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Abstract

  1. Top of page
  2. Abstract
  3. Introduction
  4. Method
  5. Discussion and implications
  6. Conclusion and limitations
  7. References

There have been many successful e-businesses as well as many failed e-businesses. The methods and practices that were evident in the development of both surviving e-businesses and failed ones have much to teach us. Why did some e-businesses fail while others survived? At present few guidelines exist to assist e-business owners and managers wanting to succeed in their Internet-based ventures. This study empirically investigated factors that may lead to e-business success or failure; these were categorized as management, market, and financial factors. The results of a survey were combined with one-on-one interviews of venture capitalists who funded successful and failed e-businesses. The results indicate that certain factors deemed applicable to an e-business may have contributed to the firm’s eventual success or failure.


Introduction

  1. Top of page
  2. Abstract
  3. Introduction
  4. Method
  5. Discussion and implications
  6. Conclusion and limitations
  7. References

The closest that can be estimated is that there are between 7,000 and 10,000 Internet companies that have been funded by venture capitalists, firms, private investors, and other formal sources (You Call This a Bust?, 2001). The number of e-business failures from the year 2000 to the end of the second quarter 2002 was 862; this includes both venture capital funded ventures and other companies (Webmergers.com, 2002, 2003). Most shutdowns and bankruptcies of Internet firms occurred in 2000 and continued into 2001 and 2002. Failed e-businesses have been notably infamous, as the “dot-com bomb” era has shown. However, from a business standpoint, there have also been many successful e-businesses. For example, whereas GE, IBM, and Sears failed to establish Internet service business, America Online was highly successful. Why did some e-businesses fail while others survived?

Little research has been published on the reasons for e-business success or failure. Several studies have addressed the issue of the quality of the website as it relates to the success or failure of a company (Francis & White, 2002; Loiacono, Watson, & Goodhue, 2002), and some studies have addressed the success of the business-to-business aspect of some firms. However, the academic literature has not empirically explored the specific factors that lead to the success or failure of an e-business. This study investigates factors that may lead to e-business success or failure.

To further our understanding of the elements involved in the success or failure of an e-business, three factors were considered. These factors were found to be significant in previous studies of success factors for small businesses in the brick-and-mortar world, and may be considered relevant to e-businesses. A survey study was conducted in which the respondents were entrepreneurs and managers who had experienced an e-business success or failure first hand and were intimately involved with the company. In addition to the survey, qualitative research was conducted in the form of in-depth interviews with venture capitalists who were also instrumental in the development of e-businesses. The broader objective of this study was to gain insight into the reasons for the dot.com failures in order to help existing and new e-businesses avoid the mistakes of the failed firms and thereby to have a better chance of success.

Literature review

Theories and concepts that examine the models and strategies used by e-businesses are still in their infancy. However, traditional academic literature in the field of new business is rich with suppositions as to the reasons for small business success or failure. In starting a new business, certain strategies, tactics, and competencies are usually assumed to be relevant. The majority of e-business executives surveyed in our study worked for businesses that were young. Thus, literature in the new business field is examined as well as Internet business studies.

Although several recent studies on e-business failure have been done, few are empirical in nature; most offer suppositions as to the causes of e-business success or failure (Freisen, 2002; Pandya & Dholakia, 2005; Razi, Tarn, & Siddiqui, 2004; Rovenpor, 2003). Those that are empirical, such as a study on the success factors for B2B (business-to-business) international Internet marketing (Eid & Trueman, 2004) and a cross industry review of B2B success factors (Eid, Trueman, & Ahmed, 2002), have examined different aspects from this study. One empirical study of managerial motivations for choosing an e-business conducted with Australian firms showed that managers hoped to gain a competitive advantage by improving customer communications and improving the functionality of the business (Berrill, Goode, & Hart, 2004). It did not, however, examine the factors that lead to failure.

To our knowledge, there has been no empirical study of specific factors which may relate to success or failure of an e-business. The following review traces the literature of brick-and-mortar firms as well as Internet literature relevant to the current study.

Management factors

Management decisions made during the start-up period of a new venture can be a key factor in the success or failure of a firm. According to Dun and Bradstreet’s failure categorizing system, poor management is responsible for 90% of business failures (Dun & Bradstreet Corporation, 1981). Many key management skills needed to see a firm through the first turbulent years have been identified in the academic literature; these include several general management factors. Out of these three factors have emerged that may prove to be applicable to the success or failure of an e-business. These have been condensed from the factors found to be significant in multiple studies (Bruno & Leidecker, 1988; Cooper, 1999; Duchesneau & Gartner, 1990; Gartner, Mitchell, & Vesper, 1989; Grossi, Lange, Rebell, & Stern, 2000; Huang & Brown, 1999; MacMillan, Zemann, & Subbanarasimha, 1987; Perry, 2001; Venkataraman, Van de Ven, Buckeye, & Hudson, 1990). The three factors are management vision, professional orientation, and managerial experience.

Management vision

Several studies investigated the roles that the management team or individual plays in the formative stages of new business development. Many variables have been considered as relevant to business success; in particular, identifying a business idea that is ‘clear and broad’ as well as the breadth of vision of the company have been found to be significant management factors in several studies (Bruno & Leidecker, 1988; Duchesneau & Gartner, 1990; Grossi, et al., 2000). Many companies start out without a clear idea of what their business should encompass, or they have defined it in terms that are too narrow, which may hamper growth and expansion.

