Enriching strategic variety in new ventures through external knowledge

Journal of Business Venturing 27 (2012) 401–413

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Journal of Business Venturing

Enriching strategic variety in new ventures through external knowledge Bárbara Larrañeta a,⁎, Shaker A. Zahra b, 1, José Luis Galán González c, 2 a

Department of Business Administration, School of Management, Pablo de Olavide University, Ctra. Utrera, Km. 1, 41013 Sevilla, Spain Carlson School of Management, University of Minnesota, Strategic Management and Organization Department, Garry S. Holmes Center for Entrepreneurial Studies, Room 3-428, 321 19th Ave. South, Minneapolis, MN 55455, USA c Department of Business Administration and Marketing, School of Management, University of Sevilla, Av. Ramón y Cajal, 1-41018 Sevilla, Spain b

a r t i c l e

i n f o

Article history: Received 18 May 2010 Received in revised form 3 November 2011 Accepted 14 November 2011 Available online 4 January 2012

Field Editor: D. Jennings Keywords: Strategic variety New ventures External knowledge Absorptive capacity Regional clusters

a b s t r a c t To build profitable market positions, new ventures have to address multiple challenges on several fronts. These ventures can compete by being simple (focused) or applying varied ways to compete. The likelihood of these ventures remaining competitive depends on their ability to build novelty into their products and operations, an activity that requires infusing knowledge into their operations. Most ventures, however, have limited knowledge bases and the reach (scope) of their external connections is limited, a factor that prompts them to tap into different external sources in their local areas. This article reports an empirical study of 140 new ventures located in seven regional clusters in Spain. The results show that new ventures can enrich the variety of their strategic repertoire by accessing diverse sources of external knowledge and being exposed to external novel knowledge, while absorptive capacity moderates this relationship. The degree of social development of these clusters also has a positive impact on the strategic variety of new ventures, exhibiting an inverted U-shape curve. © 2011 Elsevier Inc. All rights reserved.

1. Introduction Entrepreneurs create new ventures in order to exploit opportunities and create wealth by offering innovative products, goods and services. To be successful, these ventures need to build and maintain novelty in their products (Zhang and Haiyang, 2010). Whether they focus on a specific niche or pursue multiple market segments (Porter, 1980), new ventures can use a wide range of competitive methods, exhibiting a great deal of strategic variety. Alternatively, they may favor strategic simplicity by emphasizing a few strategic actions (Carter et al., 1994; Lumpkin and Dess, 2006; Miller, 1988, 1993). Strategic variety is conducive to successful creation and pursuit of opportunities. It also induces novelty into the firm's operations and allows it to retain flexibility (Miller and Chen, 1996). Strategic simplicity facilitates new ventures' ability to build distinct capabilities (Barney, 1991; Eisenhardt and Martin, 2000) and increase short-term performance. It is also less costly for new ventures. However, strategic simplicity can stifle efforts intended to build the multiple skills that can allow the firm to grow. Therefore, a question that arises is: What leads some ventures to choose variety vs. simplicity or vice versa? The body of strategy research on competitive repertoires has tried to determine the factors that influence this choice in the case of established firms, concluding that a firm's knowledge base is a key determinant of this decision (Miller, 1993). However, this stream of research has largely ignored the context of new ventures. Paradoxically, most ventures have limited and often specialized knowledge bases and they encounter unique challenges in this regard. Thus, following the knowledge-based view (KBV) of the firm (Grant, 1996a, b), new ventures can use different external sources and gain access to the knowledge needed to support and even

⁎ Corresponding author. Tel.: + 34 954 349848; fax: + 34 954 348353. E-mail addresses: [email protected] (B. Larrañeta), [email protected] (S.A. Zahra), [email protected] (J.L.G. González). 1 Tel.: + 1 612 626 6623. 2 Tel.: + 34 954 557573; fax: + 34 954 556989. 0883-9026/$ – see front matter © 2011 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusvent.2011.11.004

