680 670 -0.034 0.372 674 0.019 0.620 674 0.044 0.255 674 -0.006 0.867 670 -0.010 0.800 674
0.000
760 0.199
0.000
528 0.245
0.000
2055 -0.078
0.023
327 0.121
0.037
638 0.092
0.002
417 0.185
0.000
2645 -0.115
0.000 0.007
760 0.055 1496 0.002
0.031 0.000
326 0.059 528 0.079
0.000
2055 0.020
0.028
327 0.059
0.020 0.088 0.000

638 0.081 1485 0.008 0.755 1485 0.084 417 -0.042 0.398 417 0.236
0.000
2645 0.060
0.041
638 0.097
0.002
2645 -0.133
0.000 0.007
752 0.024 1390 0.035
0.000
524 0.129
0.000
1906 -0.154
0.015 0.002 0.000

632 0.024 0.537 638 0.090 1386 0.028 0.297 1413 0.040 0.121 1485 0.056 370 0.133
0.028 0.000
1300 -0.105 2445 -0.166
0.003
528 0.092
0.000
1943 0.063
0.007
413 0.239
0.000 0.000
1313 0.018 0.510 1313 -0.045 0.101 1313 -0.020 0.483 1293 -0.025 0.371 1313 2496 0.091
0.001
760 0.154
0.035
528 0.088
0.004
2055 -0.064
0.024
638 0.056 0.158 638 -0.004 0.912 629 0.072 0.070 638
0.000
417 0.014 0.772 417 -0.056 0.284 374 -0.137
0.000
2645 -0.113
0.000 0.019
760 0.008 0.828 747 -0.053 1496 0.096 0.268 136 0.016
0.044
528 0.038 0.390 524 -0.095
0.003
2055 0.007 0.927 191 -0.079
0.032
1485 -0.014 0.873 128 -0.011 0.664 1485
0.000
2645 0.041 0.515 253 -0.167
0.000 0.016
2055 213
0.005
417
0.000
2645
245
v12a heterogeneity - profitability
Pears Sig. N
-0.050 0.422 260 0.144 0.022 254 -0.043 0.483 268 0.013 0.834 249 -0.063 0.325 248 -0.017 0.777 272 0.003 0.961 254 -0.089 0.169 239
-0.030 0.559 389 0.083 0.102 389 0.058 0.253 389 -0.070 0.169 385 0.020 0.697 382 0.017 0.737 389 -0.005 0.926 385 -0.040 0.439 385
-0.050 0.175 752 0.403
-0.031 0.228 1488 0.142
0.107 0.058 315 -0.050 0.390 302 0.157
0.098
0.009 0.773 968 -0.008 0.801 947 -0.059 0.067 972 0.007 0.832 959 0.000 0.990 962 0.012 0.714 974 -0.008 0.795 966 0.013 0.683 959
0.194
-0.032 0.648 207 -0.161
-0.126
-0.083
-0.111
0.090 0.074 399 -0.166
0.004 0.915 674 0.012 0.761 674 -0.006 0.877 674 0.021 0.584 670 -0.010 0.806 663 0.082
0.093
0.163
0.024
528 -0.056 0.196 528 0.241
0.000
2046 -0.004 0.867 2026 0.071
0.022
327 0.016 0.770 327 0.110
0.037 0.000
633 0.163 1478 0.019 0.458 1460 -0.013 0.620 1478 -0.016 0.857 128 -0.101
0.001 0.000
1302 -0.052 0.063 1274 -0.036 0.191 1310 0.021 0.457 1293 0.061 2627 -0.029 0.145 2597 -0.032 0.099 2630 0.112 0.074 253 0.178
v12b heterogeneity - sales growth v12c heterogeneity - sales
Pears Sig. N Pears Sig. N
0.000 0.000
746 0.021 0.567 758 0.010 0.783 747 0.002 0.951 746 0.068 0.061 760 -0.004 0.922 751 -0.042 0.256 747 1480 0.070
0.025
192 -0.070 0.314 209 0.089 0.225 188 -0.026 0.717 195 0.054 0.435 213 -0.134 0.054 207 -0.019 0.801 178
0.000
618 0.001 0.980 637 -0.015 0.699 629 0.011 0.783 628 -0.065 0.099 638 -0.089
0.001
382 0.028 0.569 410 0.042 0.420 374 0.090 0.081 380 0.107
0.007
1490 0.062 0.476 136 -0.047 0.073 1476 0.013 0.613 1496 -0.040 0.122 1483 0.014 0.867 136
0.005 0.000
321 -0.006 0.919 293 0.147 528 0.094
0.001
2047 0.171
0.047
327 0.025 0.656 325 0.041 0.457 325 0.021 0.710 327 -0.034 0.538 325 -0.034 0.537 325
Pears Sig. N
0.031
524 -0.002 0.959 520 0.104
0.018
191 0.209
v14 gross margin
Pears Sig. N
0.011
301 0.108 0.051 326 0.072 0.207 308 0.035 0.565 278
0.000
2033 0.001 0.974 2055 0.068
0.000
1470 -0.053
0.029 0.000
1293 -0.024 0.384 1313 0.023 0.415 1303 -0.031 0.260 1293 2604 0.030 0.119 2645 -0.001 0.967 2629 0.104 0.100 253
Pears Sig. N
0.017
528 -0.048 0.277 524 0.069 0.115 524
0.040 0.029 0.034

1485 -0.086 417 -0.055 0.275 396 -0.107 674 -0.008 0.841 670 -0.005 0.889 670
v16 average number of employees on startup v17 investment intensity
0.002
2043 0.180
0.025 0.001
633 -0.018 0.650 629 1481 0.013 0.883 128
0.013
191
0.043
357
Industry sectors: 1=manufacturing, 2=construction, 3=trade, 4=services Correlations significant at the 0.05 level (2-tailed) are underlined and marked in bold.
Table 65: Correlation of industry factors with venture performance measures by industry sector
The assumed stimulation of venture growth by higher market size (hypothesis 1) cannot be confirmed for the overall sample, however, it can be confirmed for the service sector. The negative impact of MES on venture profits (hypothesis 2) cannot be confirmed for any industry sector. On the contrary, in construction, which has a relatively low level of MES, profit is positively related to MES. The relationship between export balance and venture growth (hypothesis 3) is particularly strong in the retail sector. The related industry variable of distance to clients (hypothesis 4) is particularly strong for both the retail and service sectors. The assumed negative correlation between distance to client and venture profits can be confirmed in the service sector. However, an opposite positive impact is found for the manufacturing and construction sectors. In manufacturing and construction, scale advantages may be of greater importance than in other sectors, which may in part explain the opposite direction of impact in different sectors. The assumed positive impact of market growth
246
on venture growth (hypothesis 5) is not confirmed for any sector. The assumed impact of entries to industry on venture growth (hypothesis 6) is confirmed for both the retail and the service sectors. The impact on venture profit is confirmed for the overall sample and for the service sector. However, for the construction sector the correlation is negative. The same phenomenon can be observed for the relationship between exits from industry and venture profit (hypothesis 7), where a negative correlation is also found for the overall sample and the service sector, but a positive relationship is found for the construction sector. With regard to the balance of net entries (hypothesis 8), both the construction and the service sectors are, according to the hypothesis, positively related to venture profits. The relationship between net entries and venture growth is only positive for the trade sector. With regard to the relationship between uncertainty and venture profit (hypothesis 9), again a negative relationship can be confirmed for the overall sample and the service sector, while for the construction sector a positive correlation exists. Relating to venture growth, the positive correlation with uncertainty can be confirmed for both the trade and service sectors. The assumed positive correlation between concentration and profit (hypothesis 10) cannot be confirmed for any sector. For no performance indicator in any sector is a significant correlation to the concentration rate observed. The assumed negative correlation between number of industry members and profit (hypothesis 11) is only confirmed for the service sector. The assumed positive impact of industry heterogeneity on venture profits (hypothesis 12) is confirmed for the construction and service sector when considering profit heterogeneity. When considering heterogeneity in sales, for the manufacturing sector as well as for the retail and service sectors, a positive correlation can be confirmed. However, both industry variables heterogeneity of venture profits and heterogeneity of ventures sales, as well as the variable of gross margin (v14) have to be considered with caution, as distortions may result from the fact that these industry variables are calculated from the DtA sample data and may be influenced directly by the level of venture profits. For no industry sector can a correlation with heterogeneity of sales growth be found. Neither can a correlation be confirmed between employee productivity and sales growth (hypothesis 13). For the construction and service sectors, the assumed positive relationship between employee productivity and venture profits can be confirmed. The expected positive correlation between gross margin and venture profit (hypothesis 14) is confirmed for the manufacturing and the service sector. However, potential distortions result from the fact that gross margin is
247
calculated based on the profits of ventures in the sample. The average firm size is positively related to venture profit only in the construction sector (hypothesis 15). The last two hypotheses of a positive correlation between the number of employees on startup and venture profit (hypothesis 16) and between investment intensity and venture profit (hypothesis 17) can only be confirmed for the service sector. The correlation analysis indicates that the impact of industry variables on venture performance varies greatly with respect to the industry sector. No single industry variable was found to have equally significant correlation with any venture performance measure for all industry sectors. On the contrary, on nine occasions significant correlations of opposing directions are identified for different industry sectors. In none of these nine cases significant correlations of opposing direction are identified between the manufacturing and the construction sector or between the trade and service sectors, indicating that industry variables affect each group manufacturing/construction and trade/service in a similar way. Opposite directions of impact with regard to the venture profit measure have been found for export balance, distance to clients, entries to industry, exits from industry and uncertainty. Similarly, with regard to the subjective performance measure, opposite directions of impact were identified for export balance, distance to clients, entries to industry and exits from industry. No significant correlations with opposite directions of impact were identified for the measures of venture growth and years to break even. The number of significant correlations also varies greatly among the different industry sectors. Considering all performance measures, a total of 37 significant correlations were identified for the service sector, as opposed to 18 in retail, 17 in construction, and only 14 in manufacturing. Taking into account only the relations between industry variables and performance measures for which hypotheses have been formulated the phenomenon is even more apparent. For the service sector, 15 of the formulated hypotheses can be confirmed. For the construction and retail sectors, five hypotheses can be confirmed, and for manufacturing only two of the initial hypotheses can be confirmed. The correlation analysis by industry sector clearly supports McGahan and
248
Porters (1997)203 conclusion that industry factors are of higher importance in the service sector than in the manufacturing sector. In order to gain additional information about the relative strength of impact of the correlated industry variables, an individual regression analysis has been performed for each industry sector with each performance measure. The results of these regression analyses are summarised in the following table.
dependent: venture growth industry sector v1 market size in 1,000 Euro Corr. Beta t v2 MES in 1,000 Euro of sales Corr. Beta t v3 export balance Corr. Beta t v4 distance to clients Corr. Beta t v5 market growth Corr. Beta t v6 entries to industry Corr. Beta t v7 exits from industry Corr. Beta t v8 net entries Corr. Beta t v9 uncertainty Corr. Beta t v10 concentration Herfindahl index Corr. Beta t + 0.106 2.962 + 0.098 2.574 + 0.244 4.462 -0.078 -3.533 -0.081 -2.565 -0.091 -3.197 -0.110 -4.608 + 0.156 4.082 + 0.12 2.171 + 0.051 2.459 1(+) 2(+) 3 4 + 0.099 3.709 + 0.282 5.219 + 0.155 2.877 + 0.122 2.231 dependent: venture profit in Euro 1 2 3(+) 4 1 dependent: years to breakeven 2 3 4 dependent: subjective performance 1 2 3 4
203
Compare chapter 2.2.1.
249
Corr. Beta t
Corr. Beta t
-0.123 -2.240 -1.61 -2.252 + 0.170 4.250 -0.114 -2.087
+ 0.074 2.605
+ 0.065 2.630
v12b heterogeneity sales growth
Corr. Beta t
v12c heterogeneity sales
Corr. Beta t
Corr. Beta t
v14 gross margin
Corr. Beta t
-0.122 -4.524 + 0.082 2.123 -0.099 -2.464* -0.096 -3.583
Corr. Beta t
v16 average number of employees on startup
Corr. Beta t
Corr. Beta t
R2. R adj F
2 .
/ / /
/ / /
0.059 0.056 15.71
0.100 0.099 13.76
0.014 0.011 4.71
0.161 0.157 50.25
/ / /
0.046 0.045 45.74
0.026 0.021 5.07
0.031 0.025 5.16
0.036 0.033 11.41
0.022 0.020 15.09
0.088 0.082 26.92
0.007 0.005 4.51
0.017 0.015 11.04
0.039 0.038 24.59
Industry sectors: 1=manufacturing, 2=construction, 3=trade, 4=services Significance level: underline= 0.05 level (2-tailed); double underline= 0.01 level (2-tailed) (+): no regression analysis could be performed due to lack of correlated variables
Table 66: Summarising regression results of 16 regressions by industry sector
The results of the regression analysis highlight the sensitivity to the industry context and the performance measures. General patterns relating to specific industry variables, industry sectors and performance measures independent of the context of the individual regression analysis cannot be derived. Regarding venture growth, the highest explanation power is found for the service sector, and regarding venture profits, the service sector has the second highest explanation power among all sectors.
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5.5.3.2
Market growth rate
Market growth and the associated variable of industry life cycle stage have been identified as some of the most important industry variables in previous entrepreneurship research204. A large share of studies concentrates only on dynamic, fast-growing, technology-oriented markets, and it was suggested in previous research205 that industry variables should be investigated by taking into account the life cycle stage of the industry. Even though the applied 4-digit industry categorisation does not allow the identification of industries in their early life cycle stages, it does allow the identification of industry segments with high rates of market growth, which is the most critical criteria for the definition of industry life cycle stages. Consequently, the 163 investigated industries are segmented on the basis of the growth of industry sales from the value-added tax statistics into low market growth, medium market growth and high market growth. The analysis will provide information on whether different industry variables are decisive in markets of different growth levels.
venture growth 1 v1 market size in 1,000 Euro Pears Sig. N v2 MES in 1,000 Euro of sales Pears Sig. N v3 export balance Pears Sig. N v4 distance to clients Pears Sig. N v5 market growth Pears Sig. N 0.019 0.558 957 0.018 0.579 957 0.090 0.005 957 0.097 0.003 957 -0.010 0.752 957 2 0.011 0.718 1030 -0.025 0.423 1030 0.006 0.858 1030 0.031 0.317 1030 -0.041 0.191 1030 3 0.034 0.305 930 0.077 0.019 930 0.115 0.000 930 0.189 0.000 930 0.035 0.290 930 1 0.002 0.948 1319 0.000 0.996 1319 -0.009 0.738 1319 0.010 0.707 1319 -0.026 0.349 1319 venture profit in Euro 2 -0.086 0.002 1322 -0.050 0.066 1322 -0.002 0.954 1322 0.004 0.878 1322 -0.058 0.034 1322 3 -0.026 0.362 1242 -0.017 0.540 1242 -0.091 0.001 1242 -0.120 0.000 1242 0.014 0.627 1242 1 -0.013 0.680 941 0.067 0.040 941 0.097 0.003 941 0.107 0.001 941 0.010 0.755 941 years to breakeven 2 -0.036 0.303 826 -0.018 0.615 826 0.027 0.434 826 0.026 0.453 826 0.027 0.441 826 3 0.035 0.300 896 0.020 0.548 896 0.052 0.117 896 0.075 0.025 896 0.006 0.856 896 1 0.006 0.806 1716 0.044 0.070 1716 0.020 0.416 1716 0.016 0.507 1716 -0.008 0.727 1716 subjective performance 2 -0.102 0.000 1716 -0.049 0.044 1716 0.002 0.946 1716 0.009 0.707 1716 -0.053 0.029 1716 3 -0.134 0.000 1617 -0.030 0.226 1617 -0.099 0.000 1617 -0.156 0.000 1617 0.013 0.611 1617
204
Compare aggregation table in chapter 2.1.3 and Tyebjee and Bruno 1981, MacMillan, Siegel et al. 1985, MacMillan and Day 1987, Hall and Hofer 1993, Zacharakis and Meyer 1998. 205 Covin and Slevin 1990, Low and Abrahamson 1997.
251
Pears Sig. N
0.094 0.004 922 -0.025 0.442 957 0.029 0.366 957 0.074 0.021 957 0.000 0.993 724 0.023 0.476 957 0.028 0.396 941 0.174 0.000 941 0.040 0.215 954 0.105 0.005 724 0.041 0.217 924 0.036 0.267 957
0.051 0.120 949 -0.032 0.326 949 0.029 0.345 1030 0.032 0.305 1030 -0.049 0.211 665 0.004 0.900 1030 0.005 0.879 1025 0.150 0.000 1019 0.024 0.442 1027 -0.001 0.986 665 0.019 0.549 1018 -0.021 0.501 1030
0.132 0.000 901 0.115 0.000 930 0.031 0.342 930 0.145 0.000 930 0.226 0.010 128 0.038 0.253 930 -0.075 0.023 923 0.364 0.000 909 -0.017 0.596 924 0.143 0.108 128 -0.096 0.004 910 0.024 0.466 930
-0.003 0.913 1272 0.012 0.650 1319 0.022 0.421 1319 -0.042 0.132 1319 0.005 0.882 987 0.016 0.551 1319 0.036 0.188 1304 0.000 0.997 1292 -0.060 0.029 1314 -0.029 0.370 987 0.034 0.222 1286 0.004 0.877 1319
-0.083 0.004 1206 -0.103 0.000 1206 0.082 0.003 1322 -0.022 0.427 1322 -0.032 0.356 831 -0.119 0.000 1322 0.254 0.000 1318 0.016 0.572 1303 -0.050 0.071 1318 0.024 0.491 831 0.206 0.000 1310 -0.019 0.487 1322
-0.208 0.000 1204 -0.183 0.000 1242 0.066 0.020 1242 -0.110 0.000 1242 -0.168 0.041 149 -0.126 0.000 1242 0.217 0.000 1235 -0.071 0.013 1208 0.116 0.000 1236 -0.037 0.650 149 0.217 0.000 1220 0.054 0.058 1242
0.011 0.751 909 -0.087 0.008 941 -0.024 0.461 941 0.047 0.147 941 0.013 0.732 665 -0.002 0.947 941 -0.024 0.474 928 0.031 0.351 914 0.009 0.794 935 0.056 0.147 665 0.004 0.913 919 0.060 0.067 941
0.031 0.396 751 -0.007 0.841 751 0.028 0.425 826 -0.008 0.830 826 -0.014 0.753 497 0.015 0.663 826 -0.120 0.001 825 0.027 0.449 813 0.020 0.558 823 -0.021 0.638 497 -0.028 0.431 818 -0.104 0.003 826
0.121 0.000 870 0.084 0.012 896 0.047 0.159 896 0.101 0.003 896 0.215 0.025 108 0.066 0.047 896 -0.128 0.000 892 0.071 0.036 870 -0.042 0.208 893 0.123 0.203 108 -0.124 0.000 881 -0.051 0.126 896
0.031 0.203 1652 -0.046 0.055 1716 0.081 0.001 1716 -0.002 0.922 1716 -0.017 0.540 1273 -0.001 0.977 1716 0.053 0.029 1688 0.025 0.307 1672 -0.024 0.312 1706 0.062 0.027 1273 0.037 0.128 1662 0.063 0.009 1716
-0.082 0.001 1563 -0.127 0.000 1563 0.109 0.000 1716 -0.054 0.026 1716 -0.014 0.642 1111 -0.108 0.000 1716 0.186 0.000 1709 0.011 0.641 1689 -0.087 0.000 1710 0.023 0.437 1111 0.213 0.000 1697 -0.047 0.053 1716
-0.142 0.000 1570 -0.173 0.000 1617 0.074 0.003 1617 -0.127 0.000 1617 -0.183 0.009 206 -0.157 0.000 1617 0.192 0.000 1605 -0.109 0.000 1566 0.032 0.197 1608 -0.046 0.508 206 0.174 0.000 1581 0.028 0.256 1617
Pears Sig. N
v8 net entries
Pears Sig. N
v9 uncertainty
Pears Sig. N
v10 concentration - Herfindahl index v11 number of industry members
Pears Sig. N
v12b heterogeneity - sales growth v12c heterogeneity - sales
v13 employee Pears productivity in 1,000 Euro Sig. N v14 gross margin Pears Sig. N v15 average firm size in 1,000 Euro Pears Sig. N
252
v16 average number of employees on start up v17 investment intensity
-0.005 0.877 937 -0.034 0.368 718
-0.027 0.386 1019 -0.050 0.200 665
-0.060 0.070 917 -0.041 0.654 124
-0.006 0.821 1300 0.048 0.136 978
0.015 0.591 1312 0.044 0.210 831
0.142 0.000 1229 0.120 0.152 143
-0.041 0.207 931 0.021 0.588 659
-0.140 0.000 822 -0.071 0.114 497
-0.066 0.048 893 0.034 0.732 104
0.016 0.511 1695 0.010 0.727 1262
-0.033 0.176 1703 0.012 0.701 1111
0.020 0.433 1600 -0.051 0.472 200
Market growth categories: 1=lower third, 2=middle third, 3=upper third Correlations significant at the 0.05 level (2-tailed) are underlined and marked in bold.
Table 67: Correlation of industry factors with venture performance measures by market growth categories
Not for a single significant industry variable, opposite directions of impact were observed for any performance measure. Industry variables do therefore not seem to impact ventures in fast-growing markets in a fundamentally different way than ventures with low or declining market growth rates. Ventures in industries of high market growth, however, seem to react stronger to industry effects. With regard to all performance measures, a total of 45 significant correlations have been identified for the high market growth segment, as opposed to 22 in the medium growth segment and 15 in the low growth segment. Only taking into account the relationships between industry variables and performance measures for which hypotheses have been formulated, 13 of the formulated hypotheses can be confirmed for the segment of high market growth, 6 for the segment of medium market growth and 7 for the segment of low market growth.
dependent: venture growth market growth category: v1 market size in 1.000 Euro Corr. Beta t v2 MES in 1,000 Euro of sales Corr. Beta t v3 export balance Corr. Beta t v4 distance to clients Corr. Beta t v5 market growth Corr. Beta t + 0.125 3.311 + 0.242 2.721 -0.084 -2.909 + 0.097 2.986 + 0.368 3.951 1 2(+) 3 dependent: venture profit in Euro 1(+) 2 3 dependent: years to breakeven 1 2 3 dependent: subjective performance 1 2 3
253
Corr. Beta t
-0.126 -4.021 -0.174 -2.138 + 0.109 3.418 -0.075 -2.287 + 0.076 2.714 + 0.079 3.184
Corr. Beta t
v8 net entries
Corr. Beta t
v9 uncertainty
Corr. Beta t
v10 concentration Herfindahl index
Corr. Beta t
+ 0.179 2.007
-0.202 -28.827
Corr. Beta t
Corr. Beta t
-0.103 2.965
-0.196 -2.106
Corr. Beta t
Corr. Beta t
Corr. Beta t
v14 gross margin
Corr. Beta t
+ 0.203 8.143 + 0.093 3.319 -0.127 -3.657
Corr. Beta t
v16 average number of employees on startup
Corr. Beta t
Corr. Beta t
254
R2. R2 adj. F
0.016 0.014 10.96
/ / /
0.107 0.092 7.01
/ / /
0.027 0.025 11.145
0.030 0.024 4.571
0.017 0.015 8.046
0.030 0.028 12.67
0.174 0.157 10.04
0.015 0.013 9.392
0.051 0.049 41.04
0.041 0.036 7.99
Market growth categories: 1=lower third, 2=middle third, 3=upper third Significance level: underline= 0.05 level (2-tailed); double underline= 0.01 level (2-tailed) (+): no regression analysis could be performed due to lack of correlated variable
Table 68: Summarising regression results of 12 regressions by market growth category
In the regression analysis, the highest explanation power of all models is also found for the highest market growth segment. The explanation power is particularly high for the measures of venture growth and years to break even. Eight variables do not appear in any regression model. General patterns relating to the exceptional frequency of specific industry variables and performance measures independent of the context of the individual regression analysis, were not observed. 5.5.3.3 Venture growth rate
In the last chapter, a segmentation by growth rate was performed on the industry level. Correspondingly within this chapter, a segmentation of growth rates shall be performed on the individual venture level. Research on success factors frequently concentrates on particularly successful organisations. Ventures of the sample are divided into groups of low, medium, and high venture growth rate. The analysis will reveal whether industry variables relate more to successful or less successful ventures. At the same time, the analysis will provide information on the impact of outliers. The recent study by Hawawini et al. (2003) has suggested that industry effects are higher for samples corrected from outliers. Therefore, it may be assumed that the segment of medium venture growth provides the strongest indicator of industry effects.
venture growth 1 v1 market size in 1,000 Euro Pears Sig. N v2 MES in 1,000 Euro of sales Pears Sig. N -0.020 0.533 974 0.060 0.062 974 2 0.004 0.892 994 -0.009 0.766 994 3 0.034 0.298 949 0.025 0.441 949 1 -0.033 0.326 869 -0.024 0.474 869 venture profit in Euro 2 -0.032 0.334 901 -0.036 0.281 901 3 -0.008 0.807 856 0.002 0.947 856 1 -0.006 0.891 489 0.018 0.698 489 years to breakeven 2 0.121 0.007 488 0.036 0.423 488 3 0.021 0.637 497 0.092 0.041 497 1 -0.081 0.012 965 -0.015 0.652 965 subjective performance 2 -0.110 0.001 980 -0.035 0.268 980 3 -0.053 0.103 940 0.014 0.665 940
255
v3 export balance
Pears Sig. N
-0.046 0.151 974 -0.095 0.003 974 0.005 0.888 974 -0.059 0.076 904 -0.119 0.000 929 0.011 0.726 974 -0.096 0.003 974 0.087 0.033 604 -0.024 0.459 974 0.097 0.003 964 -0.115 0.000 957 -0.045 0.159 969
0.048 0.134 994 0.073 0.021 994 -0.005 0.872 994 0.035 0.286 954 0.017 0.589 969 0.025 0.425 994 0.021 0.502 994 0.050 0.251 522 -0.015 0.645 994 -0.022 0.499 986 0.075 0.018 977 -0.001 0.970 990
0.038 0.247 949 0.080 0.014 949 0.016 0.626 949 0.078 0.018 914 0.015 0.642 938 0.030 0.354 949 0.087 0.007 949 0.032 0.534 391 0.024 0.452 949 -0.044 0.177 939 0.234 0.000 935 0.031 0.336 946
0.015 0.651 869 0.023 0.502 869 0.081 0.016 869 -0.127 0.000 806 -0.159 0.000 827 0.086 0.011 869 -0.083 0.014 869 -0.015 0.723 536 -0.047 0.169 869 0.161 0.000 863 -0.039 0.260 855 -0.073 0.032 864
-0.038 0.258 901 -0.054 0.106 901 0.072 0.032 901 -0.111 0.001 866 -0.107 0.001 880 0.144 0.000 901 0.007 0.843 901 -0.037 0.421 469 -0.087 0.009 901 0.186 0.000 896 0.009 0.780 887 0.023 0.499 897
-0.009 0.800 856 0.005 0.894 856 0.022 0.521 856 -0.005 0.887 822 -0.024 0.491 845 0.043 0.210 856 -0.052 0.131 856 0.005 0.932 356 -0.001 0.979 856 0.050 0.148 848 0.009 0.792 843 -0.079 0.021 853
-0.005 0.907 489 -0.009 0.845 489 -0.014 0.755 489 -0.011 0.811 458 -0.014 0.764 470 -0.032 0.484 489 -0.011 0.813 489 -0.023 0.706 284 -0.005 0.915 489 -0.032 0.484 487 -0.045 0.323 478 -0.013 0.776 486
0.126 0.005 488 0.104 0.022 488 -0.018 0.698 488 0.108 0.019 468 0.084 0.068 476 -0.095 0.035 488 0.060 0.186 488 0.033 0.620 233 0.130 0.004 488 -0.150 0.001 485 0.042 0.360 477 0.053 0.242 485
0.093 0.037 497 0.121 0.007 497 0.123 0.006 497 0.120 0.009 477 -0.055 0.224 491 0.103 0.022 497 0.114 0.011 497 0.039 0.600 181 0.037 0.411 497 -0.147 0.001 491 0.075 0.096 491 0.029 0.518 495
0.018 0.567 965 0.012 0.705 965 0.053 0.099 965 -0.019 0.574 896 -0.125 0.000 921 0.124 0.000 965 -0.064 0.047 965 0.024 0.555 597 -0.074 0.022 965 0.124 0.000 955 -0.004 0.905 948 -0.052 0.105 960
-0.030 0.355 980 -0.045 0.162 980 0.097 0.002 980 -0.091 0.005 941 -0.144 0.000 956 0.109 0.001 980 -0.027 0.399 980 -0.014 0.755 517 -0.112 0.000 980 0.142 0.000 972 -0.055 0.089 963 -0.081 0.011 976
-0.014 0.660 940 -0.043 0.190 940 0.036 0.265 940 -0.063 0.058 905 -0.121 0.000 929 0.092 0.005 940 -0.050 0.125 940 0.077 0.129 387 -0.102 0.002 940 0.134 0.000 930 -0.016 0.626 926 0.002 0.943 937
Pears Sig. N
v5 market growth
Pears Sig. N
Pears Sig. N
Pears Sig. N
v8 net entries
Pears Sig. N
v9 uncertainty
Pears Sig. N
v10 concentration
Pears Sig. N
Pears Sig. N
v12a profitability
Pears Sig. N
v12b sales growth
Pears Sig. N
v12c sales
Pears Sig. N
256
v13 employee productivity
Pears Sig. N
-0.057 0.163 604 0.020 0.536 946 -0.026 0.426 974 0.064 0.047 959 0.028 0.487 599
0.097 0.027 522 0.014 0.653 978 0.020 0.532 994 -0.070 0.029 979 -0.055 0.213 520
-0.006 0.907 391 -0.047 0.156 928 -0.009 0.777 949 -0.030 0.358 935 -0.086 0.091 388
0.004 0.934 536 0.224 0.000 847 0.013 0.703 869 0.074 0.031 855 0.179 0.000 531
0.091 0.050 469 0.200 0.000 889 0.019 0.569 901 -0.011 0.739 887 -0.071 0.126 467
-0.007 0.897 356 0.065 0.059 837 0.007 0.846 856 -0.010 0.763 844 0.066 0.219 353
0.018 0.761 284 -0.022 0.626 478 -0.034 0.450 489 -0.082 0.071 483 -0.047 0.439 279
-0.005 0.940 233 -0.168 0.000 481 -0.028 0.539 488 -0.009 0.844 484 0.063 0.336 233
0.053 0.478 181 -0.128 0.005 487 -0.001 0.988 497 -0.114 0.011 493 -0.099 0.186 180
-0.018 0.653 597 0.156 0.000 937 -0.012 0.705 965 -0.033 0.313 950 0.016 0.698 592
-0.035 0.426 517 0.156 0.000 964 0.024 0.458 980 -0.035 0.282 965 0.034 0.435 515
0.063 0.218 387 0.136 0.000 919 0.066 0.044 940 0.065 0.047 926 0.072 0.158 384
v14 gross margin
Pears Sig. N
Pears Sig. N
v16 average number of employees
Pears Sig. N
Pears Sig. N
Venture growth categories: 1=lower third, 2=middle third, 3=upper third Correlations significant at the 0.05 level (2-tailed) are underlined and marked in bold.
Table 69: Correlation of industry factors with venture performance measures by venture growth categories
Of particular interest is the identification of industry variables with opposite directions of impact for the groups with high and low venture growth. The two variables distance to clients (v4) and uncertainty (v9) correlate positively with venture growth for the group of high venture growth and negatively for the group of low venture growth. Those ventures with competitive offerings reflected in higher venture growth rates may grow faster in industries with large distances to clients. On the other hand, ventures with less competitive offerings may be disadvantaged in industries of large distances to clients. These ventures may perform relatively better in local markets, where clients are less intended to perform a meticulous comparison of alternative providers and may more frequently select the provider that is closest or most convenient to reach. Uncertainty may lead to high growth rates for ventures that dynamically reap opportunities in an uncertain environment. However, less dynamic ventures may be negatively affected by uncertain environments, to which they are unable to adapt rapidly. According to the other assumed relationships, the correlation analysis suggests that the positive impact of entries to industry (v6) on venture growth is strongest for ventures with high venture growth, while the negative impact of entries to industry (v6) on
257
venture profits is highest for ventures of low and medium venture growth. The assumed negative relationship between exits from industry (v7) and venture profit is significant, particularly for ventures of medium and low growth rates. The assumed negative relationship between uncertainty (v9) and venture profits is of particular importance for ventures with low growth rates. With respect to the effect of outliers, the segment of medium venture growth, has according to expectations, the highest number of significant correlations with industry factors and the highest number of confirmed hypotheses. Still the effect does not appear very strong since the segment of low venture growth has nearly the same number of confirmed hypotheses. In total, 24 significant correlations are identified for the segment of low venture growth, 30 significant correlations for the segment of medium venture growth and 21 significant correlations for the segment of high venture growth. Considering only the formulated hypotheses, 7 hypotheses are confirmed for the segment of low venture growth, 8 hypotheses are confirmed for the segment of medium venture growth, and 3 hypotheses are confirmed for the segment of high venture growth. The regression analysis provides information on the relative strength of the most important industry factors for each performance measure and group of venture growth.
dependent: venture growth venture growth category: v1 market size in 1,000 Euro Corr. Beta t v2 MES in 1,000 Euro of sales Corr. Beta t v3 export balance Corr. Beta t v4 distance to clients Corr. Beta t v5 market growth Corr. Beta t + 0.127 2.834 + 0.124 2.072 1 2 3 dependent: venture profit in Euro 1 2 3 dependent: years to breakeven 1(+) 2 3 dependent: subjective performance 1 2 3
258
Corr. Beta t
Corr. Beta t
-0.115 -2.717 + 0.114 2.402 + 0.090 2.729 + 0.088 2.086 -0.126 -2.816 + 0.123 2.613
-0.094 -2.486
0.099 -2.739 + 0.078 2.269
v8 net entries
Corr. Beta t
v9 uncertainty
Corr. Beta t
v10 concentration Herfindahl index
Corr. Beta t
Corr. Beta t
Corr. Beta t
+ 0.101 2.933
Corr. Beta t
Corr. Beta t
-0.079 -2.309 + 0.097 2.198 -0.124 -2.532 -0.183 -3.885 + 0.156 4.716 + 0.104 2.751
Corr. Beta t
v14 gross margin
Corr. Beta t
Corr. Beta t
Corr. Beta t
-0.120 -2.554 + 0.210 4.719
+ 0.104 3.043
Corr. Beta t
259
R2. R adj F
2 .
0.022 0.018 6.14
0.009 0.007 4.83
0.008 0.007 4.83
0.071 0.065 12.03
0.013 0.011 5.77
0.006 0.005 5.33
/ / /
0.035 0.030 8.20
0.049 0.043 8.00
0.024 0.023 22.24
0.030 0.028 14.13
0.041 0.036 9.48
Venture growth categories: 1=lower third, 2=middle third, 3=upper third Significance level: underline= 0.05 level (2-tailed); double underline= 0.01 level (2-tailed) (+): no regression analysis could be performed due to lack of correlated variable
Table 70: Summarising regression results of 12 regressions by venture growth category
Within the regression analysis no specific segment of venture growth consistently provides superior explanation power. The segment of medium venture growth does not provide higher explanation power for any measure of venture success. Consequently, outliers do not seem to have significant effects on the explanation power. The results of Hawawini et al. (2003) can therefore not be confirmed. In general, the strength of impact of industry variables does not seem to be influenced by venture growth. 5.5.3.4 Intra-industry heterogeneity
It has been suggested in previous research that the "explanatory power of industry variables strongly depends on whether firms within an industry are homogenous or heterogeneous206. When defining industries on the basis of four-digit industry classifications, heterogeneity may be caused in some broad industry categories by aggregating distinctive firm activities of differing profitability. However, in very narrowly defined industries, where each firm offers close substitute products to the other, a high industry heterogeneity may also be encountered when the success rate of firms within the industry varies strongly. Apparently, in both cases of heterogeneity, an analysis of aggregated industry variables may be less accurate and may be more influenced by factors specific to the firm instead of factors specific to the industry. Consequently, it is the objective of the following analysis on sub-samples aggregated by the contingency variable of intra-industry heterogeneity to investigate whether the suggested stronger impact of industry variables in homogeneous industries can be confirmed and whether additional relationships may be identified for homogeneous industries that have not been shown in the analysis of the overall sample. In accordance with the above cited study by Mueller and Raunig (1998), industry heterogeneity is measured by the standard deviation of firm profit rates. In the applied
206
Mueller and Raunig 1998.
260
data set, non-aggregated profitability data is only available for the ventures of the sample. The standard deviation of the venture gross margin in the last year of reporting within each industry has been already calculated in variable 12a heterogeneity profitability. Based on this variable, all the ventures of the sample have been classified into three categories of industry heterogeneity. The following table summarises the correlations among the independent variables and the four dependent variables for the three categories of industry heterogeneity.
venture growth 1 v1 market size in 1,000 Euro Pears Sig. N v2 MES in 1,000 Euro of sales Pears Sig. N v3 export balance Pears Sig. N v4 distance to clients Pears Sig. N v5 market growth Pears Sig. N v6 entries to industry Pears Sig. N v7 exits from industry Pears Sig. N v8 net entries Pears Sig. N -0.067 0.038 952 -0.029 0.373 952 0.075 0.020 952 0.137 0.000 952 0.095 0.003 952 0.135 0.000 849 -0.031 0.359 874 0.124 0.000 952 2 0.040 0.225 944 0.009 0.788 944 0.034 0.291 944 0.074 0.024 944 0.042 0.199 944 0.085 0.009 941 -0.025 0.437 941 0.089 0.006 944 3 0.031 0.325 993 -0.008 0.803 993 0.056 0.078 993 0.041 0.199 993 -0.008 0.797 993 0.006 0.846 962 -0.003 0.920 993 -0.033 0.300 993 1 0.014 0.622 1260 0.008 0.768 1260 -0.003 0.901 1260 0.002 0.944 1260 0.020 0.488 1260 0.014 0.635 1114 -0.004 0.886 1148 0.016 0.575 1260 venture profit in Euro 2 0.038 0.176 1286 0.005 0.863 1286 0.062 0.026 1286 0.075 0.007 1286 0.030 0.286 1286 -0.039 0.163 1282 -0.059 0.035 1282 0.013 0.653 1286 3 -0.008 0.761 1311 0.028 0.311 1311 0.043 0.118 1311 0.023 0.396 1311 0.044 0.115 1311 -0.134 0.000 1267 -0.083 0.002 1311 0.029 0.290 1311 1 -0.014 0.691 831 -0.021 0.545 831 0.090 0.009 831 0.089 0.010 831 0.102 0.003 831 0.071 0.053 733 -0.048 0.184 759 0.104 0.003 831 years to breakeven 2 -0.038 0.261 892 0.028 0.410 892 0.051 0.126 892 0.099 0.003 892 0.114 0.001 892 0.068 0.043 889 -0.089 0.008 889 0.134 0.000 892 3 -0.068 0.040 922 -0.019 0.563 922 -0.016 0.633 922 -0.017 0.602 922 -0.013 0.702 922 -0.009 0.782 894 -0.065 0.049 922 0.040 0.219 922 1 -0.035 0.153 1691 -0.009 0.702 1691 0.065 0.007 1691 0.038 0.123 1691 0.023 0.352 1691 0.027 0.304 1497 -0.011 0.658 1542 0.067 0.006 1691 subjective performance 2 -0.045 0.066 1663 -0.010 0.693 1663 0.013 0.594 1663 0.000 0.985 1663 0.058 0.019 1663 -0.030 0.225 1659 -0.116 0.000 1659 0.056 0.021 1663 3 -0.067 0.006 1648 -0.004 0.884 1648 -0.064 0.010 1648 -0.092 0.000 1648 0.081 0.001 1648 -0.069 0.006 1594 -0.142 0.000 1648 0.085 0.001 1648
261
v9 uncertainty
Pears Sig. N
0.153 0.000 952 0.030 0.443 651 -0.080 0.013 952 -0.054 0.095 952 0.361 0.000 941 0.010 0.764 950 0.012 0.765 651 -0.059 0.070 938 0.071 0.029 952 0.000 1.000 940 -0.067 0.087 649
0.058 0.077 944 -0.083 0.045 581 0.096 0.003 944 -0.053 0.103 944 0.144 0.000 938 0.002 0.954 944 -0.032 0.437 581 0.042 0.202 935 -0.019 0.550 944 -0.063 0.053 935 0.010 0.810 575
0.018 0.574 993 0.008 0.899 267 0.039 0.223 993 -0.017 0.603 993 0.121 0.000 978 0.035 0.274 992 -0.111 0.071 267 -0.017 0.598 979 -0.007 0.819 993 0.021 0.520 982 -0.033 0.589 265
-0.048 0.090 1260 0.006 0.854 847 0.016 0.572 1260 -0.008 0.775 1260 -0.005 0.870 1235 -0.058 0.040 1258 0.007 0.837 847 0.000 0.999 1247 0.008 0.772 1260 -0.006 0.833 1248 0.033 0.333 844
0.029 0.291 1286 -0.050 0.172 760 -0.031 0.269 1286 -0.007 0.791 1286 0.027 0.328 1272 0.042 0.137 1286 0.055 0.130 760 -0.001 0.974 1275 0.069 0.013 1286 0.024 0.396 1277 0.033 0.372 751
0.042 0.124 1311 -0.026 0.632 345 -0.016 0.556 1311 0.131 0.000 1311 0.004 0.899 1288 0.084 0.002 1309 0.046 0.399 345 0.112 0.000 1294 0.020 0.464 1311 0.113 0.000 1300 0.102 0.060 342
0.049 0.158 831 -0.003 0.945 549 -0.019 0.593 831 -0.042 0.227 831 0.070 0.046 814 0.005 0.893 830 -0.019 0.658 549 -0.046 0.184 826 -0.020 0.563 831 -0.106 0.002 827 -0.053 0.219 548
0.089 0.008 892 0.016 0.721 503 0.060 0.075 892 -0.081 0.015 892 0.057 0.089 882 -0.053 0.116 892 -0.039 0.384 503 0.123 0.000 884 -0.023 0.499 892 -0.099 0.003 888 0.056 0.210 497
-0.052 0.117 922 0.042 0.541 209 -0.048 0.144 922 -0.039 0.235 922 -0.029 0.389 898 -0.026 0.428 920 0.139 0.045 209 0.020 0.550 908 -0.056 0.091 922 -0.055 0.095 917 0.077 0.269 206
-0.036 0.139 1691 0.002 0.954 1151 -0.061 0.012 1691 0.019 0.438 1691 -0.065 0.008 1657 0.039 0.107 1688 0.037 0.208 1151 0.012 0.625 1670 0.069 0.005 1691 0.022 0.369 1678 -0.052 0.080 1148
-0.030 0.226 1663 -0.025 0.437 978 0.042 0.086 1663 0.018 0.461 1663 0.002 0.930 1643 -0.096 0.000 1663 -0.028 0.374 978 0.068 0.006 1647 -0.020 0.404 1663 -0.068 0.006 1652 -0.014 0.673 967
0.001 0.962 1648 -0.061 0.202 435 -0.110 0.000 1648 0.138 0.000 1648 -0.025 0.319 1613 -0.080 0.001 1645 0.092 0.056 435 0.134 0.000 1623 0.034 0.163 1648 0.045 0.072 1637 0.066 0.171 432
v10 concentration
Pears Sig. N
Pears Sig. N
Pears Sig. N
v12b heterogeneity sales growth
Pears Sig. N
v12c heterogeneity sales
Pears Sig. N
v13 employee Pears productivity Sig. N v14 gross margin Pears Sig. N v15 average firm size in 1,000 Euro Pears Sig. N v16 average number of employees Pears Sig. N v17 investment intensity Pears Sig. N
Intra-industry profit heterogeneity categories: 1=lower third, 2=middle third, 3=upper third Correlations significant at the 0.05 level (2-tailed) are underlined and marked in bold.
Table 71: Correlation of industry factors with venture performance measures by intra-industry profit heterogeneity categories
262
The performance measure of venture profits will not be considered in the following analysis, since the value of the dependent variable of venture profits is applied in the calculation of the segmentation variable of heterogeneity in profits and distortions may occur, especially for industries with a low number of ventures in the sample. The total number of significant relationships remains stable in the range of 21-23 significant correlations for each group of industry heterogeneity. However, breaking down the number of significant correlations to the individual venture success measures, the number of significant relationships varies widely among the three groups. According to the overall number of observed significant correlations, the assumed negative relationships between industry heterogeneity and number of significant correlations cannot be confirmed. With respect to venture growth, the number of significant correlations is in accordance with the initial assumption, and is much higher for the group of low industry heterogeneity. A corresponding trend can be observed for years to breakeven, which is related to venture growth. With respect to subjective performance, the number of significant correlations is, by contrast, distinctively lower for the group with low industry heterogeneity.
Het ALL venture growth Low Mid High 22 23 21 10 6 1 venture profit* 1 4 6 years to break even 6 7 3 subjective performance 5 6 11
* venture profit is excluded from former analysis Table 72: Number of significant correlations for different categories of industry heterogeneity by success measure
As far as venture growth is considered, the suggested increase in the number of significant correlations can be confirmed. In order to identify additional significant correlations that were not identified in the overall sample, the initial hypotheses are compared to the correlation of the subsample with low heterogeneity for the growth measure. Only for market growth (v5) an assumed positive correlation with venture growth could not be confirmed by the overall sample, but could be confirmed for the sub-sample of homogeneous industries.
263
dependent: venture growth venture growth category: v1 market size in 1,000 Euro Corr. Beta t v2 MES in 1,000 Euro of sales Corr. Beta t v3 export balance Corr. Beta t v4 distance to clients Corr. Beta t v5 market growth Corr. Beta t v6 entries to industry Corr. Beta t v7 exits from industry Corr. Beta t v8 net entries Corr. Beta t v9 uncertainty Corr. Beta t v10 concentration Herfindahl index Corr. Beta t v11 number of industry members Corr. Beta t v12a heterogeneity profitability Corr. Beta t v12b heterogeneity - sales growth Corr. Beta t v12c heterogeneity - sales Corr. Beta t + 0.118 3.348 + 0.089 2.742 + 0.094 2.683 + 0.076 2.157 1 2 3(+)
dependent: venture profit in Euro 1(+) 2 3
dependent: years to breakeven 1 2 3
dependent: subjective performance 1 2 3
+ 0.074 2.309 + 0.075 2.105
-0.061 -2.207
-0.140 -4.474 + 0.117 3.351
-0.099 -2.926 + 0.099 2.815
-0.100 -4.000
-0.060 -2.272
-0.099 -3.873 + 0.126 4.934
-0.088 -3.514 -0.077 -3.066
264
Corr. Beta t
+ 0.143 2.044
v14 gross margin
Corr. Beta t
Corr. Beta t
+ 0.071 2.554 + 0.115 3.983
+ 0.065 2.476
Corr. Beta t
Corr. Beta t R2. R adj F

