As business enterprises grow, they must navigate the opportunities and challenges presented by environmental changes. In a new study, researchers examined the interplay of environmental change and the internal and external conditions that govern the founding of a company. For companies founded in dynamic environments, they found that assembling more functionally diverse founding teams leads to longer survival when faced with increasingly uncertain environments, while functionally homogeneous teams (those with relatively few distinct roles and viewpoints) they work best when environments become more predictable.
The study was conducted by researchers from Carnegie Mellon University (CMU), Stanford University, and INSEAD. It is published in the Strategic Entrepreneurship Magazine in a special issue entitled “Environmental Change, Strategic Business Action, and Success.”
“Predicting the course of environmental change is difficult, but entrepreneurs who can synchronize their predictions with their team composition decisions perform better,” suggests D. Carrington Motley, Instructor of Entrepreneurship at CMU’s Tepper School of Business, who led the study.
Previous studies on the effect of environmental change on business enterprises have examined the role of the impact of recent events. They have not explored how the relationship between recent environmental change and performance results depends on the companies’ past, including environmental conditions when the company was founded.
“If environmental conditions at the foundation have a lasting influence on the internal processes of companies and recent environmental conditions determine the effectiveness of these processes, it is crucial that our theories of environmental change take both periods into account,” explains Charles E. Eesley, associate. Professor of Management Sciences and Engineering at Stanford, co-author of the study.
To address this issue, the study integrated research on the persistence of foundational conditions with research on the effects of environmental change. The researchers surveyed more than 140,000 Stanford University alumni to produce a data set of more than 1,000 entrepreneurs who founded companies between 1960 and 2011; the companies represented 19 industries, from agriculture to energy and utilities. Respondents’ self-reported data was verified by cross-referencing their information with lists of public and private companies.
The survey assessed the length of time the companies survived and whether the companies achieved positive liquidity events (for example, they underwent an observed initial public offering or a merger or acquisition). It also asked the founders about the functional roles present on their founding teams (eg, sales and marketing, general management, operations, finance).
Teams that are functionally diverse have members who fill a variety of roles and have a broader focus, serving areas such as sales, marketing, manufacturing, and distribution. They also seek and exchange vast amounts of information and discuss a wide range of perspectives because many points of view are represented.
The interplay of high environmental vibrancy (the degree to which environmental changes are unpredictable to corporate decision makers) in the foundation and a functionally diverse founding team helped companies survive longer when environmental vibrancy increased during the company’s useful life, the study found. However, the same foundational conditions resulted in a lower probability of a positive exit when environmental dynamism increased over the life of the company.
Among the limitations of the study, the authors note that companies started by Stanford alumni may not be representative of companies in general. Also, the data was collected at a point in time and therefore did not follow the companies at the same time. Finally, based on the data used, the study produced only indirect evidence of the relationship between environmental dynamism at the time of foundation and the internal processes of a company.
“Our findings highlight the importance of companies building capabilities to allow flexibility in decision-making processes, which are often inflexible, limiting the ability of companies to take advantage of the unique opportunities brought by environmental change.” notes Wesley Koo, an assistant professor of strategy, who is a co-author of the study.
The research was funded by Sequoia Capital, the Kauffman Foundation, the Stanford University School of Engineering, and the Stanford Technology Enterprise Program.