Excerpt
Table of Content
Table of Figures
1. Introduction
2. Definitions and Concepts
2.1 New Venture
2.2 Strategic Planning
2.3 The Corporate Life Cycle Concept
2.4 The Contingency Approach
3. New Venture Planning in the Early Phases of the Corporate Life Cycle
3.1 Basic Considerations
3.1.1 To Plan or Not to Plan?
3.1.2 The Importance of “Outsiders” in New Venture Planning
3.1.2.1 Involving Outsiders in the Planning Process
3.1.2.2 Outsiders as Addressee of the Outcome of Planning
3.2 The Courtship Phase
3.2.1 Do Founders of Successful New Ventures Write Business Plans?
3.2.2 The Impact of Written Business Plans
3.3 The Infancy Phase - A Framework to New Venture Market Entry Strategies
4. New Venture Planning by Market Context
4.1 New Ventures in the Internet Market
4.1.1 Specific Context for New Ventures in the Internet
4.1.1.1 New Forms of Communication
4.1.1.2 Critical Success Factors
4.1.2 Selected Online-Marketing Instruments
4.1.2.1 Search Engine Marketing
4.1.2.2 E-Branding
4.1.2.3 Direct Marketing
4.2 New Ventures in a High Technology Environment
4.2.1 Specific Challenges
4.2.1.1 Technological Uncertainty
4.2.1.2 Market Uncertainty
4.2.2 Strategic Planning for New Ventures in High Technology Markets
4.2.2.1 Definition of the Relevant Market
4.2.2.2 Implications for Strategic Planning
5. Conclusions
5.1 Implications for Management
5.2 Implications for Research
Appendices
References
Statutory Declaration
Table of Figures
Figure 1: “New Venture Planning in the Early Phases of the Corporate Life Cycle“
Figure 2: Using of Written Business Plans of US Inc. “500” companies
Figure 3: The ten archetypes of market entry strategies for new ventures
1. Introduction
New ventures are an important driving source of wealth in societies. Small and especially young ventures have a fundamental impact on the whole economy. Activities of new ventures provide various positive effects, such as the creation of employment, contribution to technol- ogical advance, innovation and the overall competitiveness of a society’s economy (e.g. Brinckmann 2008, pp. 1).
It is a big challenge for founders to assure that their new ventures survive and prosper. Many aspects have to be considered and high uncertainty is faced. One question which entrepreneurial research frequently tries to answer is whether planning in new ventures is positively related with performance. Plenty of research has been done on this question with rather incomplete and inconsistent results.
Rather than trying to answer the question whether planning is beneficial in a strict yes or no manner, this thesis focuses on a contingent view on the stated problem. Several external factors, so called moderators that might have an impact on the success of planning, shall be examined in more detail.
The first part of the thesis provides conclusions for planning in new ventures in context of the corporate life cycle concept. Specific planning requirements and topics will be discussed in the context of early stages of the corporate life cycle. First of all, the question whether and under what condition planning in new ventures pays off will be dealt with. Related to the first two age states following Adizes (1998) the relevance of written business plans and market entry strategies will be discussed.
The contingent view on the problem will be completed in the second part of the thesis by looking at new ventures in different founding environments. The challenges of two types of new ventures with very specific environments will be discussed in this part. New internet ven- tures are acting in a completely different environment in terms of communication and there- fore, have specific requirements for planning and e.g. marketing instruments. Also new ven- tures entering high technology markets are challenged by specific characters of their envi- ronment, especially because of the even higher uncertainty in comparison to other new ven- tures.
Finally implications for further research and concrete advice for practitioners will be given.
2. Definitions and Concepts
2.1 New Venture
Analogous to the statement “a small business is not a little big business” (Welsh and White 1981), new ventures have several characteristics that distinguishes them from large and established organizations.
The term new venture in this thesis is defined as an independent firm that evolves of some “kind of ‘new combination’ such as an innovative technology, process, business model or product”. New ventures that are based on ‘traditional combinations’ (e.g. architects) are not subject of the discussion (e.g. Gruber 2004).
