Strategic experimentation: Understanding change and performance in new ventures

This research was motivated by an interest in understanding more about the extent to which entrepreneurs initiate changes along various dimensions of strategy, the nature of those changes and their implications for firm perfo rmance. Our interest in this topic began with the observation that, within the large body of strategic-change literature, the research effort has focu sed almost exclusively on large and established firms. Moreover a fundament al assumption underlying much of this work is that strategic change involve s movement from one dominant strategic approach to another This premise doe s little to motivate or contribute to the understanding of change and strat egy in new ventures, where it is less likely that a dominant approach exist s. Thus, we drew upon the literature in managerial cognition to develop the idea of strategic experimentation as the conceptual foundation for studyin g change and strategic in new ventures. Our basic premise is that in new ve ntures, changes along dimensions of strategic are reflective of a process o f trial and error learning whereby the entrepreneur seeks to develop an und erstanding of the competitive situation and determine how to compete within that context. Further, we suggest that some aspects of the firm's strategy are more likely to be the focus of experimentation than others. Building on these premises we developed a series of research hypotheses whi ch propose that the greater the level of perceived environmental hostility, the higher the level of strategic experimentation that will be undertaken. We also propose that experimentation will always be greater along some dim ensions of strategy than others, and that the degree of environmental hosti lity will influence the extent to which there ave performance benefits asso ciated with strategic experimentation. Our hypotheses are tested ruing data from a three-year study of over 400 young businesses. Overall, we find sup port for our assertions. For entrepreneurs and their advisors, this study has several important impl ications. First, it suggests that strategic experimentation is a normal par t of the process by which entrepreneurs seek to position their businesses. Although the present study does not empirically address the linkage between formal planning and experimentation,the learning and cognition literature upon which the construct of strategic experimentation is based suggests tha t, no matter how much attention to derail is involved in the preparation of the business plan, the actual formation and development of the business wi ll involve considerable adjustment to and/or deviation from that plan. This is because the process of new business development involves iterative chan ges in the way the entrepreneur positions his/her firm as he/she develops a n understanding about what does and does nor work. The results of this stud y further suggest that some dimensions of the firm's strategy are,more like ly to change than others. Specifically, it appears that peripheral changes (competitive emphasis and time allocation) are more likely to be the focus of such learning and adaptation efforts than core feature (product scope an d partnership status). This, in part, is because the former dimensions are easier to change than the latter Moreover, our results show that ventures i n,more hostile environments clearly face difficult dilemmas. Although poor performance may stimulate experimentation along various dimensions of strat egy, the complexity of learning within a hostile environment suggests that entrepreneurs will have a particularly difficult time determining the type of changes that will make a difference. (C) 2000 Elsevier Science Inc.