2 .
0.041 0.037 11.91
0.008 0.007 7.52
/ / /
/ / /
0.009 0.007 5.51
0.028 0.026 12.34
0.014 0.012 11.23
0.029 0.026 8.73
0.020 0.015 4.78
0.014 0.012 7.97
0.019 0.018 15.88
0.032 0.030 25.52
Industry heterogeneity categories: 1=lower third, 2=middle third, 3=upper third Significance level: underline= 0.05 level (2-tailed); double underline= 0.01 level (2-tailed) (+): no regression analysis could be performed due to lack of correlated variable
Table 73: Summarising regression results of 12 regressions by industry heterogeneity category
The regression analysis confirms that industry variables provide an explanation power in homogeneous industries superior to that in heterogeneous industries with regard to the measure of venture growth. For all other performance measures homogeneous industries do not provide more explanation power as assumed. Overall the results did not confirm a general strong impact of industry heterogeneity. Only for the measure of venture growth were industry effects found to have a stronger effect in homogeneous rather than in heterogeneous industries.
265
5.6
Synopsis of results
The following table summarises the results of the 56 correlation analyses that were performed among the four measures of venture success, the overall sample and the different contextual sub-samples.
industry HYP ALL 1 v1 market size in 1,000 Euro profit break even subjective v2 MES in 1,000 Euro of sales profit break even subjective v3 export balance profit break even subjective v4 distance to clients profit break even subjective v5 market growth profit break even subjective v6 entries to industry profit break even subjective A growth A growth RO/ AC R growth A growth A R growth growth R sectors 2 3 4 industry profit heterogeneity 1 2 3 1 market growth 2 3 1 venture growth 2 3
+ + -
+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+ -
+ -
+ + -
266
growth profit break even subjective A
+ + A
+ + +
+ + + + + +
v8 net entries
growth profit break even subjective
+ + + + +
+ + + + + + +
+ + + +
+ + -
+ -
v9 uncertainty
growth profit break even subjective
A A
+ -
+ + +
+ + -
+ -
+ + + +
growth profit break even subjective R
growth profit break even subjective RO/ AC
+ + + + + + + + + + + -
growth profit break even subjective NA
+ + +
+ + +
+ + + + +
+ -
+ + + -
+ +
+ +
growth profit break even subjective R
+ + + + -
+ -
growth profit break even subjective NA
+ +
267
v13 employee growth productivity in 1,000 Euro profit break even subjective v14 gross margin profit break even subjective v15 average firm size in 1,000 Euro profit break even subjective v16 average number of employees on startup profit break even subjective v17 investment intensity profit break even subjective growth growth growth growth
RO/ AC RO/ AC
+ + + + +
+ +
+ NA
+ +
+ + + + + +
+ -
+ +
RO/ AC
+ + + +
+ + + +
RO/ AC
+ -
+ -
+ -
+ -
+ +
RO/ AC
Hypotheses: A=accepted, R=rejected, RO/ AC=rejected for overall sample / accepted in contexts, NA=not applicable
Table 74: Summary table of significant correlations in different contexts with results of hypotheses
Hypotheses A total of 17 hypotheses with 23 individual relationships between industry variables and venture success measures were initially specified in chapter 5.2. Among these relationships, three are not applicable, since the operationalisations of the respective industry variable and the respective dependent variable of venture success are based on similar items from the DtA questionnaire. This may possibly lead to distortions of results. Eight relationships from the hypotheses can be accepted for the overall sample based on the results of the correlation analysis. Seven relationships did not correlate significantly for the overall sample, however, they correlated significantly for various industry contexts, consistently in the assumed direction. These relationships from the
268
hypotheses are rejected for the overall sample, but are accepted for industry contexts. Finally five relationships from the hypotheses have to be rejected since they neither correlate significantly for the overall sample, nor consistently correlate significantly for different industry contexts. Hypothesis 1 market size (REJECTED): Most conceptual models207 and research on venture capitalists decision criteria208 have suggested that market size will correlate positively with venture performance. This study cannot confirm the proposed correlation for the applied performance measure of sales growth. Hypothesis 1 is therefore rejected for the overall sample. Hypothesis 2 economies of scale (REJECTED): Various studies209 in the industrial organisation stream of strategy have suggested that established firms will benefit from economies of scale, while new ventures may be discouraged from entry. Due to the costs disadvantages of new ventures in such industries of high economies of scale a negative correlation with venture profits has been assumed in hypothesis 2 for the context of new ventures. This hypothesis has to be rejected. The MES indicator has been neither correlated for the overall sample, nor for a larger number of contexts. For the investigated ventures of the sample that had already made the decision to enter a specific market, economies of scale did not have significant impact on profits. Hypothesis 3 export balance (ACCEPTED): It has been assumed that the export balance of an industry is positively correlated to venture growth. This hypothesis can be accepted for the overall sample. The positive impact of exports on organisational success that were identified by Ravenscraft (1983) and Buzzell (1987) for large established firms, can be confirmed for the success measure of venture growth in the new venture context. A high export balance provides additional growth opportunities.
207 208
Dean and Meyer 1996, Baaken 1989, Hinterhuber 1995. Zacharakis and Meyer 1998. 209 Porter 1979 and Ravenscraft 1983.
269
Hypothesis 4 distance to clients: a) (ACCEPTED): Corresponding to hypothesis 3 it has been assumed that a larger geographic sales market may also provide additional growth opportunities for new ventures. This hypothesis can also be confirmed for the overall sample. b) (REJECTED): With respect to profitability it has been assumed that a larger distance to clients may decrease the profit level, due to higher market transparency. This hypothesis has to be rejected. No correlation has been found for the overall sample. For different investigated contexts, a positive correlation is even found. The relationship between distance to client and profitability that Ravenscraft (1983) found in his study of established firms cannot be confirmed for the sample of new ventures. Hypothesis 5 market growth (REJECTED FOR OVERALL SAMPLE / ACCEPTED CONTEXT-SPECIFIC): In accordance with most studies in entrepreneurship and strategy, a positive correlation between market growth and venture sales growth has been assumed in hypothesis 5. This hypothesis has to be rejected for the overall sample on the basis of the findings in this study. However, for the sub-sample of low profit heterogeneity the expected correlation can be observed. A negative correlation, which was previously found by Stuart and Abetti (1987), cannot be observed for any contextual setting. The importance of market growth may not be as high as may be deduced from the frequent application of this variable in empiric and theoretic research. Hypothesis 6 - entries to industry: a) (ACCEPTED) A positive correlation between firm entries and venture growth has been expected, as high entries to industry are commonly related to early market lifecycle stages, which provide high venture growth opportunities. This hypothesis can be accepted for this study. b) (ACCEPTED) With regard to the venture profit level, a negative correlation has been proposed, since an increasing number of firm entries is assumed to increase the competitive pressure on prices. This hypothesis is also accepted for the overall sample.
270
Hypothesis 7 exits from industry (ACCEPTED): The number of exits from an industry has been assumed to be negatively related to venture profits, since high exit rates may indicate high competitive pressure and low profitability of an industry. On the basis of the results of the conducted study the hypothesis can be accepted for the overall sample. Hypothesis 8 balance of entries and exits (ACCEPTED): Corresponding to hypothesis number 6 and the concept of industry life cycles, a positive correlation between balance of entries and exits and venture growth has been expected. This correlation has been confirmed for the overall sample. Hypothesis 9 uncertainty: a) (ACCEPTED) Uncertainty has been expected to be negatively related to venture growth, since established firms cannot secure high advantages compared with new ventures in uncertain environments. This hypothesis is accepted for the overall sample. b) (ACCEPTED) Related to venture profits the negative impact of increasing risk of investments has been assumed to be stronger than the positive impact of lower competitive disadvantages in relation to established firms. On the basis of the results of this study, the hypothesis is accepted for the overall sample. This finding coincides with Stuart and Abetti (1987), who found a negative impact of market dynamics on a subjective measure of venture performance. The finding contradicts the result of the new venture study by Sandberg and Hofer (1987) who identified a positive impact of market dynamics on ROE. However, these studies may only be directly comparable to a limited degree, since they only measure the related variable of market dynamics and not directly uncertainty. Hypothesis 10 concentration (REJECTED): It was expected that the profit level of new ventures would relate positively with industry concentration as was proposed by Buzzell (1987) and Brderl, Preisendrfer et al.(1996). This hypothesis has to be rejected for the overall sample. Industry concentration has no significantly positive correlation with venture profit for any investigated sub-sample. For the sub-sample of high market growth a negative correlation is even found. Even though industry concentration has been one of the
271
most frequently applied industry variables in previous research, it may not be of much importance for new ventures, as in many other studies no relation between organisational success and industry concentration could be identified either210. Hypothesis 11 number of industry members (REJECTED FOR OVERALL SAMPLE / ACCEPTED CONTEXT-SPECIFIC): The profit level of new ventures was expected to be negatively related to the number of industry members. For the overall sample, this hypothesis has to be rejected. However, for the sub-samples of service sector, high market growth, low market growth and medium venture growth the proposed relationship can be confirmed. At the same time, for no sub-sample could a significantly positive correlation be observed. Given the rejection for the overall sample, venture capitalists may overestimate the importance of the number of competitors211. Hypothesis 12 heterogeneity It was explained in the last chapter that hypotheses 12a and 12c were not applicable due to the operationalisations of the variables. b) (REJECTED) It has been proposed that the profit level of ventures will relate positively to heterogeneity in sales, since a high heterogeneity of firms may also indicate that firms operating below the optimum efficiency level can survive. This hypothesis has to be rejected. Heterogeneity in sales growth has not been positively correlated for the overall sample or for any sub-sample. For the sub-sample of high market growth, a positive correlation between heterogeneity in sales growth and venture profit can even be observed. Hypothesis 13 employee productivity a) (REJECTED FOR OVERALL SAMPLE / ACCEPTED CONTEXTSPECIFIC) Regarding the growth rate of new ventures, a positive relationship to employee productivity has been expected, since growth in industries of high employee productivity will involve less additional organisational work related to recruiting and
210 211
No relationship was found in the empirical studies by Sandberg and Hofer 1987, Tsai, MacMillan and Low 1991, Marshall and Buzzell 1990, and Robinson 1998. Zacharakis and Meyer 1998 identified the number of competitors as the number one actual deal evaluation criteria of venture capitalists.
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training of new employees. This hypothesis cannot be confirmed for the overall sample. However, for the sub-samples of low market growth and medium venture performance the assumed relationship can be observed. b) (REJECTED FOR OVERALL SAMPLE / ACCEPTED CONTEXTSPECIFIC) Regarding venture profits a positive relationship to employee productivity has also been expected, since high employee productivity may lead to higher profitability because of lower personnel costs. This hypothesis cannot be confirmed for the overall sample. However, for the sub-samples of the construction sector, the service sector and the medium venture success level, the expected relationship can be observed. For none of the sub-samples could an opposing, significantly negative, correlation with employee productivity be observed. This study does, therefore, partly confirm the results from Buzzell (1987) who identified employee productivity as a major success factor for established large firms in the PIMS study. Wilsons results (1998) were partly confirmed as he found empirical support for the positive impact of employee productivity in the new venture context. Hypothesis 14 gross margin According to the explanations in the last chapter, hypothesis 14 is not applicable due to the operationalisations of the variables. Hypothesis 15 average firm size (REJECTED FOR OVERALL SAMPLE / ACCEPTED CONTEXT-SPECIFIC) The profit level of new ventures has been assumed to relate positively to average firm size. This has been justified by the concept of liability of size from organisation ecology212. For the overall sample the hypothesis has to be rejected. For the subsamples of the construction sector and medium profit heterogeneity, the expected relationship can, however, be observed. Nevertheless, the impact may not be as important as suggested in population ecology.
212
Compare chapter 3.2.3, p.57ff.
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Hypothesis 16 minimum organisational size (REJECTED FOR OVERALL SAMPLE / ACCEPTED CONTEXT-SPECIFIC) In accordance with the general theory on barriers to entry213 it has been assumed that minimum organisational size as an important barrier to entry will relate positively to venture profits. The results of this study lead to a rejection of the hypothesis for the overall sample. But the proposed relationship can be observed for the sub-samples of the service sector, high profit heterogeneity, high market growth and low venture growth. Hypothesis 17 investment intensity (REJECTED FOR OVERALL SAMPLE / ACCEPTED CONTEXT-SPECIFIC) For investment intensity, as second variable of barriers to entry, a positive relation with venture profits is also proposed. Again the results of the study cannot confirm this hypothesis for the overall sample, however, for the contexts of the service sector and low venture growth, they could. It is noteworthy that both contexts for which a significant correlation with investment intensity can be observed, also have positive correlations with minimum organisational size. In these contexts in particular, barriers to entry apparently have strong impacts on venture profits. Therefore, for these contexts barriers to entry seem to affect new ventures in a similar way to that proposed by Porters model of five forces214 for established firms. For no other sub-sample could a significantly negative correlation with any of the two variables of barriers to entry be observed in this study. Performance measures The results of the study strongly confirm the necessity of distinguishing among different venture performance measures, since industry variables have very different impacts on the applied measures of venture success. Two groups of related performance measures are identified, with venture growth and years to break even forming one group and venture profits and subjective venture performance a second group of related performance measures. For several variables an opposite direction of impact of industry variables on both groups of performance measures is observed.
213 214
Compare literature of industry economics and Porter 1979. Porter 1979.
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Such opposite directions of impact are observed in particular for entries to industry (v6), uncertainty (v9), number of industry members (v11), heterogeneity of profitability (12a), heterogeneity of sales growth (12b) and gross margin (v14). Generalisability of industry venture performance relationships The study shows, that there are a number of industry variables that affect venture performance for the overall sample and a wide range of contextual settings with statistical significance. The following table indicates first those variables that are significant for the overall sample as generic variables. Second, there are the variables that are not significant for the overall sample, but are significant for several industry contexts. Within this group a distinction is made between industry variables that consistently impact the respective measures of venture success in the same direction as suggested by the hypotheses, and other industry variables that impact the respective measures of venture success in different directions for different industry contexts. Finally, there is a third group of industry variables of low relevance. These variables are not significantly correlated for the overall sample and correlate to the venture measure for one or no industry context. Industry variables of group 1 may be generalised for a wide range of industries, and variables of group 2a may also impact ventures in different contexts in the same direction, but with varying strength. Variables of group 2b cannot be generalised since the direction of impact is inconsistent and varies according to the specific industry context. The variables of group 3 can be ignored, as they have hardly any correlation with the venture success measure.
industry variables (in hypotheses) 1. Generic (significant for export balance (v3) overall sample) distance to clients (v4) entries to industry (v6) net entries (v8) uncertainty (v9) entries to industry (v6) exits from industry (v7) uncertainty (v9) number of industry members (v11) venture growth venture profit
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2a. Context-specific consistent (significant for 2 contexts)
market growth (v5) employee productivity (v13)
employee productivity (v13) average firm size (v15) employees on start up (v16) investment intensity (v17)
2b. Context-specific inconsistent (significant for 2 contexts) 3. Low relevance (significant for < 2 contexts)
market size (v1)
distance to clients (v4)
MES (v2) concentration (v10) heterogeneity sales growth (v12b)
Table 75: Importance and generalisability of industry variables from hypotheses
Considering also the relationships between industry variables and venture success measures for which no hypotheses have been formulated, only the relationship between net entries (v8) and venture profit may be relevant for a wide range of industry contexts. Net entry has apparently a positive impact not only on venture growth but also on venture profit. The relationship between heterogeneity of sales growth (v12b) and venture growth cannot be considered since v12b is the standard deviation of the dependent variable of venture growth and industries with a small number of ventures in the DtA sample may therefore be distorted. Apart from these variables, the hypotheses cover all relationships that may be generalisable for a wide range of contexts. All other relationships between industry variables and measures of venture success for which no hypotheses have been formulated, indicate either context-dependent different directions of impact or low relevance.
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industry variables (not in hypotheses)
venture growth
venture profit
1. Generic (significant for heterogeneity sales growth (v12b) overall sample) 2a. Context specific consistent (significant for 2 contexts) 2b. Context specific inconsistent (significant for 2 contexts) exits from industry (v7) concentration (v10) number of industry members (v11) heterogeneity profitability (v12a) employees on startup (v16) 3. Low relevance (significant for < 2 contexts) MES (v2) heterogeneity sales (v12c) gross margin (v14) average firm size (v15) investment intensity (v17) but not applicable /
net entries (v8)
export balance (v3) market growth (v5)
market size (v1)
Table 76: Importance and generalisability of industry variables not included in hypotheses
The summary table of significant correlations provides information on the specific contextual settings in which the mentioned context-specific industry variables affect venture performance. Strengths of impact of individual industry variables The regression analyses performed indicate that the strengths of impact of individual industry variables vary strongly according to the contextual setting. For the overall sample, uncertainty (v9) and distance to clients (v4) have the highest impact on venture growth. Uncertainty (v9) has the highest impact on venture profits. For the individual contextual settings, other variables frequently have the highest impact on venture performance measures.
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Explanation power of industry variables on venture success The explanation power of industry variables on different measures of venture success has been astonishingly low. The adjusted R2 value for the regression models of the overall sample remain at 0,032 and below. Former studies in strategy research on measuring industry effects have suggested a higher explained variance from the regression models (see chapter 2.2.1). With regard to the sub-samples by major industry segments, the explanation power increases up to a maximum adjusted R2 value of 0,157 for the impact of industry variables on venture profit in the construction sector. With regard to the sub-samples of market growth segments, the explanation power increases up to the same maximum adjusted R2 value of 0,157 for the impact of industry variables on time to break even for the segment of high market growth. The chosen methodology tends to lead to lower levels of explanation power. Only those variables for which ex-ante hypotheses have been formulated, and which have been correlated with the venture success measure, and which had a significant t-value were included in the regression analysis. The selection of variables has been lmited by the availability of data. Important variables may have been omitted. Contingency variable 1: Industry sector It has been assumed from the study by McGahan and Porter (1997) that industry variables have a higher impact on venture performance in the service sector than in other sectors. The correlation analysis by industry sector confirms this assumption. The total number of significant correlations between industry variables and venture performance measures, as well as the number of confirmed hypotheses, are much higher for the service sector than for any other sector. The regression analyses by industry sector find, with regard to venture growth, the highest explained variance for the service sector and with regard to venture profit, the second highest explained variance for the service sector. Contingency variable 2: Market growth Previous research suggested the investigation of industry variables with regard to the contingency variable of life cycle stage. The analyses based on a segmentation of market growth do not indicate a single case where significant correlations of opposite directions are found for different groups of market growth. Industry variables do not
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seem to impact ventures in fast-growing markets in a fundamentally different way than ventures with low or declining growth rates. The industry variables, however, relate stronger with venture performance for the group of high market growth. The correlation analyses by market growth identify more significant correlations between industry variables and venture performance measures, and confirm more hypotheses for the group of high market growth than for the groups of medium or low venture growth. Also, within the regression analyses, the highest explanation power with regard to both venture growth and venture profits is found for the group of highest market growth. Contingency variable 3: Venture growth It has been the intention to apply venture growth as a contingency variable in order to interpret with more accuracy the effect of industry factors on ventures with different degrees of success. The variables distance to clients (v4) and uncertainty (v9) are found to relate positively to venture growth for the group of high venture growth and negatively for the group of low venture growth. Entries to industry (v6) have a particular growth impact for ventures with high growth rates. On the other hand, entries to industry (v6), exits from industry (v7) and uncertainty (v9) have led to low venture profits, particularly for ventures of low growth. Overall, the impact of industry factors has not been strongly influenced by venture growth. Moreover, the increase in explanation power, which has been suggested by Hawawini et al. (2003) for samples that have been corrected by outliers, has not been confirmed. Contingency variable 4: Industry heterogeneity The study by Mueller and Raunig (1998) suggests that the impact of industry variables is highest for industries of low heterogeneity. Dividing the overall sample into three groups of industry profit heterogeneity confirms a higher number of correlated industry variables for the venture growth measure. For the measure of venture profit, the suggested relationship, however, cannot be investigated. The regression analysis comes to the same result with the highest explanation power for industries of low heterogeneity with regard to venture growth. For the other venture success measures positive impacts of industry heterogeneity are even found.
CHAPTER 6 - QUALITATIVE EMPIRICAL STUDY: CASE STUDIES
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Qualitative empirical study: Case studies of selected ventures from the telecommunication and e-commerce industries
The qualitative study is guided by the objective of identifying the mechanisms through which market factors influence venture success215. In the context of the chosen firms, not only will the most critical market variables be identified, but it will also be shown why these variables have an impact on the performance of the venture and the direction of the impact between critical market factors and venture success. The explanation of the impact of market characteristics on venture success will be illustrated based on the structure of the theoretical model. The ratings of individual market characteristics as given in the tables throughout this chapter are based on the authors perceptions and do not necessarily coincide with those of the case interviewees. The questionnaire guideline for the case interviews, which has been developed by the author, is printed in appendix G.
6.1
Case study Imente