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promote strategic variety. More and more new ventures have made use of these different sources that typically include individuals, other companies, alliances, independent inventors, universities, and research centers (West and Noel, 2009; Zahra, 1996). In this article, we propose that two aspects of external knowledge sources that are likely to influence venture managers' choice of strategic simplicity vs. variety are: diversity and novelty. The diversity of external sources can expose managers to different ideas and discoveries that can broaden their perspectives on where, when and how to best compete, possibly promoting strategic variety (Lane et al., 2006: Miller, 1993). The novelty of the external knowledge refers to the extent to which these sources have or control new knowledge that new ventures can use. When they are exposed to different novel types of knowledge, discoveries and innovations, new ventures are likely to experiment with new competitive approaches and learn. This process can induce experimentation with varied approaches and enhance strategic variety. Still, as the KBV would suggest, the effect of external knowledge diversity and novelty on strategic variety is not automatic. Rather, it is likely to vary depending on new ventures' ability to recognize and absorb external knowledge (Cohen and Levinthal, 1990; Nelson and Winter, 1982; Zahra and George, 2002). Absorptive capacity influences what knowledge can be assimilated and how it is used, determining which strategic actions are feasible (Lane et al., 2001; 2006). As a result, we argue that the effect of the diversity and novelty of external sources on new ventures' strategic variety is moderated by these firms' absorptive capacity. Typically, new ventures have limited connections to external sources of knowledge (DeCarolis and Deeds, 1999). These ventures lack the name recognition and the resources needed to develop these relationships. Given these realities, some new ventures become dependent on nearby institutions to gain access to the knowledge they need. These ventures can cultivate their closeness to these groups and gain new knowledge. This is particularly the case when new ventures are located in a cluster, a group of geographically proximate and connected firms that often compete in the same industry (Maskell, 2001; Porter, 1980, 1998). However, the ability of new ventures to gain access to the knowledge that resides in a cluster might depend greatly on the amount of social interactions among individuals, firms, and other organizations within the cluster (i.e., the degree of social development of the cluster) which usually influences member companies' decisions (Rocha and Sternberg, 2005).3 As social relationships within a cluster increase, knowledge sharing often becomes easier (Inkpen and Tsang, 2005; Rocha and Sternberg, 2005; Tallman et al., 2004). Knowledge spillovers and transfers infuse different perspectives into new ventures' operations, which can stimulate these firms' learning (Cohen and Levinthal, 1990; Huber, 1991) that will increase strategic variety. 1.1. Objective and contributions This article examines the effect of the external sources of knowledge on new ventures' strategic variety. It explores four related questions: (1) How does the diversity of external knowledge sources impact the strategic variety of new ventures? (2) How does the novelty of the external knowledge impact the strategic variety of new ventures? (3) How does the absorptive capacity of new ventures influences the role of the diversity and novelty of external knowledge on strategic variety? And (4) How does the degree of social development of the clusters in which new ventures are located impact strategic variety? We contribute to the literature in three ways. First, we advance the entrepreneurship literature by connecting past research on new ventures' strategic actions (e.g., Carter et al., 1994; McDougall et al., 1994; Stearns et al., 1995) and the strategy literature about the simplicity and variety of competitive repertoires (e.g., Ferrier, 2001; Miller and Chen, 1996; Miller et al., 1996). This improves our understanding of how new ventures make strategic decisions and what are the factors that determine such decisions. Second, we extend extant theory about competitive repertoires by understanding the role of two aspects of external knowledge sources (diversity and novelty), the internal processes of knowledge absorption, and the local context, as key drivers of firms' strategic choices. Third, we contribute to the KBV of the firm by empirically demonstrating the strong connection between knowledge and strategy. In the next section of the article, we develop our arguments and hypotheses for the knowledge sources of strategic variety in new ventures. We then present the results of an empirical study that tested our hypotheses in a sample of new ventures from seven regional clusters in Spain, covering seven different industries. In the final section, we discuss the findings and their practical and theoretical implications, our recommendations for future research, and the study's key conclusions. 2. Theory and hypotheses New ventures focus on exploiting opportunities by deploying their technology and other knowledge-based resources (Zahra, 1996). To build their market positions and achieve success, these ventures have to decide whether to target a niche or broadly defined markets. They also have to decide whether to focus on a few strategic methods or build strategic variety by adopting multiple competitive approaches. This could be a difficult decision for some new ventures. Strategic simplicity can be beneficial for creating and achieving a competitive advantage. It channels new ventures' energies towards building distinct competencies (Barney, 1991; Hamel and Prahalad, 1994) and leads to efficient and speedy decision making that can improve profitability and growth (Lumpkin and Dess, 1995). Yet, strategic simplicity can decrease flexibility, engender myopia and block organizational learning (Miller, 1993). Some ventures may find it difficult to decide which few strategic actions 3 The degree of social development of the cluster and social capital are different, yet related concepts. The concept of social capital is broader than the concept of degree of social development of the cluster, in that it includes a number of dimensions that are not gathered in the concept of degree of social development of the cluster we are using.

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or methods on which to build their strategic positions. Hence, strategic variety becomes an attractive option to accelerate new ventures' learning (Zahra et al., 2006) and gain feedback about their markets and competition (Lumpkin and Dess, 2006). To date, research has focused primarily on well established companies, exploring the causes of their strategic simplicity vs. variety (e.g., Ferrier, 2001; Miller and Chen, 1996; Miller et al., 1996). Prior research suggests that knowledge is essential in making that choice. The types of knowledge firms hold and how it is distributed and used sets the stage for exploitation and exploration that encourages organizational learning (Huber, 1991). This learning influences the choice of new ventures' strategic actions (Lane et al., 2001, 2006). A shortcoming of existing research is ignoring new ventures which often have limited—and mostly specialized—knowledge bases (Sapienza et al., 2006; Zahra, 1996), making the building or enhancing of their strategic variety difficult. The KBV suggests that firms need different types of knowledge (e.g., marketing, technical, organizational, and operational) to succeed. Despite a long tradition of research on new venture strategies (e.g., Carter et al., 1994; Hosmer, 1957; McDougall and Robinson, 1990), researchers have ignored the effect of these ventures' knowledge and learning processes on their strategic choices. With the emergence of the KBV, researchers have begun to examine the role of knowledge in shaping these ventures' strategic choices (Grant, 1996a, b; Tsai and Li, 2007). This research suggests that entrepreneurs should capitalize on their ventures' knowledge when mapping their strategic choices, such as competing broadly vs. narrowly (e.g., West and Noel, 2009). The knowledge needed for new ventures to make and reinforce their strategic choices is assembled from internal (e.g., investing in R&D) and external sources. As the KBV suggests, these ventures use a number of processes to distribute, integrate and use the knowledge they acquire from other sources into their operations. These routines make it possible to combine internal and external knowledge and learn to use them in their operations (Huber, 1991), which can enhance new ventures absorptive capacity (Cohen and Levinthal, 1990). Absorptive capacity centers on recognizing, valuing, capturing, assimilating and using knowledge gained from external sources (Zahra and George, 2002). Therefore, absorptive capacity makes the external knowledge accessible and usable in these operations. Consequently, we focus on the implications of the characteristics of external knowledge sources and new ventures' absorptive capacity for their strategic variety. 2.1. The role of the diversity of external knowledge sources Some research shows that organizations with large knowledge bases are more likely to develop and support varied strategic actions (Ferrier, 2001; Miller and Toulouse, 1998; Miller et al., 1996). Pursuing multiple competitive methods simultaneously requires a broad knowledge base that nurtures the exploration and exploitation of different opportunities (March, 1981, 1991). Given that new ventures usually face severe internal knowledge shortages (Sapienza et al., 2005; Zahra, 1996), they can overcome this by gaining access to different sources of knowledge in their industry and elsewhere. According to the KBV, having access to diverse knowledge sources can make it easier for new ventures to develop new products, goods and services that attract and retain customers. Gaining access to diverse external knowledge sources can give venture managers valuable information about the different forms of rivalry and market needs (Van den Bosch et al., 1999). But the knowledge received from multiple sources may be incompatible. Therefore, managers need to reconcile the information, examine the nature and use of the particular knowledge at hand, and explore ways to combine the different types of knowledge and how to best use it to innovate. These processes foster learning by doing, stimulating further exploration and exploitation. Learning by doing promotes knowledge creation and successful commercial use. In turn, learning by innovating increases the variety of knowledge the new venture can employ in crafting different competitive methods, increasing strategic variety. Our discussion suggests the following hypothesis: Hypothesis 1. The diversity of a new venture's external knowledge sources is positively associated with its strategic variety. 2.2. The role of the novelty of the external knowledge sources A body of research shows that competitive conditions influence the strategic choices of firms in an industry (Ferrier, 2001; Khandwalla, 1977; Miller and Friesen, 1983), such as the scope of their operations (e.g., Carter et al., 1994; McDougall et al., 1994; Stearns et al., 1995). Specifically, prior research findings suggest that when industries are fairly stable and the environment does not change radically, growth opportunities are limited (Porter, 1980). This might encourage new ventures to niche players, pursuing simple strategies (Miller, 1993). In these industries, requirements for success are also fairly well known and widely diffused. As a result, venture managers may not have the incentive to experiment with or adopt new strategic approaches. As March (1991) argues, stable environments make it easier for managers to devote their attention to ongoing activities instead of exploring or adopting new competitive methods. The situation is different in dynamic industries, where companies are able to discover and pursue new opportunities and build market positions. These environments are characterized by constant and rapid changes in market, demand and technological conditions (Miller and Friesen, 1983). Consequently, new ventures are exposed to multiple sources of knowledge. The diversity of companies (e.g., other new ventures) and other institutions makes knowledge creation and diffusion essential. Thus, the knowledge new ventures can glean from external sources is likely to be unique and provide recipient ventures with different insights. Further, in these industries, the requirements for success will be hard to discern because the forces of competition change frequently (Lumpkin and Dess, 1995; Miller et al., 1996). This might prompt venture managers to explore different ways to compete, which

