Technology strategy and new venture performance: A study of corporate-sponsored and independent biotechnology ventures

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TECHNOLOGY STRATEGY AND NEW VENTURE PERFORMANCE: A STUDY OF C ORPORA TE-SPO N SO RED AND INDEPENDENT BIOTECHNOLOGY VENTURES SHAKER A. Z A H R A Georgia State University

New ventures, companies eight years or younger, play a major role in the development of an emerging, high-technology industry. Corporate-sponSUM'IVIARY sored new ventures (those supported by an established corporation) and independent ventures (those founded by independent entrepreneurs) frequently battle for industry leadership and financial success. Whereas both venture types use technology to achieve financial and market success, little is known about the differences in their technology strategies. Technology strategy is the plan that guides a new venture's decisions on the development and use of technological capabilities. This strategy covers six major areas. The first is selecting the pioneering posture, where a venture decides whether or not be among the industry's first companies to introduce new products (technologies) to the market. The second is determining the number of products to be introduced to the market. The third is choosing the extent o f a venture's use of internal and external R&D sources. Internal sources usually refer to in-house R&D activities. External sources may include purchasing or licensing of technology from other companies, or joining strategic alliances to acquire that technology. Thefourth is deciding the level of R&D spending. The fifih is selecting the combination (portfolio) of applied and basic research projects. Whereas basic R&D advances science, applied R&D leads to new products and technologies. The sixth, and final, dimension is the venture's use of patenting to protect any competitive advantages it might gain from its R&D activities.

EXECUTIVE

Address correspondence to Shaker A. Zahra, Department of Management, College of Business Administration, Georgia State University, Atlanta, GA 30303. The author acknowledges with much appreciation the comments by Jeff Covin, Patricia P. McDougall, Donald O. Neubaum, and Patricia H. Zahra on earlier drafts of the article. This research was supported in part by a grant from the College of Business Administration of Georgia State University. Journal of Business Venturing 11,289-321 © 1996 Elsevier Science Inc. 655 Avenue of the Americas, New York, NY 10010

0883-9026/96/$15.00 SSDI 0883-9026(95)00128-X

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This article reports the results of a study that explored the differences in the technology strategies and performance o f corporate and independent ventures. The biotechnology industry was chosen to test the study's hypotheses, using 112 ventures. Seven of the study's hypotheses focused on the potential variations in technology strategy between corporate and independent ventures. Independent ventures (IVs) were expected to surpass corporate ventures (CVs) in pioneering new products (technologies), using internal R&D, and emphasizing applied R&D. CVs were expected to surpass IVs in introducing new products, using external R&D sources, spending o n R&D, and patenting. The study's remaining three hypotheses covered possible variations in new venture performance (NVP) and their sources. The results showed that IVs focused more on pioneering, pursued a more applied R&D portfolio, and emphasized internal R&D more than CVs. CVs utilized external technology sources, spent more heavily on R&D, stressed basic R&D, and used patenting more intensively than IVs. These results were consistent with the hypotheses. However, contrary to expectations, there were no significant differences between CVs and IVs in the frequency of new product introductions, probably because most ventures were at the invention, rather than the commercialization, stage. The results on the NVP of CVs and IVs were counter to expectations. IVs outperformed CVs, probably because o f the high motivation of the IV owners who reaped the rewards o f growth and profitability. Also, whereas CVs may have greater access to the resources of their sponsors, political conflicts and rigid corporate controls might have reduced their ability to achieve competitive advantages. The results also indicated that CVs and IVs appeared to gain competitive advantages from different technological choices. Pioneering, a focus on applied R&D, and extensive use o f the internal R&D sources were also positively associated with the performance of IVs. Heavy R&D spending, the use of both internal and external R&D sources, frequent product introductions, and patenting were positively associated with the performance of CVs. Finding that technology strategies significantly impacted NVP should encourage executives to consider pursuing a formal technology strategy. Likewise, the finding that different dimensions of technology strategy influenced the performance of CVs and IVs in different ways has practical implications. CV managers can learn from their higher performing IV rivals. Also, because established companies frequently acquire IVs, information about their technology strategies can be valuable in assimilating the acquired ventures. Overall, the results show that technology strategy is an important factor in enhancing new venture performance.

INTRODUCTION New ventures play a major role in the development and growth of emerging high-technology industries such as the artificial intelligence, biotechnology, multimedia, personal computer, software, and telecommunication industries (Bell and McNamara 1991). Whether founded by entrepreneurs or established corporations, new ventures consider technological innovation their lifeblood (Acs and Audretsch 1990) and use their technological resources to create a competitive advantage (Ng, Pearson, and Ball 1992). Surprisingly, little is known about how new ventures exploit their technological resources and capabilities to achieve market and financial success.1 This gap in the literature is puzzling because poor technological choices can undermine the survival of the venture (McCann 1991). Conversely, the possession of strong technological capabilities (Duchesneau and Gartner 1990; Keeley and Roure 1990), such as excellence in research and development (R&D) activities (Doutriaux 1992), is required for effective new venture performance. Thus, research is necessary to determine how new ventures develop their technological capabilities and how ~In this study, firms that have been in existence for eight years or less are considered new ventures. This definition is consistent with the literature (e.g., Chandler and Hanks 1994a;Lambkin 1988;McDougaUand Robinson 1990; McDougall et al. 1992; Miller and Camp 1985; Miller, Wilson and Adams 1988; Smart and Abetti 1987, 1990).

TECHNOLOGYSTRATEGYAND NEW VENTUREPERFORMANCE 291 technological choices impact new venture performance (NVP). This research will respond also to calls for empirical studies on the determinants of NVP (Sandberg and Hofer 1987) and how performance differs among various new venture types (Cooper 1993). One way to classify new ventures is according to their origin. Origin indicates whether a venture is sponsored by an entrepreneur (i.e.,independent venture) or a corporation (i.e., corporate venture). Corporate ventures (CV) and independent ventures (IV) often possess different resources and capabilities which, in turn, may lead to significant variations in their strategic choices (e.g., technological strategies) and subsequent performance. To date, the extent and sources of performance variations between CVs and IVs have not been thoroughly documented (McDougall, Deane, and D'Souza 1992; Miller and Camp 1985). McGrath, Venkatraman, and MacMillan (1994) highlight the role of resources and their uses in improving NVP. Resources are required to build the capabilities and skills that give the new venture a competitive advantage, defined as the ability of the venture to generate above normal rates of return. Capabilities and skills reflect the areas where the venture excels relative to its competitors. These capabilities are usually articulated over time in the venture's strategic choices. Thus, to understand how new ventures develop technological capabilities, this study examines their technological choices. This focus is consistent with the proposition that "Technology is the most fundamental of the core capabilities of a firm." (Itami and Numagami 1992, p. 119). Technological choices and resultant capabilities influence the ability of new ventures to position themselves in the marketplace (Shan 1990; Zahra and Covin 1994a). The technological choices of a new venture are usually clarified in its technology strategyi.e, the plan that guides the accumulation and deployment of technological resources and capabilities (Zahra 1996). Researchers have not thoroughly examined the technology strategies of CVs and I V s - a gap in the literature this study aims to fill. Because new ventures owe their success to their technological resources, the study also relates the technology strategy to NVP. With data from biotechnology new ventures, this study addresses two questions: (1) Do CVs and IVs vary in their technology strategies? and (2) Do the dimensions of technology strategy influence the performance of CVs and IVs differently? The study extends the literature in three ways. First, the study explores variations in the technology strategies of CVs and IVs. Existing prescriptions about viable technology strategies may not directly apply to new ventures because these prescriptions have been derived primarily from large, established companies (Dodgson and Rothwell 1991). Because new ventures and established companies differ in the sources of competitive advantages, understanding the technology strategies of new ventures is important. Second, this study documents differences in the performance of CVs and IVs. Currently, evidence on the association of venture origin and performance is limited and contradictory. Whereas Hines (1957) has speculated that CVs should outperform IVs, later empirical studies have either found that IVs attained higher levels of performance (Weiss 1981) or that no significant performance differences existed (Van de Ven, Hudson, and Schroeder 1984). Therefore, research is needed to determine whether performance differences actually exist between CVs and IVs. Third, the study identifies the components of technology strategy that impact the performance of CVs and IVs. It aims to overcome a weakness in past research that does not delineate the performance implications of new ventures' technological strategies (Shan, Walker, and Kogut 1994). By clarifying the relationships between the technology strategy and NVP, the results can improve managers' ability to use technology to achieve success.

