The nature of information and overconfidence on venture capitalists' decision making

Venture capitalists (VCs) are considered experts in identifying high potential new ventures—gazelles. Thus, the VC decision process has received tremendous attention within the entrepreneurship literature. Yet, most studies on VC decision-making focus on which decision criteria are central to selecting gazelles. Although informative, the majority of these studies has neglected cognitive differences in how VCs make decisions. This is surprising considering the influence cognitive differences are likely to have on the exploitation of an opportunity as well as its influence on likely success. The current study investigates whether VCs are overconfident, as well as the factors surrounding the decision that lead to overconfidence.Overconfidence describes the tendency to overestimate the likely occurrence of a set of events. Overconfident people make probability judgments that are more extreme than they should, given the evidence and their knowledge. In the case of the new venture investment decision, overconfident VCs may overestimate the likelihood that a funded company will succeed.The results of the current study indicate that VCs are indeed overconfident (96% of the 51 participating VCs exhibited significant overconfidence) and that overconfidence negatively affects VC decision accuracy (the correlation between overconfidence and accuracy was 0.70). The level of overconfidence depended upon the amount of information, the type of information, and whether the VC strongly believes the venture will succeed or fail.As more information becomes available, people tend to believe they will make better decisions; they are making a “more informed decision.” More information ideally should enable the VCs to assess any potential pitfalls. However, additional information makes the decision more complex. Information factors may contradict and relate to other information in unexpected ways. Even if more information is available, people usually don't analyze all of it (even though they believe they do). Thus, more information creates greater confidence, but it also leads to lower decision accuracy.The type of information that is available also impacts overconfidence and decision accuracy. VCs are intuitive decision makers. When people are familiar with a decision and the structure of the information surrounding that decision, they resort to automatic information processing. On the other hand, if information surrounding the decision is structured in an unfamiliar way, people need to decipher what each piece of information means and how that impacts their overall accuracy. In the case of expert VCs, that means they must deviate from their intuitive style. It seems that forcing them outside their “comfort zone” has a negative effect on their confidence and has an even greater effect (negative) on their accuracy.There is evidence of an “availability bias” in VC decision-making; VCs rely on how well the current decision matches past successful or failed investments. VCs are overconfident in their prediction of venture success when they predict a very high level of success. VCs are also overconfident in their prediction of venture failure when they predict a very low likelihood of success. This high level of overconfidence in success predictions (or failure predictions) may encourage the VC to limit information search and fund a lower potential investment (or prematurely reject a stronger potential investment).Although overconfidence in itself does not necessarily lead to a wrong decision, the bias is likely to inhibit learning and improving the decision process. Overconfident VCs may not fully consider all relevant information, nor search for additional information to improve their decision. Moreover, the natural tendency for people to recall past successes rather than failures may mean that VCs will make the same mistakes again. VCs can take simple steps to reduce the effect of overconfidence, including counterfactual thinking (i.e., imaging scenarios where current assumptions might not hold), formally recording how past decisions were made at the time of the decision (versus trying to recall how that decision was made from memory), and using actuarial decision aids that decompose decisions into core components. Reducing overconfidence may lead to stronger decisions. It is hoped that this study illustrates the power of cognitive theories for understanding VC decision-making.     

Do Farmers' Market and Specialty Food Store Customers Differ in the Effects of Perceived Utilitarian and Hedonic Shopping Values?

This study explored differences in the effects of perceived utilitarian and hedonic shopping values on customer satisfaction for the two separate groups of the agricultural product marketing channel: farmers' markets and specialty food stores. Empirical data were collected from customers of agricultural product retailers located in Taiwan (N = 412). The results show that different agricultural product marketing channels provide different values to their customers. Farmers' market customers experience a greater hedonic value, and specialty food store customers experience a greater utilitarian value. In addition, the perceived utilitarian and hedonic shopping values of farmers' market customers are more highly positively associated with customer satisfaction than are those of specialty food store customers.     

