High tech firms can mitigate potential risks by diversifying their product–market portfolios. A key research question is how such diversification influences firm survival. A firm exits the market in two ways, specifically, dissolution and acquisition. Here, we model how the diversity of a new firm's product–market portfolio influences the times to both types of exits. Specifically, we allow for interaction effects of the competitive intensity of a firm's environment and the diversity of a firm's product–market portfolio with its patents and trademarks. Using a competing risk hazard model, we estimate the effects of various covariates on the time to exit for 1435 US high tech firms.
We observed that a more diverse product–market portfolio, in conjunction with a larger number of patents, hastens the time to a firm's exit by dissolution (9% decrease in survival duration), while in conjunction with a larger number of trademarks, portfolio diversity delays the time to exit by dissolution (12% increase). A more competitive firm environment results in a greater effect on the portfolio's diversity in delaying its exit by dissolution (7% increase). On the other hand, a diverse product–market portfolio, combined with either a larger number of patents or trademarks, hastens the firm's exit by acquisition (19% and 11% decrease respectively).
New firms, particularly those in the high tech industry, face many challenges resulting in high exit rates. While firms like 3Cube, Neteos, Officeclick.com and Tower Technology failed within a few years of their incorporation, others like Microsoft, Apple, Intuit and Imation have survived and evolved into successful, large enterprises. Still others like Transarc, Intersolv and SoftSolutions were acquired by other firms (i.e., they exited through acquisition). While many factors affect the survival of new firms, their marketing decisions are crucial to their existence. As Lodish (2001) noted, “Marketing decisions are the most important decisions entrepreneurs make—and they make them very badly.” Yet, there are few research-based insights on the effects of a new firm's marketing strategies on its survival.
New firms face uncertainties about the relative attractiveness of their offerings and the markets they serve and they attempt to mitigate the risks associated with those uncertainties by offering a range of products to diverse markets (Stevenson & Gumpert, 1985). However, new firms face resource constraints as they attempt to generate positive cash flows, even as they develop, commercialize and market new products. Hence, a key concern for new firms is their method of using scarce resources as they develop their product–market portfolios. Some researchers (e.g., Meyer & Roberts, 1986) suggest that new firms falter because of their inability to focus on a small set of product-markets, whereas others (e.g., Chaston, 2001) argue the opposite, i.e. that new firms are overly dependent on narrow product-markets. In this paper, we examine the relationship between the diversity of a new firm's product–market portfolio and its survival.
The survival of a new firm is a relevant issue from both managerial and policy perspectives. New firms are an important source of job creation in the United States and in Europe, accounting for over 70% and 40% of net new jobs in the 1990s, respectively (Bednarzik, 2000). In the United States, new firms accounted for more than 67% of all innovations and 95% of radical innovations since World War II (Kauffman Center for Entrepreneurial Leadership, 1999). Yet, estimates of firm exit rates in the United States range from 62% in the first six years to 90% in the first ten years (http://www.sba.gov). Romano Prodi, in a European Union speech, expressed similar concerns, noting that entrepreneurial activity is lower in Europe than in the US, yet Europe has twice the failure rate of the US (http://europa.eu.int).
We explored how the diversity of product–market portfolio relates to the timing and type of market exit for new firms. We find that the diversity of the firm's product–market portfolio has no main effect on its exit either by dissolution or acquisition. We conjecture that this null effect could result from the multiple, opposing effects of diversity of product–market portfolio on exit by either dissolution or acquisition. However, the diversity of a firm's product–market portfolio, in conjunction with the number of its patents and trademarks, affects its exit both by dissolution and acquisition. Thus, the diversity of product–market portfolio, itself, confers no advantage or disadvantage to a new high tech firm. Rather, it is important for the firm to align its product–market strategies with the appropriate assets (e.g., patents and trademarks) to improve its chances of survival or acquisition.
A useful method for assessing the substantive implications of our results is to explore the effect sizes of the parameter estimates from the model. In the AFT model, a unit increase in the covariate value is equivalent to shrinking or expanding the time scale by a certain proportion. For example, when there is a unit increase in the diversity of product portfolio and a unit increase in patents, the expected value of ln(t) changes by − 0.09, or equivalently, the new survival duration is equal to te− 0.09 (= 0.914t) of the old duration. Thus, for a firm predicted to fail at t = 1, this interaction term would hasten the time of failure to 0.914, or an 8.6% decrease. For a firm predicted to fail at t = 2, the new time of failure would instead be 1.83, an 8.6% decrease.
