Dynamic managerial capabilities in new ventures. An empirical analysis

  1. Rocío Aguilar Caro
Supervised by:
  1. Bárbara Larrañeta Director
  2. José Luis Galán González Director

Defence university: Universidad Pablo de Olavide

Year of defence: 2016

Committee:
  1. María del Mar Villegas Periñán Chair
  2. Gloria Cuevas Rodríguez Secretary
  3. Lucia Naldi Committee member

Type: Thesis

Teseo: 423458 DIALNET lock_openTESEO editor

Abstract

Dynamic Managerial Capabilities in New Ventures. Influence on Performance 1.1 Introduction The success and growth of New Ventures (NVs) plays a major role in our economies as they are the principal generators of new jobs (Birch, 1979) and the development of technological leadership (Zahra and Wright, 2015). For these reasons, the relationship between NVs and performance has received wide research attention over the past decades (Birley, 1987; McDougall, Robinson, and DeNisi, 1992; Zahra, Sapienza, and Davidsson, 2006). Scholars who promote the Resource-Based View (RBV) of the firm have worked on the assumption that sustained competitive advantage derives from the resources and capabilities controlled by a firm that are valuable, rare, imperfectly imitable, and not substitutable (Barney, 1991; Grant, 1991). Proponents of the dynamic capabilities approach have gone a step further by extending the RBV to dynamic markets, stating that performance differentials are explained by the capabilities by which firm managers integrate, build, and reconfigure internal and external competencies (Teece, Pisano, and Shuen, 1997). In the particular context of NVs, founding teams and managers have emerged as the key resource in pushing the venture forward within the competing space (Klotz, Hmieleski, Bradley, and Busenitz, 2014; Chahine, Filatotchev, and Zahra, 2011. As the routines and systems that lay the ground for the effective development of ordinary and dynamic organizational capabilities (Winter, 2000) are unlikely to be fully developed (Helfat and Lieberman, 2002). Indeed, advocates of the Upper Echelon Theory (UE) have provided evidence that executive cognitions, values, and perceptions have an influence on the process of strategic choice and the resultant performance outcomes (Hambrick and Mason, 1984). In this direction, the Dynamic Managerial Capabilities (DMCs) of NVs’ founders and managers deserve special attention when trying to explain performance variations across new ventures. DMCs are the capabilities with which managers create, extend, and modify the ways in which firms make a living (Adner and Helfat, 2003). They draw on a set of underlying managerial resources, namely, managerial human capital, managerial social capital and managerial cognition, which provide the basis for the patterned aspects of managerial intentionality, deliberation, decision making, and action (Martin, 2011). DMCs constitute a “unique core” to the resource bundle of the firm, which then drives the creation, extension, and modification of the firm’s resource portfolio, constituting the basis for why firms differ in their strategies and performance (Kor and Mesko, 2013; Townsend and Busenitz, 2014). Despite the importance of DMCs for a NV’s ability to achieve congruence between its competencies and changing environmental conditions, we know little about DMCs in NVs. The literature needs to determine which the specific attributes of DMCs in NVs are and how differently these attributes contribute to NVs performance during the early stages of the venture. Moreover, DMCs are expected to be crucial under conditions of change, yet we do not know how variations in the level of change experimented in the firm environment affect the role played by the three DMCs dimensions for NV performance. The literature needs to understand if all three DMCs dimensions are universally relevant for performance or their effects are contingent to the level of environmental change. 1.2 Research questions In this dissertation, we would like to contribute to our knowledge about the capabilities of NVs, by analyzing a specific capability: DMCs. In so doing, we assume that certain number of organizational capabilities emerge from the characteristics of the executives themselves rather than from organizational routines and procedures (Teece, 2012). This assumption is especially important in the context of NVs. NVs limited organizational experience makes capabilities residing in the managers to gain relevance when explaining heterogeneity in performance. The research gaps we identify in our literature review lead to two main overarching sets of questions. The first set of questions is related to providing a framework for measuring DMCs in the context of NVs. In spite of being a widely studiedd concept, no study to our knowledge offers a framework with which to measure DMCs that takes into accountt its three dimensions in combination. Most existing studies are theoretical articles that try to foster the concept of DMCs or use the concept in an implicit way (to explain other phenomena). Most importantly, very little is known about the measurement of DMCs in the particular context of NVs (Townsend and Busenitz, 2014). As companies evolve in their lifecycle the challenges and opportunities they face vary significantly, signaling the possibility that