Emerging Market Footholds and Knowledge: An Examination of New Product Launch Performance

As developed markets become more saturated, managers increasingly recognize the value of emerging markets as venues for growth opportunities. Yet, launching products into these markets is extremely risky due to weak institutional environments (e.g., lack of physical infrastructure), making success more uncertain. To alleviate this challenge, theory points to using emerging market footholds that yield market-specific knowledge. However, it is unclear whether knowledge is realized and, if so, what facets of harvested knowledge are effective in driving performance. Accordingly, we used data collected from a survey of business professionals to examine emerging market footholds and market-specific knowledge (i.e., customer, competitor, and logistics knowledge). Our results show that the extent of market presence held by an emerging market foothold is positively associated with all types of knowledge, yet only competitor and logistics knowledge—not customer knowledge—is positively associated with product launch performance. A supplemental sample of new product launches in developed markets revealed the opposite results wherein customer knowledge was the only significant predictor. Viewed collectively, the results suggest a market maturity threshold wherein logistics and competitive knowledge becomes less influential in driving performance, and customer knowledge becomes more influential.     

Managerial Overconfidence and Share Repurchases

Following prior studies, we use keywords in press portrayals to gauge managerial overconfidence. We hypothesize that managerial overconfidence is related to a manager's perception that the firm is undervalued. Results from 2744 share repurchase programs launched by 783 listed firms in Taiwan confirm this hypothesis. We find that managerial overconfidence is positively correlated with the intensity of share repurchasing, which is measured by scale, execution, frequency, and the difference between the announced price and post‐execution price. Moreover, the programs launched by overconfident managers were not undervalued and therefore were associated with reduced post‐announcement returns.     

Environment,corporate entrepreneurship,and financial performance: A taxonomic approach

This study examined the association between a firm's external environment, corporate entrepreneurship, and financial performance. The study emphasized three propositions: (1) perceived—rather than objective-characteristics of the environment significantly influenced entrepreneurship activities; (2) a multidimensional definition of a firm's environment was essential to unravel the interplay between the environment, orporate entrepreneurship activities, and financial performance; and (3) a taxonomic approach had the advantage of accounting for the interrelationships among the dimensions of the environment in classifying firms.Using data from 102 companies in six4-digit industrial classification codes (SIC),cluster analysis was used to distinguish four environmental settings: “dynamic growth,” “hostile and rivalrous but technologically rich,” “hospitable, product-driven growth,” and “static and impoverished” environments. These four environments varied in their characteristics.The four empirically derived environment clusters were then used to examine variations in corporate entrepreneurship—operationalized as corporate innovation and venturing, and corporate renewal activities. The first dimension—corporate innovation and venturing—had four components: new business creation, new product introduction, percent of revenue from new products, and technological entrepreneurship. The renewal dimension had three components: mission reformulation, reorganization, and system-wide change. The data were used to test six hypotheses:

• 1.H1: In dynamic or growth environments, companies will emphasize new business creation and innovation.
• 2.H2: Environmental hostility is positively associated with the redefinition of business through venturing activities.
• 3.H3: Hospitable business environments are positively associated with business venturing and renewal activities.
• 4.H4: Static environments are inversely associated with corporate venturing and renewal activities.
• 5.H5: Corporate entrepreneurship activities are positively associated with company financial performance.
• 6.H6: Corporate entrepreneurship activities emphasised in HI through H4 will be significantly and positively associated with company financial performance in their respective environmental clusters.

The results provided general support for the six hypotheses. They showed that: (1) each environmental cluster had a distinct combination of activities relating to corporate innovation and venturing, and renewal; (2) corporate entrepreneurship activities varied in their associations with measures of company growth and profitability; and (3) the associations between corporate entrepreneurship and company financial performance varied among the four environment clusters. The results from this study can help executives in selecting specific entrepreneurial activities that match the demands of success in their business environment to improve their company's performance.     

The role of top management teams in transforming technology-based new ventures' product introductions into growth

The literature highlights the importance of top management teams (TMTs) for technology-based new ventures' success in achieving growth, which is often achieved through product introductions. The human capital theory suggests that TMT members' skills, which are typically derived from their education and experience, can facilitate the transformation of new product introductions into growth. We also propose that multiple products that must be managed and brought to the marketplace smoothly and flexibly benefit from the lower coordination needs and conflicts that are typical of functionally homogeneous teams. Using a unique, multi-source dataset on 374 US technology-based new ventures during the period from 2005 to 2014, we find that new product introductions help technology-based new ventures grow only when the TMT has startup experience and is not functionally diverse. Our findings lead us to echo calls in the TMT literature to move away from simple direct-effect models to more situation-dependent analyses of TMT diversity.     