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To set the stage for the study's hypotheses, the article first presents an overview of research on the determinants of NVP. Next, it discusses the importance of technology strategy for NVP and presents the potential differences in the technology strategies and performance of CVs and IVs. The article then describes a study that examines the technology strategies and performance of U.S. biotechnology ventures. The findings and their practical and scholarly implications are discussed next. DETERMINANTS OF NEW VENTURE PERFORMANCE

(NVP)

The major contributions of new ventures to the national economy have inspired researchers to identify the key determinants of their performance (Cooper 1993). Consequently, researchers have advanced models of NVP determinants (Carter et al. 1994; Chandler and Hanks 1994a; McDougall et al. 1992 a). These models suggest that NVP is determined by the venture's external environment, competitive and functional strategies, management and leadership, and organizational characteristics. Although their impacts differ over time, individually and jointly, these variables influence NVP. Table 1 reviews the key findings from recent research on NVP. Although this review is not exhaustive, it suggests three points for the present study. First, whereas progress has been made toward cataloging the key determinants of NVP, empirical research remains sparse. Thus, there is a need for additional empirical examinations of NVP determinants. Second, there is little agreement on the domain of NVP and the criteria to be used to measure it. To overcome this problem, researchers have suggested the use of multiple criteria that gauge managers' satisfaction with NVP and provide an accurate, objective assessment of the venture's growth and profitability (Chandler and Hanks 1994; Tsai et al. 1991). Third, empirically testing midrange theories can be a useful research strategy to facilitate understanding NVP. Midrange theories are useful in establishing relationships among variables of interest and, over time, can permit meta-analyses and model building. This study adopts this research strategy, hoping to clarify the differences in the dimensions of technology strategies of CVs and IVs. It builds on past research (presented in Table 1) that indicates that the origin of the venture may impact its goals, resources, strategies and, ultimately, performance. To link venture origin to NVP, the study examines technology strategy-one of the new venture's key functional strategies, as discussed in the next section. N E W V E N T U R E O R I G I N AND T E C H N O L O G Y

STRATEGY

New high-technology ventures are established for many reasons. Some are developed to exploit the owner's talents or, simply, to keep him or her employed. Other ventures are formed to create and pursue opportunities resulting from technological advances or to create wealth for the owner. For the corporate sponsor, new ventures are a major source of new product ideas (Hisrich and Peters 1986). The ventures also offer the sponsor a window on emerging technologies, create new revenue streams, spearhead changes in the business concept, and create growth opportunities that help retain talented people (Winters and Murfin 1988). Despite the diversity of their goals, CVs and IVs transform technological opportunities into new products (Bell and McNamara 1991). Because the success of new ventures hinges on the nature of their products and the timing of their market release, the central role of technology in determining NVP has been acknowledged in the literature (McCann 1991). Today, there is a growing appreciation of technology's impact on the venture's other strategic choices. For example, a venture can

TECHNOLOGY STRATEGY AND NEW VENTURE PERFORMANCE TABLE 1

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K e y F i n d i n g s f r o m R e s e a r c h on N e w V e n t u r e P e r f o r m a n c e (NVP)

Environment. Researchers have investigated the impact of the characteristics of the external environment (Keeley and Roure 1990; Tsai et al. 1991), especially the macro- and micro-environmental forces on NVP. Macro conditions (e.g., governmental subsidy for the industry) affect the formation and survival of new ventures. NVP depends also on the conditions of the micro (or competitive) environment where new ventures must face the challenges posed by the industry and competition. Therefore, researchers have examined the impact of industry structural variables (e.g., entry barriers), the phase of the industry cycle, the hostility and dynamism of the industry, the industry's concentration ratio, intensity of the competition, and overall industry attractiveness on NVP (Chandler and Hanks 1994a; Sandberg and Hofer 1987). This interest stems from the fact that these variables affect the intensity of competition, hence the chances of survival of the young ventures. Microenvironmental conditions also determine the venture's ability to seize opportunities, thereby affecting NVP. Industry conditions also greatly impact NVP (Sandberg and Hofer 1987). This is because industry conditions influence the opportunities available for the venture, the threats it must address, and the market's acceptance of its products. These conditions also impact the resources available to the venture and, as a result, its strategic choices (Chandler and Hanks 1994a; Tsai et al. 1991). Therefore, fit between the competitive environment and the strategy of the venture will influence NVP. Competitive a n d Functional Strategies. The recognition of the importance of the match between the competitive strategy and external environment for NVP has also encouraged research into the competitive strategies of new ventures (Carter et al. 1994; Keeley and Roure 1990; Tsai et al. 1991). Competitive strategy articulates the ends a venture wishes to pursue (market segments and specific goals) and the means it will use (resources, capabilities, and skills) to achieve those ends. It also creates opportunities by imaginatively deploying resources (Hamel and Prahalad 1993); this sets the stage for developing the capabilities required for market success. This enables ventures to offset the liability of newness and resource limitations. Researchers have examined the effect on NVP of several strategic choices of new ventures, including: price, quality, cost, marketing intensity, number of products offered, type and extent of vertical integration, business and geographic market scope, number of market segments served, capacity utilization, innovation, R&D expenditure, and patenting efforts (Chandler and Hanks 1994a; Hofer and Sandberg 1987; Miller and Camp 1985). Combined, these variables allow the venture to position itself in the market and gain a competitive advantage. The impact of functional strategies-necessary for the successful implementation of the competitive strate g y - on NVP has also received some attention in research. Past studies have explored manufacturing (McDougall et al. 1992), marketing (Roberts 1992), finance (Roberts and Hauptman 1987), and new product development strategies (Keeley and Roure 1990). This research offers few generalizable findings. Further, this research has ignored the ventures' technological strategies, a gap this study aims to fill. Organizational Variables. Researchers have also studied five key organizational variables: capabilities and skills, leadership, organizational structure, life cycle, and the origin of the venture. (1) Capabilities and skills. Research has shown that capabilities and skills are the source of competitive advantage for the new venture (Chandler and Hanks 1994a; McGrath et al. 1994). For instance, Cooper, Woo and Dunkleberg (1989) have documented the impact of human and financial capital conditions at the time of the founding on NVP. Also, Roberts (1992) has found that technological and marketing skills significantly influence NVP. This research stream suggests a need for additional studies on the approaches ventures follow in exploiting their capabilities to achieve superior performance. (2) Leadership and management. The development of organizational capabilities requires competent leadership and management (Keeley and Roure 1990; McGrath et al. 1994). Capable management also interacts with the external environment to determine NVP (Chandler and Hanks 1994a). Managers (or founders) examine the environment and identify opportunities for venture success and performance by developing necessary capabilities. Recently, there has been a major shift in research away from examining the effect of the founder's background (e.g., age and past experiences) and values on NVP to emphasizing the role of the external environment, competitive and functional strategies, and organizational variables. This shift has occurred probably because those early studies on the relations between variables related to entrepreneurs and NVP produced contradictory and ungeneralizable findings (Doutriaux 1992). Despite the growing attention given to the effect of contextual variables on NVP, the importance of effective leadership and management remains unquestioned. Managers, for example, develop the structure that ensures survival, efficiency, and long-term success. (3) Organizational structure. Researchers have examined the effect of organizational structure on NVP. They have studied the effect of: the formalization of the structure, level of specialization, internal communication systems, and the use of coordination devices (Stuart and Abetti 1990). Research suggests that fit between the formal structure and the venture's stage of evolution is necessary for high NVP.

continued

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TABLE 1

Continued

(4) The Venture's phase of the life cycle. Studies have found that new ventures undergo predictable stages: conception and development, commercialization, growth, and stability. In each phase, a venture needs certain skills to build capabilities and resolve the problems it might encounter (for a review, see Kazanjian and Drazin

1990). Besides addressing several problems in each stage of their life cycle, the venture must also build different capabilities required for success. This often requires changing the venture's competitive and functional strategies as well as the formal structure. (5) Venture Origin. Researchers have also examined the effect of origin of the venture on NVP. Whether a venture is owned by an entrepreneur or a corporation determines its ability to gain access to resources (McDongall et al. 1992), influences its organizational structure and the level of autonomy it enjoys, and shapes its decisionmaking processes. Thus, origin can determine the governance, goals, strategies, and investment horizons of the venture. In turn, these horizons influence the development of a venture's technological and other capabilities. Research on venture origin is still in its infancy, and past research has been inconclusive. However, this research suggests that venture origin can be a powerful variable in explaining the strategic choices as well as NVP. Therefore, this study focuses on venture origin in clarifying the differences between CVs and IVs in their technological strategies and NVP. Measuring NVP. Research on new ventures suggests that NVP should be evaluated differently at different points in time (Biggadike 1979). Survival, the development of a new product, and the owner's satisfaction with the venture's progress are important performance evaluation criteria during the conception and development stage. However, in the commercialization stage, building name recognition, generating orders and survival become important measures of NVP. Still, in the growth stage, market share, cash flow, and profitability become dominant NVP criteria. Finally, in the stability stage, profitability, market share, productivity, internal efficiency, and expansion are among the key criteria of NVP. Therefore, the criteria used to measure NVP are likely to differ over time, reflecting the changing competitive priorities of the venture and achievements (Block and MacMillan 1993). Still, to ensure accuracy, performance criteria should combine both objective and subjective indicators (Tsai et al. 1991). Objective indicators help to assess the venture's achievements in absolute terms (e.g., growth over time) or relative to the industry or key rivals. Subjective indicators help to augment objective criteria by gauging the satisfaction of managers and owners with NVP or assessing performance on dimensions not easily captured by financial ratios (e.g., giving the founder an opportunity to innovate)."

leverage its technological capabilities by pursuing particular strategic options that lead to a competitive advantage (McGrath, MacMillan, and Tushman 1992). A new venture's technological capabilities are usually articulated in its technology strategy, which defines the desired competencies, their sources, timing, and potential use (Mitchell 1990; Porter 1985). The technology strategy addresses the venture's: pioneering posture; number of products introduced; use of internal and external R&D sources; R&D spending; R&D portfolio; and reliance on patenting. Whereas these dimensions have been covered in several past conceptual and empirical studies (as noted in Table 2), differences in the technology strategies of CVs and IVs have not been empirically explored. This study, which hopes to fill this gap in the literature, argues that CVs and IVs will emphasize different dimensions of technology strategy in pursuit of competitive advantage. The following section summarizes the expected differences between CVs and IVs in their technology strategy dimensions. Figure 1 also summarizes the study's key predictions on the differences in technology strategy between CVs and IVs and their impact on NVP. Pioneering A pioneer is the first company to introduce a product or technology to a market. As Table 2 indicates, pioneering is among the most widely recognized dimensions of technology strategy (Adler 1989; Bell and McNamara 1991; Burgelman and Maidique 1988; Christensen 1992; Mitchell 1990; Porter 1985; Utterback 1994). In the young biotechnology industry, being