In a study by Duchesneau and Gartner (1990), quantitative and qualitative data were collected on 26 businesses under seven years of age. Half of the firms (13) failed while the other half were found to be thriving. Duchesneau and Gartner found significant differences in the firms in three categories: start-up processes, the subsequent behavior of the management team, and the characteristics of the entrepreneur.

The management team or lead entrepreneur who had a clear vision for the company was found to be able to adapt to changing business situations and overcome many sources of adversity. A narrow or vague commitment by management led to failure, whereas those managers with ambitious goals and dreams were more likely to survive (Duchesneau & Gartner, 1990).

In a related study, Bruno and Leidecker (1988) compared the literature on new business failures in the 1960s to that in the 1980s. Their research identified several important management factors leading to failure in both time periods. One factor identified was the lack of a clear and broad vision of the business. Managers in both time periods concurred on this factor. In addition, unclear business strategy was also a factor identified in both time periods.

A study of failed e-businesses using secondary data surmised that one of the reasons for failure was that the management teams ignored the fact that they were marketing innovative services (Pandya & Dholakia, 2005). They concluded that the dot.com debacle was not just the result of poor management and lack of funds, but of the failure of a whole new genre of services. Thus, the vision of the managers was lacking in depth of understanding of the products sold and the kind of marketing needed for this new genre.

Lack of focus on the definition of the firm can also lead to failure if the firm has been trying to be everything to everyone and does not narrow down the source of its competitive advantage (Grossi, et al., 2000). In several cases of e-businesses, such as Wired magazine, too many co-founders had different views on what the company should be, resulting in confusion on the part of the employees and—in the case of Wired—an eventual sell-out to a large magazine conglomerate. One employee of Wired saw the problem as having so many visions that it led to the employees ending up “cross-eyed” (Moran, 1998).

Adequate planning is yet another aspect of management that has been examined. Planning time and the breadth of planning can be key in the eventual success or failure of a firm. Successful firms were found to have invested more time in the planning stage than unsuccessful firms (Cooper, 1999; Duchesneau & Gartner, 1990; Gartner, et al., 1989; Huang & Brown, 1999; Perry, 2001; Rovenpor, 2003; Venkataraman, et al., 1990 ;). With the rapid introduction of e-businesses in the mid to late 1990s, planning may be a significant factor that was ignored.

Duchesneau and Gartner (1990) conducted a field study of 26 small new firms in which 13 firms succeeded while 13 of them failed. They found that the successful firms spent an average of 237 hours in planning prior to the start of the new business, while unsuccessful firms spent about 87 hours. The mean for the failed firms was 84.92 hours, and the mean for the successful firms was 237.30 hrs; the difference had a significance level of .001. The study was conducted using new companies that were in the distribution of fresh juices market in metropolitan areas. This was approximately 30% of the U.S. market. The planning time in this industry may not be as high as in some other industries, and may have contributed to the low hours reported for this function. The time was operationalized by asking respondents the number of weeks spent planning and the average hours per week. The study found that most businesses did not have formal planning processes, which may account for the lack of planning time, but management did have personal ways to analyze critical strategies for decision making while in the initial stages prior to start-up. The successful firms made at least a small effort in market research and had a more comprehensive process of planning, while the failed firms had done little to no market research.

Planning was found to be useful in successful new ventures not only in strategy but for how management planned to acquire the skills and perform the tasks needed to run the business (Gartner, et al., 1989). Perry (2001) also found that planning was neglected in most business start-ups. His study looked at the effect of poor planning and the failure of businesses. Managers who engaged in a modicum of planning were more likely to continue to do so. The study found significant differences in the statistical means of failed and successful businesses in that the extent of planning breadth was related to the failure or success of the firm. An analysis of 31 dot.com failures by Rovenpor (2003) also cited poor planning as a possible cause of failure.

In a study of five failed dot.coms, the firms were analyzed using the prospectuses of the SEC filings (Thornton & Marche, 2003). The researchers found common flaws in the prospectuses, including lack of detail, poor contingency planning, and lack of financial controls.

Professional orientation

Whether or not the management team used professionals, such as lawyers, accountants, and marketing firms, in the start-up phase has been found to be a factor in their success or failure (Duchesneau & Gartner, 1990; Gartner, et al., 1989). Few managers are experts in every discipline. Therefore, it may aid a new business to seek expert advice on relevant issues before they become problems.

Since the environment of the dot.com world was characterized by rapid technical change and strategic complexity, managers may have spent most of their time on the more traditional concepts of marketing or product functions and little time on searching for professional resources to help them initiate a solid e-business model (Gartner, et al., 1989). In a study by Duchesneau and Gartner (1990), the use of professionals was found to be an important element of success. Successful management teams were open to any information, good or bad, that would help them improve their firm’s performance.

These issues could have been particularly relevant to an e-business in the context of the youthful culture that characterized early dotcoms and the exuberance and self-assuredness that may have dissuaded managers from seeking qualified professionals for help early in the process. In addition, the area of e-business was so new that many managers may have felt they were more qualified than the professionals to handle different areas of business functions.

Another management factor that has been recognized as important in several studies is the inability of the management team to manage rapid growth and change in the first several years of the firm’s existence (Grossi, et al., 2000; Huang & Brown, 1999; MacMillan, et al., 1987; Venkataraman, et al., 1990;). This factor would be particularly relevant to an Internet company where business is conducted in a rapidly evolving medium.

