As an entrepreneur and a small business owner, understanding the key factors that influence venture performance is critical to achieving long-term success. I decided to dig deep into my archives and resurface a favorite article that, as far as I know, is one of the most comprehensive studies of business success, “The Determinants of New Venture Performance: An Extended Model, “ by James J. Chrisman, Alan Bauerschmidt, and Charles W. Hofer. This blog post summarizes their findings and provides practical insights for entrepreneurs seeking to optimize their business performance.
The Core Formula
The heart of Chrisman, Bauerschmidt, and Hofer’s model lies in the following formula:
New Venture Performance = f (E, IS, BS, R, OS)
This equation posits that a new venture’s performance is a function of five key variables:
E = Entrepreneur IS = Industry Structure BS = Business Strategy R = Resources OS = Organizational Structure, Processes & Systems
The entrepreneur (E) serves as the catalyst, making strategic decisions that shape the venture’s trajectory based on their unique combination of personality, skills, experience, and values. These decisions include the choice of industry, the formulation of business strategy, the acquisition and allocation of resources, and the development of organizational infrastructure.
Industry structure (IS) plays a significant role in determining a venture’s potential for survival and success. Factors such as industry profitability, competitive intensity, growth rate, and barriers to entry and exit can heavily influence a venture’s performance, regardless of the entrepreneur’s capabilities.
Given the industry context, the entrepreneur must craft a business strategy (BS) that effectively positions the venture to seize opportunities and establish a sustainable competitive advantage. This requires clearly defining the target customer, a compelling value proposition, and a profitable business model.
However, the success of a strategy hinges on the venture’s ability to execute it effectively, which is largely determined by the resources (R) at its disposal. These resources include both tangible assets, such as financial capital and physical infrastructure, and intangible assets, like intellectual property, talent, and strategic partnerships.
Finally, as the venture grows, it must develop a robust organizational structure, processes, and systems (OS) to support the consistent and efficient delivery of its strategic objectives. This includes designing an effective organizational structure, establishing core processes, and implementing appropriate control systems.
The Importance of Entrepreneurial Leadership
Chrisman, Bauerschmidt, and Hofer emphasize that the entrepreneur’s impact extends far beyond their individual characteristics. Instead, it is the quality of their behaviors and decisions that differentiate high-performing founders from their less successful counterparts.
Effective entrepreneurial leaders excel at identifying and evaluating opportunities, assembling and allocating resources, devising strategies that transform challenges into advantages, and building teams and cultures that synergistically create value.
As the venture evolves from a startup to a mature organization, the entrepreneur must also adapt their leadership style accordingly. This involves transitioning from a hands-on, multifaceted role to that of a strategic architect and conductor, ensuring that the venture develops the necessary organizational capabilities to thrive.
The Crucial Role of Industry Analysis
One of the most common pitfalls for entrepreneurs is becoming overly enamored with their product or service without objectively assessing the attractiveness of the industry in which they operate. Even a groundbreaking offering can struggle to gain traction in a hypercompetitive, slow-growth, or low-margin industry.
Industry structure influences a venture’s odds of surviving its early stages and its potential for achieving significant growth and profitability. Highly fragmented industries with numerous small players may offer easier entry but limited opportunities for breakout success. Conversely, industries dominated by a few large players may boast attractive margins but pose significant challenges for newcomers.
Entrepreneurs must conduct rigorous industry analyses before committing to a particular market and remain vigilant to structural shifts that could alter the competitive landscape. Proactively adapting to these changes is essential to avoid being left behind.
Crafting a Winning Business Strategy
At its core, strategy is about making tough choices—deciding what to prioritize and what to forgo. Small businesses, in particular, cannot afford to spread themselves too thin by attempting to cater to every possible customer or market. Instead, they must identify a specific niche where they can excel and establish a defendable competitive position.
Crafting a winning strategy requires answering three critical questions:
- Who are the target customers that the venture is uniquely positioned to serve better than anyone else?
- What specific pain points does the venture address or what unique value does it create for these customers?
- How will the venture’s unique combination of resources and capabilities consistently generate profits and cash flow?