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TABLE 2 Dimensions of Technology Strategy: An Overview of the Supporting Literature Reference (year) Adler (1989) Ali (1994) Bell and McNamara (1991) Burgelman and Maidique (1988) Blurrill and Lee (1992) Chakrabrti and Weisenfeld (1991) Christensen (1992) Dussague et al. (1993) Kerin et al. (1992) Kotabe (1992) Lefebvre et al. (1992) Maidique and Patch (1988) McCann (1991) McGrath (1995) Morone (1993) Porter (1985) Teece (1986) Utterback (1994) West (1992) Zahra and Covin (1994b) Zahra (1996)

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first to market allows the firm to establish its product(s) as the standard, which forces later entrants to follow the pioneer's rules of competition (Zahra, Nash, and Bickford 1995). The pioneer can also target premium segments and achieve profitability (Covin and Slevin 1990; Kerin et al. 1992). Still, pioneering is risky because the venture must invest heavily in educating customers and developing the market, without guarantees of success (Porter 1985). The implications of a venture's origin for pioneering have not been studied systematically in past research. Several factors, however, suggest that IVs will emphasize pioneering more than CVs. Notably, IV owners may favor pioneering because they recognize market needs early by maintaining close customer contact, a key requirement for success in technology

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FIGURE 1 Model of venture origin, technology strategy, and performance.

commercialization (Karakaya and Kobu 1994). Entrepreneurs can capitalize on their ventures' simple structure by making decisions quickly, monitoring progress in developing the product(s), and reaching the market ahead of the competition. Pioneering is also compatible with the IV owners' technological expertise. Owners often establish ventures to pursue cutting-edge technologies (Cooper and Dunkelberg 1986) and are likely to retain this orientation as they lead their IVs. IV owners may favor pioneering also because of its potential high profits (Bell and McNamara 1991). In contrast, C V managers may consider pioneering risky because if it is unsuccessful, the manager risks unemployment or damage to his/her reputation. There is no guarantee that successful pioneering will improve the wealth of the CV manager. Pioneering is also essential for successful niche strategies-a strategy favored by IVs (Hofer and Sandberg 1987). This strategy requires preempting competitors from imitating the venture's products by offering distinctive products suited to their unique niches. CVs, however, are often established in response to the success of IVs in their niches (Olleros and MacDonald 1988). Other factors suggest that CVs will be less disposed to pioneer new technologies than IVs, as noted in Figure 1. For example, the limited autonomy given to CVs (MacMillan, Block, and Narasimha 1986) and excessive organizational reviews can handicap the CVs' ability to succeed as pioneers. Whereas these reviews are important for ensuring consistency with the mission of the sponsor, they can slow down the development of new technology and delay its market introduction. Corporate sponsors also may view pioneering as risky (Lambkin 1988) because they fear the cannibalization of their products. Conflicts may slow the actions of CVs and delay their introductions of new technologies. Thus, the resource advantages of

TECHNOLOGYSTRATEGYAND NEW VENTURE PERFORMANCE 297 the CVs may be overshadowed by political concerns and cause them to avoid pioneering. Therefore: HI:

Independent ventures will surpass corporate ventures in pioneering new technologies.

Number of New Products Another important dimension of a venture's technology strategy is the number of new products introduced to the market (Adler 1989; Ali 1994; Bell and McNamara 1991; Burrill and Lee 1992; Dussauge et al. 1992; Kotabe 1992; Lefebvre et al. 1992; Zahra and Covin 1993; Zahra, Sisodia, and Das 1994). Frequent product introductions can meet customers' needs, generate profits, and preempt the competition. Rapid product introductions also enhance the firm's ability to differentiate itself from the competition (Acs and Audretsch 1990). Several factors suggest that CVs may introduce more new products than IVs, as indicated in Figure 1. Notably, because CVs typically compete in broadly defined markets (Hofer and Sandberg 1987), they need to introduce many products to serve diverse customer needs. In addition, CVs have access to the sponsors' financial resources, a factor that may allow them to introduce more products (or more versions of the same products) to the market. Access to the distribution channels and manufacturing facilities of the sponsor also facilitates new product introductions. CVs often serve the same markets as their sponsor (Feeser and Willard 1990), which allows them to use the sponsor's resources and facilities. Finally, the well-rounded top management team of the CV is a major advantage in developing and introducing new products (Hisrich and Peters 1986). The situation is different for IVs, which must overcome many obstacles in introducing new products. IVs must build their own production facilities and establish distribution channels, which reduces the capital available for product introductions. IVs may also lack the requisite variety of capabilities necessary for introducing a large number of products. Finally, the simple but centralized structures of the IVs cannot cope with the complex demands of frequent new product introductions. IVs are expected to focus on developing and marketing a few, selected products. This narrow focus is consistent with some entrepreneurs' reason for establishing their ventures: inventing. Also, by necessity, the entrepreneur will narrowly concentrate the company's resources by introducing a few radically innovative products, rather than blanketing the market with many products. This is because as the product line of the IV increases, the complexity of operations rises. This complexity creates administrative challenges and reduces the entrepreneur's time for innovation, a tradeoff some entrepreneurs find unacceptable. Therefore: Corporate ventures will surpass independent ventures in the number of new products introduced.

H2:

Internal and External R&D Sources Ventures gain access to innovations from both internal and external sources (Burgelman and Maidique 1988; Chakrabarti and Weisenfeld 1991; McCann 1991; McGrath 1994; Zahra and Covin 1994b; Zahra and Das 1993). Because internal technological innovations require significant resources and capabilities but have uncertain outcomes, new ventures also use external sources that include purchasing innovations developed by other companies, joining technology alliances, and licensing (Pisano 1990).

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As indicated in Figure 1, IVs are expected to emphasize internal R&D activities more significantly than CVs. IV owners (executives) usually possess technological expertise (Knight 1989), and are therefore unlikely to outsource this competence. Internal R&D gives the IV owners control over the innovation process by focusing on those projects that enhance pioneering activities. Internal R&D also protects the venture's technological capabilities by keeping information proprietary (Teece 1986). Internal R&D helps the IVs distinguish themselves from their rivals (Helfat 1994). CVs are expected to emphasize external R&D sources more than IVs. This is because CVs need both the internal and external technology sources to offer the many products they need to serve their broadly defined markets. Also, the sponsors' reputations may give their CVs access to outside technology sourcesthat may be unavailable to the lesser known IVs. For example, established and well-known sponsors can attract more partners for cooperative R&D ventures (Shan et al. 1994). Also, the sponsors might have participated in technologybased alliances and gained expertise in negotiating favorable deals for their CVs. In contrast, because IVs may not possess this expertise and suffer from the liability of newness, their access to external technology sources is often limited. Therefore: Independent ventures will surpass corporate ventures in using internal R&D sources of technology.

H3:

Corporate ventures will surpass independent ventures in using external R&D sources of technology.

H4:

Research Spending R&D spending is a major indicator of commitment to technological innovation (Adler 1989; Ali 1994; Bell and McNamara 1991; Burrill and Lee 1992; Christensen 1992; Kerin et al. 1992; Morone 1993; Teece 1986). It supports the development of new products (technologies) and the maintenance of a capable R&D staff. CVs are expected to spend more heavily on R&D activities than IVs, as suggested in Figure 1. CVs must invest more in R&D than IVs to support the large number of products introduced to the market and also to finance external R&D activities. The sponsors can provide CVs with a steady inflow of funds, which supports frequent product introductions. In contrast, IVs receive capital in lump sums, based upon market performance (Fast 1981), a factor that can cause frequent cash flow problems. Given that R&D activities demand sustained investments, cash-poor IVs must be conservative in their R&D spending. IVs also may find it difficult to obtain funds from external capital sources because R&D involves proprietary information or requires company-specific facilities and equipment. External financing is preferable when the transaction cost is low (Williamson 1988). However, the specialized assets necessary for R&D efforts are frequently difficult to resell, a factor that raises the transaction cost. Thus, IVs may have difficulty obtaining funds from external capital sources. Even if capital is available externally, IVs may have to pay higher interest rates than the sponsors of CVs (Acs and Audretsch 1990). New entrepreneurs face more difficulties in obtaining capital, as lenders impose constraints on their loans (Evans and Jovanovic 1989). CVs can avoid these problems by gaining funds from their sponsors and spending more on R&D than IVs. Therefore: H5:

Corporate ventures will surpass independent ventures in R&D spending.

