The origins of capabilities

Research Paper Title:

“The origins of capabilities: Resource allocation strategies, capability development, and the performance of new firms”

Authors:

Noni Symeonidou (Warwick University)

Aija Leiponen (Cornell University)

Erko Autio (Imperial College London)

Johan Bruneel (IESEG and KU Leuven)

Background:

Which is the faster way to sales growth in start-ups? Should entrepreneurs develop a broad range of functional capabilities early on (e.g., R&D, marketing, and manufacturing), or should they initially specialize in a single capability only (e.g., R&D)? The authors show that focus is better, and it is all about reaching the legitimacy threshold! Free download of our forthcoming JBV article below! #startup #salesgrowth

Highlights:

• The authors investigate the performance implications of broad versus narrow scope in new firms' functional capability development

• Focusing on any single functional capability is more conducive to performance than the development of multiple capabilities

• New ventures with experienced founders suffer less than other firms from adopting a broad capability development strategy

• Ventures with external financing may even benefit from a broad capability strategy

Methodology:

• Sample Description: The authors test our hypotheses using an eight-year panel of new US ventures established in 2004

• Sample Size: 6,748

• Analytical Approach: Our main models were estimated with linear random-effects panel regressions, and the authors evaluated empirical identification of the hypothesized effects using an instrument

Hypothesis:

1. Greater focus on functional capability development is positively associated with new venture sales growth (supported)

2. The positive relationship between focus on functional capability development and new venture sales growth is less pronounced when entrepreneurial experience is high (supported)

3. The positive relationship between focus on functional capability development and new venture sales growth is less pronounced when external financing is present (supported)

Results:

1. Focusing on any single functional capability (R&D, production, or marketing) is more conducive to new venture sales growth than simultaneous and balanced development of multiple functional capabilities

2. The positive relationship between functional focus and revenue growth is less pronounced when the founder's prior entrepreneurial experience is high.

3. The positive relationship between functional focus and growth is less pronounced when external financing is present.

Conclusion:

This study has implications for new ventures’ capability development and resource allocation strategies. New ventures should pursue focus (or specialization) in capability development by primarily developing a single functional capability, rather than attempting to develop all functions in parallel. A broad resource allocation strategy of developing R&D, production, and marketing capabilities simultaneously may be risky if new ventures lack the ability to fully develop and integrate multiple capabilities. However, a broad portfolio of capabilities is less damaging (or even beneficial) to firms with abundant resources, such as experienced founders with prior experience in starting and running an early-stage organization, or access to external financing that alleviates financial pressures. Focusing on a single functional capability may thus compensate for resource access by enabling the firm to accelerate learning to build valuable capabilities.