6.1.1 Venture profile
Imente Global S.L. (Imente) is interesting to study, as it permits an analysis from the perspective of a technology-oriented new venture and at the same time serves as an example of a business-to-business market. The venture is an online news aggregator specialised on the Spanish language market. The company has developed a proprietary technology which searches over 7,000 news websites216 continuously, captures the newest headlines, organises them in multiple categories and integrates this aggregated content as a kind of online press clipping into any website. The underlying concept is commonly referred to as deep linking. The service has been online since January 2001. In October 2003, eleven employees were working for Imente.
215 216
See objective 7 in chapter 1.2, p. 4. Websites of general interest newspapers such as El pas, El Mundo etc. and special interest websites as Invertia, Futvol.com etc.
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CHAPTER 6 QUALITATIVE EMPIRICAL STUDY: CASE STUDIES
The firm was started with the private funds of the founders. In a first round of external financing in June 2003, a total of 430,000 Euro was raised for financing the growth of the firm and the recruitment of additional staff. The firm received 140,000 Euro from financial investors, 90,000 Euro as a non-returnable technology subsidy from the government of Catalonia (Generalitat), and 200,000 Euro as a non-interest loan from the Spanish state. Founders The firm was founded in June 2000 in Girona, Spain, by a team of seven founders with backgrounds in journalism, marketing and IT. The technical director is Qim Pagans, who developed the basic technology of the firm after being involved in an online music magazine for which he programmed a tool to capture music-related headlines from different sources. The general director is Dr. Christian Serarols, who is a professor of business administration at the Universitat de Girona and the Universidad de Educacin a Distancia. Products/Services Imentes clients are firms that require up-to-date information about their competitors and their industry (online news clipping service) for internal use , and website owners who would like to include on their website a section of automatically updated news about the topic of their website (website news section modules). In the future, Imente wants to additionally engage in the sale of technology. Since the company started, the two main services of online press clipping and website news section modules have been offered nearly identical in the several packages. Meanwhile, the technology has been developed and the quantity of content which is included has been greatly increased over the last few years. Performance Thanks to a strict cost control, Imente nearly reached break-even in May 2003 before closing the first round of financing. By October 2003, a total of 50,000 clients were subscribed to Imentes services. Over 99% of them use the free service, which only generates marginal revenues in advertising and is primarily offered to promote the paid service. In October the firm had 200 paying clients, which generated sales of about 18,000 Euro per month.
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6.1.2 Competition and general market setting The market of news aggregation in the business-to-consumer segment started around 1998 with some less sophisticated search engines of news headlines. In Spain, titulares.com was the only competitor of this kind at the time of the Imente start-up. In contrast to its competitor, Imente positioned itself as provider of business-to-business services and was the first provider in this segment in Spain. Within a year after Imente entered the market, a large number of firms started in the same segment. Today spynews.com and iconoce are considered as their main competitors on the Spanish market. The service by Moreover.com in the USA is considered as the major competitor on the international level. Imente considers its technology superior to the Spanish competitors and equal to Moreover.com. Despite the relatively low numberpaying customers, they assume that they still have more clients than their competitors. The whole market of online news aggregation is relatively young. The market size for online press clipping is estimated at 50-100 million Euro worldwide. 6.1.3 Explanation of market impacts on venture success 6.1.3.1 Macro level
Extremely important Not at all important
1. macro-economic changes a) changes in the propensity to consumption b) changes of interest rates c) changes of currency rates 2. political / legislative changes a) changes in environment protection regulations b) changes in market regulations c) changes in labour market regulations d) changes in public spending e) changes in international trade deregulations 3. technological changes a) development of internet usage b) development of internal IT applications c) development of new production technologies 4. socio-cultural changes a) changes in consumption preferences (volatility)
X X
X X X X X X X
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b) individualisation 5. demographic changes a) decreasing population growth b) increasing population age Other changes:
X X
copyright regulations for press clippings legal status of deeplinking online advertising rates willingness to pay for online content reputation of internet firms
Table 77: Macro level analysis Imente
The most important change for Imente on the macro level may originate from legislation. The association Gedeprensa, which currently covers 60% of the major Spanish newspapers, takes legal action against traditional news clipping services. These services copy or scan newspapers and send to their clients content-specific articles without paying royalties to the original media sources. Even though electronic services like Imente are not yet a target of this legal action in Spain, the consequences may also greatly affect the venture. Imente takes a very cooperative approach towards media sources and does not scan the websites of the few sources that did not want to be included in the service. In other countries, electronic services like Imente have already been sued by media sources and have had to shut down as a consequence. The legal situation does not appear to be very clear. While in Denmark the service newsbooster.com had to cease deeplinking without permission, in Germany and the USA, the courts decided most recently in favour of the deeplinking services. For paperboy.de and paparazzi.de, two formerly leading German news aggregators, the decision of the German courts came too late. Paperazzi.de could not afford the legal costs to confront the large media companies. Paperboy.de, which carried the costs of bringing the legal action of the media companies to the highest court in Germany, finally had to give up their service, since the whole process took more than two years, during which time the firm was not allowed to put their service online. The management team of Imente recognises that these lawsuits may considerably change the market place, but this does not necessarily have to have negative consequences on Imente. There is an intrinsic interest of those media companies who understand the internet, for the continuation of these services. It
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all depends on how a final agreement in compensation of media firms would affect the relative positioning of traditional and online press clipping services. In the past, the decreasing rates of online advertising have not only forced Imente to change their originally planned business model, but have also led to the exit of the initially strongest competitor, titulares.com. Today, all the larger competitors who started on the basis of an advertising revenue business model in Spain have changed to a paid business-to-business model. Apart from the general over-supply of online advertising spaces compared with advertisers, the ventures in the news aggregation industry had to struggle with the difficulty of relating targeted advertising to news articles and with a relatively low number of visitors. In the same context, the general willingness to pay for online services is considered as a major variable of the macro environment. Especially in Spain, Imente found that the willingness to pay for online services, even from corporate clients is still very low and is also lower in comparison with other countries. Other changes on the macro level that affect the firm are changes in the general economy and the reputation of internet firms. In times of decreasing business cycles, many firms first cut their marketing budget, which in turn directly affects the sales of Imente. With regard to the reputation of internet firms, Imente frequently encountered that potential clients had doubts about the long-term stability of Imente. An important opportunity may arise from the inclusion of customised news content in the management information system modules of SAP and other providers. 6.1.3.2 Inter-country level
II. INTER COUNTRY LEVEL NATIONAL COMPETITIVENESS Very high Very low Degree of international competition
a) activities of national competitors in foreign markets. b) activities of foreign companies in national market. c) country of strongest competition in future:
USA
X X
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Sources of important competitive advantages of competition. important important Not at all competitors from country of strongest future Extremely
1. production factors a) easier availability of qualified labour b) lower costs of qualified labour c) easier availability of resources d) lower costs of resources 2. political stability & taxation a) lower taxes b) higher stability of economical political environment 3. distance to sales market a) lower distance to main customers for export industries b) larger size of national market 4. industry infrastructure a) better transportation and telecommunication infrastructure b) better access to dependent supplying and buying industries c) more competitive dependent supplying and buying industries 5. new venture infrastructure a) easier availability of debt funding from banks b) easier availability of equity funding from venture capitalists and business angels c) more financial assistance for new ventures d) more non-financial assistance for new ventures other important sources of competitive advantage of firms from country of strongest competition: Table 78: Inter-country level analysis Imente
X X X
X X
X X
X X
- lower price sensitivity
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The whole industry is very nation-centric. Even though technologically it is very easy to offer multi-language services, until now no existing foreign c ompetitor has entered the Spanish market. Among the Spanish competitors tentative efforts to go international have been limited to the Latin American region. Also, the US market leader Moreover.com has apparently no interest in expanding internationally. Imente has contacted Moreover.com in order to build a joint venture to expand to the Latin American market. Since Moreover.com targets solely fortune 500 companies charging extraordinarily high prices for their services, they had doubts that firms outside of the USA would be willing to pay their prices. From Imentes perspective, international expansion is considered as an important future direction of expansion. Despite the limited interest of Moreover.com in internationalisation, the strongest future competition is expected to come from the USA. Ventures in the USA have a competitive advantage217 versus Spanish firms in terms of a much larger market size, easier financing218 and lower price sensitivity. Nevertheless, the Imente team agrees that the overall danger from current competitors in the USA is limited. These firms provide their services at prices, which in the opinion of the Imente founders, most firms in Spain would not be willing to pay. Additionally, US firms would have to struggle with language and cultural barriers. The Spanish business world still relies greatly on personal networks, especially with respect to large firms, where, according to the Imente team, it is very difficult to close deals without personal contacts. 6.1.3.3 Inter-industry level
III. INTER INDUSTRY LEVEL OPPORTUNITIES & THREATS FROM RELATED INDUSTRIES Extremely important important
1. complementary cooperation 2. threat of substitution 3. forward integration
217 218
Compare table 78. Moreover.com has raised about 100 million dollars of financing according to Imente.
Not at all
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4. backward integration 5. threat of other new entries