Embedded within these questions are a host of strategic decisions, such as whether to pursue cost leadership or differentiation, whether to target a broad or narrow market, whether to compete through radical innovation or operational excellence, and whether to vertically integrate or rely on strategic partnerships.
There is no one-size-fits-all approach to strategy. The key is to develop a coherent strategy that aligns with the venture’s internal capabilities and external market realities while remaining flexible enough to adapt as new data emerges, and the environment evolves.
From Strategy to Execution: The Resource Imperative
Even the most brilliant strategy will fail if the necessary resources are not mobilized to support its execution. In fact, Chrisman, Bauerschmidt, and Hofer argue that success is 5% inspiration (strategy) and 95% perspiration (execution). As the leader, the entrepreneur must ensure that the venture maintains this critical balance.
The authors distinguish between tangible resources (such as capital, equipment, and inventory) and intangible resources (such as brand, talent, culture, and partnerships). While tangible resources are necessary for a venture to get off the ground, they rarely provide a sustainable competitive advantage. Instead, it is the quality and uniqueness of a venture’s intangible resources that truly drive long-term success.
Entrepreneurs must continually assess their venture’s resource gaps and take action to fill them, whether through bootstrapping, bartering, or strategic partnerships. Mastering cash flow management is essential to avoid running out of funds just as the venture hits its stride. Additionally, attracting and retaining top talent and fostering a strong organizational culture are critical to building a resource base that can effectively execute the venture’s strategy.
Building a Scalable Organizational Infrastructure
As a venture grows, its success becomes increasingly dependent on its ability to scale its organizational infrastructure to support its expanding operations. This is the point at which the “business infrastructure” that may have been overlooked in the early stages becomes a make-or-break factor.
Organizational structure refers to the arrangement of roles and reporting relationships that drive focus, accountability, and coordination. Processes are the standardized procedures that ensure the reliable delivery of the venture’s core value proposition. Systems encompass the information, control, and incentive mechanisms that keep the organization running smoothly.
As the venture evolves, the entrepreneur must continuously refine the organizational infrastructure to eliminate redundancies, reduce confusion, and minimize inefficiencies. Documented, repeatable processes should replace ad hoc approaches, and real-time performance dashboards should be implemented to keep everyone aligned and accountable. A robust talent management system is also essential to ensure that the right people are in the right roles at the right time.
One of the most effective ways for entrepreneurs to build organizational capacity is to hire experienced managers and empower them to lead their respective functions. Scaling a venture requires a shift from a founder-centric approach to one that relies on well-designed processes and systems.
Conclusion
Chrisman, Bauerschmidt, and Hofer’s model provides a valuable framework for understanding the complex factors that drive new venture performance. While the formula may appear simple, its application requires a deep understanding of each element and a commitment to continuous improvement.
As entrepreneurs reflect on how the five elements of the model manifest in their own ventures, they should consider the following questions:
- How can I objectively assess and improve my own performance as an entrepreneurial leader? What blind spots do I need to address, and what is my plan for filling those gaps?
- How attractive is the industry in which my venture operates, and what are the key trends that I need to monitor and anticipate? What strategic pivots should I consider to position my venture for long-term success?
- How well-defined and resilient is my venture’s strategy? What are the critical milestones that will determine our success or failure, and what resources do we need to reach them? When was the last time I rigorously tested my assumptions?
- How strong is my venture’s resource foundation relative to its strategic ambitions? What are the most important assets that I need to strengthen or acquire in the near term to enable the execution of our strategy?
- How well-equipped is my venture to execute its strategy at scale? Where are we experiencing recurring challenges, bottlenecks, or inefficiencies? What new organizational capabilities do we need to develop to overcome these obstacles?
Building a successful new venture is rarely a straightforward journey. It requires a willingness to experiment, learn, and adapt in real-time, continuously working to align the five elements of the model to create compounding value. As the leader, the entrepreneur must set the tone by dedicating time and energy to working “on” the business, not just “in” it.
When faced with challenges or uncertainties, entrepreneurs should return to the fundamental principles outlined in Chrisman, Bauerschmidt, and Hofer’s model: Entrepreneur, Industry, Strategy, Resources, and Organization. By systematically diagnosing and addressing issues within each of these domains, entrepreneurs can position their ventures for long-term success.