The specific characteristics of new ventures are their newness, their small size and the turbu- lence and uncertainty related to them. New ventures have to cope with a liability of newness. They have to define new tasks and roles which are linked to high costs in resources and time, temporary inefficiency and conflict. Furthermore they have to face the challenge to create relationships, cope with lack of reputation and experience (e.g. Stinchcombe 1965).
As new ventures usually start off as small organizations, they have the characteristics of small firms such as an independent management (usually the owners), supply of capital by a small group or individual, local area of operations and a “small relative size in the industry when compared to the biggest units in the field” (e.g Carson and Cromie 1989).
The so-called liability of newness and the small size are intensified by problems of uncertainty as an unavoidable aspect of entrepreneurship.
2.2 Strategic Planning
Strategy is the “science of planning and marshalling resources for their most efficient and effective use” (Business Dictionary 2009). Strategic planning is an organized approach that helps to identify sources of competitive advantages and gains “support and commitment through communicating with participants” (McDonald 1989). The results of strategic planning are actions that help to achieve desired goals. The strategic planning process normally includes specification of objectives, generation of strategies, the evaluation of alternative strategies and the monitoring of results (e.g. Armstrong 1982).
2.3 The Corporate Life Cycle Concept
The corporate life cycle concept states that firms typically go through different life stages which have a striking similarity to the life cycle of products. It provides a framework that looks at the firm from an evolutionary perspective starting with birth and ending with death. It has been used in different disciplines like micro economics, finance and especially for management theories (e.g. Yan 2006).
There are differences in the number of stages and their respective definition in the literature. The most common models distinguish between four or five phases of the corporate life cycle (e.g. Miller and Friesen 1984).
Since the different planning requirements for new business ventures in this thesis shall be examined in the context of different life cycle phases, Adizes’ model of the corporate life cycle seems to be most adequate. In comparison to most of literature’s models, Adizes uses a first phase called courtship phase describing a state before operations actually start (e.g. Adizes 1996). The growing part of a company’s life cycle therefore consists of the phases: courtship, infancy, go-go, adolescence and prime. The firm finally reaches a peak point at the stable phases and turns into the ageing part of its life with the phases: aristocracy, recrimination, bureaucracy and finally death (e.g. Adizes 1996). Appendix A provides a graphical overview of Adizes’ ten phases of the corporate life cycle.
As this thesis focuses on new ventures, selected topics related to the two first phases, courtship and infancy will be examined in further depth.
2.4 The Contingency Approach
The underlying assumption of the contingency theory is that “organizations are subjected to a variety of environmental and internal influences” rather than being “closed, mechanistic sys- tems” (Shephard and Houghland 1978). That means that the organization is contingent on specific factors, such as the environment, technology or other variables (e.g. Wood 1979). The contingency view tries to predict “effective organizational structural arrangements” (She- phard and Houghland 1978) and appropriate strategies considering technological or environ- mental context.
The theory states that there is no general recommendation on how to design the structure of an organization (Schreyögg 1980).
The size of an organization can be a contingency variable by itself. Therefore, there are different requirements for the organizational structure and the strategic planning approach of small and young firms than for large established organization. New ventures that face very specific contingent factors, such as fast-moving and uncertain markets, have very special requirements for the strategic planning approach. Planning strategies for high-tech startups that operate in the context of uncertain markets and technologies and internet startups that face very new forms of communication will be discussed later in more depth.