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can increase strategic variety (Ferrier, 2001; Miller and Toulouse, 1998; Miller et al., 1996). These observations suggest the following hypothesis: Hypothesis 2. The novelty of the knowledge a new venture gains from external sources is positively associated with its strategic variety. 2.3. The influence of absorptive capacity on the role of the diversity and novelty of the external knowledge sources As our discussion suggests, gaining access to diverse and novel sources of external knowledge can increase the amount and variety of new ventures' knowledge. Still, how these ventures identify external knowledge and exploit their knowledge bases will be determined by their absorptive capacity (Cohen and Levinthal, 1990; Jansen et al., 2005; Lane et al., 2006). Absorptive capacity implies the assimilation, transformation and exploitation of externally acquired knowledge (Jansen et al., 2005; Zahra and George, 2002). These processes are grounded in routines that determine what external knowledge is acquired and the way in which external knowledge is used, thus influencing new ventures' decisions (Schreyögg and Kliesch-Eberl, 2007). As noted by the KBV (Grant, 1996b), the knowledge gained from different external sources is often hard for new ventures to process, digest and use. Unless the venture has related knowledge, it may miss the meaning and implications of the knowledge being imported from external sources. Indeed, the literature highlights the need of overlapping knowledge bases in order for the effective absorption of external knowledge to occur (e.g., Galunic and Rodan, 1998; Lane and Lubatkin, 1998; Mowery et al., 1996). The firm's existing knowledge base can be helpful in identifying the type of knowledge that can be acquired and integrated (Grant, 1996a; Lane et al., 2006) to conceive new and varied ways of competing. Absorptive capacity influences the knowledge a new venture accumulates over time (Zahra and George, 2002). Absorptive capacity can also limit the range of uses of diverse and novel external knowledge, contributing to the simplicity of new ventures' strategic choices. Alternatively, the infusion of diverse and novel knowledge into new ventures can promote the development of different business concepts and the development of varied business models, potentially enriching strategic variety. Either way, absorptive capacity is likely to moderate the relationship between the diversity and novelty of external sources and new ventures' strategic variety. Our arguments suggest the following hypotheses: Hypothesis 3a. The absorptive capacity of a new venture will moderate the effect of the diversity of its external knowledge sources on its strategic variety. Hypothesis 3b. The absorptive capacity of a new venture will moderate the effect of the novelty of the knowledge gained from external sources on its strategic variety. 2.4. The contributions of the cluster in which ventures are located New ventures sometimes locate in clusters where they receive support, especially in the early years of their existence. These clusters often provide legal services, as well as marketing and sales education. They also connect companies in the same industry to each other, allowing them to cooperate and learn from each other (Juriado and Gustafsson, 2007; Madhavan and Iriyama, 2009; Saxenian, 1994). Gaining access to these sources and connections can help offset new ventures' resource limitations. Further, these contributions legitimize new ventures' operations and position them to succeed, possibly overcoming the liabilities of newness (DeCarolis and Deeds, 1999; Gilbert et al., 2008). Over time, these clusters develop their own cultures and norms in terms of members' interactions and resource exchanges (including knowledge sharing). Cluster managers often work hard to develop a culture conducive to collaboration among members. As interactions occur, the culture of the cluster takes shape. This culture is likely to reflect the history, composition and communication patterns among members. Thus, over time, clusters are likely to show a great deal of variability in their degree of social development (Rocha and Sternberg, 2005), defined as the extent to which there are social interactions among individuals, firms, and other organizations within the cluster fostered by cluster institutions. In turn, the cluster's degree of social development influences the sharing of knowledge and specialized expertise among the companies within them (Capello, 1999; Tallman et al., 2004); cluster managers' mental models (Pouder and St John, 1996); and firms' propensity to acquire new competitive capabilities (McEvily and Zaheer, 1999; Molina and Martínez, 2009). These variables are likely to affect new ventures' knowledge acquisition, learning and choice of strategic simplicity vs. variety. Regional clusters typically specialize around particular industries (Saxenian, 1994; Verheul et al., 2009). Clusters also attract experts from different fields, specializing in an industry. What attracts these companies and experts to a cluster is the potential to develop new ways of innovating and exploiting innovations. Though companies in the cluster compete with one another, they frequently collaborate in new product development, lobbying for the industry, and legitimizing the industry's products. Employees also move from one company to another, transferring knowledge and creating linkages between their former and current employers. Customers and suppliers also interact with companies within the cluster, providing additional knowledge about demand conditions as well as potential industry shifts that require adaptation. Interactions with these experts, other firms, customers and competitors can enhance new firms' knowledge bases. New ventures' learning thrives as social interactions intensify within a cluster, as found by Capello (1999) who analyzed and classified several Italian industrial districts, labeling the most socially developed ones “innovative millieux”. Capello also found

