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.
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.