Managerial experience

Lack of experience in a situation that requires handling significant growth was also found to be a factor in several studies (Huang & Brown, 1999; Rovenpor, 2003; Thorton & Marche, 2003). Managers simply lacked the experience to show them how to react to certain business problems.

Although there are many similarities, the culture and management styles that characterize an e-business can be different from those of a regular brick-and-mortar firm. E-businesses are usually more informal and attempt to foster an air of creativity. The typical e-business exists in an environment that moves at the “speed of Internet” or in “real time” (Grossi, et al., 2000). Firms that have trouble moving quickly in this environment are at a severe disadvantage. This could be a significant element in a brick and click firm where the parent company mandates a careful, slow adaptation to the Internet environment.

Thornton and Marche (2003) reported that of the five failed firms they studied, each exhibited a rapid rate of growth. They suggested that the businesses grew so quickly that they had no time for making wise, effective decisions. For example, eToys grew from 13 employees to 940 in the space of a little over two years.

Of the five failed dot.coms analyzed by Thornton and Marche (2003), most of the management teams had no prior experience in the specific industry. Only pets.com has a team member from the brick-and-mortar firm, Petco. Dubini (1989) found the level of experience that an entrepreneur brings to the table to be a useful predictor of success. Measuring the level of the entrepreneur’s skill and competence is a more precise way to measure management acumen than the entrepreneur’s “gut feelings.” How the entrepreneur has reacted in the past to risk and turbulent environments, and the ability to manage people and to sustain the effort involved to make a business successful, will give the venture capitalist a more objective standard by which to choose firms for investment. However, in the rush to market of e-businesses in the mid to late 1990s, many venture capitalists may have overlooked this factor. With an opportunity at their doorstep to reap what they thought would be high rewards, experience was probably not a factor in their decision.

Similarly, Shepard, Douglas, and Shanely (2000) argue that without industry-specific information and start-up experience, mortality risk increases. Novelty to the task of management is defined as “the entrepreneurial team’s lack of business skills, industry specific information, and start-up experience” (p. 395). As the novelty on the part of the entrepreneur on several factors increases, the propensity to fail may also increase. New ventures need to be well managed. A chronic problem identified in the Shepard, et al. study is lack of organization, a crucial management skill.

Based on the variables examined as relevant to the management factor, the following hypotheses were examined and predicted to be positively related to the success of an e-business.

Hypothesis 1: Management vision will be positively and significantly related to the success of an e-business.

Hypothesis 2: Professional orientation will be positively and significantly related to the success of an e-business.

Hypothesis 3: Management experience will be positively and significantly related to the success of an e-business.

Market factors

In the e-business arena, several studies have concentrated on the market factors influencing e-businesses (Grossi, et al., 2000; Honjo, 2000; Porter, 2001).

Three variables will be examined for the market factor based on studies in the literature. The variables are those that were mentioned most frequently in several studies. The three variables are market growth, market newness, and first entrant.

Market growth

The growth rate of the market being entered into can be a relevant factor for success or failure (Dubini, 1989; MacMillan, et al., 1987). On the one hand, a growing market creates opportunities; on the other hand, it puts strain on resources. The pursuit of a growth market may require resources to develop quality products, to develop distribution channels, etc. In a study examining start-up ventures in a turbulent environment, Venkataraman, et al. (1990) found that due to the nature of the new venture itself, a “liability of newness” (Stichcombe, 1965) existed. When internal and external factors make immediate survival difficult, one of the more salient reasons for failure identified was the inability of the management team to manage rapid growth and change. When transactions crucial to the growth and survival of the firm failed early on in the life of the firm, the management team did not have time to adapt.

A growing market also attracts competitors. Competition has been touted by many studies as a key determinant of success or failure (Birley, 1986; Dubini, 1989; Gartner, et al., 1989; Grossi, et al., 2000; Honjo, 2000; MacMillan, et al., 1987; Venkataraman, et al., 1990; Watson, 1999). The competitive climate in which early e-businesses existed was difficult to analyze. During the early years of dot.com businesses, competitive advantages in the form of superior product, distribution channels, and marketing acumen were crucial to survival. Many firms found that distribution channels were already sewn up by the large brick-and-mortar firms. E-toys had a problem when they tried to acquire much-needed inventory at Christmas time. The larger, more established toy companies had cornered the distribution channels and were given priority over the small, online newcomer. However, competitive advantages attained by some firms have been the foundation for developing a long-term business. Amazon.com attained a competitive advantage in the area of bookselling by being able to understand its customers and offer them a unique, customized Web site experience. Firms such as Barnes and Noble that tried to move online later in the game faced considerable competition from Amazon. AOL.com forged alliances with numerous companies as a way to compete with other portal sites. Online procurement and extended channels to reach end users can be utilized to attain competitive advantages. E-businesses using these abilities will serve to intensify the competitive landscape of the Internet. The aforementioned discussion suggests that market growth may or may not contribute to the success of e-businesses.

Market newness

The degree of a market’s newness to the company determines the complexity involved in the operations as well as marketing of its programs. The market could be new because the product is new to the company and/or because the chosen market is new. In either case, the newness creates uncertainty and risk. In the case of a business just starting out, it may be difficult to determine if there is a sufficient market and if that market is continuing to grow. The ‘liability of newness’ can also cause a decline in a business due to its age because of the roles and tasks that require learning, and the lack of history dealing with suppliers, clients, and supporters of the venture (Stinchcombe, 1965).

