The success and longevity of businesses might be less about adapting to changing market conditions and more about the conditions under which they were founded, suggests a new study published in the Strategic Entrepreneurship Journal.
The U.S. Bureau of Labour and Statistics data shows a staggering reality: only 25% of new enterprises continue to operate after 15 years. Despite evolving economic climates, this statistic has remained consistent over the past three decades.
Offering a refreshing perspective, D. Carrington Motley, a Carnegie Mellon University lecturer and co-author of the study, elucidates, “The performance of a venture following environmental change is deeply connected to its internal processes, which are largely shaped by the founding environment.”
The research team, which also included Charles E. Eesley from Stanford and Wesley Koo from INSEAD Asia, scrutinized the performance of over 1,000 ventures operating in 19 diverse industries. The time span of the study was extensive, covering businesses founded between 1960 and 2011.
“Companies established in dynamic environments by diverse founding teams exhibit a higher survival rate during market changes, albeit not necessarily yielding a positive exit,” Eesley added.
Interestingly, these companies usually prefer slow, decentralized decision-making, fostering an environment ripe for creativity and flexibility. A diverse founding team adds to this by encouraging a broad strategic focus and extensive information seeking, which are often conducive to weathering market volatility. Yet, these firms may encounter challenges when seeking IPOs or acquisitions if their market stabilizes.
On the contrary, aggressive strategies can lead to better outcomes in stable environments, as per Koo’s observation. Continued risk-averse processes may not yield the desired benefits and could hamper the venture’s response to potential opportunities.
The researchers found that slower decision-making, a characteristic of companies founded in dynamic environments with diverse teams, can be a disadvantage in industries where rapid product development is paramount. Such ventures also struggled to secure angel or venture capital funding swiftly.
The key takeaway from the study: Businesses, whether operating in fluctuating or stabilizing industries, can thrive if the market changes align better with their founding environment. The study thus poses a valuable lesson for entrepreneurs, inviting them to continuously assess their founding structure and internal processes and align them with the evolving market environment for long-term success.
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