different team characteristics may be more or less important at various phases in the development of NVs (Brixy, Sternberg, and Stüber, 2012). Surprisingly, current research lacks longitudinal studies that examine the characteristics of NV managerial teams across different stages of the entrepreneurial process (Klotz, Hmieleski, Bradley, and Busenitz, 2014). The second set of questions relates to the deployment of DMCs in NVs. How could DMCs’ underpinnings help to improve NVs' performance? Are all of their underpinnings equally important? What roles do the features of the team, the firm itself, and ultimately the degree of change in the environment play in the relationship between DMCs’ underpinnings and NV performance? All three DMCs underpinnings -managerial human capital, managerial social capital and managerial cognition- develop through managers prior experiences (Helfat and Martin, 2015); therefore, the same experience may contribute simultaneously to the three attributes of DMCs (Beck and Wiersema, 2013). Measuring all three DMCs dimensions and exploring empirically the relationships between them as we do in this study is hence important in order to not incur in errors and misinterpretations in their assessment. 1.3 Objectives The overall objective of this dissertation is the study of DMCs in NVs. More specifically, this study aims to understand the deployment of DMCs in NVs, its implications for performance, and the contingencies exerted by the degree of environmental change. We begin by offering a framework for measuring DMCs. This framework allows us to explore how these capabilities impact NVs’ performance by assessing the relative importance of the three distinct underpinnings of DMCs -managerial human capital, managerial social capital and managerial cognition- during the early years of activity of entrepreneurial ventures. Importantly, we seek to understand the role that the features of the team, the firm and ultimately the environment play in the relationship between DMCs’ underpinnings and NV performance. The dissertation seeks to make several contributions to the literature on NVs as well as to the literature on DMCs. Overall; we move the body of literature on DMCs from its original theoretical conceptualization into its actual empirical measurement and assessment. We provide a broad perspective on how DMCs are configured in the early stages of NVs’ development. Our empirical study reveals that not all DMCs' dimensions -managerial human capital, social capital, and cognition- have the same impact on performance during the early years of a venture's activity. Also, some of these dimensions may prove to be universally relevant, whereas the effect of others may be contingent to the level of environmental change. 1.4 Scope of the dissertation 1.4.1 Theoretical scope This dissertation falls within two fields of research: strategic management and entrepreneurship research. Within the strategic management research this study essentially relates to one of the fundamental questions of this area of research: why firms are different and perform differently? (Porter, 1991; Rumelt, Schendel & Teece, 1991). In so doing we rely on the major predominant perspectives in organization and strategic management on the sources of organizational differences when referring to internal factors in the search of these explanations: the resource based view (Amit & Schoemaker, 1993; Barney, 1991; Peteraf, 1993) and the dynamic capabilities approach (Winter, 2003). We particularly focus on the founders and managers as the key firm internal element explaining performance variations across NVs exploring DMCs, the capabilities with which managers build, integrate, and reconfigure organizational resources and competences (Adner and Helfat, 2003) for achieving dynamic fit under changing conditions (Peteraf and Reed, 2007). Within the field of entrepreneurship research this dissertation relates to the set of individuals who discover, evaluate and exploit entrepreneurial opportunities (Shane and Venkataraman, 2000). Within the entrepreneurship literature there exists a broad consensus in that the team that pursues a particular opportunity is the key explanatory factor of the success of the venture (Klotz, Hmieleski, Bradley, and Busenitz, 2014). The concept of DMCs helps to explain the relationship between the quality of managerial decisions, strategic change, and organizational performance (Helfat and Martin, 2015). The link between the two fields of research is based on the need to understand how entrepreneurs develop capabilities related to entrepreneurial, managerial, and technical functional roles, who could assist them in recognizing and exploiting opportunities and ultimately achieving superior performance (Penrose, 1959). 