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that movement from the least to the most socially developed districts was characterized by the availability of public knowledge that provided more opportunities for innovation. Thus, as collective learning develops in an area, information about knowledge creation becomes a “public good” as innovations become known to various firms within a network rather than remaining exclusive to their originators (MacKinnon et al., 2002). Typically, more knowledge is shared and transferred in highly socially developed clusters (Inkpen and Tsang, 2005; Tallman et al., 2004) where collaborative relationships are common. Knowledge sharing can foster organizational learning (Haynie et al., 2010). A high degree of social development promotes mutual understanding among firms in a cluster, facilitating knowledge transfer (Inkpen and Tsang, 2005; Parra et al., 2010) and absorbing incoming knowledge. This can improve new ventures' absorption of external knowledge (Tallman et al., 2004). As such, locating in an area where knowledge is abundant and widely shared can enrich new ventures' knowledge bases. Further, being surrounded by innovative companies can also accelerate the pace of these ventures' innovations, potentially enhancing strategic variety. Beyond a threshold, however, the positive effect of the degree of social development of a cluster on a new venture's strategic variety may decline. A cluster's high social development may still boost knowledge sharing but the types of knowledge being shared may be limited. Over time, a cluster that was initially innovative might stagnate and microcultures might emerge and slow down innovation. As companies in the cluster continue to copy and imitate each other, radical innovation might decline. Companies might also become focused on other companies in the cluster while ignoring major changes elsewhere. Thus, a cluster that was once a vibrant “hot spot” might become a “blind spot” (Pouder and St John, 1996). The social development of a cluster implies increased intensity of inter-organizational relations. Sustaining these close interactions requires companies to focus more directly on ongoing relationships, sometimes sacrificing potential relations with new and often non-redundant actors who may have radically new knowledge. As a result, firms in a cluster get locked-into their current network, which is likely to inhibit their ability to establish new linkages (Molina and Martínez, 2009). Increased redundancy in inter-organizational relations hampers the acquisition of new knowledge and competitive capabilities (Burt, 1992; Expósito and Molina, 2010; McEvily and Zaheer, 1999), further reducing new ventures' strategic variety. The above discussion suggests that initial increases in the degree of social development of the cluster may prompt venture managers to explore new ways of doing things by sharing varied and innovative ideas and practices. However, beyond a threshold, the degree of social development of the cluster can drive new ventures to focus and simplify their strategic actions. These observations lead to the following hypothesis: Hypothesis 4. The degree of social development of the regional cluster in which the new venture is located has an inverted U-shape relationship with its strategic variety. 3. Method 3.1. Sample and data To test our hypotheses, we identified a number of regional clusters throughout Spain based on academic publications and discussions with several academic experts in regional economics. From the clusters identified, seven were selected based on: high start-up rates; the intensity of knowledge in the predominant industry of the cluster, the existence of academic studies about the area, and different levels of social development. Each of the seven regional clusters focused on a particular industry. Industries represented in the study included: biotechnology, agro-alimentary, aerospace, tile and ceramics, modern furniture, energy and environmental, and information and communications technology. We began with a sampling frame covering all the Spanish new ventures launched in these seven regional clusters after 1999. To identify the ventures for our study, we used the SABI/AMADEUS database, which contains a search engine that makes it possible to select firms based on the criteria we stated earlier. The ventures we studied are: 8 years or younger (McDougall et al., 1992), located in the seven chosen geographic areas of Spain, and competed in one of the seven chosen industries. Using faceto-face interviews, we obtained a response rate of 70% from the 201 companies matching our search criteria, for a final sample of 140 new ventures. Data collection took place between September and December of 2006. To avoid source bias, we also interviewed senior executives, cluster experts and canvassed archival sources to collect data from the 140 new ventures of our sample. Our face-to-face interviews with venture managers enabled us to gather reliable data by clarifying respondents' issues as well as asking follow-up questions. We also had an opportunity to understand managers' interpretations of key decisions and events. The respondents were CEOs and other senior company officials (e.g., R&D managers), providing a broad view of the ventures' strategic choices. To minimize the risks associated with using data from single informants, we surveyed an additional senior manager from each of the responding 140 new ventures—resulting in 25 responses (17.85% of the sample). We also consulted a panel of 14 regional cluster experts, 2 for each of the 7 clusters studied; they gave us their opinions about 42 new ventures (30% of the sample). We conducted three additional tests to establish the quality of our data. First, we calculated the inter-rater agreement scores (rwg) for the study scales (James et al., 1993). The test indicated acceptable inter-rater agreement, with a median score of over .90. An examination of intra-class correlations also revealed a strong level of inter-rater reliability (ICC (1) of over .41). Second, we performed Harman's one-factor test on the items included in the study to determine the severity of common method bias. We found multiple factors and the first factor did not account for more than half of the variance explained by the set of factors with eigenvalues over one. Therefore, we concluded that common method bias was not a major concern in this study (Podsakoff and Organ, 1986). Third,