3. New Venture Planning in the Early Phases of the Corporate Life Cycle
In the following, the question whether, or under which conditions new ventures should plan will be discussed. The following figure provides an overview of the structure of this part of the thesis.
illustration not visible in this excerpt
Figure 1: Overview: “New Venture Planning in the Early Phases of the Corporate Life Cycle“
3.1 Basic Considerations
3.1.1 To Plan or Not to Plan?
The question whether to plan or not to plan is a frequently discussed problem in literature. Especially entrepreneurial research debates whether business planning is of high value and therefore increases the firm’s performance. Olson and Bokor (1995) raise the question wheth- er the findings about business planning in established firms can be applied to small new ven- tures. Lumpkin (1998) also states that the impact of planning might change as the firm ad- vances in the corporate life cycle. New ventures have to face additional challenges of estab- lishing a new organization (e.g. Brinckmann, Grichnik, and Kapsa 2008). This leads to the assumption that the age factor also affects the business planning of new ventures and planning for new ventures is different from planning in other stages. New ventures should consequently be surveyed separately from established small firms. Much research has attempted to do so. Reviewing this literature Gruber (2007) comes to the conclusion that results are still incom- plete and fragmented. Please refer to appendix B for a review of meta-analysis studies on the correlation between planning and performance.
Brinckmann, Grichnik, and Kapsa (2008) speak of a planning school and an opposing group when reviewing literature on this topic. The first group argues that planning is important to the survival and growth of new ventures. A systematic planning approach leads to higher performance as mere guess. The second group doubts this view and argues that in cases of high uncertainty new ventures should focus on strategic flexibility and learning rather than constraining themselves to formal plans.
To answer the question whether planning pays off for new ventures a more contingent view seems to be appropriate. Different variables could have an impact on the correlation of business planning and performance.
The newness of the new venture is a first contingent factor. Founders’ problems and oppor- tunities are normally less predictable, which results in greater uncertainty in comparison to those of established small firms. Limited information and a lack of time for gathering infor- mation create a context of ambiguity. This might cause formal planning to be less effective. Combined with missing structures and resources, the cost might exceed the benefits of formal planning. The overall correlation between planning and success of new ventures is much low- er than for established firms but still positive (e.g. Brinckmann, Grichnik, and Kapsa 2008).
Another contingent factor is described by Rauch and Frese (1998) in a longitudinal study about the effects of environmental hostility and uncertainty on new venture success. While they found out that planning does not have a direct long-term effect on success it is very important in unfavorable environments. In a highly competitive environment with unclear future events, plans help to allocate resources and makes future events manageable. In a more favorable environment emphasis should be rather put on recognizing opportunities, because sticking to plans might be disadvantageous.
Culture is another contingent factor that affects the correlation of planning and performance. Rauch, Frese, and Sonnentag (2000) come to the conclusion that planning provides fewer benefits for new ventures that are located in cultures that are characterized by higher uncertainty avoidance than ventures in cultures with lower uncertainty avoidance. Brinckmann, Grichnik, and Kapsa (2008) explain this phenomenon by founders sticking more accurately to their plan in countries with high uncertainty avoidance. By doing this they lose strategic flexibility and their openness to change. This behavior limits performance. In comparison founders in a cultural context with less uncertainty avoidance are more likely to deviate from their plans and accordingly have better chances to challenge rapid change.
So it is difficult to draw a universally valid conclusion if planning increases performance of new ventures. Gruber (2007) also found that the performance increase from planning varies with different founding environments. But his general assumption is that also in very dynamic markets planning can be of high value for the new venture. Also Brinckmann, Grichnik, and Kapsa (2008) with a large evidence-based survey come to the conclusion that planning is beneficial for new ventures, yet contingent factors have a significant impact. Whereas the overall impacts are positive, they conclude that the impact on new ventures is not as strong as on small firms in general.
In general flexibility appears to be a major success factor in new venture planning. The per- formance of a new venture will more likely improve by engaging in informal planning than time-consuming excessive formal planning (e.g. Lumpkin 2007). In general complete formal planning should not be used in quickly changing environments (e.g. Van Gelderen, Frese, and Thurik 2000), which new ventures normally face. Olson and Bokor (1995) support this view by their conclusion that besides the mere planning process the ability to enrich the strategy with innovative content provides real positive impact on the success of rapid growing young firms.
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