In the context of an e-business, the medium of the Internet itself poses another layer of newness. The strategies and processes necessary to deal successfully with the digital environment are only now being examined. Lack of knowledge due to the newness of the Internet could be a relevant issue. Effective strategies for e-businesses depend on how the entrepreneur interprets the market and industry. If the market is not interpreted correctly due to the newness factor, pressure to engage in destructive practices could result (McGrath & Heiens, 2003).

Several studies find a relationship between age and firm failure, with an inverse curve: The longer the life of the firm, the less chance of failure. Although the numbers vary, at least 43% of new ventures failed within the first three years, according to a study of new firms in Michigan over a three-year period (Hoad & Roscoe, 1964). In other studies, the rate has been as high as 50% in the first 18 months in the U.S. (Siropolis, 1977). Dun and Bradstreet’s statistics show that 18% of the failed businesses were in the retail sector, which could be more predictive of the e-tailing sector (Dun & Bradstreet Corporation, 1994). Many companies fail during the introductory stage of their industry lifecycle. Those that survive may lack the resources to keep up with the competencies needed in the new markets.

First entrant

In addition to achieving competitive advantage using innovative strategies, Amazon.com was one of the first e-businesses with a retail product offering which gave them the advantage of being the first entrant or first mover. The first entrant advantage has been frequently investigated as a market factor that may lead to the success of a new business (Grossi, et al., 1992, 2000; Porter, 2001; Robinson, Fornell, & Sullivan, 1992). The skills and resources required for initial market entry could either increase or decrease the first mover advantage. For instance, a first mover with superior marketing skills or a new to the world product could have a definite advantage over later entrants (Robinson, et al., 1992). However, the skills and resources necessary for an e-business were not clearly defined in the early days of the dot.com boom and still are not. This may have led to a phenomenon that is the opposite of the first entrant advantage—a first e-entrant disadvantage.

The issue of the ‘first mover’ so readily touted by virgin dot.coms may have also been a factor leading to failure. Many new dot.coms thought they were destined to succeed by the mere fact that they were pioneering business in a new medium of the Internet. What they may have failed to take into account were the more traditional skills and resources necessary to any new business. The new firms were pioneering unknown territory, not only in terms of products and services, but also through a whole new medium of delivery that the normal consumer was only beginning to use. Brick-and-mortar companies with physical assets, which held back until the dust cleared, are now launching successful sites. They may have learned from the mistakes of the first movers, watching the outcome of strategies and business models used in early e-businesses and later entering the market with superior skills.

In trying to be the first mover, early entrants may have ignored some of the fundamental functions of starting a business. “First movers dashed out without ever mastering the fundamentals of their business,” wrote Freedman (2000, p. 49) in an article geared toward debunking myths. Whether this is a factor in the success or failure of an e-business will be investigated in this study.

Thus, the following hypotheses are examined:

Hypothesis 4: The market growth factor will be significantly related to the success of an e-business.

Hypothesis 5: The market newness factor will be significantly and negatively related to the success of an e-business.

Hypothesis 6: The first entrant factor will be significantly and negatively related to the success of an e-business.

Financial factors

Several financial factors are included in this study as being potentially relevant to an e-business; these have been examined in other studies (Birley, 1986; Bruno & Leidecker, 1988; Grossi, et al., 2000; Honjo, 2000; Huff & Wade, 1999; MacMillan, et al., 1987; Watson, 1999).

Three variables will be examined below as financial factors. These are stock market performance (IPO), start up capital, and cost of site operations.

Stock market performance

In two studies of failure rates for firms, Altman (1968, 1983) found that firms are more likely to fail if there is no real economic growth in the country. For example, when the money supply growth is low, increased business formation in a time of poor stock market performance will make it more difficult for a new firm to succeed. Capital and resources will be scarcer and tend to flow in the direction of more established firms.

In terms of the e-business in the dot.com boom era of the late 1990’s, these environmental conditions were not in place in the U.S. economy. Those startups that were able to participate in the tech stock boom of the mid- to late-1990s profited from their IPOs. Many others who were less fortunate faced serious losses, including bankruptcies, in the period of early 2000 and on into 2001 and 2002. Thus, we expect stock market performance to be significantly related to the success of e-businesses.

Start up capital

Some analysts believe that there was a deeper problem related to the devaluation of the dot.com stocks. According to Scott Bleier, the chief investment strategist at Prime Charter, “The problems within tech, go beyond the fact that the group lacks earnings visibility. There was a structural problem in the market with too many dollars chasing too few stocks” (quoted in Rannazzisi, 2001).

Real economic growth, stock market performance, and money supply growth were identified as contributing to the success or failure of a new business in a study by Birley (1986). Businesses that require larger amounts of capital were found to have a higher bankruptcy rate (Watson, 1999). The financial strength of a firm as well as the cost of operations were factors to consider in the success or failure of a business in several studies (Grossi, et al., 1987; Honjo, 2000; Huff & Wade, 1999; MacMillan, et al., 1987; Watson, 1999). Those e-businesses that lack sufficient startup capital to sustain their operations are expected to fail.

Cost of site operations

The cost of operations for an Internet website may have been underestimated in the early days of e-commerce. It is estimated that to develop a website that is cutting edge can cost on average anywhere from $1 to $5 million. Such a site should be capable of multi-operational models including e-commerce, Customer Relationship Management (CRM), channel functions and informational sources, and should give its firm a competitive advantage. Maintenance for an average site with e-commerce capability is estimated at $1 million, with an increase of 25% over the first two years (Alexander, 1999). Forrester, an Internet research firm, estimated that average annual operating costs were $206,000 for large promotional sites, $893,000 for content sites, and $2.8 million for transactional sites (Huff & Wade, 1999). The cost of a site today is probably even higher.