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and finally, we examined the non-response bias by comparing the characteristics of the new ventures for which responses were received against those for which no responses were received. We ran the Kolmogorov–Smirnov test for several new venture characteristics, including age, size, origin and performance. We did not find significant differences between responding and non-responding ventures. Therefore, we concluded that our sample represented the population from which it was drawn. 3.2. Variables and measures In designing the study, we used our key measures from the literature based on their validity and proven psychometric qualities. We revised the interview questionnaire based on the feedback from 10 venture managers. We also solicited comments from academic colleagues and incorporated them into the questionnaire used in data collection. 3.2.1. Dependent variable We measured new ventures' strategic variety with the most commonly used index that was developed by Miller (e.g., Miller and Chen, 1996; Miller and Toulouse, 1998; Miller et al., 1996). Specifically, we used a comprehensive list of methods described in the literature as giving new ventures competitive advantage through differentiation, cost leadership and focus. We asked managers to rate the 34 methods on a five-point scale ranging from 1, “not a part of our strategy at all,” to 5, “a key part of our strategy” (items appear in the Appendix). We developed a count measure by counting the number of items out of 34 that a respondent scored 3 or higher on the five-point scale. Thus, the higher the count, the more varied the venture's strategy whereas a lower score indicated strategic simplicity. Measuring new ventures' strategic variety is difficult. Therefore, we ran several robustness tests to compare alternative formulations of the strategic variety/simplicity measure. First, we assessed the correlations among the other three alternative indexes developed by Miller and Toulouse (1998) (range, dominance and variance) and the index used in the paper (count), finding that they are significantly high (all of them over .394; p b .001). Second, we developed a Herfindahl-type index by classifying the 34 methods for competing into three categories: operational/internal, market-directed/external and corporate-strategy oriented (α1 = .734; α2 = .658; α3 = .723) and adding the squared proportions of methods for competing on which the respondent scored 3 or higher to the total number of possible competing methods for each of the three categories. Again, the correlation among the count index used in the paper and the Herfindahl index was significant (.338; p b .001). As a final step to ensure the validity of the dependent variable, we interviewed two experts from each of the seven clusters we studied. We asked these experts to assess the extent to which the new ventures they knew (followed in their analysis) showed a great deal of variability in their competitive actions and moves. We used a single question that had a five-point scale: “the extent to which the venture has shown a great deal of variability in its competitive actions over the past 3 years”. Responses varied between 1 (no or little variation) and 5 (a great deal of variation). The 14 experts rated 42 new ventures, 30% of our sample. The correlation between expert ratings and the count measure of strategic variety developed based on venture managers' responses was .639 (pb .001), supporting the validity of our measure of the dependent variable. 3.2.2. Independent variables Following our theoretical arguments, we also created three independent variables, as follows: 1. The diversity of external knowledge sources. We measured this variable by a four-item scale that combined Kohli et al.'s (1993) and Jansen et al.'s scales (2005) for external knowledge acquisition. The items captured multiple sources of external knowledge, such as competitors, emerging technologies, customers, and suppliers; thus offering a comprehensive measure of the construct. We asked respondents to indicate the extent to which their companies emphasized various practices associated with acquiring external knowledge such as having employees who tracked the policies and tactics of competitors and having employees dedicated to forecasting technological trends and emerging technologies. The four items followed a five-point scale, with responses ranging from “not at all used” (coded 1) to “very often used” (coded 5). Items appear in the Appendix. 2. The novelty of external knowledge, which refers to the newness of the knowledge in the cluster in which a venture is located, was measured using Gatignon et al. (2002) five-point scale for the “radicalness” of a firm's innovations. To ensure the relevance of this measure to our research, we adapted the items to the overall population of the cluster. We asked respondents to rate the extent to which innovations developed by firms in the area had a number of characteristics associated with innovation radicalness, using a five-point response format (1= not at all vs. 5 = very often), as reported in the Appendix. 3. The degree of social development of the cluster was measured using Rocha and Sternberg's (2005) scale which contains two items. This scale captures information about the extent to which local institutions such as research centers and trade associations exist in a geographic area and are active in fostering local firms' interests. Thus, it is a measure of the amount of social interactions among individuals, firms, and other organizations around the area fostered by local institutions. We asked respondents to indicate their agreement with two statements describing the relationships among firms, government agencies and not-for-profit organizations within their cluster using a five-point response format (1= totally disagree vs. 5 = totally agree). Items appear in the Appendix. 3.2.3. Moderator variable We measured our moderator variable—the new ventures' absorptive capacity—using Jansen et al.'s (2005) scale that captures the four dimensions defined in the literature: acquisition, assimilation, transformation and exploitation of new knowledge (Zahra

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Table 1 CFAs goodness' of fit indexes.

Diversity of K. Acq. Novelty external K. Absorptive capacity Cluster social devel.

Satorra–Bentler χ2

Df

P

CFI

GFI

AGFI

RMSEA

90% CI of RMSEA

1.716 1.841 19.177 10.028

1 1 19 7

.190 .174 .429 .186

.996 .997 .999 .990

.994 .993 .961 .978

.942 .929 .907 .935

.072 .078 .013 .056

(.000 (.000 (.000 (.000

.250) .254) .075) .126)

and George, 2002). However, given that our first independent variable, the diversity of external knowledge sources, is clearly related to the first dimension of the absorptive capacity construct, we have used the items exclusively that build up the other three dimensions. We asked respondents to indicate their agreement with nine statements on a five-point disagree/agree scale, with three statements for each of the three absorptive capacity dimensions covered, as reported in the Appendix. 3.3. Testing the validity and reliability of the measures We also conducted several analyses to assess the reliability and validity of the scales for the three independent and moderator variables. Initially, we ran an exploratory factor analysis (EFA) to assess the measurement agreement with theoretical measures for each of the four constructs. Specifically, we performed principal component analysis with a varimax rotation, where the original scale items loaded on one separate factor for our three independent variables: the diversity of external knowledge sources (α = .865); the novelty of external knowledge (α = .87), where one item was dropped from the original scale; and the degree of social development of the cluster (α = .769). For absorptive capacity, the items loaded in three different factors with three items for each of its three theoretical dimensions (α1 = .863; α2 = .845; α3 = .657). Next, we assessed the three constructs' convergent validity through a confirmatory factor analysis (CFA) of each construct. However, in performing the CFA we encountered a problem with the degree of social development of the cluster scale, because when developing a CFA with a single-factor model at least four items are needed to yield an over-identified model for which a goodness-of-fit index can be computed (Bagozzi, 1994). With two items, as is the case for the degree of social development of the cluster, a different approach was necessary to assess reliability. Following Bagozzi (1994), we conducted a CFA using a two-factor model. The first factor was the degree of social development of the cluster. The second factor was the novelty of external knowledge. The CFA results supported the results from the EFA and showed that the models fit the data well, as displayed in Table 1. Further, Table 2 shows that the composite reliability of each construct was higher than the minimum threshold of 0.7 (Hair et al., 2005). We then estimated the discriminant validity through Fornell and Larcker's (1981) procedure, which shows that the average extracted variance (AVE) of each factor is higher than the squared correlations between the factors (Table 2). Therefore, we used the average of the respondents' scores on the items used in each of these four constructs: diversity of external knowledge sources, novelty of the external knowledge, degree of social development of the cluster, and new venture absorptive capacity. Items for the four constructs appear in the Appendix. 3.3.1. Control variables Our analyses also controlled for several variables that might affect strategic variety: new venture origin, age, entry strategy, previous performance, international competition, environmental dynamism, and industry. We discuss these variables next. We gathered information about new venture origin (whether the venture was established by independent entrepreneur vs. a corporation) by directly asking respondents, as done by McDougall et al. (1992). Venture age was measured by the number of years a venture has been in existence. Next, we measured broad versus narrow entry strategies using a five-item scale, as done in previous research (e.g., Miller, 1988; Zahra, 1996). We also controlled for new ventures' previous performance using sales growth averaged over the two preceding years (2005 and 2006), taken from the SABI/AMADEUS financial database. We collected information about a venture's participation in international markets using a dummy variable coded as 1 when the new venture percentage of sales in foreign markets was over 50%. We controlled for participation in international markets because it could increase new ventures' access to diverse sources of external knowledge. Finally, the degree of environmental dynamism was captured using Baum and Wally's (2003) scale of five items, asking the panel of 14 regional cluster experts to rate the industries they were specialized in on a five-point scale. We averaged the responses of the two experts for each of the seven industries and used that value for every new venture competing in the same industry. Finally, we dummy coded the seven different industries associated with the seven different clusters under study. 4 4. Analysis and results Descriptive statistics and correlations for the study's variables appear in Table 3. The data show that new ventures' strategic variety is positively correlated with entry strategy, previous performance, environmental dynamism and all the independent as well as moderating variables of the study except the degree of social development of the cluster. We computed Variance Inflation 4 We do not use or report the result dummies for each of the seven industries included in our sample for the sake of simplicity, having found that none of the seven industries has a significant effect on the strategic variety of the new ventures.