Running for pleasure or performance? How store attributes and hedonic product value influence consumer satisfaction

Previous retailing studies have linked consumer satisfaction to perceived hedonic or utilitarian product value. This research extends previous studies by examining how the context in which the product is purchased (store attributes) and product value influence consumer satisfaction. We conducted a field study with 213 consumers attending two major running events. The findings from structural equation modelling suggest that a specific combination of store attributes (tangible and intangible) and hedonic product value has a positive influence on satisfaction. Results also show that tangible store attributes have a stronger positive impact on utilitarian (vs. hedonic) product value, and that intangible store attributes have a positive impact on hedonic product value. However, we found that only hedonic product value has a positive impact on satisfaction. This research contributes to theory by showing that a match between store attributes (tangible and intangible) and hedonic product value can positively influence satisfaction. In managerial terms, the findings provide insights on how to improve consumer satisfaction in retail environments through store attributes and hedonic product value.     

What drives brand love and purchase intentions toward the local food distribution system? A study of social media-based REKO (fair consumption) groups

Local food is gaining increasing popularity among consumers due to its association with sustainable consumption. However, for a product to be commercially successful, such growing popularity should translate into high purchase intentions and positive associations with the product post-consumption. Although this success has not yet been reflected for local food consumption, research in this area has remained limited. The present study addresses this gap by examining the antecedents of brand love for both the local food distribution system and the local food it distributes. The study thus employs the stimuli-organism-response (SOR) theory, which indicates that certain environmental stimuli influence the consumers' internal state or organism and shapes their behavior, in turn. Specifically, this study uses altruism as the stimulus, supporting local producers, transparency, satisfaction with labeling, and desire for labeling as the consumers’ internal state (organism), and purchase intentions and brand love as the response. Cross-sectional data were collected from 2045 local food consumers associated with Facebook-based REKO (fair consumption) groups in Finland. Findings indicate that altruism is associated with internal state, i.e., desire for labeling, supporting local producers, and satisfaction with labeling. These variables, in turn, are associated with brand love for the local food distribution system. Furthermore, purchase intentions positively mediate the association of the four internal states with brand love.     

Processes of firm growth and diversification: theory and evidence

Investigating the role of diversification in the firm growth process, we build on Penrose’s (The theory of the growth of the firm. Oxford University Press, Oxford, 1959) Theory of the Growth of the Firm to formulate hypotheses about growth of employment, assets and sales in the years before, during and after a new product introduction. We exploit a new database from the German machine tool industry that boasts a detailed and meaningful definition of diversification. Our exploratory analyses indicate that diversification, in terms of product introductions, is preceded by employment growth. Moreover, we find support that diversification is positively associated with subsequent asset growth, but negatively associated with subsequent employment growth.     

Making new products go viral and succeed

Why are some new product introductions more viral and successful than others? This research integrates theories of interpersonal communication and consumer learning to explore this question. Analyzing a unique data set of millions of consumer word-of-mouth transmissions (eWOM) on social media regarding 345 new automobile products introduced during 2008–2015, we find that more innovative products generate more eWOM volume but surprisingly less positive sentiment. These effects vary in magnitude across eWOM channels. However, the use of rich-content communication, pre-announcement, and cobranding strengthens (weakens) the positive (negative) effect of product innovativeness on eWOM volume (sentiment). The results further indicate that eWOM sentiment is a stronger predictor of new product success than eWOM volume. Experimental results reveal more insights into how product innovativeness influences eWOM metrics in several product categories and shed light on the role of excitement and perceived risk as mechanisms underlying these effects. The research offers useful implications for firms to design effective viral marketing campaigns to enhance new product success.     