TECHNOLOGYSTRATEGYAND NEW VENTURE PERFORMANCE 299

R&D Portfolio (Basic vs. Applied) Focus Developing new products requires attention to the venture's basic and applied R&D projects. Therefore, as indicated in Table 2, researchers have highlighted the importance of this dimension of technology strategy (Burrill and Lee 1992; Christensen 1992; Helfat 1994; Maidique and Patch 1988; McGrath 1994; West 1992). Basic research advances science and knowledge, often without emphasis on the immediate commercialization of the results. Thus, basic R&D requires major financial commitments with little guarantee of immediate profits. Large financial investments are also needed to conduct applied R&D that transforms scientific discoveries into products. Applied R&D, therefore, stresses the near-term commercial application of scientific findings. CVs are expected to focus on basic R&D more than IVs. One reason is that IVs obtain funding from outside investors who expect a return on their investment. Consequently, IVs may encounter difficulties in securing funds for R&D activities unless they can convince investors that these activities will yield high returns on their investments. Therefore, IVs will emphasize applied R&D projects that have greater probability to generate income than basic research. Further, the external capital markets for basic R&D funding are inefficient because the information involved is usually proprietary, which makes it more difficult for IVs to support basic R&D. In contrast, CVs receive funding from their sponsors, with whom they can share product and scientific information. CVs are also better positioned than IVs to secure grants for basic R&D because their sponsors may have an established system to apply for these funds. IVs, however, may lack the expertise and the reputation necessary to secure these grants. The potentially long investment horizons of basic R&D projects also favor CVs over IVs to perform this research. Basic R&D requires sustained investments over several years, an investment the corporate sponsors can justify by the potential gains that they can transfer from the venture to other units. Conversely, IVs, which are pressured to generate cash to survive will emphasize applied R&D. Because the entrepreneur's equity is tied to market performance, the IV will focus on applied R&D to rapidly commercialize the technology. This prediction is highlighted in Figure 1. Therefore: H6:

Independent ventures will surpass corporate ventures in the use of applied R&D.

Patenting Whereas there are many ways for a company to protect its gains from technological investments, patenting is among the most widely used (Adler 1989; Bell and McNamara 1991; Dussauge et al. 1992; Kotabe 1992; McGrath 1994; Teece 1986; Utterback 1994; West 1992). Patenting helps to delay imitation by other firms and protects the venture's gains from R&D spending and product introductions (Teece 1986). Levin et al. (1987) observe that patenting represents the most effective means of protecting new ventures' technological resources because other means may not be feasible. They also suggest that patents held by the technologically oriented venture are often its most marketable asset (p.797). As noted in Figure 1, IVs are expected to secure fewer patents than CVs. This is because IVs are expected to introduce fewer products to the market. CVs may secure more patents because of their frequent product introductions and their sponsors' expertise in dealing with the regulatory requirements associated with patenting. Obtaining patents can be timeconsuming and costly; the sponsor's resources can help the CV to overcome these challenges. Therefore: H7:

Corporate ventures will surpass independent ventures in patenting.

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S.A. ZAHRA

Venture Origin and Performance Both CVs and IVs struggle to achieve market acceptance and superior performance. As noted in Table 1, the literature on the performance variations between CVs and IVs is limited and inconclusive. Whereas Hines (1957) predicted that CVs would outperform IV s, Weiss (1981) concluded that IVs outperformed their CV counterparts. Still, others have found no significant differences (Van de Ven et al. 1984). Determining the performance differences between CVs and IVs requires attention to their respective advantages. However, several factors suggest that IVs will outperform CVs. First, IV owners may be highly motivated to take the risks more than CVs, because the rewards of the IV owners are tied directly to their venture's market performance. The wealth of the owner increases as the venture succeeds. Second, IV owners may use their limited resources more effectively because they set clear goals (Knight 1989). Finally, the simple, centralized structures of the IV promote rapid decision-making and ensures flexibility in coping with changes in the market. For the CV, most advantages usually relate to their ability to gain resources from the sponsor (Miller, Spann, and Lerner 1991), which may include: gaining access to the sponsor's existing marketing, production, and organizational capabilities; benefiting from the sponsor's established reputation and existing product and process patents; and using the sponsor's existing distribution channels. These resources enable the CV to overcome entry barriers and achieve success. Also, as mentioned, personnel within the CV come from several functional areas (Hisrich and Peters 1986; Miller and Camp 1985), which aids in solving problems and implementing effective strategies, thus increasing the potential success of the CV (Keeley and Roure 1990). The sponsor's resources can also encourage the CV to pursue an aggressive entry strategy and capture fast-growing segments, thereby achieving high performance (MacMillan and Day 1987). The CV also has access to capital through the sponsor's "deep pocket." Access to capital is important because it sometimes takes years for a venture to achieve profitability. New ventures also need capital to finance R&D projects, commercialize products, and establish their market position. Financing, especially in the venture's early years, also determines the long-term success of the CV (Roberts and Hauptman 1987). In summary, contrasting the relative advantages of the CVs and IVs indicates that, on balance, CVs will outperform IVs, as indicated in Figure 1. Therefore: H8:

The performance of corporate ventures will surpass that of independent ventures.

Technology Strategy and Performance Links in CVs and IVs The technology strategy variables will influence the performance of CVs and IVs differently, because they possess different resources and capabilities, as suggested earlier in Table 1. That is, the two venture types are expected to follow different technology strategies to develop their competitive advantage. However, whereas previous researchers have not compared the viability of technology strategy by venture origin, theory suggests that the two venture types will benefit from different technology strategies. As indicated in Figure 1, the IV is likely to succeed by pioneering a few new products (technologies) and using them to develop or capture and then dominate a niche. Pioneering builds on the IV's technological and organizational strengths already mentioned. It also enables the IV to offer differentiated products. Ng et al. (1992) suggest that if IVs pioneer products, they can achieve success. The IV may also benefit from relying on internal R&D by keeping

TECHNOLOGYSTRATEGYAND NEW VENTUREPERFORMANCE 301 that information proprietary and protecting any advantages derived from pioneering (Levin et al. 1987). This approach also keeps the IV's R&D activities focused on those products that match the chosen niche. Finally, a focus on applied R&D can enhance the performance of the IV by expediting pioneering and increasing the odds of successful technology commercialization. A focus on applied R&D allows the firm to develop unique applications of a technology (Helfat 1994). This is important in the case of IVs that are pressured to offer differentiated products to ensure market success. Therefore: Pioneering, reliance on applied R&D, and the use of internal technology sources will be positively associated with the performance of independent ventures. H9:

As Figure 1 suggests, CVs are expected to benefit from pursuing different dimensions of technology strategy. For example, the CV's tendency to compete in broadly defined markets (Hofer and Sandberg 1987) requires it to introduce a large number of products or offer different versions of a few products. In introducing these products, the CV should heed Roberts and Berry's (1985) observation that radical departures from the prevailing industry technology, markets, or products can lead to failure. Still, extensive product offerings require intensive R&D spending, a factor that is expected to be positively associated with the performance of the CV. To benefit from this spending, however, the CV should protect its technologies by using patents, an approach that can enhance their performance (Miller and Camp 1985). Unlike the IV that can keep its technological developments proprietary, there is a higher probability for information leakage because the CV must keep its sponsor informed of its achievements. In turn, the sponsor usually publicizes these achievements as a means of justifying continuing investments in the venture. Still, patenting may delay information leakage and reduce imitation (Levin et al. 1987). Moreover, in developing their products, CVs can supplement their internal R&D with external technologies. This can shorten the product development cycles and reduce the chances of failure. External sources also enable the CV to offer a wider variety of products than the IV. Therefore: R&D spending intensity, the number of new products, patenting, and the use of external technology sources will be positively associated with the performance of corporate ventures.

H10:

METHOD

Sample and Data To test the study's hypotheses, data were collected from 112 new U.S.-based biotechnology ventures. The biotechnology industry was selected because, as an emerging industry, it fosters the creation of new ventures (VanderWerf 1993); it has great growth potential; it promises large profits for successful ventures and large losses for failures; and both established corporations and new ventures are currently battling for industry dominance. Although other researchers have examined this industry (Chakrabarti and weisenfeld 1991; Grandstrand and Sjolander 1990; Hamilton and Singh 1992; Pisano 1990; Shan et al. 1994), they have offered little empirical documentation of variations in the performance and the technology strategies of CVs and IVs. Data were collected by a mail survey that allowed simultaneous access to many new ventures. This was desirable because public sources did not contain detailed information about

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the technology strategies of new ventures. In addition, most IVs did not publish annual reports, and data on CVs were often subsumed within the sponsors' operations. The development of the survey went through several iterations. The original questionnaire was revised based on feedback from 17 venture managers (not included in the mainstudy) and a follow-up review by three biotechnology managers. The final survey targeted the ventures' chief executives officers (CEOs) or highest ranking managers, who are likely to be the most knowledgeable individuals about the ventures' operations (Kazanjian and Drazin 1990). The number of U.S. biotechnology companies has grown from 470 (Office of Technology Assessment 1984), to 484 (Dibner 1986), to 878 (Sittig and Noyes 1987), and to more than 1000 (Hamilton 1994). To generate a mailing list for the study, company names and addresses were identified from the lists found in New Developments in Biotechnology (Office of Technology Assessment 1988), Bioscan (1989), North Carolina Companies in Biotechnology (several years), the Philadelphia Inquirer's ( 1991) list of biotechnology companies in Eastern Pennsylvania and South New Jersey, and from other leading newspapers (Chicago Tribune, Los Angeles Times, New York Times, and Washington Post), all for the 1989-1991 period. Combined, these sources produced 893 names. To be included in the study, however, a venture had to meet three criteria: (1) it had to be in existence for eight years or less; (2) the venture had to operate in the United States, thereby limiting the geographic scope of the research; and (3) the venture had to be active in one or more of the major areas that constituted the domain of the biotechnology industry. The areas were: human diagnostics, pharmaceutic/therapeutic, specialty chemicals, plant agricultural, animal agriculture, food processing, waste management, and equipment/appliances (Burrill and Lee 1992; Ng et al. 1992; Office of Technology Assessment 1988). The third criterion ensured the inclusion of companies that actually engaged in the development, production, and marketing of biotechnology products while excluding venture capitalists and other companies that offered consulting or other services to the industry. Using these three criteria, 443 ventures were identified and targeted by the survey~ However, 54 questionnaires were undeliverable because the companies had moved or ceased to exist. Two mailings, conducted one month apart, yielded 112 completed responses; a response rate of about 29 %. The ventures averaged 4.9 (SD = 2.4) years in age and employed 71 (SD = 57) people. Three steps were followed to determine the absence of response bias. Initially, responding companies were compared to nonresponding companies on three known attributes: age (t = 0.94, p < .41), number of employees (t = 1.07, p < .23), and sales growth (t = 0.83, p < .44). Next, the Z2 test compared responding and nonresponding ventures by ownership (CV vs, IV). This test was insignificant (p = .29), indicating no significant relationship between participation in the study and ownership type. Finally, using the t-tests, respondents to the first and second mailings were not significantly different in age (t = 0.69, p < .46), number of employees (t = 0.73, p < .38), and sales growth (t = 0.79, p <.31). Consequently, it was concluded that the sample represented its target population. Still, the sampling frame suggests caution in making generalizations to established biotechnology companies or to ventures located outside the United States. Other factors also indicated the absence of response bias. For example, the majority of questionnaires were completed with only minimum levels of missing data (questionnaires with excessive missing data were excluded in calculating the response rate). Also, many respondents provided detailed comments about their company's operations and track records. Further, more than 70% of the respondents requested summaries of the survey results, which showed their strong interest in the study. To ensure reliable data, the questionnaire was sent to a second senior manager in the