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Table 2 Composite reliability and discriminant validity results. CR

AVE

Diversity of K. Acq. (F1)

.849

.589

Novelty external K. (F2)

.851

.595

Cluster social devel. (F3)

.799

.674

Absorptive capacity (F4) S variety (count) (F5)

.835 1

.634 1

Fi–Fj

r2

F2–F1 F3–F1 F4–F1 F5–F1 F3–F2 F4–F2 F5–F2 F4–F3 F5–F3 F5–F4

.037 −.019 .539 .530 .064 .094 .181 .019 .000 .287

CR: composite reliability. AVE: average extracted variance. r2: squared correlations between factors.

Factors (VIFs) to examine the severity of multicollinearity. None of the VIFs exceeded 2, indicating that severe multicolinearity was not a problem in our database. To test the hypotheses, we used Poisson regression analyses because our dependent variable is count data (Cohen et al., 2003). We used hierarchical entry of variables in all regressions, starting with the control variables in a base model. We then entered the independent variables in the independent model. Next, we introduced the quadratic effect in the following quadratic model and the interaction terms in the final model. The Poisson regression results for the determinants of new ventures' strategic variety appear in Table 4. Among the control variables, a venture's entry strategy was the only significant variable explaining strategic variety. Thus, broad entry strategies are associated with strategic variety in new ventures. The next model added the independent variables to the control variables. This model leads to a statistically significant improvement in model fit (Delta χ 2 = 59.47; p b .000). Further, the diversity of external knowledge sources (β = .0896; p b .000) and the novelty of external knowledge (β = .0724; p b .001) are positively and significantly associated with strategic variety, supporting Hypotheses 1 and 2. However, there is no direct effect of the degree of social development of the cluster on new ventures' strategic variety. Indeed, in the quadratic model the results support the inverted Ushape relation predicted in Hypothesis 4 among the degree of social development of the cluster and a new venture's strategic variety (β = −.0295; p b .034). The final (moderated) model includes the two interactions where a new venture's absorptive capacity is presented in the last column of Table 4. This model makes a significant contribution over and above the previous model (Delta χ 2 = 15.04; p b .000). The plots of the significant interaction results appear in Figs. 1a and b (β = −.0766; p b .009 for the absorptive capacity interaction with the diversity of external knowledge sources; and β = −.0695; p b .063 for the absorptive capacity interaction with the novelty of external knowledge). Interaction plots indicate that the positive effects of the diversity and novelty of external knowledge on the venture's strategic variety exists only under low absorptive capacity. However, for high absorptive capacity, these effects are neutral. These results support the moderating effect proposed in Hypotheses 3a and 3b. 5. Discussion The KBV of the firm suggests that companies can use their knowledge to develop unique strategies that allow them to build strong market positions and succeed (Saarenketo et al., 2009). New ventures typically make use of external sources to augment Table 3 Means, standard deviations, and intercorrelations among the study's variables.

1. Age 2. Entry strategy 3. NV origin 4. Sales growth (05 + 06) 5. Intern. competition 6. Env. dynamism 7. Industry 8. Diversity of K. Acq. 9. Novelty external K. 10. Absorptive capacity 11. Cluster S. develp. 12. S. variety

Range Mean SD

1

1–8 1–5 1–5

1 .026 1 .016 −.020 1 −.273⁎ .009 .179⁎ 1 −.128 .094 −.007 .174⁎ 1 −.164 .116 .111 .118 .320⁎ 1 −.111 −.125 .087 −.149 −.361⁎ −.264⁎ .358⁎ −.193⁎ .180⁎ .056 .238⁎ −.094 .142 .042 .100 .312⁎ .492⁎ −.114 .251⁎ −.031 .127 .196⁎ .235⁎ −.037 −.082 −.051 .038 .351⁎ .278⁎ −.148 .349⁎ .024 .167⁎ .157 .207⁎

1–0 1–5 1–7 1–5 1–5 1–5 1–5 1–24

4.61 2.49 2.98 1.02 0.51 0.50 48.89 78.11 0.00 1.00 3.32 .5154 3.85 1.94 3.44 .929 2.62 .864 3.89 .601 3.48 1.05 25.43 5.39

⁎ Correlations significant at least at p b .05 (one-tailed test).