Technology Newness and Impact of Go/No-Go Criteria on New Product Success

This study shows that the relative effect of five dimensions of go/no-go criteria on new product success is contingent on the stage of the development process and newness of the technology. Specifically, strategic fit criteria are critical to new product success at the initial screening. Technical criteria are significantly correlated with product success only at the go-to-development decision gate. Market opportunity criteria relate positively with project success at the initial screening, the market launch gate and the post-launch review. Financial criteria correlate positively with success from the go-to-development decision to the first post-launch review. Customer-acceptance criteria stand out as equally important to success throughout the entire development process. In relation to the moderating effect of technology newness, it was found that customer acceptance and market opportunity criteria at the initial screening are more important for the success of low technologically innovative projects than for the success of high technologically innovative projects. At the initial screening, financial criteria exert a negative effect on the success of projects incorporating highly innovative technologies.     

The link between customer satisfaction and price sensitivity: An investigation of retailing industry in Taiwan

Are customers less likely to seek bargains once they are satisfied with a product and service? This study examines the relationship between customer satisfaction and price sensitivity. Specifically, satisfaction is divided into economic satisfaction derived from tangible products and social satisfaction provided by service encounters. This survey of 248 retailer–consumer dyads shows that economic satisfaction is negatively associated with price sensitivity. However, social satisfaction is positively related with price sensitivity, especially for female customers and customers with high patronage frequency. Interpersonal relationships emphasized in the Chinese collectivist societies tend to influence customers' price sensitivity. These findings have many implications for researchers and practitioners in the retail sector.     

To Launch or Not to Launch: An Empirical Estimate of New Food Product Success Rate

New product introduction is one of the most important activities for a company’s growth. It is generally accepted that new product introductions are essential to the health of food companies. Yet, many believe that most new products fail, therefore discouraging companies to introduce some new products. However, most of the estimates suggesting high failure rates are either anecdotal or qualitative. This article provides a quantitative approach to measuring new product success rates for food products and to show the relationship between the success of new product and entry strategies. This article uses a quantitative approach to measuring product success/failure exclusively for food products. The authors contend that failure rates for food products are not nearly as low, and success rates much higher than it was previously established in the literature and perceived by the industry professionals. There was a significant variability of success rates between various food groups ranging from 58% for both fruit and vegetables and desserts and ice-cream categories to 88% for baby food. Success rates also varied among the different introductory strategies of the new food products, ranging from 50% for new packaging to 75% for re-launch strategies.

Academics and practitioners usually quote very low success rates for new products based on subjective and/or strictly qualitative information. This empirical quantitative research shows that success rates for food products are much higher than previously reported. This should encourage greater use of new products to grow sales and profits. The previously reported low success rate may have led to the reluctance to introduce new products and therefore set many of the legacy food companies in their current poor financial condition.     

The relationship among psychological need satisfaction,class engagement,and academic performance: Evidence from China

Utilizing self-determination theory, the authors examined the relationship among psychological need satisfaction, class engagement, and academic performance among Chinese accounting students. The structural equation modeling analysis indicated that (a) students’ psychological need satisfaction for autonomy, competence, and relatedness were significantly positively associated with their perceived autonomy support from instructors; (b) students’ class engagement was significantly positively associated with their psychological needs for competence and relatedness; and (c) students’ academic performance was significantly positively associated with their class engagement (i.e., effort and persistence). These findings emphasize the importance of satisfying students’ psychological needs in the learning process. Implications for educators are discussed.     

Perceived product necessity,perceived value,customer satisfaction and affective attitude: an integrative model

ABSTRACT

Inter-relationships among perceived product necessity, perceived value, customer satisfaction and affective attitude are examined in Harare, Zimbabwe using structural equation modelling. The study provides evidence that perceived product necessity, perceived value and customer satisfaction each positively influences affective attitude. The findings also show that perceived product necessity has a positive effect on perceived value while perceived value has a positive effect on customer satisfaction. Lastly, the study reveals that perceived product necessity does not influence customer satisfaction. The research has implications for theory, managers and future researchers.     