1.4.2. Empirical scope The empirical study of the dissertation focuses on new ventures, firms in their early 6 to 10 years of existence (McDougall, Robinson, and DeNisi, 1992)), that operate in knowledge-intensive service industries that entered the alternative investment market of the London Stock Exchange (AIM) during their first two years of existence for the period 2004 to 2010. These are a total of 126 ventures that were tracked from 4 to 10 years after their register. Our sample consists mostly on British NVs, although most of them operate globally. In spite of only considering service firms, our sample is multi-sectorial and the activities developed are diverse: information and communication, financial and insurance activities, administrative and support service activities, among others. However, most of the companies are involved in professional, scientific and technical activities. These particular ventures represent an especially relevant setting for answering our research questions for several reasons. First, new ventures that intend and manage to go public soon after inception are managed by ambitious teams that exert a strong influence on the endeavors of the firm. Second, services have a number of characteristics that make them not very visible to the consuming public (i.e. being non-standardized intangibles; being labour intensive; and requiring high customer participation), a fact that strengthens the important role that managers have to play in order to reduce the ambiguity around their services while trying to bring them to the market. Finally, the various service industries under study (i.e. information and communication; professional, technical and scientific activities; and financial and insurance activities differ in their levels of change and dynamism. The level of environmental change is meant to affect the type of experience and the required abilities of management teams. 1.5 Research methods The conceptual framework and hypotheses of the dissertation are developed based on extant literature. Our literature review departs from Helfat and Martin’s (2015) recent paper about DMCs. The literature review allowed us to determine what is currently known about DMCs in the context of NVs. Importantly, the literature review signaled a lack of studies measuring DMCs’ three underpinnings in combination, a finding that led us to undertake a second literature review to explore empirical studies that explained independently a single DMC underpinning –managerial human capital, social capital or cognition–. This review helped us to identify the key characteristics of managers that should be considering when trying providing a framework for measuring DMCs. Departing from the literature review we gathered fine grained information about the backgrounds and experiences of all ventures’ top management team members for the period under study. The longitudinal data on managers were gathered from the various sources of secondary data: firm’s annual reports’ and completed by information from Amadeus, LexisNexis, professional social networks such as LinkedIn, and economic webpages such as Bloomberg and Zoom Info. Data at the firm level, such as performance, size, ownership, among others and data at the industry level, such environmental dynamism were compiled from Amadeus. The empirical study is longitudinal in nature. That is, data is collected at different points in time: yearly observation for a period ranging from 4 to 10 years. The quantitative approach makes it possible to empirically test hypotheses derived from extant theoretical and qualitative work, and it allows for the simultaneous inclusion of elements derived from different theoretical approaches. With this quantitative approach, this dissertation aims at consolidating and expanding the existing knowledge on the fields of strategic management and entrepreneurship and subjecting them to rigorous testing. In this study, factor analysis and dynamic panel regression analysis, among other multivariate techniques, are employed to test whether the hypothesized relationships between the constructs hold in the data. The reliability, validity, and limitations of the study are carefully assessed. 1.6 Overall research design and reading guide The dissertation is structured as following. In the first chapter, we set forth the broad research problem and the specific questions that will be examined in this dissertation, and identify the objectives, research questions and research methods of the study. In Chapter 2, we summarize the state of the art of the research on DMCs in general and in the context of NVs in particular and identify current research gaps in the literature on DMCs. In Chapter 3, we describe the empirical setting of the dissertation: the population and sample. We provide a detailed description of the variety of NVs and industries under study. We offer descriptive statistics on the main variables used in the dissertation. In Chapter 4, we describe the process followed to provide a framework for measuring DMCs. We provide details about the selection and justification of the variables used for measuring DMCs’ underpinnings, and report the factor analysis by which we identify the key factors underlying NVs’ DMCs. In Chapter 5, we present and empirically test the research model of the dissertation, in which we explore the influence of DMCs’ underpinning on performance and the contingency effects of the degree of environmental velocity. The models are tested using panel data analyses controlling for variables at different levels: TMT, board, firm and industry. Interesting significant results are obtained. Finally, in Chapter 6 we present the key findings of the dissertation, recognize the overall limitations of the study, and identify the managerial implications and potential future research avenues.