2

3

4

5

6

7

8

9

10

11

12

1 −.173⁎ 1 −.204⁎ .177⁎ 1 −.296⁎ .454⁎ .233⁎ 1 −.166 .020 .222⁎ .100 1 −.189⁎ .477⁎ .373⁎ .470⁎ .031 1

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Table 4 Moderated Poisson regression analysis of sources of strategic variety in new ventures. Dependent variables

Control variables Age Entry strategy NV origin Previous performance Internat. competition Env. dynamism Industry Main effect variables Diversity of K. Acq Novelty external K. Social development Absorptive capacity Quadratic effect Social development2 Interaction Diversity of K. Acq × absorptive cap Novelty of K. Acq × absorptive cap Model Log likelihood χ2 Change χ2 Note: n = 140;

+

Base model

Independent model

Quadratic model

Moderated model

β

p

β

p

β

p

β

p

−.0103 .0670*** .0077 .0003 .0114 .0280 −.0166+

.151 .000 .824 .130 .524 .461 .080

−.0026 .0357* .0455 .0001 .0113 −.04522 −.0113

.716 .051 .205 .515 .553 .277 .237

−.0043 .0360* .0358 .0001 .0025 −.0306 −.0091

.555 .049 .322 .623 .899 .468 .342

−.0072 .0448* .0089 .0000 −.0126 −.0207 −.0008

.330 .018 .807 .683 .532 .624 .929

.0896*** .0724*** −.0055

.000 .001 .754

.0952*** .0678** .1873*

.000 .003 .044

.3517** .3306* .1624+ .5203***

.002 .028 .084 .000

−.0295*

.034

−.0255+

.072

−.0766** −.0695+

.009 .063

− 426.20 32.21***

− 412.58 59.47*** 27.53***

− 410.30 64.01*** 4.27*

− 398.29 88.04*** 15.04***

p b 0.10; *p b 0.05; **p b 0.01; ***p b 0.001.

their internal knowledge and develop and use multiple competitive approaches, showing a great deal of strategic variety in their competitive actions. This variety could be essential for successful adaptation, achieving long-term success, and ensuring survival. Our results advance both the entrepreneurship and the strategy literatures by connecting past research on new ventures' strategic actions (e.g., Carter et al., 1994; McDougall et al., 1994; Stearns et al., 1995) and research about the simplicity and variety of competitive repertoires (e.g., Ferrier, 2001; Miller and Chen, 1996; Miller et al., 1996). This adds to our knowledge of the possible ways new ventures build variety in their competitive actions when positioning themselves in the marketplace. The results underscore: the role of two aspects of external knowledge sources (diversity and novelty) as key drivers of new ventures' strategic choices; the effects of new ventures' abilities to integrate and exploit the knowledge externally captured—their absorptive capacity—in fostering and inhibiting competitive variety; and how certain characteristics of the local environment influence new ventures' strategic actions. 5.1. Diversity and novelty of external sources of knowledge Consistent with Hypotheses 1 and 2, we found that the diversity and the novelty of external knowledge are positively and significantly related to new ventures' strategic variety. The finding that acquiring knowledge from diverse external knowledge is positively associated with strategic variety suggests that new venture managers need to follow industry trends, identify companies and institutions that have needed knowledge, and connect with different sources and external knowledge. Knowing that external knowledge novelty affects new ventures' strategic variety underscores the basic arguments of the KBV; new knowledge could be strategically valuable. Our results remind managers that this new knowledge lies outside the firm and they have to work hard to acquire it. This has two implications for new ventures and their managers. First, they have to be selective in acquiring particular types of knowledge, especially those that can enhance novelty. Combining different types of knowledge might induce novelty. Second, having access to novel knowledge per se does not confer advantage on the new ventures; instead, how this knowledge is used is crucial for strategic variety and long-term value creation. Managers' creativity is crucial in this regard. These findings are consistent with the entrepreneurship literature, which has examined several environmental factors that are likely to influence new ventures' choice of strategic actions. Entrepreneurship researchers have studied organizational and environmental conditions as precursors to strategic choices (e.g., Carter et al., 1994; McDougall et al., 1994; Stearns et al., 1995; Wesson and De Figueiredo, 2001), but have overlooked the potential effect of the diversity and novelty of the external knowledge. Our results also contribute to the strategy literature finding that firms in different environments employ different modes of strategic adaptation (Ferrier, 2001; Lumpkin and Dess, 1995; Miller et al., 1996), but have ignored the effects external knowledge characteristics (i. e., diversity and novelty) have on firms' ability to adapt. New and diverse knowledge can prompt managers to think differently and explore new ways of doing things, thereby increasing variety. 5.2. The role of absorptive capacity Our results also show that the effect of external knowledge diversity and novelty on strategic variety varies depending on new ventures' absorptive capacity. These results support the propositions of the KBV (Cohen and Levinthal, 1990; Grant, 1996a, b;

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a

5 4,5

S.VARIETY

4 3,5 Low ACAP

3

High ACAP

2,5 2 1,5 1 Low Div. External K.

b

High Div. External K.

5 4,5

S.VARIETY

4 3,5 Low ACAP

3

High ACAP

2,5 2 1,5 1 Low Novelty E. K.

High Novelty E. K.

Fig. 1. a. New venture's ACAP moderating effect in the diversity of external knowledge–strategic variety relationship. b. New venture's ACAP moderating effect in the novelty of external knowledge–strategic variety relationship.

Lane et al., 2006). Consistent with Hypotheses 3a and 3b, we found that highly developed absorptive capacities tend to homogenize the effect of knowledge source diversity and novelty, lowering strategic variety. We find that the role of absorptive capacity is not as straightforward as depicted in the literature. Specifically, the infusion of diverse and novel external knowledge into new ventures' operations through their absorptive capacity can promote the conception of different business concepts and varied business models. Conversely, absorptive capacity can have the opposite effect by hampering strategic variety. This differential effect seems to reflect the strength of absorptive capacity and its role in organizational learning (Huber, 1991). Higher absorptive capacity can funnel the diverse and novel external knowledge into existing mental models and ways of doing things, inhibiting the development of innovative models that enrich strategic variety. In this case, high absorptive capacity can help in “selecting and linking” different types of knowledge (Winter, 2003), along well-known paths. This can reinforce habitual action patterns (Dosi et al., 2000) that further deepen path dependence where actions become self-reinforcing processes (Schreyögg and Kliesch-Eberl, 2007; Sydow et al., 2009). Knowledge accumulation from multiple and novel external sources, therefore, helps to deepen the firm's existing knowledge bases but does not necessarily breed variety. Thus, our results signal that there are upper limits to the potential gains from having a well developed absorptive capacity; beyond a threshold, high levels of absorptive capacity can stifle strategic variety.