Defensive strategies for managing satisfaction and loyalty in the service industry

The investment model is used to predict customer responses to defensive value-added and value-recovery strategies. The two strategies were manipulated under different competitive environments with airline services scenarios in a controlled experiment. Hypotheses were affirmed as value-added and value-recovery strategies influenced customer satisfaction and loyalty with varying sensitivities to the competitive environment and different mechanisms consistent with prediction derived from the investment model. Regardless of value-added strategy and competitive environment, value-recovery strategy strongly and positively influenced customer satisfaction, situational loyalty, and enduring loyalty. Value-added strategy also had a positive effect on customer satisfaction and loyalty, but these effects emerged primarily when a value-recovery strategy was already present, and under conditions of less intense competition. Satisfaction was found to mediate strategic effects on loyalty, with more pronounced effects observed for value-recovery strategy and situational loyalty. © 1998 John Wiley & Sons, Inc.     

Linking two dimensions of entrepreneurial orientation to firm performance: The moderating role of environment and industry life cycle

The term “entrepreneurial orientation” has been used to refer to the strategy-making processes and styles of firms that engage in entrepreneurial activities. A popular model of entrepreneurial orientation (EO) suggests that there are five dimensions of EO—autonomy, innovativeness, risk taking, proactiveness, and competitive aggressiveness (Lumpkin and Dess 1996). This paper reports on two of those dimensions—proactiveness and competitive aggressiveness. Proactiveness refers to how firms relate to market opportunities by seizing initiative in the marketplace; competitive aggressiveness refers to how firms react to competitive trends and demands that already exist in the marketplace. Despite these distinctions, prior research has tended to equate these two concepts and argued that they have a similar effect on firm performance. This paper investigates how these two approaches are related to each other, how they are related to performance, and how their function differs in the environments in which firms exhibit these approaches to strategy making. These distinctions are important because proactiveness and competitive aggressiveness represent distinctly different avenues to entrepreneurial success.A field study was conducted in which 124 executives from 94 firms were surveyed. These were executives from non-affiliated, non-diversified firms who were actively involved in strategic decision making at the top level of the firm. All firms reporting had at least one respondent who was an owner. Analysis of the data was conducted in two phases. In phase 1, factor analysis was used to examine the distinctions between different dimensions of EO. Proactiveness and competitive aggressiveness emerged as two separate factors indicating that these two strategy-making modes were perceived differently by the executives in the study. In the second phase, the relationship of these two dimensions to performance was analyzed in various contexts. Initial tests found that proactiveness was positively related to performance but competitive aggressiveness tended to be poorly associated with performance.Subsequent tests of the EO-performance relationship indicated that the stage of industry life cycle tended to favor one entrepreneurial orientation over another. The performance of firms in the early stages of industry development was stronger when their strategy making was proactively oriented. In contrast, a competitively aggressive frame of mind was helpful to firms in more mature stages of industry development. These findings were supported by other tests of the business environment. In dynamic environments, characterized by rapid change and uncertainty, proactive firms had higher performance relative to competitively aggressive firms. In hostile environments, where competition is intense and resources are constrained, competitively aggressive firms had stronger performance.The findings suggest that these two different approaches to entrepreneurial decision making may have different effects on firm performance. The differences were particularly apparent in the way firms relate to their external environment. Proactiveness—a response to opportunities—is an appropriate mode for firms in dynamic environments or in growth stage industries where conditions are rapidly changing and opportunities for advancement are numerous. But such environments may not favor the kind of combative posturing typical of competitive aggressiveness. Firms in hostile environments, or in mature industries where competition for customers and resources is intense, are more likely to benefit from competitive aggressiveness—a response to threats. A further implication of this research is that the dimensions of an entrepreneurial orientation, often considered to be positively related to performance under all conditions, may not always be associated with successful outcomes. This study indicates that the dimensions of EO often vary independently rather than covary, suggesting that the extent to which an entrepreneurial approach to strategy making is useful will frequently depend on the organizational or environmental conditions under which such decisions are made.     

Are some entrepreneurs more overconfident than others?

Entrepreneurs are more susceptible to certain cognitive biases than are managers who are not entrepreneurs, but it is not clear why. In an effort to help explain why, I examine differences in the degree to which entrepreneurs exhibit the overconfidence bias. Results show that individual age, firm decision comprehensiveness and external equity funding affect the degree to which entrepreneurs are overconfident. In addition, founder-managers are shown to be more overconfident than are new-venture managers who did not found their firms. The results suggest that entrepreneurs' cognitive biases are a function of both individual and contextual factors.     

