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.
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 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.
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.
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.
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.
Several factors related to market functions are relevant to firm success or failure (Birley, 1986; Bruderl & Schussler, 1990; Dubini, 1989; Gartner, et al., 1989; Grossi, et al., 2000; Honjo, 2000; MacMillan, et al., 1987; Nucci, 1999; Porter, 2001; Singh, Tucker, & House, 1986; Stinchcombe, 1965; Venkataraman, et al., 1990; Watson & Everett, 1996).
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.
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.
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.
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.
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.