TECHNOLOGYSTRATEGYAND NEW VENTURE PERFORMANCE 303 ventures that responded to the main survey (n = 1 !2). Forty-seven of these managers returned completed responses, which were then matched with replies from the main survey. Correlations indicated significant agreement on the venture's technology strategy (p < .001), as follows: pioneering (r = 0.71), number of new products (r = 0.61), use of internal source (r = 0.73), use of external sources (r = 0.59), R&D spending (r = 0.73), applied portfolio (r = 0.56), and patenting (r = 0.67). Next, where possible, secondary data were correlated with the survey data to validate the measures, as reported in the Appendix, a procedure used in the literature (e.g., Zahra and Covin 1993). The purpose was to determine if significant correlations exist between data collected from secondary and survey sources. If a significant relationship was found, the validity of the survey data was supported. However, because validity is multifaceted, any significant correlations are at best suggestive of validity. Triangulation, using multiple sources of data and multiple measures of the same construct, is needed to unequivocally establish validity (Price and Mueller 1986). As noted in the Appendix, the correlations between secondary and survey data were statistically significant, which supported the validity of the measures. Currently, there is no agreed on cut-off correlation coefficient that indicates validity (Price and Mueller 1986, p. 5). Still, caution should be exercised in interpreting the results because the data were collected from the same source. Evidence of validity is based on a comparison of subsamples rather than data from all companies, and other types of validity have not been documented.

Measures Data were collected for venture origin, technology strategy, NVP, and statistical controls, as described below.

Venture Origin Ventures created by individual entrepreneurs were classified as independent ventures (n = 72). Ventures owned by established firms were classified as corporate (n = 40).

Technology Strategy The Appendix presents the measures for technology strategy variables. A comment is in order about the validity of the technology strategy measures used in this research. First, having been developed from past research, the measures maintain content validity. Each measure captures an important portion of the domain of the underlying theoretical construct. Second, the Appendix offers an indication of the criterion-related (concurrent) validity for several of the technology strategy measures. The survey-based measures are significantly correlated with other indicators of the same construct. Third, the technology strategy measures have acceptable predictive validity; the majority of these measures are associated with NVP. Moreover, these associations are consistent with predictions. Still, the above caveats about evidence of validity apply.

Performance NVP is a complex and multidimensional construct whose measurement is difficult (Brush and VanderWerf 1992; Chandler and Hanks 1993, 1994b). Thus, multiple indicators were used to gauge differences in key NVP dimensions over a three-year period. These measures, which

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appear in the Appendix, covered growth (e.g., sales growth and market share growth) and profitability (ROE). This was done in response to Tsai et al. (1991), who suggested a need to use both measures because tradeoffs might exist between them. Also, the review of research presented in Table 1 suggests a need to use both subjective and objective measures of NVP. Finally, to complement objective performance measures, an overall subjective index of NVP was also used. This index considered the managers' (or owners') satisfaction with the venture's performance. The use of this index augmented the current study because financial criteria are often imperfect in judging NVP (Doutriaux 1991; Tsai et al. 1991). The six-item subjective index also gauged both the profitability (e.g., ROI, ROE, ROA, and net profit margins) and growth (e.g., sales and market share growth) of the new venture. When subjected to an orthogonal factor analysis with a varimax rotation, the items loaded significantly on one factor (eigenvalue = 4.17), indicating that managers viewed NVP as a unidimensional construct. Responses to the six items were, therefore, averaged to develop the index used in the analysis. The Appendix presents evidence of significant interrater agreement, internal consistency, and validity of the index. Still, this measure has shortcomings (see the Appendix) that should be considered when interpreting the results.

Statistical Control Variables The venture's age and size were considered as statistical controls in this study, as follows.

Age. IVs were expected to be older than CVs because independent entrepreneurs were the first to develop biotechnology ventures. Established corporations, especially in the chemical and pharmaceutical industries, entered the industry later, following the initial success of IVs (Bylinski 1991; Hamilton 1991; Henkoff 1992). The older IVs were expected to outperform CVs, as indicated in H8. Age was measured by the number of years the venture has been in existence. Size. CVs were expected to be larger than IVs because CVs often pursued broader markets than IVs (Hofer and Sandberg 1987). Size was measured by the number of full-time employees of the venture. ANALYSIS To test the hypotheses, the t-test contrasted CVs and IVs on age, size, technology strategy scores, and NVP. Next, because technology strategy decisions are interrelated (West 1992), a two-group discriminant analysis was run. Separate regression analyses were then run for CVs and IVs to delineate the associations between technology strategies and NVP by venture type. Finally, the Chow tests were used to determine if regression pairs were significantly different. If the Chow test was significant, it was concluded that determinants of a particular NVP measure differed significantly between CVs and IVs.

RESULTS

Results of the T-tests: CVs vs. IVs Table3 presents the means for the CVs' and IVs' age, size, technology strategy, and NVP variables. The two venture types differed significantly in age and size (both at p < .05).

TECHNOLOGY STRATEGY AND NEW VENTURE PERFORMANCE

TABLE 3

305

T-test o f Technology Strategies and Performance: Independent vs. Corporate Ventures Venture Types

Variables General characteristics Age (years) Size (full-time employees) Technology strategy variables Pioneering New product number Internal R&D sources External R&D sources R&D investment Applied R&D Patenting New venture performance Sales growth (%) Market share growth (%) ROE (%) Subjective performance index

Independent (n = 72)

Corporate (n = 40)

t

5.8 61

3.3 89

2.09 ~ 2.17 ~

3.14 6.61 3.81 2.58 16.21 76.07 2.71

2.14 6.44 2.15 3.56 21.23 50.14 3.46

3.92 C 0.02 6.2Y -4.00 ~ -2.95 b 11.29 C - 2.65 a

21.02 3.09 6.52 3.61

10.17 3.05 4.19 2.81

4.06 ~ 0.20 2.17 ~ 2.11 n

a p < .05. b p < .01. Cp < .001.

Whereas IVs were "older" than CVs, CVs were significantly larger than IVs. The two venture types also differed in six out of the seven technology strategy measures; the exception was the number of new products. 2 However, because repeated t-tests may magnify Type I error and fail to consider the intercorrelations among variables, a two-group discriminant analysis was also conducted.

Discriminant Analysis: Technology Strategy in CVs vs. IVs Discriminant analysis helped to distinguish CVs and IVs by technology strategies and the two control variables (age and size). The analysis produced a linear combination of technology strategies, age and size that best distinguished CVs from IVs. Still, although discriminant analysis had the advantage of considering the technology strategy measures simultaneously, it did not establish causality among the study's variables. Because technology strategy measures varied in range and measurement units, they were standardized (x = 0, sd = 1) before performing this analysis. Before conducting the discriminant analysis, diagnostic tests were conducted to establish the multivariate normality of the data by examining the multivariate skewness and kurtosis (Hawkins 1981; Mardia 1985). There was no evidence of non-normality. Further, when normal probability plots (Hair et al. 1992) were inspected, they reaffirmed the normality of the data. Box's M test was also run to determine if the variances of the CV and IV groups were equal (Hair et al. 1992). The test was not significant (Box's M = 66.19, p = .27); the two 2Because basic and applied research scores added up to 100, the two items were perfectly correlated. Therefore, analyses were performed by using applied research figures. The analysis was performed twice- once with the applied R&D figure and the second with the basic R&D figure. No significant differences were observed. Therefore, the results using the applied R&D are presented.