Google!
Table 79: Inter-industry analysis Imente
A vast number of potential complementary cooperation opportunities with firms from related industries have been identified by Imente. Potential technological applications of Imentes services are versatile. Establishing collaborations with related firms in other industries is currently a major strategic focus of the company. Via a new commission model, the product is sold by traditional press clipping, web design and public relation agencies with established relationships to the target customers. In the medium term, the highest growth expectations of the venture relate to these collaborations. The most imminent threat on the inter-industry level for the company is Googles recent expansion into the news aggregation sector. With its monopolistic dominance of the search engine market, its superior technology, its immense financial resources and its established international sales centres219, Google could easily dominate the market of news aggregation. Currently, the news aggregation service is already promoted on Googles homepages as one of Googles major four search services and is included as standard feature in the Google toolbar220. The Google service is currently still very basic and does not allow the advanced customisation features that are offered by Imente. Additionally, Google does not currently offer any services for the business-tobusiness segment. Nevertheless, it is clear that Imentes business model in the future will have to take into consideration the services offered by Google in order to prevent direct competition. It appears inevitable that Imente has to focus on the niches that will not be covered by Google, especially since it will be impossible to offer a technologically competitive product. On the other hand, the entrance of Google into the market also represents a major opportunity. It has been mentioned by the interviewees that most of the potential clients contacted by the company are not aware that they have a need for the services offered by Imente and that selling the services requires very intensive explanations of the service. The promotion of a news
219 220
Google just opened its own commercial sales centre in Madrid in the middle of 2003. Google toolbar version 2.
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aggregation service in Google will be an excellent opportunity to increase awareness of the utility of these services among worldwide internet users. As long as Imente manages to find profitable business models outside of the service range of Google, the entrance of Google into the market can be evaluated as a big opportunity. Current threats from backward and forward integration are not considered particularly important, even though both cases have occurred in the past. In terms of forward integration, iconoce, one of Imentes main competitors in the Spanish market, belongs to a major media conglomerate and another media group is planning entry into the market. In terms of backward integration, there is a client of Imente who adds additional value to Imentes service by creating summarising statistical and graphical evaluations. This client is preparing to enter in a future news aggregation market. 6.1.3.4 Intra-industry level
IV. INTRA-INDUSTRY LEVEL Very high Very low
1. market structure a) market size
X X
X X X X
X X X X
potential market size
b) heterogeneity of products c) branding potential d) distance to clients e) economies of scale f) export-import balance g) need for specialised products h) buyer concentration i) average order volume j) seasonal change of demand k) intensity of price bargaining l) market transparency
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m) advertising intensity n) R&D intensity TOP factors from market structure -- with positive impact on firm -- with negative impact on firm
X X
- need for specialised products - potential market size /
2. market dynamics a) former market growth b) rel. expected market growth c) entries to industry d) exits from industry e) balance of entries and exits f) degree of uncertainty about future development g) customer loyalty h) changing customer needs TOP factors from market dynamics -- with positive impact on firm -- with negative impact on firm /
X X X
X X X
- customer loyalty
3. dependencies a) on clients b) on suppliers
X
Associations not individual suppliers
c) on key employees, employee institutions and key knowledge d) on legislation e) on business cycle f) on maintenance in industry (barriers to exit)
X X
X X
289
g) relative dependency compared with earlier and later value chain members TOP factors from dependencies -- with positive impact on firm -- with negative impact on firm
/ - on legislation - on business cycle - on supplier associations
4. competitor dynamics a) inertia of established firms due to organisational structure b) inertia of established firms due to legislative restrictions c) inertia of established firms due to cost structure d) aggressive responsiveness of established firms e) inflation rate in selling prices f) number of new products introduced g) investment in new assets TOP factors from competitor dynamics -- with positive impact on firm -- with negative impact on firm
X X X X
- low responsiveness of firms - high inertia due to organisational structure /
5. competitor structure a) concentration b) number of industry members c) heterogeneity of industry members d) general efficiency level among industry members e) prevalence of competitive strategies on other than price f) capacity utilisation level g) employee productivity h) labour costs intensity
X X X X
X X
X
potentially currently
290
i) gross margin j) vertical integration k) degree of diversification l) average age of industry members m) average size of industry members n) variable costs TOP factors from competitor structure -- with positive impact on firm
X X X
X X
potentially
project team
- low variable costs - potential gross margin - low concentration
-- with negative impact on firm
Table 80: Intra-industry level analysis Imente
Market structure: The most relevant variables of the market structure are the large potential market size and the need for specialised products. Although Imente is still in the process of identifying which kinds of companies might be most likely to pay for their services, the potential market size for the news aggregation service could be extraordinarily large. The customers need for specialised services is considered highly important, since the possibilities of customisation of Imentes service are superior to the competition in Spain, and these customisation features are a major advantage in selling the services to the clients. In general it is difficult for clients to compare the different services currently offered in Spain. The basic services are very similar and mainly differ in their pricing models. For clients it is difficult to evaluate the real quality of the services and the advanced features. It is recognised that this difficulty of comparison prevents the danger of stronger price competition for the whole industry. For Imente in particular, this is also negative, since it considers itself as market leader in terms of service quality with the lowest prices in the market. At the moment, however, the market is still so young that firms are more focused on increasing the overall market size than increasing their market share at the expense of competitors. Even though the whole industry and, in particular Imente, is
291
highly technically oriented, advertising intensity is considered as important as R&D intensity. The maintenance of the free service basically only serves the purpose of promoting Imentes brand name and it simultaneously generates considerable costs for the firm. It has been mentioned by the technological director that the firm with the strongest sales and marketing team will be most successful rather than the firm with the most advanced technology. Compared with the high sales efforts that are required in order to acquire a new client, the average monthly order volume is relatively low. Imente has therefore changed its sales strategy and utilises web agencies and traditional press clipping services as distributors of their services. On the other hand, once clients are acquired, they generate a steady flow of income for a long time period. The minimum duration of the contracts is six months. Market dynamics: The most relevant variable of the market dynamics is customer loyalty. The Imente management team does not believe that a single client of theirs has ever changed to a competitor. By ensuring a good customer support they are generally able to maintain a large share of their acquired customer base. Customers are very loyal. Only once in Imentes history have the prices for their service been increased. As a consequence, not a single client has quit the service. The clients are not very price sensitive, which may give Imente the opportunity, in the short-run, to increase profitability by increasing prices and may prevent stronger price competition in the long-run. Within the last few years, several firms have entered the industry. Currently the number of firms is stabilising and the first competitors have already given up. The entries of new firms have, until now, not directly affected Imente in a negative way. In fact, these new firms have contributed in convincing potential clients of the necessity of news aggregation services. When recently one competitor gave up, many of their clients changed to Imente. The growth of the overall market has been expected to be higher than it actually was in the last few years. The demand for the service has been found to depend more on the proactive marketing efforts of the industry members than on externally given demand drivers.
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Dependencies: Imentes dependencies are mainly related to the already mentioned variables of legislation and business cycle on the macro level. The buyer concentration is relatively low and Imente is not dependent on a single key content provider. Imente is more vulnerable if content providers act in associations such as the Gedeprensa. If all media sources affiliated to this association were to block their websites to Imente, this could create serious problems. Competitor dynamics: The intensity of competitor dynamics is rated as low and in favour of Imente. The competitors are not very aggressive nor particularly dynamic. One of the reasons might be that the most important competitors are part of large organisations and therefore do not have the same business focus nor the same motivation to generate revenues. For many competitors from large organisations, the news aggregation service might not be more than a technological experiment. As mentioned before, the intensity of competition is not very strong. None of the competitors have reacted directly to special price offers from Imente in the past. Imente enjoys a cooperative relationship with its main competitors. Discussions have taken place with the major competitors about increasing the market, and Imente has tried to sell its technology to other competitors with less developed technologies. So far, no competitor has showed inclinations of engaging in stronger competition on prices. Competitor structure: With regard to the dimension of competitor structure, the most influential variables belong to the costs structure. Once the technology is developed and the service is positioned successfully in the market, Imente could attain a very high gross margin. The variable costs per additional client are negligible. The service is highly automated and with its current staff and technological resources, Imente could easily serve five times the current number of customers. If Imente decided to cease new product improvements and stop all efforts to acquire new clients, the firm could be maintained with only two employees. Also, the characteristics of the competitors in Spain are evaluated as positive. No single large competitor has emerged. Competitors are relatively young, of small size and with a
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limited budget to invest. Even though many competitors belong to large firms with high financial resources, the actual project teams responsible for the news aggregation service are relatively small and only have limited budgets. This has enabled Imente to maintain its technological leadership in the market. The diversification of the competitors firm group is considered as an advantage by Imente as it will decrease the staying power in the market. 6.1.3.5 Barriers to entry
BARRIERS TO ENTRY Very high Very low
a) inventory intensity b) fixed asset intensity c) minimum organisational size & complexity d) accessibility of distribution channels e) customer loyalty f) legislative barriers g) product sophistication TOP factors from barriers to entry -- with positive impact on firm -- with negative impact on firm
X X
Not applicable
- technological product sophistication
- accessibility of distribution channels (in the future this might turn into an advantage)
Table 81: Barriers to entry analysis Imente
The most obvious barrier to entry is the proprietary technology that is needed to perform the news aggregation. The Imente team estimates that a firm would need an investment of about 1 million Euro and about one year to develop the technology from scratch that Imente possesses today. However, Imente itself intends to sell its own technology to competitors and acknowledges that their competitor spynews.com can achieve considerable sales with a far less sophisticated technology. The possibility of
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purchasing the technology therefore decreases the technological barriers. Still, until now, purchasing external technology has been rare among news aggregators in Spain, due to the risk of becoming dependent on a competitor. Access to distribution channels has turned out to be a major barrier, which Imente is still struggling with. A major share of sales has been prepared by the personal networks of the founders. Due to the Spanish business culture and the difficulty of explaining the service, the founders and the commercial director perceived it as extremely difficult to initiate contacts with large firms without personal contacts. This difficulty has led to a much slower growth of the company than was previously projected. Legislative barriers do not currently exist, but possible changes in the legal attitude to deeplinking and the copyright laws may create additional barriers in the future. Since the market is still young, and no dominant player with a strong brand reputation has emerged yet, a new competitor with strong commercial capabilities may still successfully enter the market. 6.1.3.6 Venture / firm level
V. VENTURE / FIRM LEVEL
Competitors
Imente
1. products/services a) relative price (better=lower price) b) relative quality c) relative design d) innovation potential (potential to offer completely new product/service) 2. firm resources a) relative financial strength b) relative knowledge / patents
X X X
better
better
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3. management team a) relative capability of management team b) relationships key partners c) relevant industry experience 4. strategy a) relative growth aspirations/aggressiveness 5. location a) relative distance to clients (who is closer?) b) availability of labour and production factors c) relative costs of labour and production factors Table 82: Venture level analysis Imente
X X
X X X
In the present industry setting, spynews.com and iconoce are currently identified as Imentes strongest competitors in Spain. The Imente team considers their service superior in quality and in innovation to its competitors, and at the same time they believe that it is offered at a lower price than their competitors services. Imentes other advantages can also be found in its internal knowledge, growth aspirations, industry experience and its relationships with key partners. Imente has been able to establish a cooperation agreement with Acceso, the largest press clipping agency in Spain, in order distribute their product. 6.1.4 Excursus: Derived strategic recommendations for Imente On the basis of the analysis conducted on market attractiveness, several strategic recommendations have been derived by the author and have been presented to the management of each case venture. The intention is to test how far the information, that has been obtained guided by the presented conceptual model, serves to derive valid recommendations on strategic key decisions.
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General business strategy Instead of the articulated long-term vision of providing a personalised newspaper, it might be more appropriate to focus on the vision of a one-stop, automated, up-to-date monitoring system of relevant company information. Focus on firm-specific instead of industry-specific information: Imentes vision and technological development is currently largely focused on providing customised industry news content. However, the service of firm-specific online press clipping with the potential to expand the clipping for additional media contents may be, at the moment, the more profitable business segment. In the interviews it was mentioned several times, that clients were asking for more comprehensive news clipping services, whereas the technological development of Imente goes in a different direction. The very technological approach of the company may be the reason for the mentioned problem of commercialisation. It might be too late to reflect on potential customer applications and ways of promoting the service after the technology has already been developed. Instead, Imente may achieve greater success by first thinking about the needs of the clients and the services that they might be willing to pay for and then afterwards building the corresponding technology. Currently, clients may have a higher need and a higher willingness to pay for services related to firm-specific press clipping instead of customised industry news content. Industry-specific news is already collected by specialised industry magazines and industry-specific websites. The advantage of both industry-specific magazines and industry-specific websites is that there is an editorial staff, with knowledge on the industry. They are probably better able to filter the incoming information than any automated algorithm could ever do. By contrast, in press clipping the online service could be far more competitive than traditional services in terms of quality and price221. Traditional press clipping services suffer from an extremely inefficient and labour-intensive work process. Moreover, these firms are neither innovative nor dynamic. Target customers: The company defines SMEs as their target customers. However, the service might be most useful for large firms, which are frequently mentioned in online news sources. The example of Moreover.com in the USA demonstrates that
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The city of Girona, for example, could substitute the work of one employee in the documentation centre by contracting Imentes service.
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there is a considerable interest from large firms and that these large firms are willing to pay very high prices for such services. These large firms may be the most profitable target group. Product development strategy According to the vision of a one-stop service of monitoring firm-relevant information, Imente may expand its service to monitor not only free online content, but also paid online content, newsgroups, web forums, external links, TV and radio, and information from the official firm register: Paid online content: The possibility of also offering the complete print content of newspapers as paid content will make it easier to sell the service. Customers can compare directly the saving potential by using Imentes service instead of the traditional press clipping services with which they are already working. Content providers might also pay for preferred listing of links to their paid content. Newsgroups and web forums: Unsatisfied clients can generate tremendous damage to the reputation of a company if they publish their negative experience in frequently populated newsgroups and web forums. Moreover, these opinions are indexed by search engines and may damage a firm for many years. Therefore it is critical to be upto-date about such comments in order to react in a timely manner. Firms can respond directly to the client and offer compensation before they continue to publish the comment in other places as well. Additionally, the firm may respond publicly in the forum in order to clarify the issue, apologise, and demonstrate a dedication towards customer satisfaction. An increasing number of clients is aware of the power of making negative experiences public. External web links: External links are not only one of the most critical criteria for the ranking of a website, it might also be interesting for a firm to keep informed about which website has published a link and in what context. Such a service could compare, at monthly intervals, the external web links to a firms homepage found in Google or alltheweb.com, with the links from the month before. A report could be provided about the external websites that dropped links to the companys website and those external websites that added a link to the companys website. Optionally, it would be helpful to give additional information on the importance of each of these websites (e.g. by Google page rank).
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TV and radio: As today many TV and radio stations already broadcast via the internet, a future service could index the dialogues via third-party voice recognition technologies and then allow a search of these sources for keywords related to the clients firm. Firm registry: Contrary to most other countries, in Spain the official firm register also publishes the complete financial information of non-publicly traded firms. Anybody can request at the firm registry the complete financial details, including annual reports from basically all firms. Some online database providers such as axesor.com purchase this data from the firm registry and provide it to their clients in their online database. Imente could scan the data from the firm registry for changes in the legal situation of competitors and may inform clients of the dates when their competitors annual reports are available online. Such a comprehensive service could significantly increase the utility of the service for the client and would therefore be easier to sell. Additionally, it would be possible to charge higher prices, since the service can be directly compared with the expensive services of traditional press clipping agencies, which require a large amount of nonautomated work. This approach would also make the firm less vulnerable to the emergence of competition in one particular technological segment. Pricing strategy The number of potential customers could be greatly increased if small firms were offered a pay-per-article payment model for the online press clipping service. Small firms which do not send out weekly press releases are only mentioned a few times a year in the media. The current payment model, based on monthly fees is too expensive for these clients. For larger clients, package prices should be maintained. However, the differentiation of the package prices based on the number of article references might offer the possibility to charge higher prices to very large clients with respectively deeper pockets. The pay-per-article payment model should only be offered if the technological implementation and the processing of small payment amounts can be widely automated. Cooperation strategy Media companies: The current legal actions of media sources against press clipping services may dramatically change the press clipping industry. Imente now has the unique opportunity to present to the media companies a compensation model that
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provides a fair compensation to the media companies for the articles that are forwarded from the press clipping service to the final clients. This model could take the following structure: The media sources publish their complete print content daily online. In cooperation with a third party provider of micro payments222, a fixed price has to be paid per article, which is requested in full text by each user and similarly each final client of the press clipping firm. As soon as the major news sources, who are members of the Gedeprensa association, publish their complete content online, they would be able to force traditional press clipping agencies to apply this compensation model, and Imente could emerge as the leading player for the whole sector of press clipping. The compensation model between media sources and press clipping services would also provide the opportunity of additional sources of revenues, as media sources could be asked for commission on each referral of paid content. It may be critical to convince media companies that the earning potential through paid online content is higher than through the sales of CD-Rom archives. Micro payment companies: The development in Germany has shown that many media sources have decided to offer their complete print content online. This development has not yet reached the Spanish market. However, in Spain media sources have also encountered the difficulty of financing their websites solely from advertising revenues. Now that third party providers for micro payments with successful track records in other countries exist, more Spanish media companies will also try to reap paid content services as an additional source of revenue. Imente can benefit from the commercial efforts and competence of the micro payment firms, who are in a much better position to convince media firms to publish their complete content online. Imente could provide its clients with the service of registering them automatically for the micro payment service, so that clients can access the paid content without additional registration procedure. Imentes customer base should be highly interesting for micro payment providers, since these clients have shown a high inclination to pay for news content. In return for providing this highly targeted client base to the micro payment provider and for frequently sending clients to these paid content sources, Imente should ask the micro payment provider to include in their contract with the media firm that Imente is allowed to scan all paid content. Moreover,
222
Firstgate (es.firstgate.com) has recently entered the Spanish market and already provides such pay-percontent services for a wide range of media in Germany. Firstgate is the clear market leader in Germany.
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Imente should negotiate a commission with the micro payment provider for all referred clients who purchase articles. 6.1.5 Summarising evaluation of the impact of critical market characteristics on venture performance throughout different evolution phases Imente and the whole market of online news aggregation are still in a very early evolutionary phase. The exact target market for the service remains vague and Imente is still in the process of identifying the most profitable market segments for their service. The initial opportunity for starting news aggregation ventures has emerged from the macro-level trend of a growing number of media sources publishing their content online and on the technological side from the development of tools and knowledge of search spiders and agent technologies. At the time of entry, barriers have mainly been imposed in terms of time to development and financial investment in programming manpower. Imente could overcome the barriers by making use of the technical directors expertise and his experience in former projects. He and his fellow programmers have continuously developed the service for three years, and it is competitive with the best similar service on the global market scale. In the meantime, the barriers to entry have changed. With an increasing number of firms possessing the required technology, it is possible to purchase the technology instead of having to develop it. Technological barriers have therefore been replaced by financial barriers. The development of a proprietary technology requires a minimum of 1 million Euros of investment. On the other hand, it is now possible to purchase or license the technology from existing competitors at comparably low costs. Subsequent entries of new firms to the market have been moderate within the last years and have had hardly any effect on Imentes growth or profitability. Within the first years of operation the critical problem was the slow increase of the number of clients for the value-added paid service. Several market variables have contributed to this situation. On the macro level the lack of willingness to pay for online services has led to the extremely low share of users for the paid service compared with the dominating share of users of the free service. On the intra-industry level, the lack of established distribution channels and the intensity of required sales
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efforts to sell the service to potential target customer groups turned out to be the major reason for the slow growth of the paid service segment. Today, on both the macro level as well the inter-industry level important changes have started to emerge which have not yet had a direct impact on the business, but may lead to a radically changed competitive environment in future. Most important among the changes on the macro level are from legislation the legal actions from media companies against news clipping services and the future availability of free online news content together with the acceptance of online micro payment providers. On the inter-industry level the most relevant factor is the recent entrance of Google into the segment of news aggregation. It is difficult to forecast the direct implications of these changes on the future performance of Imente. However, the concepts that were presented in the previous chapter demonstrate that there is a possibility that Imente may benefit from such changes. These changes may make Imentes services more attractive as it may be possible to process more content and Imente could strengthen its competitive position compared with traditional news clipping agencies. Further growth promises a rapid increase in profitability as the service can be scaled at basically no costs and therefore variable costs are extremely low. In the future the constellation of high homogeneity of competitor services and low variable costs may encourage competitors to gain market shares by aggressively lowering prices at the expense of the profitability of all industry members. Currently, the intensity of competition is still very low, however, this may change in a later life cycle stage. The vulnerability to future price competition may depend on the final client group. Small firms may be more price sensitive than large firms, who may place more importance on customer service. Due to the small number of industry members and the high remaining growth potential of the overall market, the danger of intense price competition is not yet imminent. An already planned future geographic expansion into South American markets could prolong the growth of the overall market and therefore delay the need for competition on prices.
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6.2
Case study Open House

Open House Spain S.L. (Open House) has been chosen as a venture in a relatively young market with very high increase in competition due to low barriers to entry. The company is an internet-based agency for vacation apartment rentals in Barcelona and was founded in 1997. In October 2003 the company employed four permanent staff members and three temporary student workers. Founder Claudia Eleuterio started the firm in 1997 in response to the increasing demand of shared flats in Barcelona from international students. Previously she worked in a marketing position for an international fashion company for several years and she has studied in Brazil, Argentina and Spain. Products/services Over 95% of revenues are generated from commissions of vacation apartment rentals. Commissions from the sales of Spanish language courses account for the remaining 5% of overall revenues. In 1997, Mrs. Eleuterio started the company by renting flats in Barcelona and subletting them to foreign students. In 1998, language courses were included as an additional product segment, which was considered complementary to the initial target customer group of university students. In 1999, the company also started to rent third-party apartments based on a new commission system. Several apartment owners had contacted Mrs. Eleuterio to rent their apartments as shared flats to students, which generates higher earnings than traditional long-term rental contracts. At the same time, the maintenance of Mrs. Eleuterios own apartments turned out to be very time consuming, which enforced the desire to shift the business focus on third party apartments and to concentrate solely on marketing and sales. In the same year the existing basic web representation was converted into a professional website with detailed information on the offered apartments. This shift in the business model enabled an ongoing growth for the following years.
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In 2001, Open House was the first company in Barcelona to offer the service of online availability checks on their website. Until today the number of third-party apartments has continuously increased to 150 and large efforts have been taken to further develop the companys website and to promote the service online. The target customer has shifted from students to tourists in the age range of 30 to 40 years. Performance Open House is the market leader of vacation apartment rental in Barcelona, with over 5,000 bookings per year and by far the highest number of apartments on offer. Within the last three years the sales level has increased greatly and is estimated at about 1 million Euros per year. The company has been operating profitably for many years. 6.2.2 General market setting At the start of the company in 1997, the market for short-term rentals was very limited. It was a major problem for international students to find accommodation in Barcelona. Currently the vast majority of students in Spain live with their parents, which meant that a real estate market for student flats basically did not exist. Over the last few years, Barcelona has experienced an extraordinary boom in the real estate sector. Rents and sales prices of apartments have doubled within only five years. This boom has attracted a lot of speculation. Many people discovered a very profitable business in buying old run-down flats in the old city centre, renovating them and then renting them to foreigners and tourists. The earning potential of renting a flat on a daily basis is frequently 5-10 times higher for property owners compared with renting it by traditional long-term contracts. Hand in hand with the increasing attractiveness of Barcelona as a tourist destination from the demand side, the market of vacation apartment rentals has grown rapidly. While in 1997 only one or two other companies dealt with short-term rentals, the number of firms operating in the market has since increased dramatically to more than 30 agencies exclusively focusing on short-term vacation rentals in Barcelona in 2003.
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6.2.3 Explanation of market impacts on venture success 6.2.3.1 Macro level

Extremely important important Not at all
1. macro-economic changes
a) changes in the propensity to consume b) changes of interest rates c) changes of currency rates 2. political / legislative changes a) changes in environment protection regulations b) changes in market regulations c) changes in labour market regulations d) changes in public spending e) changes in international trade deregulations 3. technological changes a) development of internet usage b) development of internal IT applications c) development of new production technologies 4. socio-cultural changes a) changes in consumer preferences (increasing volatility) b) individualisation 5. demographic changes a) decreasing population growth b) increasing population age
X X
X X X X
X X
X X

Attraction of Barcelona as tourist destination Boom of real estate sector
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Other changes:
Emergence of low cost airlines flying to Barcelona High occupancy rate of hotels in Barcelona
Table 83: Macro level analysis Open House
Three major changes of the macro environment have favoured the development of Open House over recent years. First, Barcelona has become one of Europes most popular tourist destinations223. The number of visitors has steadily increased and is expected to reach 4.2 million visitors in 2003, accounting for 9.2 million over night stays. At the same time Barcelona has benefited as has no other city from the emergence of low cost airlines. A multitude of these new airlines are flying to Barcelona. Also, over the next years, projects as the Forum 2004, a new cultural centre with exhibition, conference and entertainment facilities, which required more than a billion Euro of investment, is likely to maintain the attraction of Barcelona as a major tourist destination in the future. Open House has already been in contact with the organisation group of the forum for future cooperation. Second, the real estate sector in Barcelona has been booming in recent years and has attracted a lot of speculation. As a result the offer of renovated city centre apartments has greatly increased. Third, the higher intensity of internet usage has opened a new distribution channel. Especially for travel-related information it has become common to consult offers on the internet. Open House has been able to benefit from this development by offering an innovative website and by conducting intensive search engine marketing. Moreover, several other smaller changes on the macro level have impacted Open House. A general trend in tourism towards weekend city trips has been notable and has augmented Open Houses bookings. The number of hotel beds has not increased at the same pace as the number of visitors to Barcelona. Therefore the occupancy rate of
223
According to the international association European Cities Tourism, Barcelona has been the city with the highest growth in tourism in Europe within the last decade.
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hotels has been very high, making it frequently difficult to find hotel accommodation. Renting a vacation apartment may therefore be considered more frequently as a valid alternative. On the other hand, it has also been shown that geopolitical occurrences can have an important impact on the business. The terror attacks from 11th of September 2001 have led to a steep drop in visitors from the USA, formerly the strongest client group. The currency devaluation of the US dollar has been another macro level variable that has enforced this drop in bookings from the USA. 6.2.3.2 Inter-country level
II. INTER-COUNTRY LEVEL NATIONAL COMPETITIVENESS Very high Very low Degree of international competition
a) activities of national competitors in foreign markets b) activities of foreign companies in national market c) country of strongest competition in future
UK
Sources of important competitive advantages of competition. important important Not at all competitors from country of strongest future Extremely
1. production factors a) easier availability of qualified labour b) lower costs of qualified labour c) easier availability of resources d) lower costs of resources 2. political stability & taxation a) lower taxes b) higher stability of economical political environment
X X X
X X
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3. distance to sales market a) lower distance to main customers for export industries b) larger size of national market 4. industry infrastructure a) better transportation and telecommunication infrastructure b) better access to dependent supplying and buying industries c) more competitive dependent supplying and buying industries 5. new venture infrastructure a) easier availability of debt funding from banks b) easier availability of equity funding from venture capitalists and business angels c) more financial assistance for new ventures (e.g. governmental funding, tax incentives etc.) d) more non-financial assistance for new ventures (e.g. consultancy) Other important sources of competitive advantage of firms from country of strongest competition: Table 84: Inter-country level analysis Open House /
X X X
X X X X
The market of vacation rentals in Barcelona is still dominated by local competition. International agencies such as the Swiss-operated interhome provide only a limited selection of apartments in Barcelona. The increasing intensity of competition has motivated several local competitors to expand their service to other cities within Spain and also abroad. Potential future foreign competitors may be expected, especially from the UK, even though this danger is not considered particularly high. The UK currently represents the highest share among all client nationalities. Competitors in the UK are closer to the final clients. They might find it easier to recognise opportunities for promoting and distributing the service in the UK market. On the other hand, the labour market in Barcelona is very attractive from a companys perspective. A multitude of qualified foreigners are looking for jobs in Barcelona and face a very limited offer of jobs.
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Therefore it has been easy for Open House to find multilingual staff to support their international customer base. The salaries, which are paid in Barcelona, are at the same time among the lowest in Europe. The popularity of Barcelona as tourist destination has attracted also many qualified foreign students interested in an internship in Barcelona. Open House has continuously employed several students over the last few years for four to six months internships. Since basically no salaries are paid under these internship arrangements, Open House has been able to maintain the labour costs at a very low level. In case of an expansion abroad, the founder presumes that the location of the company in Spain may negatively affect the reputation of the service, since clients may have less confidence in the professionalism and reliability of a service from Spain than from the UK, for example. Overall, the situation in Spain and particularly in Barcelona provides a relative attractive setting for an already established firm such as Open House. The market of vacation apartment rentals is larger and more competitive than in other cities. Competitors have been forced to innovate in improving their websites and in promoting their services. This experience will give them a competitive advantage in expanding their services to other cities. 6.2.3.3 Inter-industry level
III. INTER-INDUSTRY LEVEL OPPORTUNITIES & THREAT FROM RELATED INDUSTRIES Extremely important important
1. complementary cooperation 2. threat of substitution 3. forward integration 4. backward integration 5. threat of other new entries
X X
Table 85: Inter-industry analysis Open House
Not at all
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The industry of vacation apartment rental in Barcelona is expected to further attract new market players. The forward integration of apartment owners and the emergence of new competitors pose particular threats. Most of the apartment owners that Open House cooperate with, also rent their apartments themselves. Many promote their apartments directly on their own websites. Clients are frequently more likely to book directly with apartment owners, since they expect that agencies charge a commission mark-up, which they can avoid paying by booking directly with the owner. Since Open House relies heavily on search engine marketing, owner website listings compete directly with Open Houses listings. It is expected that in the future even more owners will promote their apartments on their own websites and that their general knowledge about achieving high search engine placements will increase. Moreover, it is noticeable that the sophistication of these owner websites improves continuously. Some apartment owners with successful direct promotion activities may, in the future, consider expanding by also promoting third party apartments. Apart from the threat of forward integration by apartment owners, the market is exposed to various current and potential threats of entry. The number of competitors continues to increase dramatically. Most of these recent entries to the market are individual foreign residents in Barcelona, who identify the apartment rental business as a convenient way of making a living. However, new entries are also emerging from existing organisations. Many traditional real estate agencies have started to expand into the segment of short-term apartment rental. In the future, large online travel agencies may also enter the market and offer apartment accommodation as an alternative option to established hotel accommodation. Since the vacation apartment rental market is still relatively small, the entrance of large online travel agencies may not only pressure the market share of Open House in a negative way. It may also positively lead to a higher awareness of travellers to consider apartment rental as an accommodation option. In general only few competitors actively look for cooperation partners in other industries. From the perspective of the Open House team, prospective cooperation partners may be organisers of large events such as the Forum 2004 in Barcelona, which attract a lot of visitors, as well large international companies who frequently send their employees on projects outside their home town. In particular, the
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development of the business traveller segment, which currently accounts for only about 15% of all clients, might be impacted very positively by new partnerships. Moreover, cooperation with travel agencies could open up an alternative distribution channel for Open Houses apartments. Potential substitution of the service may derive from online web services, which give apartment owners the possibility to advertise their apartments free or at little costs. Operators of such websites could be, for example, the websites of classified magazines such as Primerama. Overall, the threat of new entries is rated very high and is expected to have the highest impact on the future market setting among the variables of the inter-industry level. 6.2.3.4 Intra-industry level
1. market structure a) market size
X X X
If Barcelona market
b) heterogeneity of products c) branding potential d) distance to clients
Local market in terms of supply
e) economies of scale f) export-import balance g) need for specialised products h) buyer concentration i) average order volume
X X X
Compared to customer acquisition costs
j) seasonal change of demand k) intensity of price bargaining
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l) market transparency m) advertising intensity n) R&D intensity TOP factors from market structure -- with positive impact on firm -- with negative impact on firm
X X
/ - limited market size - seasonal change of demand - low heterogeneity of products
2. market dynamics a) former market growth b) rel. expected market growth c) entries to industry d) exits from industry e) balance of entries and exits f) degree of uncertainty about future development g) customer loyalty h) changing customer needs TOP factors from market dynamics -- with positive impact on firm -- with negative impact on firm - former market growth - entries to industry & nearly no exits - lack of customer loyalty 3. dependencies a) on clients b) on suppliers c) on key employees, employee institutions and key knowledge d) on legislation e) on business cycle
X X X
X X
X X X
X X X X
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f) on maintenance in industry (barriers to exit) g) relative dependency compared with earlier and later value chain members TOP factors from dependencies -- with positive impact on firm -- with negative impact on firm
X X
- low dependency on clients and suppliers - dependency on search engine promotion
4. competitor dynamics a) inertia of established firms due to organisational structure b) inertia of established firms due to legislative restrictions c) inertia of established firms due to cost structure d) aggressive responsiveness of established firms e) inflation rate in selling prices f) number of new products introduced g) investment in new assets TOP factors from competitor dynamics -- with positive impact on firm -- with negative impact on firm / - aggressive responsiveness - inflation rate in selling prices
X X
X X X X
5. competitor structure a) concentration b) number of industry members c) heterogeneity of industry members d) general efficiency level among industry members e) prevalence of competitive strategies on other than price f) capacity utilisation level g) employee productivity
X X
X X
313
h) labour costs intensity i) gross margin j) vertical integration k) degree of diversification l) average age of industry members m) average size of industry members n) variable costs TOP factors from competitor dynamics -- with positive impact on firm
X X
X X
- gross margin - variable costs
- number of industry members
Table 86: Intra-industry level analysis Open House
Market structure The limited size of the Barcelona market, the high seasonality of the business and the low heterogeneity has a negative impact among the variables related to market structure. Considering the high number of agencies in the Barcelona area and the limited popularity of vacation apartment rentals, the actual market size is very limited. The potential market size, however, could greatly increase if the geographic market is expanded beyond Barcelona to the whole of Europe. The seasonal peak demand during the summer months has affected the company negatively. The nature of the business requires multilingual staff. At the time of the interview, the customer support was offered in Spanish, English, German, French and Portuguese. Even though in the offseason only a few enquiries are received in French or Portuguese, staff capable of speaking all of these languages has to work for Open House throughout the whole year. Because the number of enquiries from France and Portugal do not reach a sufficiently high level throughout the whole year to justify the recruitment of a fulltime employee, Open House decided to recruit temporary student workers, who continuously require a lot of initial training and involve a considerable amount of recruitment activities. Another disadvantage from the perspective of Open House is the
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low heterogeneity among the service offerings of the different agencies. Now that the company is established, it is perceived as a disadvantage that small new firms can basically offer an identical service, which is only distinguished by the number of apartments offered. A positive aspect is the average order volume, which at about 150 Euros is relatively high compared with the costs of client acquisition and reservation processing. However, with the increase in competition, the costs of client acquisition may increase in the future. Market dynamics Several aspects of the market dynamics have a critical impact on the industry. The demand for vacation apartment rental has grown strongly within recent years and has reinforced the growth of Open House. At the same time, the market growth attracted a large number of new firms to enter the market. While there were only about two similar services in Barcelona at the time of the foundation of Open House, today the number of agencies has increased dramatically. Even with the increasing intensity of competition over the last few years, basically no firm has quit the industry. Since a basic vacation rental service does not require large overhead and high fixed costs, the exit barriers are very low. One could easily maintain a simple service of apartment rentals as an individual person, even as a part-time job. This has led to a continuous increase in the total number of firms operating in the market, which further intensified competition. Another critical aspect is the low degree of customer loyalty. Since at the time of market entry, no other large established competitors existed, the low loyalty of customers did facilitate the market entry of Open House. To the contrary, it is a major problem of the whole industry that many clients will only book their first stay in Barcelona with an agency, and will book subsequent stays in the future directly with the owner of the apartment at a lower price. Being aware of this problem, Open House has started a promotion to offer a premium of 50 Euros for each client referral or repeat booking. Dependencies It is one of the major advantages of the industry that firms are generally neither dependent on critical suppliers nor on individual clients. Losing the largest client or apartment owner has only a limited impact on the overall performance of a vacation rental agency. However, strong dependencies result from heavy reliance on search
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engine placements. The internet and in particular the search engine Google is the one most important means of distribution and promotion of the service for basically all vacation rental agencies in Barcelona. The exclusion of a companys website from Google would have a devastating effect on sales. In cases where websites apply very aggressive online promotion activities in order to reach a high ranking, search engines such as Google occasionally ban websites. Moreover, the prices for paid listings in search engines have more than doubled within the last year as a result of stronger competition for the few relevant key words related to Barcelona vacation apartment rentals. Competitor dynamics The increasing number of market players within the last few years has forced firms to develop their services dynamically in order to remain competitive. The founder of Open House stressed particularly what she called a war for search engine rankings. Open House as well as various larger competitors check their ranking every month for the main keywords Barcelona apartments, and make adjustments to their pages in order to preserve or improve their ranking, which is critical for the monthly sales of their business. Other competitors pay several thousand Euros monthly for paid listings in Google. The fierce competition is also notable in the high responsiveness of competitors. New website features such as online availability verification of apartments, last-minute offers, off-season discounts, lotteries and city information are frequently adopted within weeks or months by competitors. In some cases, even text passages from the website are copied verbally from competitors. Another consequence of increasing competition, which affects the industry negatively, is a slowly evolving pressure on rental prices. As the offer of apartments has increased more than the number of clients, apartment owners are forced to lower their prices. Open House has also recently started to approach cooperating apartment owners to lower their prices in order to remain more competitive with the apartment offers from other agencies. Since Open House earns a fixed commission of 25% on the rental price, the pressure on rental prices directly affects the earnings per booking. For the future, the pressure on prices may become even stronger with a continuously increasing construction activity in the real estate sector in Barcelona.
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Competitor structure From the supply side of the market, a positive costs-earning relationship combined with relatively low variable costs characterise the main attractiveness of the industry. The intentional limitation of Open House on the intermediation service segment, without offering time-consuming property management services, ensures a high simplicity and standardisation of the business process, which can be highly automated. The necessary time needed for Open House staff to consult clients and to process bookings is very little due to the comprehensive information on the website and the automated booking procedure. A further increase in the business volume would lead only to marginal increases in costs and could have immediate impact on profits. The most important negative aspect of the competitor structure has to be the large number of highly homogeneous competitors in Barcelona. The management of Open House mentioned that they would prefer to operate in a highly concentrated market than in the currently highly fragmented market of numerous small competitors. The sheer number of competitors leads for potential clients to a confusing information overload. In order to check all the apartments that are offered from the multitude of agencies in the market, a potential client can easily spend half a day and more. For Open House, it is a major challenge to get noticed within this multitude of competitors, especially since the search engine promotion also makes it easy for small competitors to reach a wide potential audience. 6.2.3.5 Barriers of entry
a) inventory intensity b) fixed asset intensity c) minimum organisational size & complexity d) accessibility of distribution channels e) customer loyalty
X X
X X
Not applicable
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f) legislative barriers g) product sophistication TOP factors from barriers to entry -- with positive impact on firm -- with negative impact on firm /
X X
- low minimum organisational size - low loyalty of customers - low product sophistication - low capital intensity
Table 87: Barriers to entry analysis Open House
The industry of vacation apartment rentals is characterised by very low barriers to entry. This has been a major driver for the continuous increase in the number of competitors. During the first years of operation, Open House, which started as a onewoman firm without any external financing, also benefited from the low barriers to entry. The one major barrier is the establishment of an attractive website with a high ranking in the search engines. However, the difficulty in overcoming this barrier is decreasing. The costs of developing a website are decreasing, while at the same time an increasing number of people are capable of developing database-driven websites. Web editing applications provide out-of-the-box standard solutions which require less time and knowledge to implement than has been necessary in the past. Moreover, the awareness about the importance of search engine rankings, and the knowledge on how to achieve high rankings is growing. 6.2.3.6 Venture / firm level
Competitors
Open House
better
1. products/services a) relative price (better=lower price) b) relative quality
better
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c) relative design d) innovation potential (potential to offer completely new product/service) 2. firm resources a) relative financial strength b) relative knowledge / patents 3. management team a) relative capability of management team b) relationships key partners c) relevant industry experience 4. strategy a) relative growth aspirations/aggressiveness 5. location a) relative distance to clients (who is closer?) b) availability of labour and production factors c) relative costs of labour and production factors Table 88: Venture level analysis Open House
X X
X X
X X X
The one company which has been identified by the Open House team as the most important competitor is Barcelona On Line S.L. with its website barcelona-online.com. This company was one of the early competitors, who started only one year after Open House. In 1999, Barcelona On Line S.L. reported for the first time relevant sales of about 100,000 Euros. In 2000, the firm started to expand rapidly and recruited four full-time employees. Their sales more than doubled to 250,000 Euros. The expansion led to an overall reported loss of 130,000 Euros in the same year of 2000. In the year 2001, the investments made in 2000 paid off and the company managed to increase their sales by over 150% to more than 640,000 Euros. The annual report of 2002 was not made available by the firm register by the end of 2003. Barcelona On Line S.L. only offers about 80 apartments in Barcelona compared with the 150 apartments offered by Open House. The firm has expanded their service to include complementary services such as hotel reservation and bus and boat tour reservations.
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Recently, sister sites for apartment rentals in Madrid and Paris were started. Moreover, they included various features on their website which Open House is still working on, such as last-minute offers and the exploitation of their website by the inclusion of third-party advertising. Another important competitor that has just emerged within the last years is the firm Visit Barcelona S.L. with its website visit-bcn.com. Within less than two years, this company has established itself as a major competitor due to a very dynamic growth strategy. Since the firm has only been operating for a short time, no financial information is available. Visit Barcelona S.L. has been very successful in achieving high search engine rankings for their website. In order to increase the number of apartment offers, Visit Barcelona S.L. has bought apartments in the Barcelona city centre, renovated them, and later on sold these apartments to investors who had to agree not to use the apartments themselves but to let the apartments to Visit Barcelona S.L. for vacation rentals. This way Visit Barcelona S.L. was able to offer on their website, within a relative short time, over 50 apartments in Barcelona. Already the firm has expanded geographically with specific websites for vacation rental in Paris and London. With regard to the basic service and the ways of promotion, these two competitors and Open House are nearly identical. The interviewees from Open House consider the prices of their apartments slightly lower than the prices of the competitors. Also with regard to the offered apartment range, Open House leads as it offers many more apartments than other competitors. However, the growth dynamics of their main competitors have been stronger and competitors have leaded the introduction of complementary products, innovative features and the geographic expansion beyond the Barcelona region. Barcelona On Line S.L. in particular has been very active in offering complementary services. It appears that in the years 2001 and 2002, Open House mainly concentrated on organising the growth within their main segment of Barcelona apartment rentals. Due to the steep increase in sales within this segment, they did not feel a strong need to expand. However, within the last year the geographic expansion of the service has become an important priority after several competitors have expanded into other cities. At the time of the case study interviews, Open House was about to launch a new service that offers apartment rentals for a wide range of European cities. With this new offer the managers of Open House are confident that they will be able to take over the
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leadership in the expansion of the vacation rental service beyond Barcelona. The fact that they are already providing multilingual customer support facilitates the organisational effort of implementing a geographic expansion. This project and a timeconsuming optimisation of the existing website have been the reason for Open House lagging behind in the adoption of discount schemes that are already offered by competitors. Open House may have small competitive advantages with regard to their relationships with apartment owners and the design of their website. It has been mentioned in the interviews that Open House might have a better relationship with apartment owners than their competitors, which is documented in the large number of apartments offered. Apartment owners have told Open House about other agencies not treating them respectfully. Many new apartment owners contact Open House due to the recommendations of apartment owners who already collaborate. Finally, the design of the Open House website appears more professional than the websites of many competitors. This reinforces the clients trust in the service. 6.2.4 Excursus: Derived strategic recommendations for Open House The management team of Open House has already identified many promising ideas for the future development and expansion of their firm. It might be helpful if in more specific medium- and long-term planning, priorities for the implementation of new projects are set in accordance to their relevance on firm profits. The orientation on worldwide apartment rental agencies such as the worldwide leader interhome from Switzerland may provide new ideas for the development of the company. Geographic expansion: Open Houses decision to place first priority on geographic expansion into other cities and also to implement this new service immediately for a wide range of cities appears reasonable. Open House will be able to attract many visitors to their new websites for other cities by applying their proven concepts of search engine marketing. The attraction of apartment owners in the beginning could be critical. Since the company is not currently planning to have staff locally present in the different cities, and since the concept of vacation apartment rental may not be that known in other cities, the establishment of an initial base of apartments may be difficult. Therefore it might be recommendable to start the launch of the new website with the standardised marketing strategy to attract apartment owners. This could be done by putting advertisements in
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the real estate sections of local newspapers or by directly contacting apartment owners who are themselves offering their apartments for short or long-term rent. Apartment offers in online bulletin boards, where apartment owners can be conveniently be contacted by standard emails may also be of particular interest. In the case where their own recruitment efforts do not give sufficient results or turn out to be too time consuming, Open House could establish cooperation with similar agencies in other cities. Those agencies that lack professional website promotion could be of particular interest. Moreover, these agencies would be obliged to inform Open House immediately about any changes in the availability of apartments. These agencies could be offered the opportunity to include their complete apartment offer into the Open House database and an additional margin could then be added to the price of these apartments. Product development: The offering of additional complementary services should be considered with caution. The earning potentials of each service should be evaluated carefully. A concentration on the basic service seems at the moment to offer higher results and the expansion into complementary services may detract from the main business. Especially with regard to the limited staff, complementary services could complicate the business process and slow the growth in the main business. Organisation: With the expansion of the service, it might be useful to give apartment owners the opportunity to include changes in the availability of apartments themselves into the database. A notification e-mail about the change in availability may be sent to the respective customer support staff. Moreover, it appears necessary to prepare a plan about how to delegate responsibilities among the existing staff in case the website achieves the success expected. The recruitment of additional full-time employees with clearly outlined responsibilities may be necessary as soon as the new service starts operating. Marketing: Accessing new distribution channels, such as traditional travel agencies, will be important in order to differentiate Open House from competitors and in order to decrease the dependency on search engine rankings. However, from the perspective of traditional travel agencies, cooperation is much more interesting if a broad geographic
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apartment coverage of the service can be offered. Therefore it might be worthwhile to focus first on the expansion of the service to other cities and only in a second step start to access additional distribution channels.
6.2.5 Summarising evaluation of the impact of critical market characteristics on venture performance throughout different evolutionary phases Throughout the development of Open House, relevant market characteristics have been greatly related to barriers to entry. The initial opportunity for starting Open House has emerged from the formerly unfulfilled demand of foreign students for short-term apartment rentals in Barcelona. The market entry was very easy and did not basically require any investments, organisational overheads or special knowledge. The founder of Open House started to rent apartments in her own name and offered them for subletting to foreign students. Until now the barriers to entry have remained extremely low. The case of Open House illustrates very clearly the opposing short- and long-term effects of barriers to entry as proposed in the theoretical model. Upon market entry the low barriers facilitated and enabled the market entry, while in the current venture stage the high number of competitors resulting from these low entry barriers poses the major threat. Within the growth phase of the company, the most critical market characteristic has been the dynamic growth of the overall market induced by macro level factors which has led to higher numbers of tourist visitors in Barcelona. Attracted by the market growth and the low barriers to entry, a large number of new competitors entered the market. It is to be expected, according to the theoretical model and the results of the quantitative study, that this high number of competitor entries has a negative effect on the profitability. However, the effect on the profitability of Open House has been relatively low, since only a low degree of price competition has resulted from the new entries. Even though the basic service of industry members is quite similar, actual rental prices from apartments are difficult to compare due to a multitude of differences in apartment features and locations. While a large number of new firms entered the market, Open House continued to grow rapidly in the growing market segment.
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Today, in a less dynamically growing environment, the growth of Open House has further been affected by the large number of competitors, which make it more difficult for Open House to be noticed, and the limited market size in Barcelona. Together with the higher professionalism and growth aspirations of current competitors and a low exit rate, it can be expected that the intensity of competition will further increase. In the future, further growth dynamics will therefore have to result from geographic expansion into other cities where the intensity of competition is still lower. This intensity of competition, which is the major threat to the attractiveness of the Barcelona market, may actually turn out to be a key advantage in the future for expansion to other cities, as the intense competition in Barcelona has forced Open House to continuously improve its service and promotion activities . This will provide Open House with a favourable competitive position compared with existing services in other cities. In the context of Open House, therefore, the low barriers to entry had a positive short-term impact on the market entry, a negative medium- and long-term impact on profitability and growth potential in the Barcelona market, and a positive long-term effect for the growth into other geographic markets.
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6.3
Case study Tele-Ruf Kommunikations GmbH