As regards e-businesses, the trial and error element of the dot.coms, and the adoption curve of consumers that is inherent in the medium, make the cost of site operations a factor that could lead to success or failure. New companies may have lacked the resources to give them flexibility when it came to switching gears. Even though many e-businesses had strong initial backing, it was not enough to sustain the business through repeated lack of earnings. Surviving in a turbulent environment such as the dot.com companies faced is not an easy task. This leads to the following hypotheses:

Hypothesis 7: The stock market performance factor will be significantly related to the success of an e-business.

Hypothesis 8: The availability of start up capital factor will be significantly and positively related to the success of an e-business.

Hypothesis 9: The cost of site operations factor will be significantly and negatively related to the success of an e-business.

Method

  1. Top of page
  2. Abstract
  3. Introduction
  4. Method
  5. Discussion and implications
  6. Conclusion and limitations
  7. References

Sample

The data for the study were collected by contacting 3,000 e-commerce executives in the United States in 2004. The names and contact addresses of the sample were obtained from a national mailing list company. The respondents held positions as managers, owners, presidents, vice presidents, or directors at their respective companies. The data collection was done in three phases. In the first phase the respondents were sent a pre-notification letter explaining the purpose of the study and requesting their cooperation. In the second phase the respondents were sent the questionnaires for successful and failed e-commerce companies and were urged to fill out either one or both based on their prior experience. In the third phase the respondents were mailed the questionnaires again and urged to respond to them in the event they had not done so earlier.

Each questionnaire was clearly labeled as either for a successful or for a failed e-business. The executives were asked to evaluate a successful or failed e-business company on a series of detailed statements for each of the hypothesized factors, on a seven point scale from (1) “completely disagree” to (7) “completely agree.” Questions were also included to assess the executives’ definition of success/failure in terms of the following categories: 1) the firm is no longer in business, 2) the firm is still online, 3) the firm is profitable, 4) the firm is not profitable but has a promising future, 5) other.

A total of 307 responses were obtained from the sample. Comparison of early respondents (first 10 percent) to late respondents (last 10 percent) in terms of business success or failure did not show significant difference, suggesting minimal non-response bias. The majority of the respondents, 70%, were very involved, and the remaining 30% were either somewhat or slightly involved with the company about which they were responding. Almost 40% of responses were for digital product companies, 46% for physical product companies, and the remaining 14% were for both digital and physical products. The overwhelming majority (98%) of the companies were started after 1990. The relationship of each of the hypothesized factors to the success of e-business companies was captured by comparing responses for the successful and the failed companies.

Data analysis

Instrument validation

Prior to testing the hypothesized relationships, analysis was conducted to determine the validity and reliability of the scales designed to measure the constructs related to management factors and market factors. The results are shown in Tables 1 and 2. The items for the factors came from previously published studies (Management—Duchesneau & Gartner, 1990; Gartner, et al., 1989; Grossi, et al., 2000; Venkataraman, et al., 1990; Market—Dubini, 1989; Gartner, et al., 1989; Honjo, 2000; Venkataraman, et al., 1990; Financial—Birley, 1986; Honjo, 2000).

Table 1.  Management factors: Factor 1 = management vision; Factor 2 = management professional orientation; Factor 3 = management experience
ItemFactor 1Factor 2Factor 3
Had a clear vision of the e-business0.650
Was able to evaluate and react to risk well0.632
Could handle rapid growth and change0.750
Did not demonstrate adequate pre and post planning in launching the e-business (reverse item)−0.749 
Did not hesitate to use professionals such as accountants, lawyers, consultants0.713
Spent a lot time seeking advice from lawyers, bankers, consultants and friends0.830
Had more than adequate business experience0.813
Had owned or operated a similar business prior to this venture0.826
Table 2.  Market factors: Factor 1 = Market growth; Factor 2 = Market newness; Factor 3 = First entrant
StatementFactor 1Factor 2Factor 3
Being the first to market with this product/service allowed to outlast the competition0.865
Being able to garnish market share due to being the first to market helped the company0.838
Being the first to market with this product was a definite advantage0.790
The lack of knowledge due to the newness of the firm was an important issue in the start-up phase0.734
it was thought that the venture would create a new market0.580
The firm lacked a stable distribution channel due to its newness in the market.0.765
The target market enjoyed a significant growth rate0.769
The quality of the firm’s products/services was high compared to its competitors0.574
There was a demonstrated high demand for the product0.778
Management factor

The management factor was designed to capture the three dimensions of managerial vision, professional orientation, and managerial experience. The three hypothesized constructs were captured by 10 statements and factor analyzed. Table 1 shows the results of factor analysis with varimax rotation. As hypothesized, three factors with eigen values greater than one captured 62% of the variance in the data. The statements that loaded only on one factor and with loadings of 0.40 or higher were included to form a scale designed to capture the designated construct. The reliability coefficient alpha of the scale was calculated. The managerial vision scale was captured by summing up the responses to four items; the management team/entrepreneur: a) had a clear vision of the e-business, b) was able to evaluate and react to risk well, c) could handle rapid growth and change, and d) did not demonstrate adequate pre and post planning in launching the e-business (reverse item). The reliability alpha of the four-item scale was 0.76.