5.3. The contribution of being located in a cluster to strategic variety Locating in a cluster gives new ventures an opportunity to benefit from the knowledge spillovers that occur while gaining access to the knowledge of other companies in the cluster. Being part of a cluster helps, but our results indicate that the amount of social interactions among individuals, firms, and other organizations within the cluster fostered by cluster institutions (i.e., the degree of social development of the cluster) (Rocha and Sternberg, 2005) has a curvilinear effect on strategic variety. It initially increases strategic variety but beyond a certain level, variety declines. These results support Hypothesis 4.

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When social interactions are limited, strategic variety tends to be low. As the KBV makes clear, knowledge sharing is a time consuming and costly process. Therefore, when the social development of the cluster is weak, ventures may experience difficulties in gaining and understanding knowledge (Maskell, 2001). As social connections in a cluster start to increase, strategic variety also begins to rise since the latest research findings are more easily disseminated. However, innovation benefits from social interactions in a cluster can rise only to a threshold, after which they turn negative as the knowledge shared becomes homogenized (Capello, 1999; Pouder and St John, 1996). When this happens, strategic simplicity overtakes the company's operations. Our results signal that there is an optimal level of social development among firms operating in clusters through which new ventures can enrich their strategic variety. Yet, there are also several points where what is enhanced is their strategic simplicity. Managing the appropriate level of strategic variety is a complex task for new ventures connected with clustered firms whose social connections vary over time. This finding improves our understanding of the relationship among regional clusters and new ventures' strategic behavior (Gilbert et al., 2008). Overall, our results add to the KBV by empirically demonstrating the strong connection between knowledge and strategy. Though the connection among knowledge and strategy has long been recognized (Grant, 1996a, b; Kogut and Zander, 1992) and researchers have recently begun to document it empirically (e.g., Tsai and Li, 2007; West and Noel, 2009), little is known about the learning processes by which knowledge is transformed into strategic actions, especially in the case of new ventures. 5.3.1. Implications for new venture managers For new venture founders and managers, our results provide insights into how to best induce and sustain strategic variety. The results reinforce the notion that internal decisions made in relation to managing knowledge can impact new venture strategies (Tsai and Li, 2007; West and Noel, 2009). If new venture managers seek to achieve a greater variety in their companies' strategies, they need to pay close attention to both the processes of acquiring external knowledge and the knowledge environment. More acquisition of diverse knowledge and exposure to a novel external knowledge base can bring about greater strategic variety. Yet, managers need to be aware that the effect of external knowledge diversity and novelty is likely to vary depending on their ventures' own absorptive capacity. Low absorptive capacity can hamper knowledge acquisition and strategic variety. Highly developed absorptive capacity may homogenize incoming external knowledge combining it with existing knowledge, reducing the likelihood of conceiving varied strategic options. Thus, even though building absorptive capacity promotes sustainable competitive advantages (Cohen and Levinthal, 1990), attaining these benefits may require suppressing some strategic alternatives. The results also underscore the importance of entrepreneurs' understanding of their local settings in order to capture the knowledge necessary to build their ventures' strategies. Connecting with others in the same cluster can be an important source of new knowledge. However, the effect of the incoming knowledge may decline after a certain threshold. Entrepreneurs are inundated with competing demands on their busy schedules. Our results remind entrepreneurs and venture managers that the time devoted to scanning external knowledge sources and building relationships with different sources of knowledge (including those firms and institutions in their cluster) is worth their investment. 5.3.2. Limitations and future research directions Though the results support our hypotheses, our focus on new ventures from a single country (even with different industries and regions) raises questions about the generalizability of the findings beyond this country. Institutions associated with knowledge transfer and sharing might differ across industries, regions and countries, potentially influencing the results reported here. Future research should validate our results using data from other industries and countries. We also found a positive association between our study's variables (e.g., diversity of external knowledge sources and strategic variety), but this does imply causality among the variables examined. It is possible that new ventures choose the desired level of strategic variety and then determine the mechanisms they could employ to sustain it. The relationship between strategic actions unfolds over time and therefore the direction of the causality may change as the company evolves (Brinckman et al., 2010). Our study has also explored a limited number of factors that could determine new ventures' strategic variety. Future researchers have an opportunity to explore other internal and external factors that could determine this variety. For instance, they could develop a deeper understanding of the structure and dynamics of the industry and how they influence new ventures' strategic variety. Some industries are rich with different types of knowledge spillovers that can enhance a company's own strategic variety. Others are more impoverished in the types of knowledge they have. Similarly, the possibility of a saturation effect of the social development of a cluster on strategic variety indicates a need for longitudinal analyses. Firms and the clusters in which they operate evolve, making such longitudinal analyses necessary (Pouder and St John, 1996). Likewise, researchers should examine the implications of social capital—not only the social development of the cluster—for new ventures' acquisition and exploitation of external knowledge. One of the study's contributions is empirically documenting the effect of the diversity and novelty of external knowledge sources on strategic variety. Future researchers need to explore other characteristics of these sources. These might include ease of comprehension and use. The possibility that absorptive capacity moderates the effect of these sources on strategic variety should be validated in other settings and with other measures. 6. Conclusion New ventures need to build distinctiveness in their products and the strategies they use to position themselves in their markets. They can do so by using multiple competitive methods or by focusing on one or a few tactics; i.e., by being strategically varied or simple. In this article, we have proposed that gaining access to different types of knowledge from multiple and novel external sources

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enhance new ventures' strategic variety. The absorptive capacity of these ventures can enrich this variety by infusing new knowledge. However, beyond a threshold, this capacity can reduce variety. Our results also show that the social development of the clusters in which new ventures locate can initially improve strategic variety up to a certain threshold beyond which this variety declines. These findings draw managers' attention to establish connections to different external sources of knowledge (including those in their cluster) to build and enrich the variety of new ventures' strategic moves. Acknowledgements We would like to acknowledge the financial support from The Program for Advanced Research of the Spanish Ministry of Education and Science (grant ECO2009-13378), and the Galvin Center for Global Management at Babson College. We thank three Academy of Management reviewers for their useful suggestions. References Bagozzi, R.P., 1994. 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