The Tele-Ruf Kommunikations GmbH (Tele-Ruf) has been chosen for the specific market conditions of a formerly monopolistic market which has been deregulated. The companys core business is the operation of public payphones. In October 2003 the company employed 14 employees at its headquarter in Bonn, Germany, and four employees at a sister company in Berlin. Franchising cooperation exist with partners in six other cities in Germany. Founder Stefan Martinstetter installed his first payphone in 1996 close to a snack bar at the Bonn central railway station. Encouraged by the high revenues of this first payphone, he decided in 1997 to quit his economics studies and to found the company Tele-Ruf. Products/services From 1997 to 2000, Tele-Ruf continuously increased the number of payphone installations. After the Bonn region, the payphone operations were geographically expanded to adjacent cities. In 2001, a sister company was founded with a partner in Berlin in order to cover the new capital of Germany and to prepare further expansion to the north and east of Germany. In the same year, Tele-Ruf invested heavily to diversify into the business segment of prepaid phone cards and bought its own switching centre in Cologne. At the same time, Tele-Ruf started to offer the service of reselling of phone connections to major clients as hospitals. In 2002, the new business segment of prepaid phone cards was terminated after encashment problems with major clients generated losses of over one million Euros, which nearly led to the insolvency of the whole company. Tele-Ruf focused again on the profitable core business of public payphones and successfully launched a franchising system to accelerate the national and international expansion of the service. At the end of 2003, Tele-Ruf will start to offer first public payphones with broadband internet services. Performance It seems that Tele-Ruf has found a profitable niche in the shrinking public payphone market and the highly competitive telecommunication sector. The sustainable growth
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during the first years ensured that the company already operated profitably in the early years. For the year 2003, a turnover of 6 million Euros is estimated for the operation of their 500 public payphones. Additional revenue is generated from the reselling of interconnections to franchising partners. Since the initiation of the franchising programme last year, six franchising partnerships have already been established and current negotiations with several potential partners in Germany and abroad promise fast growth Over the next few years, Tele-Ruf has declared its objective of acquiring 50 franchising partners and to reach their final target of a total of 5,000 installed public payphones in Germany. 6.3.2 General market setting The market of public payphones has been among the first segments of the telecommunication market that have been deregulated in the beginning of the 1990s. However, the market attracted only a limited number of private companies. Until today, the former state monopolist German Telekom dominated the market in Germany with over 110,000 installed public payphones. Within the last few years 15,000 payphones have been deinstalled and by the year 2005, 15,000 non-profitable payphones are to be converted into limited emergency phones. By law, German Telekom is obliged to install at least one public payphone in a radius of 3km. Consequently, German Telekom has to maintain many payphone locations that are not profitable. By contrast, private competitors do not have the obligation to provide a Germany-wide infrastructure of payphones and can pick the most attractive locations. The largest private competitor is the British firm New World Payphones, which operates over 6,000 payphones mainly at railway stations. Tele-Ruf is, with 500 installed payphones, the second largest new provider of public payphones in Germany. With about 100 installed payphones, the firms Gekartel AG and Bytel Kommunkation GmbH follow.
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6.3.3 Explanation of market impacts on venture success 6.3.3.1 Macro level

Not at all Extremely important important
1. macro-economic changes
a) changes in the propensity to consumption b) changes of interest rates c) changes of currency rates
X X
2. political / legislative changes a) changes in environment protection regulations b) changes in market regulations c) changes in labour market regulations d) changes in public spending e) changes in international trade deregulations 3. technological changes a) development of internet usage b) development of internal IT applications c) development of new production technologies 4. socio-cultural changes a) changes in consumer preferences (increasing volatility) b) individualisation 5. demographic changes a) decreasing population growth b) increasing population age
X X
X X
X X
X X
immigration
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Other changes:
Intensity of mobile phone usage Penetration of broadband services Immigration
Table 89: Macro level analysis Tele-Ruf
The deregulation of the telecommunication sector has been the major change in the 1990s that opened the opportunity to start the business in the previously monopolistic market of public payphones. From the technological dimension, changes in the penetration and usage intensity of mobile phones have led to a decreasing intensity of public payphone utilisation. However, the impact has been frequently overestimated since the more expensive calls to mobile phones have compensated for the decreasing frequency of calls by higher average prices per public payphone call. It can be expected that the penetration and usage intensity of broadband services such as web surfing, e-mail, videoconferencing and multimedia messaging will determine the future growth potentials of the market. Until now, multimedia terminals in Germany are only operated at airports or in limited pilot projects. Broadband services may offer the opportunity to generate new sources of revenues and to develop new business models. Revenues from content providers may add or even replace the traditional revenues from consumers. Also, demographic changes have had an impact on the payphone market. A large share of the clients are foreigners and especially illegal immigrants, who do not have the required papers to contract a mobile phone or a fixed network phone connection. Changes in immigration regulations may therefore also have a notable impact on the payphone sales.
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6.3.3.2
Inter-country level
II. INTER.COUNTRY LEVEL NATIONAL COMPETITIVENESS Very high Very low Degree of international competition
a) activities of national competitors in foreign markets. b) activities of foreign companies in national market. c) country of strongest competition in future:
UK (British Telecom and New World Payphones)
Table 90: Inter-country level analysis Tele-Ruf
The conditions for foreign and national industry members are basically identical, since independently of the location of the headquarter, all current industry members purchase telephone minutes and hardware on an international market and have to perform the acquisition of new locations and the maintenance of phone cells under same conditions on a regional level. Therefore the country of origin of the company does not lead to any differences in competitiveness. Currently German competitors are not operating abroad, and New World Payphones is the only foreign competitor operating with its German subsidiary in the German market. 6.3.3.3 Inter-industry level
III. INTER-INDUSTRY LEVEL OPPORTUNITIES & THREATS FROM RELATED INDUSTRIES Extremely important important Callshops, mobile phones 3. forward integration 4. backward integration Franchisees
1. complementary cooperation 2. threat of substitution
X X
Not at all
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5. threat of other new entries
Table 91: Inter-industry analysis Tele-Ruf
The most obvious threat to the payphone business relates to further mobile phone penetration and callshops. Within recent years, small shops with fixed network phone booths have been founded throughout Germany, and many internet cafes have started to complement their product range with phone services. These callshops serve a similar client group as payphones. Moreover, by offering very competitive pricing, callshops attract particularly the interesting customer group of frequent international callers. Tele-Ruf reacted to the trend towards callshops by offering software, hardware and connection reselling packages specifically to the callshops. Even though Tele-Ruf is convinced that they can offer their phone service at much lower costs than callshops, the current connection prices of Tele-Ruf payphones are much higher than the prices of callshops. This may lead to future pressure on the prices, in order to remain competitive for the attractive segment of international calls. Another major threat relates to potential backward integration of current franchising partners. Gekartel AG, one of Tele-Rufs main competitors, only started their company after acquiring knowledge about the payphone business in negotiations about a franchise contract with Tele-Ruf. Similarly, current and future franchisees may decide in the future to operate their payphone business independently of Tele-Ruf. Due to Tele-Rufs relatively low brand recognition, franchisees of a larger size may find it more beneficial to operate their payphone business independently of Tele-Ruf. The threat from other new entrants is considered relatively low. Several fixed network carriers such as Netcologne, Isis and Mannesmann Arcor undertook attempts to enter the payphone market, but finally decided to terminate their payphone operations. For a large carrier, the market volume of the payphone market may simply be too small in relation to sales in other segments of the telecommunication market. Opportunities may arise from complementary cooperation with firms from other industries. On analysing the market setting and the offers from competitors, examples of such cooperation could include the use of the phone booths for advertising, promotion of third-party content in multimedia phones or the inclusion of WLAN senders in phone booths. Currently, all the private payphone providers are strongly focused on the acquisition of new locations.
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6.3.3.4
Intra-industry level
1. market structure a) market size b) heterogeneity of products c) branding potential