Professional orientation was measured by summing up responses to two items; the management team/entrepreneur: a) did not hesitate to use professionals such as accountants, lawyers, consultants, and b) spent a lot time seeking advice from lawyers, bankers, consultants, and friends. The reliability alpha of the aggregated s cale was 0.68. Finally, the managerial experience scale was created by summing up responses to two items; the management/entrepreneur: a) had more than adequate business experience, b) had owned or operated a similar business prior to this venture. The reliability alpha of the two-item scale was 0.68.

Market factor

The market factor was designed to capture the three elements of market growth, market newness, and first entrant. Table 2 shows the results of factor analysis with loadings of 0.40 and higher. The three varimax rotated factors captured 59% of the variance in the data. The first factor captured the market growth construct, as suggested by the loadings on the following items: a) the target market enjoyed a significant growth rate; b) the quality of the firm’s products/services was high compared to its competitors; and c) there was a demonstrated high demand for the product. The reliability alpha coefficient of the three-item scale was 0.69.

The second factor captured the market newness dimension, as exemplified by responses to three items: a) the lack of knowledge due to the newness of the firm was an important issue in the start-up phase; b) it was thought that the venture would create a new market; and c) the firm lacked a stable distribution channel due to its newness in the market. The reliability alpha of the summated three-item scale was 0.66.

Factor 3 captured the dimension of first entrant as indicated in response to the statements: a) being the first to market with this product/service allowed to outlast the competition; b) being able to garnish market share due to being the first to market helped the company; and c) being the first to market with this product was a definite advantage. The reliability alpha of the summated three-item scale was 0.84.

Financial factor

The literature suggested three product-related factors that may influence the success or failure of an e-business. Thus, the financial factor was measured by asking the following three questions:

Was the stock market performance a factor leading to the firm’s success (failure)? The possible responses were: 1) Not Applicable, 2) Yes, 3) No.

Did the company have enough start-up capital to sustain it? The possible responses were: 1) Yes, 2) No.

Was the cost of the site operations a factor leading to the success (failure) of the company? The possible responses were: 1) Yes, 2) No.

E-Business success or failure

The dependent variable was measured dichotomously as success or failure. At the beginning and the top of each questionnaire was a boldfaced heading stating that the survey was for either a successful or a failed e-business. The respondents were requested to indicate the level of agreement with the survey statements based on their involvement with a successful or failed e-business. One of the questions asked at the end of the survey was if the e-business was financially sound, with possible responses being (1) yes, (2) no. It was hypothesized that the successful businesses would tend to be financially sound, and conversely that failed e-businesses would be predominantly financially unsound. We cross tabulated the success and failed business variable with the response to the corresponding perceived financial soundness variable to further validate the dependent variable. The results are shown in Table 3. Ninety-two percent of successful e-businesses were perceived to be financially sound and 90% of failed e-businesses were perceived to be financially unsound. The Chi-Square test showed a significant difference at the p<.001 level.

Table 3.  Success and failure vs. financial soundness of the firm*
Type of e-businessWas the company financially sound?TOTAL
YesNo
  • *

    Chi-Square 207.89 with 1 degree of freedom, significant at p<.001 level.

  • **

    1 case has a missing value.

SUCCESSFUL16814182
FAILED12112124
TOTAL180126306**
Hypothesis testing

After validating the dependent variable, the hypotheses were tested via discriminant analysis. Each of the six hypothesized management and market factors was the independent variable and the success or failure of the e-business was the dependent variable. The results are shown in Tables 4a, 4b, and 4c. Each factor was statistically significant at p<0.05. The overall discriminant function was significant at the p<0.001 level with a Chi-Square value of 187.38 and 6 degrees of freedom. The classification matrix grouped 84% of cases correctly. Thus the results are strongly supportive of the stated hypotheses. The financial factor hypotheses were tested by cross-tabulating responses to each statement separately with the dependent variable. The results are shown in Tables 5 through 7. The study results are supportive of all nine hypotheses. The following section provides discussion of our results.

Table 4a.  Discriminant analysis: Canonical discriminant function
Eigen valueCanonical CorrelationWilks’ LambdaChi-SquareDegrees of FreedomSignificance
0.9120.6910.523187.38960.001
Table 4b.  Discriminant analysis: Tests of equality of group means of the six factors
VariablesWilks LambdaF ValueDegrees of FreedomSignificance
Management Vision0.79675.0011,2920.001
Management Professional Orientation0.93719.6591,2920.001
Managerial Experience0.9825.4411,2920.050
First Entrant0.75495.3941,2920.001
Market Newness0.9776.8331,2920.050
Market Growth0.741102.1491,2840.001
Table 4c.  Discriminant analysis: Classification results
OriginalPredicted GroupMembershipTotal
SuccessfulFailed
  1. **84.0% correctly classified.

Successful15032182
Failed17108125
Table 5.  Success and failure vs. Was the stock market performance a factor leading to the firm’s success?*
Type of E-BusinessStock performance a factor?Total
Not ApplicableYesNo
  • *

    Chi-Square 10.900 with 2 degrees of freedom p < .01.

  • **

    1 case has a missing value.

Successful972560182
Failed703123124
Total1675683306**
Table 6.  Success and failure vs. Did the company have enough start-up capital to sustain it?*
Type of E-BusinessDid the company have enough start up capital to sustain it?Total
YesNo
  • *

    Chi-Square 15.727 with 1 degree of freedom p < .001.

  • **

    5 cases had missing values.

