The Impact of Innovation and Market Orientation on Nascent Ventures’ Sales Revenues: Evidence from the PSED2 Data Set Jeremy A. Woods Department of Management Carl H. Lindner College of Business University of Cincinnati August, 2012

Nascent Ventures Nascent entrepreneurial ventures represent an enormous potential for value creation in economies around the world (Chrisman, 1999). However, the vast majority of these firms never succeed in achieving initial sales revenues (Everett & Watson, 1998).

Innovation & Market Orientation Two factors which scholars have suggested are important determinants of nascent ventures’ success are: –The innovativeness of their products and services (Covin & Slevin, 1989; Lumpkin & Dess, 1996; Miller, 1983). –Their understanding of customers’ demands in light of current offerings in the marketplace (Hult, Snow, & Kandemir, 2001).

Summary of Findings This paper tests the importance of these factors utilizing a sample of 1,179 nascent ventures from the PSED2 data set. The results suggest that firms which fill gaps in current market offerings achieve initial revenues more quickly than those which introduce innovative products and services. These results provide empirical confirmation of the predictions of extant literature regarding the relative impact of market orientation and innovation on nascent venture sales revenues. The results also provide longitudinal evidence for the amount of time may take for innovation to impact nascent venture revenues.

Innovation Innovation, broadly stated, can be seen as the introduction of new or different products & services to the marketplace (Hult et al., 2001). The greater willingness of customers to pay for new or different products as opposed to more familiar ones has long been highlighted by entrepreneurship scholars as a critical factor in determining which firms survive and which firms perish (Schumpeter, 1934, 1942).

Innovation One critical element of innovation is the extent to which production is based on new technology (Damanpour, 1991). Products & services based on new technologies often add more value for customers than those based on older technologies. Another important element of innovation is R&D spending (Dalziel, Gentry, & Bowerman, 2011). The greater the level of investment a firm makes in R&D, the more likely that firm is to create new and different products and services for the marketplace.

Innovation Based on the aforementioned logic, I submit the following: Hypothesis 1: nascent ventures which introduce innovative products and services to the marketplace are more likely to achieve initial sales revenues than those which do not.

Market Orientation Market orientation, broadly stated, is the focus of firms on creating value for customers (Day, 1994). Two sub-components of firms’ market orientation are attentiveness to their competitive positioning and attentiveness to customer demands (Hult et al., 2001). Ventures which offer products and services which are in demand by consumers, but for which there are few offerings from existing competitors, tend to find a customer base willing to pay for the value they create.

Market Orientation Based on the aforementioned logic, I submit: Hypothesis 2a: nascent ventures which introduce products and services which fill gaps in customer demand are more likely to achieve initial sales revenues than those which do not. Hypothesis 2b: nascent ventures which introduce products and services which fill gaps in competitors’ offerings are more likely to achieve initial sales revenues than those which do not.

Results This paper performed logistic regression analysis on five variables from wave A of the PSED2 data set (1,179 nascent ventures across the USA) as predictors for whether a firm had achieved initial sales revenues or not. The variables analyzed included: –Whether the availability of the technology to produce a venture’s products and services was new (questions AS3 and AS4). –The priority which the venture placed on R&D (question AS5). –Whether the venture had achieved initial sales revenues or not (question AE13). –The newness of a venture’s products and services to its target customers (question AS1). –Whether the lack of competitors offering products and services similar to the venture (question AS2).

Results – Hypothesis 1 To test hypothesis 1, I examined whether the availability of the technology to produce a venture’s products and services was new (questions AS3 and AS4) and the priority which the venture placed on R&D (question AS5) were significant predictors of whether the venture had achieved initial sales revenues or not (question AE13). While the newness of production technology was not significant as a predictor, R&D priority was significant (Wald = 7.583, P < 0.006; B = , Exp (B) = 0.902). While R&D was predictive of the achievement of sales revenues, the results indicate that firms for whom R&D was a priority were less likely to have achieved initial sales revenues, rather than more likely. These results fail to provide support for hypothesis 1.

Results – Hypothesis 2a To test hypothesis 2, I examined whether the newness of a venture’s products and services to its target customers (question AS1) was a significant predictor of whether the venture had achieved initial sales revenues or not (question AE13). This relationship was insignificant, failing to provide support for hypothesis 2a.

Results – Hypothesis 2b To test hypothesis 3, I examined whether the lack of competitors offering products and services similar to the venture (question AS2) was a significant predictor of whether the venture had achieved initial sales revenues or not (question AE13). This relationship was highly significant (Wald = , P < 0.001; B =.147, Exp (B) = 1.158), and indicated that ventures with less competition were more likely to have achieved initial sales revenues than those with more competition. These results provide support for hypothesis 2b.

Post-Hoc Analysis The above-mentioned results may indicate that innovative products have a longer return-on-investment horizon. Given this fact, I also performed logistic regression analysis of R&D investment from wave A of the PSED 2 data set as a predictor for whether a firm had achieved initial sales revenues in successive longitudinal waves of the data set collected from the same firms in the four years following collection of the wave A data. The variables analyzed included: –The priority which the venture placed on R&D in year one of the data set (question AS5). –Achievement of sales revenues in successive longitudinal waves of the data set (questions BE13, CE13, DE13, and EE13).

Post-Hoc Analysis As stated above, I conducted post-hoc analysis of the data to see whether R&D priority in wave A of the data set (question AS5) was a significant predictor of achievement of sales revenues in successive longitudinal waves of the data set (questions BE13, CE13, DE13, and EE13). The relationship was also significant for waves C and D of the data set, and the relationship remained negative, indicating that the aforementioned return- on-investment horizon may be, at the least, greater than four years.

Summary The results in this paper may indicate that scholars, practitioners, and policy-makers alike could have a greater impact on short-term value creation in the economy by focusing on the competitive positioning of nascent ventures, rather than on the innovativeness of these ventures’ products and services.

Next Steps Explore literature on innovation and market orientation in greater depth. Get up to speed on PSED2 data set. Position paper more in terms of nascent venture decision-making in response to failure. Examine family business-specific contextual factors.

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