Important for franchising, but little consumer preferences
d) distance to clients e) economies of scale f) export-import balance g) need for specialised products h) buyer concentration i) average order volume j) seasonal change of demand k) intensity of price bargaining l) market transparency m) advertising intensity n) R&D intensity TOP factors from market structure -- with positive impact on firm
X X X X
X X X X X
Regional market
Not applicable
- large potential market size - high economies of scale - low advertising intensity
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2. market dynamics a) former market growth b) rel. expected market growth
X X
X X
X X X
X
Potential from webphones
c) entries to industry d) exits from industry e) balance of entries and exits f) degree of uncertainty about future development g) customer loyalty h) changing customer needs TOP factors from market dynamics -- with positive impact on firm -- with negative impact on firm
- few entries to industry - uncertainty
3. dependencies a) on clients b) on suppliers c) on key employees, employee institutions, and key knowledge d) on legislation e) on business cycle f) on maintenance in industry (barriers to exit) g) relative dependency compared to earlier and later value chain members TOP factors from dependencies -- with positive impact on firm -- with negative impact on firm - low dependency on both clients and suppliers - high barriers to exit - potential legislative changes
X X
X X
X X
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4. competitor dynamics a) inertia of established firms due to organisational structure b) inertia of established firms due to legislative restrictions c) inertia of established firms due to cost structure d) aggressive responsiveness of established firms e) inflation rate in selling prices f) number of new products introduced g) investment in new assets TOP factors from competitor dynamics -- with positive impact on firm - inertia of German Telekom in payphone segment - low responsiveness - low inflation rate in selling prices -- with negative impact on firm /
X X X
X X
5. competitor structure a) concentration b) number of industry members c) heterogeneity of industry members d) general efficiency level among industry members e) prevalence of competitive strategies on other than price f) capacity utilisation level g) employee productivity h) labour costs intensity i) gross margin j) vertical integration k) degree of diversification
X X X X
X X
X X
X X
location
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l) average age of industry members m) average size of industry members n) variable costs TOP factors from competitor dynamics -- with positive impact on firm
X X
- gross margin (about 70%) - low number of industry members - prevalence of strategies on other than price
Table 92: Intra-industry level analysis Tele-Ruf
Market structure One of the most attractive industry variables is the large potential market size. With 500 public payphones, Tele-Ruf only covers less than 0.5% of the overall market. The business model is easily transferable to new regions and cities within Germany, which is reflected in the launch of the franchising system. Also, the low number of industry members is a major advantage. It was mentioned in the interview that the limited number of competitors decreases the pressure on prices and may, in the future, facilitate a possible coordination of the different competitors. Economies of scale occur particularly with respect to the purchasing of customised phone cells and call interconnections. Tele-Ruf already purchases call interconnections with the status of a telecommunication carrier, which guarantees the lowest possible purchasing prices. The phone booths are purchased directly from a manufacturer in Scotland. Apart from the investments in the installation and hardware of the phone booth, basically no other investments are required for firms entering the market. Neither investment in advertising nor in R&D is required. Final clients will choose a payphone by proximity rather than by brand image. It can be deduced that the low importance of brand recognition has facilitated Tele-Rufs market entrance and has led to healthy profit margins. For the success of the franchising system, however, the lack of brand recognition may have a negative impact on the long-term commitment of dynamic franchisees to Tele-Ruf. The low heterogeneity of the payphone services from different providers does not pose a problem in the context of the payphone market,
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since dependence on location avoids low heterogeneity leading to a greater pressure on prices. Market dynamics The negative overall market growth, given the decreasing usage of payphones, only affects Tele-Rufs growth to a limited degree. Potentially attractive locations for payphones are still plentiful and growth is more limited by time investments for the acquisition of new locations. In fact, the decreasing usage of payphones does lead to lower profitability as the turnover per phone booth decreases. The negative market growth has had, however, a positive side effect. With German Telekom announcing the closure of thousands of unprofitable phone booths and the penetration of mobile phones, only a very limited number of firms have considered the payphone market as attractive. While after the deregulation of the telecommunication market an immense number of new firms entered the market for fixed network telephony, no new firms have successfully entered the public payphone market within the last three years and only the few existing market players have remained. The telecommunication sector is among the most rapidly changing markets. The payphone business has probably never before been exposed to such dramatic changes from the demand side as today. With the further penetration of mobile phones, decreasing mobile phone prices, the development of smaller handheld devices and longer battery life of devices, the market for traditional payphone calls can be expected to decrease in the long-run. Broadband services may provide future growth opportunities, however, for now there are no references that show the profitability of such new broadband services. The uncertainty about the speed of substitution from mobile phones and the commercialisation of broadband services from public payphones poses a major investment risk. Costs of the terminal hardware represent a major share of initial investments. Due to the high costs and long lifetime of the terminals, all payphone providers have to make long-term investment decisions on a backdrop of a high degree of uncertainty and changing customer needs in the context of broadband services.
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Dependencies Tele-Ruf is in the awkward situation of their major competitor, the German Telekom, being an essential supplier for the installation of the phone booths to the local phone node. Contrary to other competitors, however, Tele-Ruf has never experienced any problems with respect to German Telekoms installation service. German Telekom has not only complied with their obligations from the deregulation contracts, but attends Tele-Ruf from their department of key clients with a prompt and professional service. Apart from the installations to the local node, Tele-Ruf is in the favourable position of not relying on any critical supplier or client. The deregulation of the telecommunication market is not expected to change profoundly, although continuous adjustments are expected to be made. An area where legislative changes may substantially affect Tele-Rufs business is the legislative decision to expand the responsibility of the maintenance of a Germany-wide payphone infrastructure to all private providers of a larger size. The exit barriers are particularly high. Not only would the costs of installation be basically lost for non- profitable locations, also the phone booths and terminals are difficult to sell and a company which intends to exit the market would have to face additional costs for the deinstallation of their phone booths. The dependency on the landlords of the public spaces or the private house walls where payphones are installed can be considered low, as the contracts are commonly closed for unlimited or long durations and contracts are rarely cancelled. Competitor dynamics The German Telekom, as the only established competitor has paid relatively low attention to the development of the payphone segment in recent years. Recent changes have concentrated on improving the cost structure of the loss-making segment. Unprofitable locations were closed or were converted into low-maintenance emergency phone columns where it was not possible to close them due to the deregulation contract. Further attempts to minimise maintenance costs have included changing to card phones and replacing phone cells by open phone booths. Further efforts to differentiate their service from competitors and to increase the attractiveness of the payphone usage have not been undertaken. The German Telekom, as a highly diversified conglomerate, is apparently not treating the payphone market with priority in their product portfolio. Moreover, the obligation from the deregulation law to
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provide country-wide coverage of a public phone infrastructure can be considered as a major competitive disadvantage for German Telekom, which may reduce German Telekoms interest in dynamically developing this market segment. Direct actions against new private competitors have been limited to dissuasions against marketing campaigns. The price level for payphone calls has remained basically unchanged for the last six years and has only been adjusted marginally with the introduction of the Euro currency. Compared with the frequent and strong price cuts in the fixed network telephony segment, competition on prices has basically been absent for payphones and has ensured comparably high margins in the payphone business. A one-minute national call costs, at both Telekom and Tele-Ruf payphones, 10 Cents224, while the same call only costs the final customer 1-2 Cents from a low-price fixed network operator. Competitor structure Overall, the intensity of competition in the market is very low. It was mentioned in the interviews at Tele-Ruf that the activities of competitors are hardly relevant for their business. Frequently, Tele-Ruf phone booths are placed right next to Telekom phone booths and generate a higher turnover due to the slightly lower costs of calls and the high level of maintenance, which guarantees that 98% of Tele-Ruf phones are operational at all times. Also, in relation to private competitors, the intensity of competition is relatively low since companies operate frequently in different cities and even in cases where competitors operate within the same city, a multitude of potentially attractive locations remains. Competition is only notable in cities where the municipality prohibits the placement of more than one public payphone in a 100 to 300 meter radius on public ground. In these cases, the private payphone providers are strongly disadvantaged compared with German Telekom with its presence in highly frequented locations. The low intensity of competition is manifested in the low number of industry members, a relatively high gross margin of about 70% and the prevalence of competitive strategies which focus on location instead of price. The major challenge for all payphone companies is the identification and acquisition of attractive payphone
224
Tele-Ruf, however, charges the first minute of a call in 30-second increments, which leads to a lower price for phone calls of less than 30 seconds and a lower minimum fee per call.
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locations, since clients mainly choose payphones for reasons of proximity. Because companies do not compete on price, low variable costs, low capacity utilisation levels and low labour costs intensity, which may lead in other industry contexts to pressure on profitability, do not have a negative impact in the context of the payphone market. 6.3.3.5 Barriers to entry
a) inventory intensity b) fixed asset intensity c) minimum organisational size & complexity d) accessibility of distribution channels e) customer loyalty f) legislative barriers g) product sophistication TOP factors from barriers to entry -- with positive impact on firm -- with negative impact on firm
X X
X X X
Not applicable
- low minimum organisational size -
Table 93: Barriers to entry analysis Tele-Ruf
Considering the low number of industry members, one might have deduced that the barriers to entry may be particularly high. However, in order to start a business in the payphone market neither large investments, expertise nor organisational overheads are required. The initial start-up size would be basically only limited by the set-up costs of each phone booth, which accounts for 5,000 to 10,000 Euros, including installation and the time-consuming process of location acquisitions, which can take several years in bureaucratic negotiations with municipalities.
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6.3.3.6
Venture / firm level
Gekartel
Tele-Ruf
better
1. products/services a) relative price (better=lower price) b) relative quality c) relative design d) innovation potential (potential to offer completely new product/service) 2. firm resources a) relative financial strength b) relative knowledge / patents 3. management team a) relative capability of management team b) relationships key partners c) relevant industry experience 4. strategy a) relative growth aspirations/aggressiveness 5. location a) relative distance to clients (who is closer?) b) availability of labour and production factors c) relative costs of labour and production factors Table 94: Venture level analysis Tele-Ruf
X X
X X
X X
X X X
Apart from the German Telekom, Tele-Rufs main competitor is Gekartel AG. New World Payphones as the largest new operator of payphones in Germany is specialised in equipping airports and train stations, which is not currently Tele-Rufs target segment. Gekartel AG started two years after Tele-Ruf in 1999, and since then it has
better
339
grown dynamically with innovative ideas and investments of about 2 million Euros. For 2003, Gekartel forecasts a turnover of one million Euros with more than 100 installed payphones. The company had sixteen employees at the end of 2003. The basic service offered by Gekartel and Tele-Ruf is very similar. Gekartel offers slightly lower prices than Tele-Ruf and German Telekom. Both Tele-Ruf and Gekartel ensure a higher maintenance frequency of the phone booths than German Telekom and have their service team visit the booth twice a week. In terms of design, Gekartel innovated with the provision of phone cells with seats and automatic emission of scents. With regard to the firms resources and management team, Tele-Ruf has an advantage over its competitor with a much higher revenue base and nearly two more years of industry experience. Its larger size in particular gives Tele-Ruf an advantage in negotiations with key partners and suppliers. Gekartel and Tele-Ruf are strongly growth oriented. Tele-Ruf may, in the short-term, have the higher growth potential after the launch of the franchising programme. With regard to location, no relevant differences between Gekartel and Tele-Ruf can be observed. 6.3.4 Excursus: Derived strategic recommendations for Tele-Ruf The management of Tele-Ruf has established, with its franchising system, a very promising vehicle with which to accelerate growth in the future. Parallel to the focus on growth, additional potential sources of revenues may improve the profitability of the firm. Development of a webphone business model Tele-Ruf lacks a clear idea about how to profit from webphone services and has delayed the introduction of webphone installations until December 2003. The provision of webphone services may require the development of a new business model. These services provide the opportunity to attract a new consumer group to use the Tele-Ruf terminals and to greatly augment the potential market size. With a monthly flat fee, the costs for providing broadband internet connections are relatively low. At the same time, online shops and commercial services could generate additional revenue. One might even consider changing the whole business model and financing the webphone service solely from advertising online shops and offering users websurfing, online games or even videochats at no cost. The management of online
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advertising and the development of online services could also facilitate the attraction of new franchising partners, as Tele-Ruf would be associated with a growing market segment. Additionally, the long-term commitment of larger franchisees could be improved, as the online service could be much more efficiently managed from a central headquarter. Increase attractiveness for international phone calls The emergence of callshops around Germany has demonstrated that there is a large market for international phone calls from public phones. As clients are more pricesensitive for international phone calls than for national phone calls, Tele-Ruf should lower its prices for international phone calls. As currently the Tele-Ruf phones are only marginally used for international calls, the company could reach a new customer segment. Moreover, clients may associate the low prices of international phone calls with the Tele-Ruf brand, which might also positively impact the usage for national calls. International calling rates from Tele-Ruf might not even have to be lowered to the level of callshops, since many clients may prefer the proximity of a Tele-Ruf phone over small extra savings in a callshop. Temporary special offers of international phone calls to specific countries may further increase the attractiveness of the service and may be an attractive opportunity for the promotion of Tele-Ruf payphones. Promote advertising space Contrary to its competitor Gekartel, Tele-Ruf does not yet sell advertising space on their phone booths. The Tele-Ruf phone booths are generally located in highly frequented locations, which make them predestined for promotion of advertising space. Given the large number of installed payphones, it may even be possible to completely outsource the administration to national outdoor advertising companies such as, for example, JC Decaux, Ster, Wall or Deutsche Stdte Medien. The promotion of advertising space may not only generate additional revenue without additional investments, it might also increase the investment risk and profitability for Tele-Ruf and its franchisees. Additionally, the central management of advertising space by Tele-Rufs headquarter could increase the long-term commitment of franchisees, as the promotion of advertising space might be more efficient for a large number of advertising spaces, and third-party outdoor advertising companies may have a higher interest in a collaboration.
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6.3.5 Summarising evaluation of the impact of critical market characteristics on venture performance throughout different evolutionary phases Market factors have been critical for the success of the venture at various stages of the evolution of Tele-Ruf. The initial opportunity to create a private business in the payphone market was opened up by the deregulation of the telecommunication market. The preferential treatment of private companies was critical for the commercial attractiveness of this opportunity, as it exempted these companies from the legal obligation to provide a Germany-wide infrastructure and they could thereby freely choose the most profitable locations. The core opportunity was therefore the direct result from legislative changes on macro level. Upon entering the market, Tele-Ruf benefited from very low entry barriers, which made it possible to start the firm without large investments and with only two people. The market did not require large investments in advertising or R&D. Simply by its physical presence in highly frequented locations Tele-Ruf payphones attracted clients and were competitive with payphones of the dominant market player German Telekom. It was subsequently possible to grow continuously from the revenues of the first payphone installations. As expected by the theoretical model, low barriers to entry facilitated the entry into the market. Within the growth phase of the firm, the negative market growth of the overall payphone market, the losses of German Telekom in the payphone sector and the penetration of mobile phones have led to the general perception that the payphone market is not an attractive market for starting a firm. In fact the negative impact of the mobile phone penetration on the business may have been highly overestimated and the freedom to pick only the most populated locations has provided a profitable business model. The negative perception of the attractiveness of the payphone business has given Tele-Ruf time to grow steadily in their regional market, while at the same time only a limited number of competitors have entered the market. Today, with Tele-Ruf having reached a stage that allows nation-wide expansion with its franchising system, the firm benefits from the ongoing absence of other private competitors in many regions of Germany. The low presence of competitors together with the fact that clients choose payphones for location rather than for price has
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ensured that the margins in the payphone business remained stable, and they have not been impacted by the threatening price competition in the fixed network phone market. The high margin is one of the most important factors for the attractiveness of the market. In the long-term it has been proposed by the theoretical model that low barriers to entry would lead to lower profitability induced by an increasing number of competitors. Even though the barriers to entry have not increased within the last few years, surprisingly only a few companies entered the market and no resulting negative impact on profitability can be observed. The decrease of the overall demand for payphone services has not notably slowed Tele-Rufs growth, since the potential market size in terms of attractive payphone locations has provided plenty of growth opportunities. Instead the decline of the overall payphone market has protected the firm from a larger number of new firm entries. In the near future, the constellation of low competition and high market size promises further growth in particular with the backdrop of the launched franchising programme. With regard to the low barriers to enter it might be important to evaluate in which areas Tele-Ruf can generate additional value for its franchisees. In the medium- and longer-term future, it can be expected that the changes in the mobile phone segment on the macro level will finally lead to lower sales in pay phone communication due to a higher availability of mobile phones, longer battery life and lower mobile phone calling rates. Also, with the dynamic expansion of current competitors and the potential entrance of new competitors in the future, the intensity of competition for attractive locations may increase and competitors may start to lower prices in order to increase market share. There is a great uncertainty about the future development of the market since telecommunication technology and broadband services are undergoing rapid changes. These changes may lead to a further substitution of the use of traditional payphones or may provide growth opportunities with new services. The uncertainty about future development may, in the present situation, slow Tele-Rufs growth, as franchisees might feel threatened by the risk of investment, particularly since they are required to make long-term terminal and installation investments.
CHAPTER 7 - CONCLUSIONS, SIGNIFICANCE OF RESULTS AND PERSPECTIVES
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Conclusions, significance of results and perspectives for future research
This study has provided a contribution to a better understanding of the influence of market environment on venture success. In the first part of this last chapter, conclusions drawn from the results found throughout the study are given. Then, the significance of the results for both the practical and scientific area are explained. Finally, the dissertation finishes with the presentation of perspectives for future investigation for advancing this field of research.
7.1
Summarising conclusions
The conclusions derived from this study are presented according to the seven initial objectives of the study225, which are repeated for easier reference below.
1. Objective: To analyse the empirical results from relevant studies in the areas of entrepreneurship and strategy research with respect to marketventure success relationship: As a result of the comparison and aggregation of previous empirical research, critical market-related variables that have a consistent impact on venture success among different investigations and different measures of venture success were identified. In entrepreneurship research226 early life cycle stage, low competition and high buyer concentration consistently lead to positive impacts on venture success. In strategy research227 high market share, high industry capacity utilisation, low import rate and low inventory intensity were identified as the variables that consistently lead to a positive impact on organisational success. Given the findings of the conducted empirical study, it can be concluded that the inconsistent market variables of the literature review are either sensitive to specific performance measures or to specific contexts. The existing literature is too fragmented to deduce the reasons for the inconsistencies of individual variables.
225 226
Compare p.3f. Detailed results in chapter 2.1.3 figure 4, p.33. 227 Detailed results in chapter 2.2.3 figure 5, p.50.
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CHAPTER 7 CONCLUSIONS, SIGNIFICANCE OF RESULTS AND PERSPECTIVES
2. Objective: To study from different theoretical perspectives the market factors that affect organisational success: Industry economics, population ecology, transaction costs economics, contingency theory and game theory were identified to provide relevant theoretic concepts that could be applied to explain the relationship between market factors and venture success. The key variables, which were stressed within each theoretic concept228 together with the variables found within the review of previous empirical studies, have provided a large number of relevant market variables which have been taken into account in the development of the proprietary model of market attractiveness. Overall, the previous theoretic concepts were useful for providing explanations for isolated mechanisms. However, the later qualitative study in particular, demonstrated that the relationship between market environments and venture success is too complex to be explained by only one theoretical concept with a limited number of variables. 3. Objective: To propose a new proprietary theoretical model of market attractiveness that concentrates on the specific perspective of new ventures and provides a structuring framework for the analysis of the impact of market variables on venture success: A model has been developed, which considers over 100 potentially relevant market variables. These variables are structured into a 5*5 matrix with five distinctive levels of analysis and five key dimensions of impact for each level of analysis229. Both the quantitative and the qualitative empirical studies refer to the model as structuring framework. The proprietary model is different from previous frameworks for the market environment as a larger number of variables are considered. From a new venture perspective important characteristics such as barriers to entry and environmental dynamics were included to distinguish between short- and long-term effects. Relationships and interactions among variables were specified. The direction of impact was specified by explaining potential risks and opportunities. The applicability of the model in practice was facilitated by referring to publicly available data
228 229
See figure 7 in chapter 3.2.7, p.66 with a list of key factors of each theoretic concept. See figure 20 in chapter 3.4.8, p.119f for a presentation of the complete model.
345
sources. Finally, the impact of different measures of organisational success as growth, profitability and survival were distinguished for each variable. The model, as applied for the investigation of the case studies, took into consideration the inevitable limitation in the number of variables that can be considered by any model and remained open for additions of relevant variables in each firms context. Without this openness, no reasonable analysis of market attractiveness would have been possible. 4. Objective: To empirically identify markets in which new ventures have been most successful: On the basis of the DtA sample of 5,117 new ventures, 163 industries in Germany were ranked according to the four success measures of average venture growth per industry230, average venture profits per industry231, average years needed to break even232 and subjective venture success per industry233. With regard to the performance measures of average venture profits and years to break even, industries from the manufacturing and the construction sector ranked higher. In contrast, with regard to the performance measures of venture growth and subjective performance, industries from the service sector ranked higher. Retail, as the fourth sector investigated, ranked low for all performance measures. This finding has important implications for quantitative empiric research in entrepreneurship. The frequent approach in empiric research of relying on firms in the manufacturing sector for reasons of easier data collection, may lead to results that are not directly transferable to other industry sectors, as performance measures are impacted differently among industry sectors. The later study on the impact of contingent variables reinforces this indication. 5. Objective: To empirically study the relationship between industry variables and the success of new ventures: The impact of 17 market variables on the industry averages of venture growth and venture profits was investigated. High export balance, high distance to
230 231
Complete ranking in appendix D. Complete ranking in appendix E. 232 Complete ranking in appendix F. 233 Complete ranking in appendix C.
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clients, high number of entries to industry, high number of net entries and high uncertainty were found to relate to higher venture growth. With regard to venture profits, a low number of industry entries, a low number of firm exits and low uncertainty was found to be positively related. The results underline the necessity of applying different sets of performance measures in empirical entrepreneurship research on success factors. Opposite directions of impact were frequently observed for venture growth and venture profitability. 6. Objective: to empirically study the impact of contingent variables on the relationship between industry variables and the success of new ventures: The analysis of the impact of the 17 market variables on venture growth and venture profits, years to break even and subjective performance was performed independently for 13 different subsamples, which were derived form the contingent variables of industry sector, market growth, venture growth and industry heterogeneity. The market variables that were particularly important in specific contextual settings were shown. This analysis allowed the identification of additional variables, which were not significantly related for the overall sample, but which were significantly related to venture success measures for a range of contextual settings, as defined by the contingent variables. The importance of the contingency variable of industry sector, which was suggested by McGahan and Porter (1997) was confirmed. Several variables were identified as having opposite impacts on venture success for different industry sectors. Market growth as a contingency variable was not found to lead to an opposite impact on venture success in different subsamples. In fact, high market growth enforced the impact of market variables without changing the direction of impact. An important impact of the contingency variable of venture growth, as found by Hawawini (2003), could not be confirmed in this study. Finally, the importance of the contingency variable of industry heterogeneity, as found by Mueller and Raunig (1998), could only be confirmed for the performance measure of venture growth. For other performance measures, industry heterogeneity did not seem to be very important. Overall, the results of the study underline the importance of investigating the industry sector in particular as contingent variable for a better understanding of the complex effects of market environments on success.
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7. Objective: To empirically identify the mechanisms through which market factors influence venture success: The qualitative empirical study has reinforced the understanding of the complexity of industryventure success relationship. While many market variables were found to affect the investigated firms, as proposed by the theoretical model and the results of the quantitative study, some market variables impacted venture success contrarily to expectations. In particular the impact of competition seemed highly sensitive to the contextual setting. Additionally, competition was shown to be an important driver of venture development and innovation. Changes on the market macro level created opportunities for a ventures initial and further growth. From the context of the case studies one may conclude that the intensity of competition on prices is critical for venture profitability, and the potential to multiply the business concept to other geographic regions or related product segments is critical for the ventures growth dynamics.
7.2
Significance of results for practice
Several results of this study may be of interest for entrepreneurs, managers and investors. The literature review and the empirical study highlight, among the multitude of market variables, those which are most critical with regard to venture success. The industry rankings according to the four venture success measures give an indication of the attractiveness of the broader industry context. Of most interest, from the perspective of practitioners, could be the developed model of market attractiveness, which provides a clear framework for conducting an industry analysis and interpreting its implications for a firm. An understanding of the factors and patterns that contribute to market attractiveness, which is the purpose of this study, is of high practical value as it allows recognition of the opportunities and risks from the industry environment. Nevertheless, the recent explanations and frameworks which research on entrepreneurship and strategy have yielded, have gone largely unknown to entrepreneurs or investors. Until now, beside Porter's (1980) model of industry analysis, no other model has been widely applied in
348
practice. It has to be noted that Porter's model, developed about two decades ago, contains several weaknesses234. This study provides an alternative model with a broad theoretical base. The model developed should enable practitioners to perform a structured analysis of the industry environment by taking into consideration a multitude of potentially relevant factors and allow them to deduce the potential risks and opportunities for a firm. In the future, a comprehensive systematic model, as developed in this study, may serve to develop more advanced tools for industry analysis, which integrate a wide range of relevant industry information. Moreover, the dataset generated for the quantitative empirical study with information on 17 market variables for the 163 most popular industries of new ventures may serve as a starting point for the collection of more statistical industry data. IT-based models may facilitate the process of analysis, decrease the required time for conducting the analysis and, finally, increase the quality of results by processing a higher complexity of data. Possible features of such a future tool of industry analysis are outlined in the box below. Excursus - application of results into practice: Industry-analysis.com Vision of a web-based tool of industry analysis and industry benchmarking Basic concept: A free online service could be developed, which provides a comprehensive, integrated and guided analysis of market attractiveness for a wide range of industries. On the basis of the results from previous empirical research, statistical data and the opinions of other market players, a wealth of information could be provided and attention can be drawn to the critical areas of the particular industry context. Specification of the user interface (user input): o The user is provided a general overview of the different levels of analysis and may select whether he235 wishes to perform analysis on all or individual levels. o The user specifies the industry code of the industry that he is interested in.
234 235
See chapter 3.3.1, p.67ff. It is referred to both female and male users. For easier readability only the male term is used in the text.
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o The user specifies whether he would like to (1) evaluate a market that he would like to enter, or whether he would like to (2) evaluate a market in which he is already operating in and for which he would like to receive the benchmark values of his firm. o The user fills in a questionnaire with questions regarding each variable of the model of market attractiveness on the chosen levels of analysis. Numeric and likert scale response fields are provided. o The user fills in a list of the ten factors that appear to him as the most important for the given industry. Specification of the analysis output: o Summarising profile of all rated market variables, highlighting those variables that have been rated by the user as highly positive or highly negative. o Additional highlighting of market variables that have been considered particularly important by the user for the analysed market. o Additional average ratings of other users for the same industry or sector. o Additional statistical industry data is applied from various sources to give information on the individual market variables of the model of market attractiveness. o Explanation of possible opportunities and risks associated to the market variables that were rated as highly positive or negative by the user, variables that have extreme values from statistics, variables that were considered very important by the user, variables that were considered highly important by the average of other users in the same industry, variables that are suggested by entrepreneurship research as being important. o Average firm performance benchmark in industry compared with average firm performance in other industries (percentage rating of evaluated industry compared with other industries). o For existing firms, benchmark of performance of the rated firm compared with average firm performance in industry for key performance indicators (percentage rating of evaluated firm compared with average in industry).
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Challenges for implementation: o Reaching critical mass of ratings for comparison: Financial institutions that provide credit or funding to firms, such as the DtA, could demand a completed industry analysis, applying the indicated tool from all ventures that apply for funding . This would facilitate evaluation of venture concepts, since market analyses for all ventures would apply the same structure. Thereby the probability of venture success would be increased as founders are forced to consider risks and opportunities of the market environment that they may not had recognised previously. o Reliability of entered data: (1) Since industry analysis is only conducted for broad industry categories, users in attractive market niches may not have to be concerned when their specific niche is identified. (2) The suggested participation of financial institutions could greatly improve the data reliability. (3) Manipulations can be restricted by blocking repeated questionnaire submissions from the same IP address. (4) The function of benchmarking the performance data of the individual firm to the performance of the industry provides an incentive to give accurate information. o Copyrights for electronic publication of statistical data: All of the data sources that have been applied within this study do not permit the electronic publication of data. Those organisations that possess relevant industry statistics could be offered benefits for cooperating, such as presentation of the products and services that they offer or providing users with the option to purchase more in-depth data from cooperating organisations. Scientific value: The data obtained on industry ratings and firm performance could be an excellent source for future empirical research in entrepreneurship as well. It could enable a higher consideration of not publicly listed SMEs in research, which is currently limited by the lack of available data sets. Moreover, it may permit the study of the impact of a higher number of industry variables than has been possible in the undertaken study.
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7.3
Scientific significance of results and perspectives for future research
Significance for entrepreneurship research The thesis project aims to supply a contribution for a better understanding of the factors that lead to a higher probability of new venture success. This objective is approached by narrowing the view on market-related environmental factors, where former studies provided only limited and often contradictory findings. Thus, the study contributes to a more complex context-oriented explanation, taking into account the context variables of industry sector, market growth, industry heterogeneity and venture growth. Finally, the study might contribute to the development of a general entrepreneurship theory, by providing a framework for the investigation and explanation of the environmental dimension. The presented framework, which integrates insights from a broad scope of disciplines and the findings of previous empirical studies in entrepreneurship and related fields, may be a valuable guide for future research in the field. Although the study is focused on the short-term success of small new venture companies, the results of the study might be of equal interest to the field of strategy. Significance for strategy research Despite the fact that Porter's "Competitive Strategy: Techniques for analyzing industries and competitors "236 is by far the most widely cited publication in strategy literature237 and in the history of business administration, the book's central feature the industry framework - has attracted little empirical attention238. Empirical studies on measuring industry effects often applied similar data on large-scale publicly traded enterprises. In order to investigate industry impacts, data on highly diversified multinational companies does not seem to be the most appropriate239. In addition, McGahan and Porter (1997) identified the focus on manufacturing industries as a major fault in previous research, and they concluded that manufacturing industries are highly unrepresentative and understate the importance of industry effects.
236 237
Porter 1980. According to a study in Hambrick 1990. 238 Powell 1996. 239 Powell 1996.
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Perspectives for future research The results of the study lead to four implications for future research. First, more application of comprehensive theoretical models of the market environment are desirable for the future. A major restriction of the undertaken quantitative study was the fact that a limited number of only 17 market variables from the previously developed theoretical model could be investigated. Due to the limited availability of statistical data on variables of the market environment, it was not possible to verify all of the proposed relationships of the theoretical model. A questionnaire survey including questionnaire items on all variables of the theoretical model might allow the empirical verification of the model. However, the collection of industry data from a range of over 100 industries requires extensive resources240. Therefore, future research should not only apply more comprehensive models, but also try to empirically verify a comprehensive model of market factors such as that proposed within this study. Second, future research should increase the degree to which the impact of market variables varies by market context and performance measure. Those generic variables, which were identified in the literature review as empirically consistent241 and those variables that showed comparable results for different market contexts within the quantitative study are the most appropriate for investigating the majority of studies that do not incorporate the impact of contextual contingencies. Third, future studies that investigate the relationship between market and organisational success in more depth should identify the central contextual settings of market variables and validate their importance empirically. The consideration of four contingency variables within the undertaken study has already enabled an analysis on a higher complexity level. However, in order to reach a better understanding of contextsensitive variables, it may be necessary to consider even more complex constellations of contingency variables. The qualitative study indicated that the current and future intensity of price competition in particular may be an important contingency variable.
240
241
In the undertaken study, venture success indicators from 163 industries were applied. Given a 10% questionnaire response rate and the estimation of industry indicators from data of 10 firms per industry, it would be necessary to send out 16,300 questionnaires. None of the empirically consistent variables from the literature review could be investigated within the undertaken quantitative empirical study due to the limited availability of statistical data.
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Moreover, the inclusion of strategic variables as contingency variables will permit the investigation of the connection between market characteristics and strategy. Fourth, quantitative empirical studies in entrepreneurship research should apply databases of large numbers of new ventures more frequently. Various organisations in different countries have recently started to build such databases242. Even though access to these new venture databases is generally restricted, these databases now offer the unique opportunity to advance the field of entrepreneurship research with studies of higher validity. Due to the intensity of firm-specific factors of distortion in the context of new ventures, the field of entrepreneurship, more than other fields of research, may benefit from large sample sizes. An alternative approach for obtaining financial information on a large number of new ventures is given in countries such as Spain, where financial reports of non-publicly traded firms are also published.
242
E.g. Existenzgrnder Pandel of DtA which has been applied within this study; ZEW database of new ventures in Germany; Kauffmann Foundation`s financial statement database in the USA.
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BIBLIOGRAPHY
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APPENDICES
Appendices
Appendix A: Calculations for operationalization of MES variable
The following script has been written in the Visual Basic editor of MS Excel in order to calculate the value of the MES based on the data of the value added tax statistics in classes of firm size.
'Private Sub Worksheet_Change(ByVal Target As Range) Public Sub calculate_values() debugging = False debugging_msg = False warnings = False anz_col = 4 anz_row = 3 sum_anz_col = 4 sum_anz_row = 16 sa_col = 4 sa_row = 19 target_col = 4 target_row = 82 data_width = 163 gk_col = 3 gk_row = 3 min_i = 0 max_i = 12 ' CALCULATION MES '******************************************* If debugging Then 'delete content of complete output range Me.Range(Cells(target_row, target_col), Cells(target_row target_col + data_width)) = "" End If For x = 0 To data_width - 1 sum_anz = Me.Cells(sum_anz_row, sum_anz_col + x).Value total_revenue = Me.Cells(sa_sum_row, sa_sum_col + x).Value um = 0 ' k is number of remaining smaller firms k = sum_anz ' max_k is total number of firms in industry (constant and corrected by 1) max_k = k + 1 anz_i0 = Me.Cells(anz_row + max_i, anz_col + x).Value If anz_i0 < max_k Then For i = min_i To max_i With Me anz_i = .Cells(anz_row + max_i - i, anz_col + x).Value gk_i = .Cells(gk_row + max_i - i, gk_col).Value gk_i1 = .Cells(gk_row + max_i - i - 1, gk_col).Value sa_i = .Cells(sa_row + max_i - i, sa_col + x).Value 'write output to this position 'output of branchconcentration 'width for all ranges 'write calculation steps in target 'show msg_boxes with values 'show warning if anz_i0 < k
max_i
2,
APPENDICES
End With
371
If (i = 0) And (anz_i > 0) And (sa_i = "") Then MsgBox "error: anz(0) = " & anz_i & " but sa(0) = 0 " & sa_i & Chr(13) & Chr(13) & _ "position: " & x & ":" & i End If If debugging_msg And (anz_i > 0) Then Cells(target_row, target_col + x).Activate MsgBox ("i: " & i & Chr(13) & _ "x: " & x & Chr(13) & _ Chr(13) & _ "anz_i0: " & anz_i0 & Chr(13) & _ "anz_i: " & anz_i & Chr(13) & _ "gk_i: " & gk_i & Chr(13) & _ "gk_i1: " & gk_i1 & Chr(13) & _ "sa_i: " & sa_i) End If break_total = total_revenue * top_total_revenue_percent / 100 If (um + sa_i) <= (break_total) Then If anz_i > 0 Then um = um + sa_i k = k - anz_i If debugging Then Me.Cells(target_row + max_i - i + 2, target_col + x).Formula = "i: " & i & " - k: " & k & " - um: " & Round(um) End If Else If anz_i > 0 Then 'calculation of average sales interval within last size class Mw = (((sa_i)) / anz_i) End If For n = 1 To anz_i Um = um + gk_i - mw * n k = k - 1 Cells(target_row, target_col + x).Activate If debugging Then Me.Cells(target_row + max_i - i + 2, target_col + x).Formula = "i: " & i & " - k: " & k & " - um: " & Round(um) If um >= break_total Then Exit For Next End If If um >= break_total Then Exit For Next Me.Cells(target_row, target_col + x).Value = Round(um / (max_k - k)) Else warn_str = "anz(0) bigger than k" & _ Chr(13) & _ "i: " & i & Chr(13) & _ "x: " & x & Chr(13) & _ Chr(13) & _ "anz_i0: " & anz_i0 & Chr(13) & _ "k: " & Chr(9) & k If warnings Then 'activate cell that contains the value that is too high Cells(anz_row + max_i, anz_col + x).Activate MsgBox (warn_str) End If Me.Cells(target_row, target_col + x).Formula = "" End If Next End Sub
372
APPENDICES
Appendix B: Industry ranking: Startups per industry