306 S.A. ZAHRA TABLE 4 Discriminant Analysis: Cross-Classification Matrix Venture Type Venture Type Independent Corporate % Correctly Classified =

Independent (72)

Corporate (40)

67 5

7 33 89.3

groups did not vary significantly in their variance. Therefore, discriminant analysis was considered appropriate for the data. The discriminant results are summarized as follows: 1. The analysis produced one significant function; the number of functions was determined by the number of groups minus 1. The function was statistically significant (eigenvalue = 3.07; canonical correlation = 0.81; Wilks' lambda = 0.29; Mahalanobis' D: of 6.29), a t p < .001. 2. A key test of the power of the discriminant function was its ability to correctly classify the ventures into CV vs. IV types. As Table 4 shows, it correctly classified 89.3 % of the sample, a high hit ratio. To validate the results in Table 4, two additional tests were considered: the proportional chance criterion and the Press's Q statistic. Both tests supported the strong classificatory power of the discriminant function, as described next. a. The proportional chance criterion (CpRo), which showed the percent of the observations that would be correctly classified by chance, was calculated by summing the square of group proportions. CpRO was 53.9%, which was lower than the 89.3 % correctly classified by the function. b. Press's Q was considered. This statistic compared the number of correct classifications with the total sample and the number of groups, using the formula (Hair et al. 1992, p. 106): Press's Q = [N-(nxk)] 2/N(K-1) where: N = total sample size; n=number of observations correctly classified; and K = number of groups. A Q statistic of 69.1 was obtained and was higher than the critical value (df = 1, X 2 = 7.88), a t p < .001. 3. Discriminant coefficients and loadings were examined next. However, coefficients (weights), defined as the contribution of a variable to the discriminant function, are known to be unstable (Hair et al. 1992). Thus, the use ofloadings that measure the linear correlation between an independent variable (e.g., patenting) and the function was more appropriate. A high loading indicated a strong association between that variable and the discriminant function. The signs of the loadings in Table 5 showed the direction of the variables' correlation with the function. A variable with a positive loading contributed positively to the discriminant function and vice versa. Finally, Hair et al. (1992) suggested that, "In simultaneous discriminant a n a l y s i s . . , any variables exhibiting loadings &plusminus0.30 are considered significant." (p. 119) 4. The most important discriminant variables in Table 5 (in descending order) were: having an applied research portfolio, pioneering, using internal sources, R&D spending (negative), using external sources (negative), and patenting (negative). The number of new products was not significant. Thus, IVs emphasized the following variables more than CVs: applied

TECHNOLOGY STRATEGY AND NEW VENTURE PERFORMANCE

TABLE 5

307

D i s c r i m i n a n t A n a l y s i s o f T e c h n o l o g y Strategy Variables: I n d e p e n d e n t vs. C o r p o r a t e Ven-

tures Variables Pioneering Number of new products Internal source External source R&D investment Applied R&D Patenting Company age Company size

Expected Sign°

Coefficient (weights)

Loadings (structure correlation)

+ + + + -

0.679 -0.284 0.435 -0.470 -0.497 0.719 - 0.389 0.441 -0.651

0,576 -0.173 0.544 -0.359 0.493 0.635 - 0.351 0.337 -0.469

+ indicates that IVs will have a higher score on the variable than CVs, and vice versa.

research, pioneering, and the use of internal R&D. IVs spent less on R&D, used external sources less, and patented less frequently than CVs. Table 5 also indicated that IVs were older and smaller than CVs.

V e n t u r e Origin and N V P To test H8, the t-tests (in Table 3) indicated that IVs outperformed CVs in sales growth (p < .001), ROE (p < .05), and the subjective index (p < .05), but not in market share growth. These results did not support H8, which predicted that CVs will surpass IVs in NVP.

Technology Strategy and N V P To test H9 and H 10, multiple regression analysis examined the associations between technology strategy and the measures of CV and IV performance) Separate analyses were conducted for the CVs and IVs, for a total of eight runs, as displayed in Table 6. Regression analyses controlled for the venture's age and size before entering technology strategy measures.

Independent Ventures The regressions for IVs were statistically significant (p < .05 or better), explaining 23 to 38% of the variance in the NVP measures. Pioneering was positively associated with sales growth, market share growth, and the performance index but negatively with ROE. Internal R&D and applied portfolio were positively and significantly associated with the four NVP 3Before conducting regression analyses, we examined the correlation matrices for the CVs and IVs. Simple correlations, which ranged between - 0 . 2 3 and 0.38, were moderate. Further, the correlations between the number of new products and patenting were 0.34 for the CVs and 0.27 for IVs. The z-test of differences between two correlation coefficients was not significant (p = . 17). The lack of significance, however, might have mirrored the biotechnology industry's present stage of evolution. Both CVs and IVs continue to face major obstacles in patenting their products. The fact that some biotechnology products resemble naturally occurring phenomena raises debate over their patentability (Ko 1992; Slutsker 1991). Unclear and outdated regulatory guidelines on patent approval also add to these problems (Acharya 1991; Templeton 1992). However, legislation has been proposed to simplify patent approval of biotechnology products. As these laws are enforced and the industry matures, the relationship between new product introductions and patenting may become more significant than found in the present study. Future researchers should consider the changing nature of the new product introductions-patenting relationship and control for the number of new products in explaining the effect of patenting on NVP among biotechnology ventures.

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TABLE sults

6

Technology Strategy of Independent vs. Corporate Venture Performance: Regression R e Independent

Variables Intercept Age Size

Pioneering Number of new products Internal source External source R & D spending

Applied portfolio Patenting R2

df F

Sales Growth

Market Share Growth

4.18 b 0.12 0.09 0.26 ~ 0.15 0.44 b -0.06 0.12 0.37 b 0.11 0.27 9,62 5.19 c

Corporate

ROE

Performance Index

Sales Growth

2.13 ~ 0.11 0.05" 0.28 0.11

0.41 0.14 0.10 -0.26 a -0.19"

1.05 0,14 0.11 0.33 b 0.29"

6.93 b 0.23 ~ 0.07 0.09 0.36 b

0.26 ~ -0.09 0.15 0.28" 0.06 0.34 9,62 7.06 c

0.20 ~ 0.10 -0.13 0.390 0.14 0.23 9,55 3.280

0.26 a 0.12 0.23" 0.320 0.10 0.38 9,61 10.08 ~

0.23" 0.42 b 0.36 a 0.19 a 0.340 0.17 9,32 4.110

Market Share Growth

ROE

Performance Index

3.19 a 0.25" 0.09 0.34 b 0.29 ~

1.03 0.18" 0.17 -0.09 0.09

1.61 0.25" 0.12 0.09 0.45 b

-0.17" 0.33" 0.37 b 0.23 a 0.27 ~ 0.24 9,32 2.19 a

0.27" 0.45 b -0.13 0.15 0.24" 0.19 9,30 3.070

0.28 ~ 0.43 b 0.13 0.23 ° 0.26 9,31 3.29 C

" p < .05. b p < .01. Cp < .001.

measures. R&D spending and the number of new products were significantly associated only with the performance index. Finally, the age and size of the IV were not related to NVP. C o r p o r a t e Ventures The results for CVs are also displayed in Table 6. Technology strategies explained from 17 to 26 % in the NVP measures. Pioneering was positively associated with market share growth: New product introductions were significantly and positively associated with sales growth, market share growth, and the performance index. Internal R&D was positively associated with sales growth, market share growth, and the performance index but negatively with ROE. External technology and patenting were positively associated with the four NVP criteria. The applied technology portfolio was positively associated with sales and market share growth. R&D spending was positively associated with the NVP measures except ROE. Finally, although the size of the CV was not significant, age was positively associated with the four NVP measures. CVs vs. IVs: C h o w Test Results The Chow test compared pairs of regression equations (e.g., ROE by IVs vs. CVs). The four regression pairs were significantly different (p < .05). Thus, the associations between technology strategy and NVP were significantly different between CVs and IVs. DISCUSSION Focusing on the technological strategies of new ventures, this study has examined two questions: Do CVs and IVs vary in their technology strategies and do technology strategies influence the performance of CVs and IVs differently? This section reviews the results on both questions.

TECHNOLOGY STRATEGY AND NEW VENTURE PERFORMANCE

309

Variations in Technology Strategy: CVs vs. IV (H1 to H7) The first research question is: Do CVs and IVs vary in their technology strategies? This question is answered affirmatively based on the significant results of the t-tests (Table 3) and discriminant analysis (Table 5). The results support six of the seven hypotheses depicted in Figure 1. Consistent with H1, IVs focus more on pioneering than CVs. They also pursue a more applied R&D portfolio than CVs, which supports H6. IVs also emphasize internal R&D more than CVs, which supports H3. The results also show that, as hypothesized in H4, CVs utilize external technology sources more than IVs. CVs also spend more heavily on R&D, which supports H5. CVs also surpass IVs in their basic R&D, which is consistent with H6. (Recall that the R&D portfolio measure covered applied and basic research, with the two scores adding up to 100. Thus, deemphasis on applied research by CVs meant greater attention to basic R&D.) Finally, CVs also use patenting more intensively than IVs, which supports HT. In summary, the results support H1, and H3 through H7. The results, however, do not support H2, which predicted significant differences between CVs and IVs in new product introductions. The results may reflect the biotechnology's current stage of evolution or may be unique to this industry. A study of the information technology (IT) industry has found that the two venture types differ significantly in the number of new products introduced (McDougall et al. 1992). Although IT manufacturers have been prolific in their product introductions, many biotechnology ventures are still at the invention, not commercialization stage (Hamilton 1994). Most biotechnology ventures are still struggling with securing regulatory approval of their products (Burrill and Lee 1992). As these ventures become more established, differences in product introductions might become evident. Researchers should track the evolution of biotechnology CVs and IVs and document differences in their product introductions.