Success14137178
Failure7252124
Total21389302**
Table 7.  Success and failure vs. Was the cost of the site operations a factor leading to the success (failure) of the company?*
Type of E-BusinessWas the cost of site operations a factor?Total
YesNo
  • *

    Chi-Square 13.985 with 1 degree of freedom, p < .001.

Success12061181
Failure5669125
Total176130306
Venture capitalist perspectives

In order to add to the depth of information obtained in this study, in-depth personal interviews were conducted with 14 venture capitalists. The interviews were conducted at the 2001 Venture Capital Association meeting in Orlando, Florida and through a series of personal interviews at several locations in the South Florida area. The companies discussed in these interviews were from a variety of fields including software and hardware firms, and online food and retail businesses. The questions asked during the interviews and the subjects that were discussed closely followed the three main factors examined in the survey. The interview findings are incorporated into the discussion of the survey results below.

Discussion and implications

  1. Top of page
  2. Abstract
  3. Introduction
  4. Method
  5. Discussion and implications
  6. Conclusion and limitations
  7. References

Management factors

The results of the analysis of the management factors of management vision, professional orientation, and management experience strongly indicate that these issues do matter in the ultimate success or failure of an e-business. Those firms whose managers had a clear vision of the business fared better than those whose managers’ ideas of the e-business seemed more ambiguous, without clearly defined objectives and goals. This was also reflected in the comments of the venture capitalists. A recurrent theme among them was that management teams were either “technology experts” or “marketing experts;” rarely were they both. This could lead to a dichotomy of knowledge. Many failed businesses had an unrealistic business model. Indeed, the venture capitalists had heard of many e-firms that did not consider making a profit important to the welfare of the business. A president of an extinct e-business was described by the venture capitalist who was close to the management of the firm as “unfocused.” He lacked vision and squandered the company’s resources on a large office instead of operations.

Managers who did not have the ability to manage rapid change and react quickly and decisively to risk factors did not have the same success as those who possessed these attributes. This was especially true in the early dot.com era when ideas and business models were coming and going very rapidly. The ability to imitate an online business immediately was probably key in the management factor. The management could not react to new competitors; it may have been hard for the business to survive.

In addition, the speed with which businesses were coming online and the propensity of venture capitalists to throw funds at these firms did not allow for an adequate planning process. Very few e-businesses took the time and effort to perform planning functions to ensure a better chance of success. This is measured in the management vision factor in Table 1 and was echoed by the venture capitalists when discussing the failed ventures. They admitted to granting financing to e-businesses in spite of poor plans due to the tendency to rush to market. The more quickly the firm was brought to market, the better. The ability to roll with the punches was valued over thoughtful planning. This resulted in disjointed management objectives and poor business models. As a consequence, the managers were unable to turn the business around once the slide began.

In this rapid rush to market, many managers neglected to hire professionals to help in areas that the entrepreneur or manager was not as skilled in. Those who did seek advice from professionals fared better than their counterparts. Ego may have been a factor in this area, as well as the management experience factor described in Table 1. Many of the new e-business people were young, enthusiastic, entrepreneurial types who thought they could do almost anything.

The last element examined in the Management factor was the level of experience that the manager had attained. It was clear that managers with prior business experience, and also those who had prior experience in this type of venture, were more apt to be successful than new managers with little or no business experience. Many of the owners of e-businesses came more from the technical side than the management side. Many times people from a technical background were thrust into management roles, only to find themselves floundering. The venture capitalists interviewed also saw successful management teams as being focused with good business experience. The more experienced teams who had had past successes were able to react quickly and effectively to market conditions and proved to have staying power. Successful entrepreneurs also were receptive to others’ comments and adopted flexible management policies. One venture capitalist interviewed ssssstated that the CEO was the reason for the success of that particular e-business. His excellent managerial skills and enthusiasm for the business helped place his firmly in the success column. He focused on success factors, recruited a good team, and was committed to success at any cost. For companies that had failed, the majority of venture capitalists reported that the management teams were inexperienced in running a business. They were mostly young people with no understanding of business fundamentals and with poor management skills. They were riding the “Internet high” phase where they thought they were invincible and could not see risk in the venture. One venture capitalist described the philosophy of many of the e-business entrepreneurs as having a “Dr. Evil mentality where they thought their business was going to take over the world!”

Market factors

The results of the study show that the market factors of market growth, market newness, and first entrant advantage may have contributed to the success or failure of the e-business. Those firms that were launched in a period of growth for the industry had a better chance of success than some of the “new to the world” products and services. Those firms that had a product or service that was superior to the competition and was in high demand also fared better. This is reflected in the market growth factor in Table 2. This element of market growth shows that the basics of market or industry growth rate are just as important to an e-business as to the brick-and-mortar business.

Some of the products and services offered by the dot.com era sites were perhaps too complex or difficult to purchase, such that the diffusion rate was slower than other e-businesses with a more traditional product or service. Several software companies that expected the public to install difficult programs were an example of this problem. The literal “newness” of the firm could have lead to its demise. The lack of knowledge on the part of the consumer about these products and services, particularly in the start-up phase of the business, may have led the consumer to wait for more conventional products. This is documented in the first entrant factor from Table 2.