Pioneers and followers: Competitive tactics,environment, and firm growth

Market pioneering—where a firm is first to offer a distinctively new product to the market—is a commonly recognized form of corporate entrepreneurship. As with other forms of corporate entrepreneurship, the linkage between market pioneering and firm performance has received limited empirical attention, much of which has yielded inconsistent results. Nonetheless, two conclusions regarding when and how pioneering relates to firm performance are revealed in the literature. First, theory and past research suggest that pioneering is an environment-specific phenomenon. That is, certain types of environments may be most likely to encourage or reward the actions of pioneers, while these same actions may meet with limited success in other environments. Second, theory and past research suggest that firm performance is affected by the fit between a firm's pioneer/follower status and its competitive tactics. In other words, market entry order moderates the effectiveness of a firm's competitive tactics such that certain tactics will be most effective when employed by market pioneers, while other tactics will be most effective when employed by market followers.Considered jointly, the preceding observations suggest that insights might be gained regarding the effective management of market pioneering and market following by seeking to understand (a) how these phenomena are manifested in different industry environments and (b) what pioneers and followers do differently in these environments to promote their performance. The research described in this paper addresses these issues. In particular, this paper develops theory that describes how particular competitive tactics are thought to relate to firm sales growth rate among market pioneers and market followers in two distinct environmental settings. Hypotheses are developed based on the following research propositions:P1: In hostile environments, pioneers and followers will differentially benefit in achieving high sales growth rates from their reliance on relatively high prices, relatively broad product lines, relatively broad served (geographical) markets, relatively advanced process technologies, and relatively advantageous purchasing arrangements.P2: In benign environments, pioneers and followers will differentially benefit in achieving high sales growth rates from their reliance on relatively high quality products, relatively strong product warranties, relatively high advertising and promotion expenditures, relatively strong control over distribution channels employed, and relatively large numbers of distribution channels employed.To test the hypothesized relationships, data were collected from the senior managers of 103 independent, nondiversified manufacturing firms operating in 75 industries. Cluster analysis, ANOVA, and correlational analysis were employed as the principal analytical techniques.The results suggest that market pioneers grow neither more nor less rapidly than market followers. However, in hostile environments, pioneering may enable firms to break out of the dominant price-based mode of competition and grow in spite of charging high prices. This ability of pioneers to excel in hostile environments seems to be further facilitated by limiting product line breath to a small number of product offerings that provide a “tight fit” with market needs. Pioneers in hostile environments also appear to be relatively better served than followers from gaining a wide geographical distribution for their products. Followers in hostile environments, on the other hand, should seek to reduce their cost structures in order to effectively sustain low price strategies. The employment of advanced process technologies and the pursuit of “purchasing advantages” were actions which proved to be more advantageous for followers than for pioneers in hostile environments.The managerial implications of this research applicable to benign environment firms are quite different. Other things being equal, relatively high prices may not be as detrimental to growth among followers in benign environments as they are among followers in more hostile environments. Benign environment followers may, in fact, be better off when they charge relatively high prices and compete on non-price bases. The results also suggest that, in benign environments, offering products with warranties superior to those of competitors may have a significantly more positive effect on sales growth among pioneers than followers. Moreover, employing a large number of distribution channels appears to benefit pioneers more than followers. However, among the sampled firms, benign environment pioneers that realized the greatest growth did not have extensive control over distribution channel members. Therefore, benign environment pioneers may grow more quickly if they target their distribution-related resources toward expanding their channels rather than toward controlling some smaller number these channels.This study contributes to the pioneering literature by having corroborated several findings of the PIMS-based studies regarding tactical differences between pioneers and followers, and by having further documented the relevance of market entry order (or pioneer/follower status) as a moderator of the performance associated with particular competitive tactics. Moreover, by having examined the tactics-performance relationships of pioneers and followers in two distinct environmental settings, this study adds specificity and empirical support to the emerging theoretical paradigm that depicts pioneering as an environment-specific phenomenon. Finally, this study contributes to the literature on coping with hostility by having theorized about and empirically identified common and effective bases for competition under varying levels of environmental hostility.