Differences in Performance between CVs and IVs (H8) Contrary to H8, IVs outperform CVs on three out of four NVP criteria: the three-year average sales growth, ROE, and the subj ective index. These results support Weiss ( 1981) but contradict Van de Ven et al. (1984). There are three possible explanations for the superior performance of IVs. First, the owners and founders are often intimately involved in the operations of their ventures, creating an atmosphere where risk-taking is encouraged. Owners are interested in the fate of their firms because their wealth depends on the success of the venture. However, the sponsor must work hard to motivate the managers of the CV and ensure a closer alignment of their goals and those of the venture. For example, the failure of the CV may damage the reputation of managers, whereas its success does not always increase their personal gains. This may induce the CV manager to be more risk-averse than the IV owner. Second, resource advantages may not always generate competitive advantages. As Hamel and Prahalad (1993) suggest, market success requires resourcefulness. Superior resources alone do not guarantee superior performance by CVs over IVs. As mentioned earlier, CVs frequently encounter difficulties accessing their sponsors' resources or become embroiled in organizational political battles and lengthy budgetary processes. CVs may also be constrained by the existing systems and policies of the sponsor (Burgelman and Sayles 1986), which may limit their freedom to act. Even when CVs are fairly autonomous, key decisions usually have to go through multiple layers of organizational reviews, a factor that causes delays in seizing market opportunities.

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Third, IVs emphasize three technology strategy variables more than CVs: pioneering, applied R&D, and internal sourcing of R&D. As shown in Table 6, these variables are significantly associated with superior NVP. However, the match between technology strategy and NVP is less perfect for CVs. For example, CVs do not emphasize pioneering even though it is positively associated with both market share and the performance index (though it depresses sales growth). Also, whereas new product introductions can enhance CV performance, CVs do not emphasize this variable any more than IVs. In general, the results relating to H8 may reflect the current stage of the biotechnology industry's evolution. IVs may have done better because emerging high technology industries, such as biotechnology, require radical innovation. As the industry evolves, however, different technological choices are required for success (Hamilton and Singh 1992). Research should track changes in technology strategies over time. For now, however, the differences observed in technology strategies may reflect the different roles IVs and CVs play in emerging industries. IVs often introduce radically new products that establish industry standards. Therefore, pioneering is consistent with the venture's origin and goals. Independent entrepreneurs frequently leave established companies to pursue ideas considered"too" radical for commercialization. By tightly focusing their R&D programs on a few, selected products, IVs can bring these products to the market ahead of CVs.

Technology Strategy-Performance Links (H9 and H10) The study's second research question, "Do technology strategies influence the performance of CVs and IVs differently?" can also be answered affirmatively. The results support the predicted relationships, highlighted in Figure 1. Table 6 indicates that associations between technology strategy and NVP vary by venture origin, thus supporting both H9 and H10. As H9 predicted, pioneering, the use of applied R&D, and internal sources of innovation are associated with the performance of IVs. Also, as H10 suggested, R&D intensity, patenting, frequent new product introductions, and the use of internal and external technology sources are significantly associated with the performance of CVs. Most of the associations between technology strategies and NVP are consistent with theory and prior studies. For example, pioneering may enhance performance by creating a period of monopoly where the ventures can position themselves and protect their products from imitation (Zahra et al. 1995). Pioneering also preempts the competition and strengthens the position of the IV (Roure and Maidique 1986). By relying on internal innovations, IVs can guard proprietary product information and protect any competitive advantages they may derive from pioneering (Levin et al. 1987). In turn, this focus may even reduce the IVs' need to engage in patenting. As reported earlier, IVs rely more on applied R&D than CVs, which is performed internally. As Helfat (1994) argues, companies can develop multiple uses for the same applied R&D program. As companies conduct more applied R&D internally, they gain added competence. Moreover, much of the learning that occurs within the IVs remains internal, a factor that enhances their ability to pursue technology strategies that differ appreciably from CVs. The results suggest that the two venture types follow different paths to achieve success. The high performing IV focuses its R&D spending on pioneering a few new products. Conversely, the CV benefits from investing more in R&D to develop many products and by protecting these products with patents. To generate the new products needed, the CV uses both internal and external R&D sources. The performance results of CVs are also consistent with the literature. For example,

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the belief that firms with better developed infrastructures achieve greater benefits from strategic alliances (Hamel and Prahalad 1993) may explain why external R&D is associated positively with the performance of CVs. The sponsors of CVs often have well-established connections with outside sources of innovation and may possess expertise in negotiating deals with the suppliers of these technologies. The sponsors also may have expertise in securing patents that increase the profitability of CVs (Miller and Camp 1985). The results suggest that the inability (or reluctance) of CVs to pioneer products can put them at a disadvantage. Whereas these results may be industry specific, the positive signs associated with the NVP suggest that CVs can probably benefit from increased pioneering. If future research confirms this finding, managers should explore ways to encourage CVs to pioneer new products.

Limitations The results should be interpreted with caution because the study examined only one industry, which raises a question about the generalizability of the findings to other industries. Also, because the data were collected from U.S.-based ventures, the results may not apply to other biotechnology ventures that are located outside the United States. In addition, the study's cross-sectional data neither permit causal inferences on the relationship between technology strategy variables and NVP measures nor allow inferences about long-term NVP. In fact, because the study's NVP measures focused on marketing and financial criteria, they may overlook other goals o f corporate venturing such as gaining access to technological developments. Future studies should consider these nonfinancial goals in evaluating NVP. The present research has not directly considered the relationship between the sponsor and the venture, a factor that impacts the performance of CVs (Block and MacMillan 1993). Hence, the study has ignored a possible source of technological differences between CVs and IVs. The fact that data were collected from a single source (the venture's most senior executive) raises the possibility of source bias. Whereas significant interrater evaluations enhanced confidence in the results, the possibility of source bias cannot be completely ruled out. Similarly, though reliable measures were used in this research, different aspects of validity remain unknown. Therefore, the results are best interpreted as tentatively suggesting relationships among the study's variables. Researchers should validate the results using alternative NVP and technology strategy measures. Another limitation of the study is the possibility of survivor bias, because the data were collected from existing companies. In the fast changing biotechnology industry, there is a possibility that observed performance results may reflect high mortality among young ventures (Cooper 1993). Finally, Roberts (1992) observes, "The complexity inherent in the process leading to company performance precludes the possibility of an all-explaining or all-encompassing model . . . . "Researchers should be cautious in generalizing the study's findings, which explain only a modest amount of variance in NVP based on technology strategies. Whereas the results are significant, they suggest a need for future researchers to explore other determinants of NVP. For instance, besides technology strategies, researchers can examine the organizational, production, marketing, and financial capabilities of the venture. Also, as Table 1 would suggest, researchers should consider the venture's competitive strategy, environment, and their interactions. Indeed, the review presented in Table 1 suggests that much more model

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building and theory testing research is needed to gain a more complete understanding of NVP determinants.

Managerial Implications The results have several implications for CV and IV managers because IVs may outperform CVs, and corporate executives can learn from the competition. CV executives can examine the strategic choices of their rivals, especially those pertaining to technology, and determine how to use these strategies to enrich their ventures' performance. Managers should be careful, however, because the two venture types have distinct capabilities, and some practices may not be directly transferable. Finding that each type of venture emphasizes different technology strategies also has practical implications for venture managers. Because biotechnology CVs and IVs frequently compete in the same markets, managers should gather information about their rivals' technology strategies. This information can be useful in making important decisions about the venture's technological capabilities. Because established companies sometimes absorb IVs, this information can also aid in assimilating the acquired ventures. Similarly, CVs and IVs often develop joint strategic alliances to create and commercialize new technologies. Understanding differences in the technology strategies of these two venture types can be useful in identifying the ways in which they may complement each other. The results indicate that, although spending more on R&D, CVs may not use their investments to develop more new products than independents. Perhaps CVs should make special efforts to transform research into products by creating multifunctional product development teams and reducing bureaucracy (Karakaya and Kobu 1994). Another possibility is to spin off CVs that focus on technologies that fall outside the parent's sphere of interest. This option empowers the new entity to vigorously pursue the new technology without diluting corporate resources.

Future Research Directions The results also suggest several issues for future research. Of interest are replications that measure NVP differences by venture origin, using data from different industries and different NVP measures. Because the results may reflect the present stage of the biotechnology industry, longitudinal analyses can test the persistence of NVP variations between the two venture types over time, using alternative measures of growth (e.g., growth in earnings and changes in ROE). Future studies should also explore the nonfinancial goals of venturing activities. To what extent do companies evaluate CVs based on providing access to emerging technologies? Future researchers should also attempt to match pairs of successful and unsuccessful ventures to delineate any differences that might exist in their technology strategies or other attributes. The results also suggest that IVs do not gain an advantage from patenting, raising a question for future research: How do IVs protect their technological advantages? Do they use trade secrets or proprietary technology for this purpose? In a dynamic industry, such as biotechnology, an IV must invest heavily in creating technologies and protecting its competitive advantage. It is important, therefore, to delineate the different approaches companies use to protect their technological advantages. Future researchers need to examine additional dimensions of technology strategy and determine their effect on NVP. Such future studies would help to fill a gap in the literature, which hereto has emphasized larger, well-established companies. By paying greater attention

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to new ventures, the role of technology variables in determining success and failure in the marketplace can be better understood. For example, examining whether a venture uses its technology defensively (to protect its markets) or offensively (to enter new markets) can help in delineating the impact of these variables on NVP. Another variable that deserves attention is the venture's relative emphasis on product and process innovations. Because the relative importance of these innovations varies over time (Utterback 1994), researchers should document their long-term contributions to the performance of CVs and IVs. Finally, there is a need for studies that examine the effect of the external environment and competitive strategies (including technological choices) on the performance of CVs and IVs. Does the environment moderate the relationship between the technology strategy and NVP? Several researchers have suggested a need for studies that identify the sources of NVP differences (Carter et al. 1994; Cooper 1993; McGrath et al. 1994). This study has responded to this call by showing that independent and corporate biotechnology ventures emphasize and benefit from different technology strategies. It is hoped that the results will invite other researchers to examine the implications of technology strategy for new venture performance in different industry settings.