Many mangers and entrepreneurs believed that the venture itself would create a market for the product or service. This is tied to the issue discussed above where instead of leaping in to try these new devices, the consumer merely sat back and waited. The diffusion process, while rapid for the Internet, was not as rapid for certain e-businesses. Many of these e-businesses could not survive this “waiting period.” As one venture capitalist put it, “the entrepreneurs and many venture capitalists saw the new economy as one of couch potatoes who would sit and order all goods and services online.” When this did not happen and there was no particular rush to make purchases online, e-businesses began to fail, financing dried up, and a snowball effect took over. As e-businesses began to fail, venture capital firms and other financing companies began to pull back on the liberal funding tactics of the previous years. This, in turn, created a minor panic which pushed many e-businesses into bankruptcy.

Another disadvantage for these new e-businesses was the lack of power to establish stable distribution channels. For example, when supplies were low during the first Christmas season, E-toys could not get an adequate supply of popular model toys. Suppliers favored their regular base of retailers such as Toys R’ Us and left the new guy (E-toys) in the lurch. The firm never recovered from this as consumers who were willing to buy toys online found themselves having to resort to brick-and-mortar retailers in the end. This is reflected in the first entrant factor from Table 2.

The traditional advantage of being the first entrant into a market seemed to hold for an e-business. While the authors would have expected the opposite results, namely that the firms that stayed back and learned from the early e-businesses’ mistakes would have been more successful, most survey respondents thought being first to market contributed to their success. They found it a definite advantage in being able to garnish market share and outlast the competition. The venture capitalists felt that another skill that successful entrepreneurs exhibited was the ability to work with the competition and form strategic partner relationships. They founds that the management focused on profitability rather than brand or market share. Many thought that being first to market turned out to be an advantage. Clever early firms such as Amazon.com also worked hard to develop marketing programs to ensure loyalty among consumers. Their strategy seems to have worked, as the bookseller is a viable e-business to this day.

Financial factors

Each of the three financial factors was significantly related to the success of the e-businesses. Stock market performance was not a factor for a majority (54%) of the e-businesses. Of the remaining 46%, those that were failures were more likely to have been affected by stock market performance than those that were successful. It is possible that as the stock market took a nosedive in the year 2000, it created difficulties for the fund raising capabilities of the startups, leading to the failure. This is reflected in the statistics reported in Table 6, which show that there is a significant relationship between the availability of capital for start-ups and success. Of those who did not have enough start-up capital, almost 60% failed. Finally, the cost of the site operation had a significant relationship with the success of the e-businesses. However, it was in an unanticipated direction, i.e., those who failed were less likely to agree that the cost of the site was a contributing factor than those who were successful. The venture capitalists concurred with this viewpoint. Several found themselves in the position of cutting expenses in the business to try to salvage what funding remained.

Conclusion and limitations

  1. Top of page
  2. Abstract
  3. Introduction
  4. Method
  5. Discussion and implications
  6. Conclusion and limitations
  7. References

Is the Internet a new paradigm or is it merely a new delivery and communication system? As one venture capitalist said in a personal interview, “I don’t believe there is a difference between an online and an offline business. Business is still the same. You still need to pay the rent and have a product that someone is willing to pay for.” While that may be an oversimplification of the peculiar aspects of an e-business, clearly some of the issues faced by a traditional brick-and-mortar business are also significant issues faced by e-businesses.

The findings of the present study contribute to the practice and theory of e-business success and failure in several ways. First, the study reveals the influence of nine key variables in achieving success in e-business. Second, the study results are based on the opinions of owners/executives and the venture capitalists who are intimately involved in the planning, executing, financing, and day to day activities of running an e-business. Third, the study contributes by providing guidance to those who will benefit by focusing on the key factors separating the winners from the losers. Fourth, all of these factors are under the owners and/or managers’ control, as well as actionable. Consequently, the study results may benefit those who would like to improve the sustainability of their e-businesses. It is important to note that the same kinds of factors play a role in both e-businesses and small brick-and-mortar businesses. This finding could aid managers when starting up an e-business, in that they can study successful models and hopefully avoid the pitfalls many early e-business managers fell into.

To date, this is the only published study dealing with the success and failure of e-businesses. Given that it is difficult to address all the factors related to success or failure in one single study, future studies may benefit by investigating the influence of additional factors not addressed in the current study, such as the viability of the product or service or the expertise of the management team in terms of marketing and promotion. As the electronic business sector continues to gain a foothold in the U.S. economy, albeit at a slower but steady rate, more sustained research efforts will be needed to identify which additional factors are relevant and how they affect the success or failure of an e-business. The operationalization of the factors may need further examination; the study results could also be replicated with a different sample framework such as consumers and/or government officials, so that the results could be compared and contrasted.

Because little empirical work has been conducted on success/failure factors in e-business, there are no theoretical models. Contextual explanations for success/failure, as in separate industry studies or circumstances leading to a factor’s significance, were not addressed in this study but would constitute an interesting future contribution to this body of work.

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  3. Introduction
  4. Method
  5. Discussion and implications
  6. Conclusion and limitations
  7. References
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About the Authors
  1. Pradeep Korgaonkar is InternetCoast Adams Professor of Marketing at Florida Atlantic University.His research and teaching interests are in the areas of electronic marketing, marketing research, and advertising effectiveness.

    Address: College of Business, Florida Atlantic University, 111 East Las Olas Blvd., Fort Lauderdale, Fl 33301 USA

  2. Bay O’Leary is an Assistant Marketing Professor in the Andreas School of Business at Barry University in Miami, Florida. She has published several articles pertaining to e-business and is currently researching buying behavior on the Internet.

    Address: Andreas School of Business, Barry University, 11300 Northeast Second Avenue, Miami Shores, FL 33161 USA