Complete ranking in continuation of excerpt in chapter 5.4.2.1. Ranking is based on venture sample of quantitative study.
rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 NACE code 8512 8514 5248 9305 9302 7484 4545 5530 8513 7411 7420 4533 5020 4534 5212 5231 4531 5241 7412 5227 4542 5511 5244 5211 7414 8520 4544 5242 5247 5232 4522 7440 1581 6024 9272 5245 8042 5540 industry Medical practice activities Other human health activities Other retail sale in specialized stores Other service activities n.e.c. Hairdressing and other beauty treatment Other business activities n.e.c. Other building completion Restaurants Dental practice activities Legal activities Architectural and engineering activities and related technical consulting Plumbing Maintenance and repair of motor vehicles Other building installation Other retail sale in non-specialized stores Dispensing chemists Installation of electrical wiring and fittings Retail sale of textiles Accounting, book-keeping and auditing activities; tax consultancy Other retail sale of food, beverages and tobacco in specialized stores Joinery installation Hotels and motels, with restaurant Retail sale of furniture, lighting equipment and household articles n. Retail sale in non-specialized stores with food, beverages or tobacco Business and management consultancy activities Veterinary activities Painting and glazing Retail sale of clothing Retail sale of books, newspapers and stationery Retail sale of medical and orthopaedic goods Erection of roof covering and frames Advertising Manufacture of bread; manufacture of fresh pastry goods and cakes Freight transport by road Other recreational activities n.e.c. Retail sale of electrical household appliances and radio and television Adult and other education n.e.c. Bars # ventures 333 315 258 236 195 190 158 151 151 125 119 109 103 98 90 77 75 73 73 67 66 62 60 57 57 57 56 55 53 48 47 41 40 39 38 35 35 33
APPENDICES
39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 112 5010 6330 4543 5170 6340 1513 7230 2735 2875 5523 7260 5040 5050 5222 5246 5225 5224 6603 2670 6022 7220 9301 2225 2524 5243 5263 8041 2956 2051 9261 2811 3614 4521 5030 5147 7410 7450 7470 7481 9262 2840 2924 3310 Growing of vegetables, horticultural specialities and nursery products Sale of motor vehicles Activities of travel agencies and tour operators; tourist assistance Floor and wall covering Other wholesale Activities of other transport agencies Production of meat and poultrymeat products Data processing Other first processing of iron and steel n.e.c.; production of non-ECS Manufacture of other fabricated metal products n.e.c. Other provision of lodgings n.e.c. Other computer related activities Sale, maintenance and repair of motorcycles and related parts and accessories Retail sale of automotive fuel Retail sale of meat and meat products Retail sale of hardware, paints and glass Retail sale of alcoholic and other beverages Retail sale of bread, cakes, flour confectionery and sugar confectionery Non-life insurance Cutting, shaping and finishing of stone Taxi operation Software consultancy and supply Washing and dry-cleaning of textile and fur products Other activities related to printing Manufacture of other plastic products Retail sale of footwear and leather goods Other non-store retail sale Driving school activities Manufacture of other special purpose machinery n.e.c. Manufacture of other products of wood Operation of sports arenas and stadiums Manufacture of metal structures and parts of structures Manufacture of other furniture General construction of buildings and civil engineering works Sale of motor vehicle parts and accessories Wholesale of other household goods Legal, accounting & auditing activities; consultancy; market res. Labour recruitment and provision of personnel Industrial cleaning Photographic activities Other sporting activities Forging, pressing, stamping and roll forming of metal; powder metallurgy Manufacture of other general purpose machinery n.e.c. Manufacture of medical and surgical equipment and orthopaedic appliance 32 32 32 31 28 28 27 26 25 25 25 24 22 21 21 20 19 18 18 17 17 17 17 16 15 15 15 15 14 13 13 12 12 12 12 12 12 12 12 12 12 11 11 11
373
374
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 3622 5165 5240 5274 7031 2862 4541 9304 5226 2030 3162 3340 7483 2010 4525 5118 7032 7430 8532 9303 2666 2745 3663 5153 5221 5512 5552 8531 9211 2222 2625 3630 4523 4532 5115 5142 5143 5223 5233 5261 7020 9234 141 202 1930 2221 Manufacture of jewellery and related articles n.e.c. Wholesale of other machinery for use in industry, trade and navigation Other retail sale of new goods in specialised stores Repair n.e.c. Real estate agencies Manufacture of tools Plastering Physical well-being activities Retail sale of tobacco products Manufacture of builders' carpentry and joinery Manufacture of other electrical equipment n.e.c. Manufacture of optical instruments and photographic equipment Secretarial and translation activities Sawmilling and planing of wood, impregnation of wood Other construction work involving special trades Agents specializing in the sale of particular products Management of real estate on a fee or contract basis Technical testing and analysis Social work activities without accommodation Funeral and related activities Manufacture of other articles of concrete, plaster and cement Other non-ferrous metal production Other manufacturing n.e.c. Wholesale of wood, construction materials and sanitary equipment Retail sale of fruit and vegetables Hotels and motels, without restaurant Catering Social work activities with accommodation Motion picture and video production Printing n.e.c. Manufacture of other ceramic products Manufacture of musical instruments Construction of highways, roads, airfields and sport facilities Insulation work activities Agents involved in the sale of furniture, household goods Wholesale of clothing and footwear Wholesale of electrical household appliances and radio and television Retail sale of fish, crustaceans and molluscs Retail sale of cosmetic and toilet articles Retail sale via mail order houses Letting of own property Other entertainment activities n.e.c. Agricultural service activities Forestry and logging related service activities Manufacture of footwear Printing of newspapers 11 11 11 11 11 10 10 10 9 8 8 8 8 7 7 7 7 7 7 7 6 6 6 6 6 6 6 6 6 5 5 5 5 5 5 5 5 5 5 5 5 5 4 4 4 4
APPENDICES
APPENDICES
129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 2521 2851 2863 2900 2923 4511 4540 5114 5119 5144 5250 6321 7140 7210 7310 9212 1511 2215 2220 2223 3420 3710 5134 5154 5220 5262 5271 6021 6023 7250 8000 8021 9000 9240 9271 Manufacture of plastic plates, sheets, tubes and profiles Treatment and coating of metals Manufacture of locks and hinges Manufacture of machinery and equipment n.e.c. Manufacture of non-domestic cooling and ventilation equipment Demolition and wrecking of buildings; earth moving Other construction Agents involved in the sale of machinery, industrial equipment, ships Agents involved in the sale of a variety of goods Wholesale of china and glassware, wallpaper and cleaning materials Retail sale of second-hand goods in stores Other supporting land transport activities Renting of personal and household goods n.e.c. Hardware consultancy Research and experimental development on natural sciences and engineer Motion picture and video distribution Production and preserving of meat Other publishing Printing and service activities related to printing Bookbinding and finishing Manufacture of bodies (coachwork) for motor vehicles Recycling of metal waste and scrap Wholesale of alcoholic and other beverages Wholesale of hardware, plumbing and heating equipment and supplies Retail sale of food, beverages and tobacco in specialised stores Retail sale via stalls and markets Repair of boots, shoes and other articles of leather Other scheduled passenger land transport Other land passenger transport Maintenance and repair of office, accounting and computing machinery Education General secondary education Sewage and refuse disposal, sanitation and similar activities News agency activities Gambling and betting activities 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
375
376
APPENDICES
Appendix C: Ranking of industries by subjective success evaluation

rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 subjective rating (0-1) 0,9 0,88 0,8 0,8 0,75 0,75 0,75 0,73 0,73 0,71 0,71 0,7 0,69 0,68 0,67 0,67 0,67 0,67 0,67 0,67 0,67 0,67 0,66 0,64 0,64 0,63 0,63 0,63 0,63 0,63 0,63 NACE code 4523 2923 4532 8531 2862 6321 7310 9261 2924 8532 7470 2625 6603 2811 2745 5030 5262 7140 7250 7481 9262 9271 2735 8513 8512 141 202 1930 2521 2900 3162 industry Construction of highways, roads, airfields and sport facilities Manufacture of non-domestic cooling and ventilation equipment Insulation work activities Social work activities with accommodation Manufacture of tools Other supporting land transport activities Research and experimental development on natural sciences and engineer Operation of sports arenas and stadiums Manufacture of other general purpose machinery n.e.c. Social work activities without accommodation Industrial cleaning Manufacture of other ceramic products Non-life insurance Manufacture of metal structures and parts of structures Other non-ferrous metal production Sale of motor vehicle parts and accessories Retail sale via stalls and markets Renting of personal and household goods n.e.c. Maintenance and repair of office, accounting and computing machinery Photographic activities Other sporting activities Gambling and betting activities Other first processing of iron and steel n.e.c.; production of non-ECS Dental practice activities Medical practice activities Agricultural service activities Forestry and logging related service activities Manufacture of footwear Manufacture of plastic plates, sheets, tubes and profiles Manufacture of machinery and equipment n.e.c. Manufacture of other electrical equipment n.e.c. # ventures 5 4 5 5 10 4 4 13 11 7 12 5 18 11 6 12 3 3 3 12 12 3 25 150 330 4 4 4 4 4 8
APPENDICES
32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 0,63 0,62 0,62 0,61 0,61 0,61 0,61 0,6 0,6 0,6 0,6 0,58 0,58 0,57 0,57 0,57 0,57 0,57 0,57 0,56 0,56 0,56 0,55 0,55 0,55 0,53 0,53 0,53 0,52 0,52 0,52 0,51 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 5114 7220 8520 7411 5231 2956 5170 7412 2222 3310 5240 7430 2051 6340 7032 9303 5040 8041 9272 2225 7483 8514 9304 5050 6330 9302 5243 6022 4522 2875 4544 5232 4533 7484 2030 2215 2220 2851 2863 3420 Agents involved in the sale of machinery, industrial equipment, ships Software consultancy and supply Veterinary activities Legal activities Dispensing chemists Manufacture of other special purpose machinery n.e.c. Other wholesale Accounting, book-keeping and auditing activities; tax consultancy Printing n.e.c. Manufacture of medical and surgical equipment and orthopaedic applianc Other retail sale of new goods in specialised stores Technical testing and analysis Manufacture of other products of wood Activities of other transport agencies Management of real estate on a fee or contract basis Funeral and related activities Sale, maintenance and repair of motorcycles and related parts and acce Driving school activities Other recreational activities n.e.c. Other activities related to printing Secretarial and translation activities Other human health activities Physical well-being activities Retail sale of automotive fuel Activities of travel agencies and tour operators; tourist assistance a Hairdressing and other beauty treatment Retail sale of footwear and leather goods Taxi operation Erection of roof covering and frames Manufacture of other fabricated metal products n.e.c. Painting and glazing Retail sale of medical and orthopaedic goods Plumbing Other business activities n.e.c. Manufacture of builders' carpentry and joinery Other publishing Printing and service activities related to printing Treatment and coating of metals Manufacture of locks and hinges Manufacture of bodies (coachwork) for motor vehicles; manufacture of t
377
4 17 56 125 76 14 28 73 5 10 10 6 13 28 7 7 22 15 38 16 8 307 10 21 32 194 15 15 46 25 55 45 105 189 8 3 3 4 4 3
378
72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,49 0,48 0,48 0,48 0,47 0,47 0,47 0,47 0,46 0,45 0,45 0,45 0,45 0,45 0,45 0,45 0,45 0,44 0,44 0,44 0,44 0,44 0,44 0,44 0,43 0,42 3630 4511 5115 5119 5142 5222 5247 5271 5512 5552 6021 6023 8000 9212 5511 5010 4531 4534 8042 5020 112 2524 3614 2840 5274 4542 9305 5244 5246 7420 7414 5224 5226 5241 4545 5523 3340 6024 4525 5225 Manufacture of musical instruments Demolition and wrecking of buildings; earth moving Agents involved in the sale of furniture, household goods, hardware an Agents involved in the sale of a variety of goods Wholesale of clothing and footwear Retail sale of meat and meat products Retail sale of books, newspapers and stationery Repair of boots, shoes and other articles of leather Hotels and motels, without restaurant Catering Other scheduled passenger land transport Other land passenger transport Education Motion picture and video distribution Hotels and motels, with restaurant Sale of motor vehicles Installation of electrical wiring and fittings Other building installation Adult and other education n.e.c. Maintenance and repair of motor vehicles Growing of vegetables, horticultural specialities and nursery products Manufacture of other plastic products Manufacture of other furniture Forging, pressing, stamping and roll forming of metal; powder metallur Repair n.e.c. Joinery installation Other service activities n.e.c. Retail sale of furniture, lighting equipment and household articles n. Retail sale of hardware, paints and glass Architectural and engineering activities and related technical consult Business and management consultancy activities Retail sale of bread, cakes, flour confectionery and sugar confectione Retail sale of tobacco products Retail sale of textiles Other building completion Other provision of lodgings n.e.c. Manufacture of optical instruments and photographic equipment Freight transport by road Other construction work involving special trades Retail sale of alcoholic and other
APPENDICES
5 4 5 4 5 21 52 3 5 6 3 3 3 4 60 31 75 95 35 99 32 15 12 11 11 65 234 60 20 118 56 18 9 72 155 25 8 39 7 19
APPENDICES
beverages Other retail sale in specialized stores Retail sale of clothing Manufacture of other articles of concrete, plaster and cement Other manufacturing n.e.c. General construction of buildings and civil engineering works Wholesale of wood, construction materials and sanitary equipment Other retail sale in non-specialized stores Retail sale of fruit and vegetables Other computer related activities Motion picture and video production Cutting, shaping and finishing of stone Manufacture of bread; manufacture of fresh pastry goods and cakes Retail sale of fish, crustaceans and molluscs Retail sale of cosmetic and toilet articles Other non-store retail sale Letting of own property Bars Retail sale in non-specialized stores with food, beverages or tobacco Advertising Floor and wall covering Other retail sale of food, beverages and tobacco in specialized stores Retail sale of electrical household appliances and radio and televisio Restaurants Wholesale of china and glassware, wallpaper and cleaning materials Labour recruitment and provision of personnel Real estate agencies Production and preserving of meat Bookbinding and finishing Recycling of metal waste and scrap Wholesale of alcoholic and other beverages Wholesale of hardware, plumbing and heating equipment and supplies General secondary education Sewage and refuse disposal, sanitation and similar activities News agency activities Manufacture of jewellery and related articles n.e.c. Plastering Wholesale of electrical household appliances and radio and television
379
112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148
0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,42 0,41 0,41 0,4 0,4 0,4 0,4 0,39 0,39 0,39 0,39 0,39 0,38 0,38 0,38 0,38 0,35 0,33 0,33 0,33 0,33 0,33 0,33 0,33 0,33 0,32 0,3 0,3
5248 5242 2666 3663 4521 5153 5212 5221 7260 9211 2670 1581 5223 5233 5263 7020 5540 5211 7440 4543 5227 5245 5530 5144 7450 7031 1511 2223 3710 5134 5154 8021 9000 9240 3622 4541 5143
253 55 6 6 12 6 90 6 24 6 17 39 5 5 15 5 33 56 40 31 66 34 149 4 12 10 3 3 3 3 3 3 3 3 11 10 5
380
149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 0,3 0,29 0,29 0,29 0,28 0,27 0,26 0,25 0,17 0,13 0,13 0,13 0,13 0,1 0,1 7230 5147 2010 5118 1513 5165 9301 7410 5220 2221 4540 5250 7210 5261 9234 Data processing Wholesale of other household goods Sawmilling and planing of wood, impregnation of wood Agents specializing in the sale of particular products or ranges of pr Production of meat and poultrymeat products Wholesale of other machinery for use in industry, trade and navigation Washing and dry-cleaning of textile and fur products Legal, accounting & auditing activities; consultancy; market res.; hol Retail sale of food, beverages and tobacco in specialised stores Printing of newspapers Other construction Retail sale of second-hand goods in stores Hardware consultancy Retail sale via mail order houses Other entertainment activities n.e.c.
APPENDICES
25 12 7 7 27 11 17 12 3 4 4 4 4 5 5
APPENDICES
381
Appendix D: Ranking of industries by venture sales growth

rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 sales growth rate 5,38 2,56 2,33 2,03 1,84 1,76 1,75 1,71 1,65 1,65 1,63 1,56 1,54 1,53 1,49 1,44 1,43 1,41 1,41 1,40 1,40 1,40 1,40 1,38 1,36 1,35 1,35 1,35 1,34 1,34 1,32 1,31 NACE code 5261 7260 9234 7484 7483 5274 7414 7230 5170 4525 7031 1513 5040 2923 6024 4544 7032 9000 7220 6330 7411 5119 8042 7470 9305 5118 9304 5220 5227 9261 2840 3630 industry Retail sale via mail order houses Other computer related activities Other entertainment activities n.e.c. Other business activities n.e.c. Secretarial and translation activities Repair n.e.c. Business and management consultancy activities Data processing Other wholesale Other construction work involving special trades Real estate agencies Production of meat and poultrymeat products Sale, maintenance and repair of motorcycles and related parts and acce Manufacture of non-domestic cooling and ventilation equipment Freight transport by road Painting and glazing Management of real estate on a fee or contract basis Sewage and refuse disposal, sanitation and similar activities Software consultancy and supply Activities of travel agencies and tour operators; tourist assistance a Legal activities Agents involved in the sale of a variety of goods Adult and other education n.e.c. Industrial cleaning Other service activities n.e.c. Agents specializing in the sale of particular products Physical well-being activities Retail sale of food, beverages and tobacco in specialised stores Other retail sale of food, beverages and tobacco in specialized stores Operation of sports arenas and stadiums Forging, pressing, stamping and roll forming of metal; powder metallurgy Manufacture of musical instruments # ventures 5 24 5 190 8 11 57 26 28 7 11 27 22 4 39 56 7 3 17 32 125 4 35 12 236 7 10 3 67 13 11 5
382
33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 1,31 1,30 1,30 1,30 1,29 1,29 1,29 1,29 1,27 1,27 1,27 1,27 1,27 1,26 1,26 1,26 1,25 1,25 1,25 1,25 1,24 1,24 1,24 1,23 1,23 1,23 1,23 1,22 1,22 1,22 1,22 1,22 1,22 2811 2900 7410 7420 9211 8532 5232 4532 4543 2524 9262 5154 112 7440 2030 7412 5523 4531 9302 8514 5144 2735 5225 6603 2875 2670 4533 5115 5245 6340 5153 4545 2956 Manufacture of metal structures and parts of structures Manufacture of machinery and equipment n.e.c. Legal, accounting & auditing activities; consultancy; market res. Architectural and engineering activities and related technical consulting Motion picture and video production Social work activities without accommodation Retail sale of medical and orthopaedic goods Insulation work activities Floor and wall covering Manufacture of other plastic products Other sporting activities Wholesale of hardware, plumbing and heating equipment and supplies Growing of vegetables, horticultural specialities and nursery products Advertising Manufacture of builders' carpentry and joinery Accounting, book-keeping and auditing activities; tax consultancy Other provision of lodgings n.e.c. Installation of electrical wiring and fittings Hairdressing and other beauty treatment Other human health activities Wholesale of china and glassware, wallpaper and cleaning materials Other first processing of iron and steel n.e.c.; production of non-ECS Retail sale of alcoholic and other beverages Non-life insurance Manufacture of other fabricated metal products n.e.c. Cutting, shaping and finishing of stone Plumbing Agents involved in the sale of furniture, household goods Retail sale of electrical household appliances and radio and television Activities of other transport agencies Wholesale of wood, construction materials and sanitary equipment Other building completion Manufacture of other special purpose machinery n.e.c.
APPENDICES
12 4 12 119 6 7 48 5 31 15 12 3 32 41 8 73 25 75 195 315 4 25 19 18 25 17 109 5 35 28 6 158 14
APPENDICES
383
66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
1,22 1,21 1,21 1,21 1,21 1,20 1,20 1,20 1,19 1,18 1,18 1,18 1,18 1,18 1,17 1,16 1,16 1,16 1,15 1,15 1,15 1,15 1,15 1,14 1,14 1,14 1,13 1,13 1,13 1,13 1,12 1,12 1,12 1,12
4523 8513 2051 8512 3162 2924 2225 7430 5224 3310 4542 5240 2010 5552 202 8520 5223 2521 5010 3340 4521 9303 2745 5248 5147 5030 8531 4534 2863 5244 7481 3622 6022 9301
Construction of highways, roads, airfields and sport facilities Dental practice activities Manufacture of other products of wood Medical practice activities Manufacture of other electrical equipment n.e.c. Manufacture of other general purpose machinery n.e.c. Other activities related to printing Technical testing and analysis Retail sale of bread, cakes, flour confectionery and sugar confectionery Manufacture of medical and surgical equipment and orthopaedic appliance Joinery installation Other retail sale of new goods in specialised stores Sawmilling and planing of wood, impregnation of wood Catering Forestry and logging related service activities Veterinary activities Retail sale of fish, crustaceans and molluscs Manufacture of plastic plates, sheets, tubes and profiles Sale of motor vehicles Manufacture of optical instruments and photographic equipment General construction of buildings and civil engineering works Funeral and related activities Other non-ferrous metal production Other retail sale in specialized stores Wholesale of other household goods Sale of motor vehicle parts and accessories Social work activities with accommodation Other building installation Manufacture of locks and hinges Retail sale of furniture, lighting equipment and household articles n. Photographic activities Manufacture of jewellery and related articles n.e.c. Taxi operation Washing and dry-cleaning of textile and fur products
5 151 13 333 8 11 16 7 18 11 66 11 7 6 4 57 5 4 32 8 12 7 6 258 12 12 6 98 4 60 12 11 17 17
384
100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 1,12 1,11 1,10 1,10 1,10 1,09 1,09 1,09 1,09 1,08 1,07 1,07 1,07 1,06 1,06 1,06 1,06 1,06 1,05 1,05 1,05 1,04 1,03 1,03 1,03 1,02 1,02 1,01 1,00 1,00 0,99 0,97 0,89 0,86 0,70 not available not available not available 7020 5231 3614 5243 5511 1581 9272 5241 5222 5050 5271 5530 5212 4522 5242 5165 5020 5211 2222 5540 5247 2223 5263 4541 5246 3420 8041 2862 5233 2666 5512 4540 2221 7210 4511 3710 5221 2625 Letting of own property Dispensing chemists Manufacture of other furniture Retail sale of footwear and leather goods Hotels and motels, with restaurant Manufacture of bread; manufacture of fresh pastry goods and cakes Other recreational activities n.e.c. Retail sale of textiles Retail sale of meat and meat products Retail sale of automotive fuel Repair of boots, shoes and other articles of leather Restaurants Other retail sale in non-specialized stores Erection of roof covering and frames Retail sale of clothing Wholesale of other machinery for use in industry, trade and navigation Maintenance and repair of motor vehicles Retail sale in non-specialized stores with food, beverages or tobacco Printing n.e.c. Bars Retail sale of books, newspapers and stationery Bookbinding and finishing Other non-store retail sale Plastering Retail sale of hardware, paints and glass Manufacture of bodies (coachwork) for motor vehicles Driving school activities Manufacture of tools Retail sale of cosmetic and toilet articles Manufacture of other articles of concrete, plaster and cement Hotels and motels, without restaurant Other construction Printing of newspapers Hardware consultancy Demolition and wrecking of buildings; earth moving Recycling of metal waste and scrap Retail sale of fruit and vegetables Manufacture of other ceramic products
APPENDICES
5 77 12 15 62 40 38 73 21 21 3 151 90 47 55 11 103 57 5 33 53 3 15 10 20 3 15 10 5 6 6 4 4 4 4 3 6 5
APPENDICES
385
not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available
5114 1930 7450 5226 6321 9212 141 2851 7310 9271 5262 7140 7250 2215 8000 2220 6021 5142 6023 3663 9240 5134 1511 8021 5143 5250
Agents involved in the sale of machinery, industrial equipment, ships Manufacture of footwear Labour recruitment and provision of personnel Retail sale of tobacco products Other supporting land transport activities Motion picture and video distribution Agricultural service activities Treatment and coating of metals Research and experimental development on natural sciences and engineer Gambling and betting activities Retail sale via stalls and markets Renting of personal and household goods n.e.c. Maintenance and repair of office, accounting and computing machinery Other publishing Education Printing and service activities related to printing Other scheduled passenger land transport Wholesale of clothing and footwear Other land passenger transport Other manufacturing n.e.c. News agency activities Wholesale of alcoholic and other beverages Production and preserving of meat General secondary education Wholesale of electrical household appliances and radio and television Retail sale of second-hand goods in stores
4 4 12 9 4 4 4 4 4 3 3 4 3 3 3 3 3 5 3 6 3 3 3 3 5 4
386
APPENDICES
Appendix E: Ranking of industries by venture profit level

rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 profit in 1000 EUR 350,12 205,76 144,23 135,52 118,62 110,52 100,13 85,78 85,14 80,83 80,55 80,42 76,81 76,27 71,74 70,93 70,88 68,60 65,41 64,83 58,99 57,93 56,67 55,03 53,77 47,38 46,35 46,02 43,34 43,32 NACE code 4532 3162 4525 2666 2862 9261 4511 8513 2840 2521 2875 7220 3310 5231 7412 4523 8512 5512 3340 2222 7410 2900 3663 7420 4540 2956 6603 5030 2924 7450 industry Insulation work activities Manufacture of other electrical equipment n.e.c. Other construction work involving special trades Manufacture of other articles of concrete, plaster and cement Manufacture of tools Operation of sports arenas and stadiums Demolition and wrecking of buildings; earth moving Dental practice activities Forging, pressing, stamping and roll forming of metal; powder metallurgy Manufacture of plastic plates, sheets, tubes and profiles Manufacture of other fabricated metal products n.e.c. Software consultancy and supply Manufacture of medical and surgical equipment and orthopaedic appliance Dispensing chemists Accounting, book-keeping and auditing activities; tax consultancy Construction of highways, roads, airfields and sport facilities Medical practice activities Hotels and motels, without restaurant Manufacture of optical instruments and photographic equipment Printing n.e.c. Legal, accounting & auditing activities; consultancy; market res. Manufacture of machinery and equipment n.e.c. Other manufacturing n.e.c. Architectural and engineering activities and related technical consulting Other construction Manufacture of other special purpose machinery n.e.c. Non-life insurance Sale of motor vehicle parts and accessories Manufacture of other general purpose machinery n.e.c. Labour recruitment and provision of personnel # ventures 5 8 7 6 10 13 4 151 11 4 25 17 11 77 73 5 333 6 8 5 12 4 6 119 4 14 18 12 11 12 sales in 1000 EUR 2.324 1.451 3.426 3.780 1.115 409 611 318 558 1.883 1.158 2.001 1.886 850 412 1.574 262 653 338 810 242 3.827 286 493 340 1.527 190 466 1.341 823
APPENDICES
31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 43,19 42,42 41,86 41,76 41,73 40,08 39,77 39,48 39,10 38,09 37,55 36,64 36,39 36,05 35,47 35,35 34,51 34,41 34,11 33,23 32,95 32,71 31,88 31,67 31,57 31,49 30,92 30,65 29,63 29,36 29,31 28,93 28,49 28,22 28,14 28,11 28,04 27,98 27,77 27,75 27,25 26,55 26,54 5050 5240 7411 141 5143 8532 7484 5147 5511 2051 7470 2625 2225 2745 5010 2811 6024 2735 2923 8531 5114 4544 4534 5144 2670 8514 8041 6340 7481 202 4522 5211 9303 5222 4531 4542 7414 8520 1581 5020 4545 4543 4541 Retail sale of automotive fuel Other retail sale of new goods in specialised stores Legal activities Agricultural service activities Wholesale of electrical household appliances and radio and television Social work activities without accommodation Other business activities n.e.c. Wholesale of other household goods Hotels and motels, with restaurant Manufacture of other products of wood Industrial cleaning Manufacture of other ceramic products Other activities related to printing Other non-ferrous metal production Sale of motor vehicles Manufacture of metal structures and parts of structures Freight transport by road Other first processing of iron and steel n.e.c.; production of non-ECS Manufacture of non-domestic cooling and ventilation equipment Social work activities with accommodation Agents involved in the sale of machinery, industrial equipment, ships Painting and glazing Other building installation Wholesale of china and glassware, wallpaper and cleaning materials Cutting, shaping and finishing of stone Other human health activities Driving school activities Activities of other transport agencies Photographic activities Forestry and logging related service activities Erection of roof covering and frames Retail sale in non-specialized stores with food, beverages or tobacco Funeral and related activities Retail sale of meat and meat products Installation of electrical wiring and fittings Joinery installation Business and management consultancy activities Veterinary activities Manufacture of bread; manufacture of fresh pastry goods and cakes Maintenance and repair of motor vehicles Other building completion Floor and wall covering Plastering 21 11 125 4 5 7 190 12 62 13 12 5 16 6 32 12 39 25 4 6 4 56 98 4 17 315 15 28 12 4 47 57 7 21 75 66 57 57 40 103 158 31 10
387
2.816 590 145 246 860 342 699 2.121 491 329 312 212 600 175 2.530 525 607 779 1.026 785 225 333 543 869 553 143 116 385 231 829 366 2.808 294 466 352 510 242 148 1.054 1.226 587 556 300
388
74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 26,13 26,11 26,02 25,69 25,59 25,24 24,34 23,95 23,22 22,72 22,67 22,12 21,95 21,66 21,65 21,62 20,56 20,43 20,00 19,33 19,31 19,30 18,97 18,96 18,77 18,65 18,38 17,78 17,62 17,33 17,26 16,84 16,20 16,19 16,15 15,85 15,16 13,88 13,83 112 5552 5224 7430 2524 1513 1930 3710 6330 3420 4533 5119 3622 5232 9000 5247 5243 7031 3614 5227 8042 2030 5540 5212 5233 5274 5248 5165 5530 5221 5225 5271 5115 5244 5241 9212 9211 5226 7483 Growing of vegetables, horticultural specialities and nursery products Catering Retail sale of bread, cakes, flour confectionery and sugar confectione Technical testing and analysis Manufacture of other plastic products Production of meat and poultrymeat products Manufacture of footwear Recycling of metal waste and scrap Activities of travel agencies and tour operators; tourist assistance Manufacture of bodies (coachwork) for motor vehicles Plumbing Agents involved in the sale of a variety of goods Manufacture of jewellery and related articles n.e.c. Retail sale of medical and orthopaedic goods Sewage and refuse disposal, sanitation and similar activities Retail sale of books, newspapers and stationery Retail sale of footwear and leather goods Real estate agencies Manufacture of other furniture Other retail sale of food, beverages and tobacco in specialized stores Adult and other education n.e.c. Manufacture of builders' carpentry and joinery Bars Other retail sale in non-specialized stores Retail sale of cosmetic and toilet articles Repair n.e.c. Other retail sale in specialized stores Wholesale of other machinery for use in industry, trade and navigation Restaurants Retail sale of fruit and vegetables Retail sale of alcoholic and other beverages Repair of boots, shoes and other articles of leather Agents involved in the sale of furniture, household goods Retail sale of furniture, lighting equipment and household articles n. Retail sale of textiles Motion picture and video distribution Motion picture and video production Retail sale of tobacco products Secretarial and translation activities 32 6 18 7 15 27 4 3 32 3 109 4 11 48 3 53 15 11 12 67 35 8 33 90 5 11 258 11 151 6 19 3 5 60 73 4 6 9 8
APPENDICES
219 205 405 173 1.025 647 . 532 700 325 368 66 187 281 111 396 242 69 217 1.792 111 232 508 439 187 729 468 734 251 196 618 82 179 503 320 91 281 319 38
APPENDICES
113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 13,64 13,59 13,17 12,82 12,69 12,18 11,67 11,31 10,99 9,96 9,66 9,65 9,57 9,36 9,23 7,85 5,11 3,23 1,83 1,02 -3,83 -5,68 -6,12 -7,99 -13,21 -18,75 -24,29 -37,21 -40,33 -537,55 not available not available not available not available not available not available not available not available 9302 9262 7440 7032 5242 4521 5263 9301 5223 5246 2223 3630 9272 9305 2010 5040 5118 6022 2215 9304 5261 7260 9234 5153 5170 5250 7210 5523 7230 5245 5220 5154 2863 7020 2221 7310 6321 9271 Hairdressing and other beauty treatment Other sporting activities Advertising Management of real estate on a fee or contract basis Retail sale of clothing General construction of buildings and civil engineering works Other non-store retail sale Washing and dry-cleaning of textile and fur products Retail sale of fish, crustaceans and molluscs Retail sale of hardware, paints and glass Bookbinding and finishing Manufacture of musical instruments Other recreational activities n.e.c. Other service activities n.e.c. Sawmilling and planing of wood, impregnation of wood Sale, maintenance and repair of motorcycles and related parts and accessories Agents specializing in the sale of particular products Taxi operation Other publishing Physical well-being activities Retail sale via mail order houses Other computer related activities Other entertainment activities n.e.c. Wholesale of wood, construction materials and sanitary equipment Other wholesale Retail sale of second-hand goods in stores Hardware consultancy Other provision of lodgings n.e.c. Data processing Retail sale of electrical household appliances and radio and television Retail sale of food, beverages and tobacco in specialised stores Wholesale of hardware, plumbing and heating equipment and supplies Manufacture of locks and hinges Letting of own property Printing of newspapers Research and experimental development on natural sciences and engineering Other supporting land transport activities Gambling and betting activities 195 12 41 7 55 12 15 17 5 20 3 5 38 236 7 22 7 17 3 10 5 24 5 6 28 4 4 25 26 35 3 3 4 5 4 4 4 3 .
389
89 130 138 175 218 2.118 1.327 114 194 523 1.054 165 170 261 595 2.610 234 95 186 135 186 251 43 2.613 1.611 35 433 312 412 1.626 315 364 588 1.491 735 340 77
390
not available not available not available not available not available not available not available not available not available not available not available not available not available 5262 7140 7250 8000 2220 6021 5142 2851 6023 9240 5134 1511 8021 Retail sale via stalls and markets Renting of personal and household goods n.e.c. Maintenance and repair of office, accounting and computing machinery Education Printing and service activities related to printing Other scheduled passenger land transport Wholesale of clothing and footwear Treatment and coating of metals Other land passenger transport News agency activities Wholesale of alcoholic and other beverages Production and preserving of meat General secondary education 3 4 3 3 3 3 5 4 3 3 3 3 3
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. 98 124 . 902 . 306 1.187 425 . 554 . .
APPENDICES
391
Appendix F: Ranking of industries by years ventures needed to break even

rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 years to break even 1,00 1,00 1,00 1,00 1,07 1,07 1,09 1,17 1,17 1,20 1,20 1,20 1,24 1,25 1,25 1,25 1,29 1,29 1,30 1,33 1,33 1,33 1,33 1,33 1,33 1,36 1,37 1,38 1,38 1,38 1,38 1,39 1,39 NACE code 4523 2924 141 2851 1513 4522 6603 7412 4541 3340 5240 5147 5211 9261 2745 5222 2225 5243 4544 2862 1581 7031 9212 5153 6321 4534 5247 3310 6024 4542 5274 6340 5231 Industry Construction of highways, roads, airfields and sport facilities Manufacture of other general purpose machinery n.e.c. Agricultural service activities Treatment and coating of metals Production of meat and poultrymeat products Erection of roof covering and frames Non-life insurance Accounting, book-keeping and auditing activities; tax consultancy Plastering Manufacture of optical instruments and photographic equipment Other retail sale of new goods in specialised stores Wholesale of other household goods Retail sale in non-specialized stores with food, beverages or tobacco Operation of sports arenas and stadiums Other non-ferrous metal production Retail sale of meat and meat products Other activities related to printing Retail sale of footwear and leather goods Painting and glazing Manufacture of tools Manufacture of bread; manufacture of fresh pastry goods and cakes Real estate agencies Motion picture and video distribution Wholesale of wood, construction materials and sanitary equipment Other supporting land transport activities Other building installation Retail sale of books, newspapers and stationery Manufacture of medical and surgical equipment and orthopaedic appliance Freight transport by road Joinery installation Repair n.e.c. Activities of other transport agencies Dispensing chemists # ventures 5 11 4 4 27 47 18 73 10 8 11 12 57 13 6 21 16 15 56 10 40 11 4 6 4 98 53 11 39 66 11 28 77
392
34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 1,40 1,40 1,40 1,40 1,42 1,43 1,43 1,44 1,46 1,46 1,46 1,47 1,48 1,50 1,50 1,50 1,50 1,50 1,50 1,50 1,51 1,53 1,53 1,56 1,56 1,56 1,56 1,56 1,56 1,56 1,57 1,59 1,60 1,60 1,60 1,62 1,62 1,62 1,63 1,63 1,63 1,67 9303 3614 5226 4533 4545 7450 5530 5244 5050 5020 8512 2735 7440 5030 5010 2670 4543 9301 5246 5245 5511 7420 5241 4531 5224 5225 5242 6022 9302 5212 4521 8514 2524 7483 5263 5170 8520 8513 8041 6330 7484 4532 Funeral and related activities Manufacture of other furniture Retail sale of tobacco products Plumbing Other building completion Labour recruitment and provision of personnel Restaurants Retail sale of furniture, lighting equipment and household articles n. Retail sale of automotive fuel Maintenance and repair of motor vehicles Medical practice activities Other first processing of iron and steel n.e.c.; production of non-ECS Advertising Sale of motor vehicle parts and accessories Sale of motor vehicles Cutting, shaping and finishing of stone Floor and wall covering Washing and dry-cleaning of textile and fur products Retail sale of hardware, paints and glass Retail sale of electrical household appliances and radio and television Hotels and motels, with restaurant Architectural and engineering activities and related technical consult Retail sale of textiles Installation of electrical wiring and fittings Retail sale of bread, cakes, flour confectionery and sugar confectionery Retail sale of alcoholic and other beverages Retail sale of clothing Taxi operation Hairdressing and other beauty treatment Other retail sale in non-specialized stores General construction of buildings and civil engineering works Other human health activities Manufacture of other plastic products Secretarial and translation activities Other non-store retail sale Other wholesale Veterinary activities Dental practice activities Driving school activities Activities of travel agencies and tour operators; tourist assistance Other business activities n.e.c. Insulation work activities
APPENDICES
7 12 9 109 158 12 151 60 21 103 333 25 41 12 32 17 31 17 20 35 62 119 73 75 18 19 55 17 195 90 12 315 15 8 15 28 57 151 15 32 190 5
APPENDICES
76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 1,67 1,67 1,67 1,67 1,67 1,67 1,67 1,67 1,67 1,67 1,67 1,67 1,67 1,68 1,69 1,71 1,71 1,72 1,74 1,75 1,78 1,78 1,80 1,80 1,80 1,83 1,88 1,89 1,95 2,00 2,00 2,00 2,00 2,00 2,00 2,00 2,00 2,00 2,00 2,07 2,20 2,25 7220 2222 2625 8531 5114 7481 7430 1930 3622 5232 5223 9304 7260 5227 9305 112 5540 7411 5248 3162 2051 7414 7470 2811 5221 2875 2956 7410 8042 2840 8532 202 3710 5119 2030 5165 9211 9262 5040 7230 9272 7032 Software consultancy and supply Printing n.e.c. Manufacture of other ceramic products Social work activities with accommodation Agents involved in the sale of machinery, industrial equipment, ships Photographic activities Technical testing and analysis Manufacture of footwear Manufacture of jewellery and related articles n.e.c. Retail sale of medical and orthopaedic goods Retail sale of fish, crustaceans and molluscs Physical well-being activities Other computer related activities Other retail sale of food, beverages and tobacco in specialized stores Other service activities n.e.c. Growing of vegetables, horticultural specialities and nursery products Bars Legal activities Other retail sale in specialized stores Manufacture of other electrical equipment n.e.c. Manufacture of other products of wood Business and management consultancy activities Industrial cleaning Manufacture of metal structures and parts of structures Retail sale of fruit and vegetables Manufacture of other fabricated metal products n.e.c. Manufacture of other special purpose machinery n.e.c. Legal, accounting & auditing activities; consultancy; market res. Adult and other education n.e.c. Forging, pressing, stamping and roll forming of metal; powder metallurgy Social work activities without accommodation Forestry and logging related service activities Recycling of metal waste and scrap Agents involved in the sale of a variety of goods Manufacture of builders' carpentry and joinery Wholesale of other machinery for use in industry, trade and navigation Motion picture and video production Other sporting activities Sale, maintenance and repair of motorcycles and related parts and accessories Data processing Other recreational activities n.e.c. Management of real estate on a fee or contract basis
393
17 5 5 6 4 12 7 4 11 48 5 10 24 67 236 32 33 125 258 8 13 57 12 12 6 25 14 12 35 11 7 4 3 4 8 11 6 12 22 26 38 7
394
118 119 2,25 2,67 not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available 2010 2923 4525 2666 4511 2521 5512 2900 3663 4540 5143 5144 5552 3420 9000 5233 5271 5115 2223 3630 5118 2215 5261 9234 5250 7210 5523 5220 5154 2863 Sawmilling and planing of wood, impregnation of wood Manufacture of non-domestic cooling and ventilation equipment Other construction work involving special trades Manufacture of other articles of concrete, plaster and cement Demolition and wrecking of buildings; earth moving Manufacture of plastic plates, sheets, tubes and profiles Hotels and motels, without restaurant Manufacture of machinery and equipment n.e.c. Other manufacturing n.e.c. Other construction Wholesale of electrical household appliances and radio and television Wholesale of china and glassware, wallpaper and cleaning materials Catering Manufacture of bodies (coachwork) for motor vehicles Sewage and refuse disposal, sanitation and similar activities Retail sale of cosmetic and toilet articles Repair of boots, shoes and other articles of leather Agents involved in the sale of furniture, household goods Bookbinding and finishing Manufacture of musical instruments Agents specializing in the sale of particular products Other publishing Retail sale via mail order houses Other entertainment activities n.e.c. Retail sale of second-hand goods in stores Hardware consultancy Other provision of lodgings n.e.c. Retail sale of food, beverages and tobacco in specialised stores Wholesale of hardware, plumbing and heating equipment and supplies Manufacture of locks and hinges
APPENDICES
7 4 7 6 4 4 6 4 6 4 5 4 6 3 3 5 3 5 3 5 7 3 5 5 4 4 25 3 3 4
APPENDICES
not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available not available 7020 2221 7310 9271 5262 7140 7250 8000 2220 6021 5142 6023 9240 5134 1511 8021 Letting of own property Printing of newspapers Research and experimental development on natural sciences and engineering Gambling and betting activities Retail sale via stalls and markets Renting of personal and household goods n.e.c. Maintenance and repair of office, accounting and computing machinery Education Printing and service activities related to printing Other scheduled passenger land transport Wholesale of clothing and footwear Other land passenger transport News agency activities Wholesale of alcoholic and other beverages Production and preserving of meat General secondary education
395
5 4 4 3 3 4 3 3 3 3 5 3 3 3 3 3
396
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Appendix G: Questionnaire guideline for case study interviews

PART I: Key Data Information on interviewee: o Name: o Position: o Years working for firm: Key firm data: o Markets in which company is currently operating o Importance ranking of each of these market in overall firm activities today and future potential o Year of firm foundation o Development of product/service range of firm since startup (each year) Key market data o In the moment of starting the company, why did you think that this has been an attractive market to enter? o How far did the market change in the meanwhile until today? o Who has been the strongest competitor at the time of venture foundation and why this company? o Who is the strongest competitor now? o What happened to the strongest competitor from time of startup (question 3.c.) until now? Why did this happen? o How did the currently strongest competitor reach his leading competitive position today? o What are the TOP5 positive characteristics of the market from your firms point of view? o What are the TOP5 negative characteristics of the market from your firms point of view?
APPENDICES
397
PART II: Model of market attractiveness

OPPORTUNITIES IN GLOBAL & NATIONAL ENVIRONMENT macroeconomic legislative technological socio-cultural demographic changes changes changes changes NATIONAL COMPETIVITY production factors stability & distance to industry new venture taxation sales market infrastructure infrastructure
MACRO LEVEL
INTER-COUNTRY LEVEL
OPPORTUNITIES & THREATS FROM RELATED INDUSTRIES complementary threat of forward cooperation substitution integration backward integration threat of new entries
BARRIERS TO ENTRY RELATIVE POSITIONING TO COMPETITION products/ services firm resources management team
strategy location
Please mark importance of each variable and comment for the important ones why they are important!
Extremely important Not at all important I. MACRO LEVEL OPPORTUNITIES IN NATIONAL & GLOBAL ENVIRONMENT Did any of the following changes/developments have an impact on your main industry and your firm in particular? Please specify why for the important ones. 1. macro-economic changes a) changes in the propensity to consumption b) changes of interest rates c) changes of currency rates 2. political / legislative changes a) changes in environment protection regulations b) changes in market regulations c) changes in labour market regulations d) changes in public spending e) changes in international trade deregulations 3. technological changes a) development of e-commerce b) development of internal IT applications
398
c) development of new production technologies 4. socio-cultural changes a) changes in consumption preferences (increasing volatility) 5. demographic changes a) decreasing population growth b) increasing population age Other changes in economic, political, technological, sociocultural, demographic environment with important impact on your main industry and your venture in particular: II. INTER COUNTRY LEVEL NATIONAL COMPETITIVENESS Introduction Degree international competition
APPENDICES
a) Many of your national competitors are also operating in foreign markets. b) Many foreign companies compete in our national market. c) Which is the country where you expect strongest competition from in your industry for the future: => if international competition is currently and in foreseeable future of little importance then skip following paragraph and continue with III. Will competitors from this country where you expect strongest competition from have an important competitive advantage because of
Extremely
1. production factors a) easier availability of qualified labour b) lower costs of qualified labour c) easier availability of resources d) lower costs of resources 2. political stability & taxation a) lower taxes b) higher stability of economical political environment 3. distance to sales market a) lower distance to main customers for export industries b) larger size of national market 4. industry infrastructure a) better transportation and telecommunication infrastructure b) better access to dependent supplying and buying industries c) more competitive dependent supplying and buying industries 5. new venture infrastructure a) easier availability of debt funding from banks b) easier availability of equity funding from venture capitalists and business angels c) more financial assistance for new ventures (e.g. governmental funding, tax incentives etc.)
Not at all important
important
Do not at all agree
Agree 100%
APPENDICES
d) more non-financial assistance for new ventures (e.g. consultancy) Other important sources of competitive advantage of firms from country of strongest competition:
399
1. complementary cooperation: In my market there are many unused opportunities of cooperating with firms in other related industries. Give examples. 2. threat of substitution: New products / services / technologies from other industries lead to a much lower demand. 3. forward integration: Current suppliers have great interest and the capability to sell directly to our customers. 4. backward integration: Major customers have great interest and the capability to purchase directly from our suppliers. 5. threat of other new entries: Many new players are entering our market and threaten our position. Other important opportunities or threats from related industries: IV. INTRA INDUSTRY LEVEL How do you rate the following statements regarding your industry:
1. market structure a) market size: The market for our product/service is tremendous and we have just covered a small part of the overall market. b) heterogeneity of products: Our products/service features are identical to the ones from our competitors. c) branding potential: It is easy in our market to establish an own brand. d) distance to clients: In my market, firms generally compete on a national level, not only on a regional or local level. e) economies of scale: Large firms can offer much lower prices than smaller firms in my market. f) export-import balance: Much more foreign companies operate in our national market than national companies operate in foreign markets. g) need for specialised products: Clients in my market need a product which is perfectly customized to their individual necessities. h) buyer concentration: Less than ten buyers normally count for over 50% of all firm sales in my industry i) average order volume: In my market the average volume of orders is very high (e.g. clients place large bulk orders).
Do not at all agree
Agree 100%
Do not at all agree
III. INTER INDUSTRY LEVEL OPPORTUNITIES & THREATS FRIN RELATED INDUSTRIES How do you rate the following statements regarding opportunities and threats from related industries: Agree 100%
400
j) seasonal change of demand: A majority of our sales is generated in only three months of the year. k) intensity of price bargaining: Basically all clients in my market do not accept the official price, but try to bargain. l) market transparency: It is very difficult for clients to compare the product/service prices in our market. m) advertising intensity: You can only compete in my market if you spend from the beginning a lot of money in advertising n) R&D intensity: You can only compete in my market if you spend from the beginning a lot of money in R&D TOP 2 factors from market structure -- with positive impact on your firm -- with negative impact on your firm 2. market dynamics a) former market growth: My market grew very rapidly throughout the last years. b) rel. expected market growth: My market is expected to grow very rapidly within the next years. c) entries to industry: A very large number of new firms have entered the market in the last year. d) exits from industry: A very large number of firms in my market had to close down in the last year. e) balance of entries and exits: The overall number of firms in my market is increasing a lot. f) degree of uncertainty about future development: The demand varies strongly from year to year and it is very difficult to forecast the development in our market. g) customer loyalty: My clients are very flexible and would change immediately if competitor products are a little better or cheaper. h) changing customer needs: The needs of clients have changed strongly in the last years. TOP 2 factors from market dynamics -- with positive impact on your firm -- with negative impact on your firm 3. dependencies a) on clients: Firms in my market depend often on a small number of very large clients. b) on suppliers: Firms in my market rely on a few critical suppliers with fix purchase conditions (e.g. suppliers of brand products). c) on key employees, employee institutions, and key knowledge: There are some employees in each company in my market who are nearly impossible to replace. d) on legislation: The market is to a very high degree affected by changes in legislation. e) on business cycle: The demand of our products/services fluctuates strongly with the overall business cycle. f) on maintenance in industry (barriers to exit): All large firms in market would stay in market if demand and profits drop very strongly. g) relative dependency compared to earlier and later value chain members: Not a single client or supplier relationship is so important that ceasing this relationship would affect strongly our business. Our bargaining power
APPENDICES
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is higher than that of clients or suppliers of us. TOP 2 factors from dependencies -- with positive impact on your firm -- with negative impact on your firm 4. competitor dynamics a) inertia of established firms due to organisational structure: Established firms are very sluggish, because the decision makers do not seem to notice small changes in the market. b) inertia of established firms due to legislative restrictions: Labour law and other legislative restrictions prevent established firms from reacting quickly to market changes. c) inertia of established firms due to cost structure: Established firms have frequently much higher costs than new firms entering the market. d) aggressive responsiveness of established firms: Competitors react directly with special offers and price cuts to the new entry of firms into market. e) inflation rate in selling prices: The prices of newly introduced product start to decrease rapidly in my market.. f) number of new products introduced: Competitors seek continuously to improve their products/services and introduce constantly new products/services. g) investment in new assets: Everybody in the industry invests continuously high amounts in new buildings, machinery and equipment. TOP 2 factors from competitor dynamics -- with positive impact on your firm -- with negative impact on your firm 5. competitor structure a) concentration: In my industry a few big companies dominate the whole market. b) number of industry members: In my geographic sales market are a large number of other firms offering similar products / services. c) heterogeneity of industry members: Firms in industry are very different in terms of strategies, distribution channels, and profitability. d) general efficiency level among industry members: Most competitors are very efficiently cost-sensitive managed and would not have a lot of costs saving potentials. e) prevalence of competitive strategies on other than price: In my market NOT the one who offers the lowest prices is most successful. f) capacity utilisation level: Most firms in the industry could increase sales easily by 30% with their current resources. g) employee productivity: Turnover per employee is very high in our industry. h) labour costs intensity: In our industry the largest share of costs are labour costs. i) brut margin: The brut margin is very high in our industry. j) vertical integration: Products are bought directly from creator / manufacturer of product / service or the company that buys from manufacturer. No more distribution levels
401
402
are included in the distribution process. k) degree of diversification: Most large competitors are also operating in other markets. l) average age of industry members is very high m) average size of industry members is very large n) variable costs are major share of total costs. TOP 2 factors from competitor dynamics -- with positive impact on your firm -- with negative impact on your firm BARRIERS TO ENTRY Do not at all agree
APPENDICES
a) inventory intensity: New firms entering the market need necessarily to invest in a very high inventory. b) fixed asset intensity: New firms entering the market need necessarily to invest a lot in building, furniture, or machinery. c) minimum organizational size & complexity: It is not possible to start a company with 2 people in this market. d) accessibility of distribution channels: In our market is a clearly defined customer target group which can be easily reached by advertising in specialised magazines or can be identified from yellow pages. e) loyalty of customers: clients do generally not like to change because of small differences in price or quality f) legislative barriers: Access to market is restrictively regulated by law g) product sophistication: The offered product is very sophisticated and requires a lot of specialised knowledge TOP 2 factors from competitor dynamics -- with positive impact on your firm -- with negative impact on your firm V. VENTURE / FIRM LEVEL
Agree 100%
1. products/services a) relative price (better=lower price) b) relative quality c) relative design d) innovation potential (potential to offer completely new product/service) 2. firm resources a) relative financial strength b) relative knowledge / patents 3. management team a) relative capability of management team b) relationships key partners c) relevant industry experience
Competitors better
You better
APPENDICES
403
4. strategy a) relative growth aspirations/aggressiveness 5. location a) relative distance to clients (who is closer?) b) availability of labour and production factors c) relative costs of labour and production factors
404
APPENDICES
PART III: Focus on key factors Key factors o Is it now easier or more difficult to enter the market than at the moment when you started? Why? o Please comment in more detail the impact of the following variables on the growth of your venture: export balance, distance to clients, entries to industry, net entries, uncertainty, employee productivity? o How do you evaluate the impact of the following variables on venture profit: entries to industry, exits from industry, uncertainty, number of industry members (employee productivity, average number of employees at startup, investment intensity? o Discussion of top5, top5 from former list. Strategy o Ad 5.1: How was relative price/quality compared to main competitors upon startup and how is it today? Why did it change? o How far is your strategy different from your competitors?
APPENDICES
405
Appendix H: List of interviewees

Imente Global S.L., Girona/Spain o Prof. Dr. Christian Serarols founder and general director date of interview: 3. October 2003 o Qim Pagans founder and technical director date of interview: 3. October 2003 o Oscar Trasbazos marketing director working at imente for 2 months date of interview: 3. October 2003
Open House Spain S.L., Barcelona/Spain o Claudia Eleuterio director and founder date of interview: 7. October 2003 o Jrg Lahmann co-director working at Open House for 1 year date of interview: 8. October 2003
Teleruf GmbH, Bonn/Germany o Stefan Martinstetter director and founder date of interview: 28. October 2003 o Christine Haberland PR & marketing manager working at Teleruf for 3 years date of interview: 28. October 2003
Curriculum Vitae
Name: Born:
Daniel Spohn 29.6.1972 in Leverkusen, Germany
Education 1999 European Doctoral Programme in Entrepreneurship, Universitat Autonoma de Barcelona, Spain and Vxjo University, Sweden 1993-1998 1996 1992-1993 1983-1992 Studies of information management at University of St. Gall, Switzerland, degree: lic.oec.HSG Exchange semester at MBA program of Rensselaer Polytechnic Institute New York, USA Courses in business and law, Fernuniversitt Hagen, Germany Friedrich Wilhelm Gymnasium Cologne, Germany
Practical Experience Since 1999 Since 1999 1996-1998 Founder manager LanguageCourse S.L. Barcelona, Spain Co-founder manager Gebr. Spohn GmbH Cologne, Germany Internships at Mercedes Benz AG (South Africa), Roland Berger Strategy Consultants (Germany), VTC Consult (Germany), Euro-Asia Consulting (China)

Market Attractiveness Model

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Evaluating Market Attractiveness - A New Venture Perspective -

vorgelegt von Daniel Spohn aus Deutschland

Dissertation Nr. 2917

Difo-Druck GmbH, Bamberg 2004

St. Gallen, den 4. Mai 2004 Der Rektor:

Prof. Dr. Peter Gomez

Barcelona, July 2004

2.2 Strategy / Industrial organisation research................................................... 37

2.2.1 2.2.2 2.2.3 3

3.4.6 3.4.7 3.4.8 4

versus Zentrum fr Europische Wirtschaftsforschung

General purpose of the study and objectives

characteristics impact venture performance?

Definition of basic terms

Delimitation of the study

Germany / Western Europe

Figure 1: Delimitation of the study

Underlying assumptions and choice of general research

Market-success relations generalisable Existing market settings not modifiable at will

Figure 2: Assumptions about the nature of social science: Objectivist approach

General structure of the study

7. CONCLUSIONS, SIGNIFICANCE OF RESULTS AND PERSPECTIVE

Figure 3: General structure of chapters of study

CHAPTER 2 - LITERATURE REVIEW

CHAPTER 2 - LITERATURE REVIEW

Studies of entrepreneurship research investigating sets of market success factors

Sandberg and Hofer

new ventures seeking venture capital

Stuart and Abetti

p=0.01 (reverse impact on quantified success!!)

new technical ventures

- quantifiable initial success - subjective initial success

p=0.10 (reverse impact on subjective success!)

Keeley, Roure et al.

VC backed ventures in computer industry in the US, Europe and Japan

- ROI for venture capitalists

Tsai, MacMillan and Low

Corporate startups from PIMS startup database

- market share (MS) - ROI

Brderl, Preisendrf er et al.

ventures in 46 industries in Northern Bavaria / Germany

CHAPTER 2 - LITERATURE REVIEW

relative market share investment intensity industry growth rate revenue/employee

firms of 8 service industries in US (Census of service industries data)

ventures in 71 SIC industries from Compustat

Table 1: Studies of entrepreneurship research investigating sets of market success factors

Sandberg and Hofer 1987.

CHAPTER 2 - LITERATURE REVIEW

CHAPTER 2 - LITERATURE REVIEW

+ ROE - ROI JP + ROI US o ROI - EG + FS - EG + ROI + MS

Wilson 1998. Robinson 1998.

CHAPTER 2 - LITERATURE REVIEW

Table 2: Summary of market success factors

CHAPTER 2 - LITERATURE REVIEW

CHAPTER 2 - LITERATURE REVIEW

Tsai, MacMillan, and Low 1991: 15.

CHAPTER 2 - LITERATURE REVIEW

CHAPTER 2 - LITERATURE REVIEW

CHAPTER 2 - LITERATURE REVIEW

Market factors investigated

Significance (if investigated)

# of Findings units investigated Unit of analysis

p=0,1 (+ on sales growth) p=0,1 (+ on sales growth)

- ROS - sales growth