APPENDIX

This Appendix presents the study's measures of technology strategy and new venture performance. Technology Strategy. A venture's emphasis on technological pioneering, investment, applied and basic research, new product introduction, proprietary technology, and patenting were measured, covering the immediate past three-year period. Respondents provided data, reflecting their venture's actual, rather than planned (or desired), activities. When mutli-item indexes were used (to measure: pioneering, internal and external sources, patenting, and performance), the average response score was used in the analysis. This average was calculated by summing item scores and then dividing the total by the number of items. 1

2

3

4

5

6

Very True

Untrue

Neutral

True

Very True

Not Applicable

• Pioneering (three items, ct= .72) This company: •... • . . • . .

is usually among the first to introduce new products to the market . is this industry's leader in introducing new products . is well known for introducing breakthrough-type products

1 2 3 4 5 NA 1 2 3 4 5 NA 1 2 3 4 5 NA

multi-item scale measured pioneering. Trade publications (e.g., Business Week, Fortune, and Wall Street Journal) and company annul reports were used to construct accounts for 23 ventures' pioneering, defined as being first to introduce a new product (technology). This total was then correlated with the survey-based index (r = .64, n = 23, p < .001). A

• R&D Investment. Respondents were asked to circle the one number closest to their venture's actual R&D spending over the past three years. •

Average annual spending on R&D (as a % of your sales):

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Consistent with past research (West 1 9 9 2 ) , R&D spending was measured as the three-year average percent of company sales. Data provided by executives were compared to data available in secondary references (trade press and company annual reports and other publications) for a subsample of 27 companies. The two sources were signficantly correlated (r = 0.96, n = 27, p < .001).

•

Research Portfolio: Basic vs. Applied. Please distribute 100 points between the two options listed below to show the extent to which the company has stressed the following R&D activities over the past 3 years: Basic: focuses on original research with goals for advancement of science but may not have immediate commercial objectives. ( b ) A p p l i e d : focuses on developing specific products or theologies.

(a)

• Internal Source (three items, a = .68) 1

2

3

4

5

6

Very True

Untrue

Neutral

True

Very True

Not Applicable

This company: develops its new products internally . relies heavily on technologies developed internally • . . . considers its internal R&D the major source of new products •...

• . .

1 2 3 4 5 NA 1 2 3 4 5 NA 1 2 3 4 5 NA

• External Source (three items, ct= .71) 1

2

3

4

5

6

Very True

Untrue

Neutral

True

Very True

Not Applicable

This company: contracts out a major portion of its R&D activities • . . . uses joint ventures for R&D • . . . uses licensing agreements extensively to acquire technology

•...

1 2 3 4 5 NA 1 2 3 4 5 NA 1 2 3 4 5 NA

This measure was correlated with two indicators of company's reliance on external sources. The first was the number o f technology-related joint ventures in which companies participated (r = .74, n = 23, p < .001). This information was assembled from different sources such as the Business Week, the industry's newsletters, and companies' annual reports. The second indicators, based on data from the references just cited, was the number of licensing agreements for sale or purchase o f technology (r = .61, n = 19, p < .01).

• Number of new products (including modifications in existing brands/lines) your company has introduced to the markets: Data provided by executives were correlated with data collected from industry publications (r = .78, n = 32, p < .001).

• Patenting (three items, et=.78) 1

2

3

4

5

6

Very True

Untrue

Neutral

True

Very True

Not Applicable

This company:

TECHNOLOGY STRATEGYAND NEW VENTURE PERFORMANCE 315 • . . . holds important patent rights •... has more patents than its key competitors •... has increased its patenting efforts over the past 3 years

1 2 3 4 5 NA 1 2 3 4 5 NA 1 2 3 4 5 NA

Pilot interviews indicated that companies were unwilling to provide data on their patenting activities. Hence, a multi-item index measured a venture's emphasis on patenting. The index was then correlated with patent applications or actual counts for a subset of 41 ventures (r = .53, n = 41, p < .01). New Venture Performance. As mentioned, executives provided data for three objective NVP measures and a subjective performance index, all for a 3-year period. Past research (see Table 1) suggests a need to consider both objective and subjective indicators of NVP. 1. Objective NVP. These measures included: growth in sales, growth in market share, and ROE. To validate the survey figures, data were collected for a subset of companies, using annual reports and trade publications. Secondary and survey data were then correlated, as follows: sales growth (r = .71, n = 23, p < .001), market share growth (r = 0.66, n = 19, p < .001), and ROE (r = 0.56, n = 17, p < .05). The rationale for using each of these measures is discussed below. (a) Sales growth. As Tsai et al. (1991) observe, sales growth indicates the market acceptance of a venture's products. Growth in sales (measured as a percentage) has been used in several sutdies (Chandler & Hanks 1993; Cooper et al. 1989; Feeser & Willard 1990; Kazanjian & Drazin 1990; McGee & Dowlings 1994; Van de Ven et al. 1984), Miller et al. (1988) suggest that the use of this measure recognizes that market share is a means to an end (profits) and that market share and ROI are related. Thus, using this measure, one evaluates the venture's progress toward making a profit. Despite the popularity of this measure, it is sensitive to economic fluctuations. Further, "[p]percentage growth in sales is problematic for the first few years, because firms are starting from a position of no sales" (Tsai et al. 1991, p. 13). (b) Market share growth. Tsai et al. (1991) suggest that this variable "may be the best measure of new venture performance available"(p. 14). Market share is defined as the company's sales divided by industry sales. However, market share growth data are hard to interpret because the constantly changing boundaries of the emerging biotechnology industry. (c) ROE. This measure gauged the profitability of the venture. However, the use of profitability measures such as ROE to eveluate NVP has been questioned (see Chandler & Hanks 1994b), because it is affected by owners' salaries and other cost items that are frequently not disclosed by the venture. 2. The subjective performance index. A 6-item index was used to assess executives' perceptions of NVP. Executives rated their satisfication with each item, weighted by that item's importance. The use of this index was consistent with past research (Chandler & Hanks 1994a; Covin & Slevin 1990; Randolph et al. 1991; Roberts 1992; Sapienza 1992; Stuart & Abetti 1990). While consistent with the literature, this measure has limitations. As Covin, Slevin & Covin (1990) observe, satisfication with performance might reflect managerial aspirations, a variable not examined in the current research. In addition, Chandler and Hanks (1993) questined the external valdity of this type of measures. However, Brush and VanderWerf (1992) and Chandler and Hanks (1994) found these measures to be

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signficantly correlated with objective performance measures. Thereore, the inclusion of both subjective and objective strategies of CVs and IVs on NVP. This completeness is desirable to resolve the ongoing debate on the best way to measure NVP. To recap, the six-item NV P index gauged managers' perceptions of their ventu re's performance. Two evaluations per item were used. The first indicated the importance of each item (the "importance" score). The second indicated the extent top managers were satisfied with the unit's performance of each itesm (the "satisfaction" score). Importance scores were multipled by their corresponding satisfaction scores. The sum was then divided by 6 (the number of items in the scale). Inter-rater agreement on the index was 0.67 (n = 47, p < .001) and Cronbach a was 0.85. The measures were as follows:

How important is this goal for your company Very Unimportant Important

How satisfied are you with the company's achievement of the goal Very Dissatisfied Satisfied

Return on investment Return on equity Sales growth

1 1 1

2 2 2

3 3 3

4 4 4

5 5 5

1 1 1

2 2 2

3 3 3

4 4 4

5 5 5

Net profit margin Market share Return on assets

1 1 1

2 2 2

3 3 3

4 4 4

5 5 5

1 1 1

2 2 2

3 3 3

4 4 4

5 5 5

Three additional factors provided evidence of the validity of the NVP index used in this study: (1) The results of factor analysis produced a single performance index. This supported convergent validity of the index. Convergent validity is supported when items suspected to guage the same theoretical construct load on the same factor (Chandlder and Hanks 1993; Price and Mueller 1986). (2) The index enjoys content validity, which refers to the extent to which the measure adequately reflects the theoretic domain of NVP. The six items used to develop the subjective index were distilled from the literature. The ROI, ROE, and sales growth items were used by Chandler and Hanks (1993), Covin, Slevin, and Covin (1990) and Sapienza (1992). The market share and net profit margin items were used by Chandler and Hanks (1994). The return on assets (ROA) was added because it gauged the venture's ability to productively use its assets; this variable was used by Chandler and Hanks (1993) to guage NVP. (3) The correlations of the performance index with objective performance measures were significant (all at p < .001): growth in sales (r = 0.64), growth in market share (r = 0.59), and ROE (r = 0.67). These correlations indicated that, while the performance index guaged major aspects of NVP, it also provided additional information from that gleaned through objective indicators. The significant correlations provide evidence of criterion-related validity (Price and Mueller 1986). In summary, whereas a subjective NVP index has limitations, its use in this study helped to corroborate and supplement findings, using the objective NVP measures.

TECHNOLOGY STRATEGY AND NEW VENTURE PERFORMANCE 317

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