Success of businesses is connected to circumstances surrounding their inception: Study
Washington, US: In accordance with data from the U.S. Bureau of Labour and Statistics, just 25 per cent of new enterprises survive for 15 years or more. That statistic hasn't changed in 30 years, despite shifting economic situations within and between markets. An elegant explanation is offered by a recent study published in the Strategic Entrepreneurship Journal: a company's long-term success is greatly influenced by the circumstances surrounding its inception, rather than just changes in its markets.
"A venture's performance following environmental change depends on its internal processes," says D. Carrington Motley, an entrepreneurship lecturer at Carnegie Mellon University and a co-author of the study. "A business's founding environment shapes those processes, which quickly solidify and become ingrained in beliefs about how to operate."
Motley and his co-authors, Charles E. Eesley of Stanford and Wesley Koo of INSEAD Asia, examined performance for more than 1,000 ventures founded from 1960 to 2011. The businesses operated in 19 industries ranging from agriculture to energy and utilities. The authors used data from the Bureau of Economic Analysis to quantify dynamism within each industry over time and within each venture's founding year. They used alumni survey data to establish the composition of each business's founding team as well as its longevity and ultimate outcome.
"Businesses founded in dynamic environments by a functionally diverse team show meaningfully more ability to survive during market change," Eesley said. "However, they don't necessarily have an increased likelihood of a positive exit."
Businesses founded in dynamic environments typically favor slower, decentralized decision-making and increased creativity and flexibility. A founding team with many distinct functional roles compounds these behaviors -- they have broader strategic focus and seek large amounts of information. These risk-averse structures and strategies help businesses persevere during environmental change, but the study also found that these businesses where less likely to gain IPOs or acquisitions if their market stabilized.
"In stable, more predictable environments, being more aggressive can produce better outcomes," Woo said. "The risk of untested assumptions is less, so continued use of risk-averse processes produces fewer benefits and may detract from a venture's ability to respond to opportunities."
The authors argue that the key differentiator for businesses founded in dynamic environments by functionally diverse teams was slower decision-making. They tested the theory by first examining their performance in industries where fast product development was critical to competitive advantage and second by determining how quickly they took to receive angel or venture capital funding. Businesses founded in dynamic environments by functionally diverse teams fared worse in both instances.
Whether an industry is in flux or stabilizing, the study indicates that typically businesses benefit from market change only if that change better aligns with their founding environment. Despite its premise that founding processes become entrenched, it offers an insight to entrepreneurs hoping to both survive chaos and thrive in calm. Businesses need to examine their founding structure and internal processes and consistently re-evaluate whether they are best suited to their market environment.