A study of the impact of owner's mode of entry on venture performance and management patterns

Abstract This study examines if firm performance and the associated patterns of management vary with the owner-manager's mode of entry into the firm in owner-started (OS), buyout (BO), and family firms (FF). Prior research suggests that these three types of firms differ on certain managerial characteristics but has not examined the role of the owner-manager's mode of entry in determining firm performance on the one hand and its influence on the firm's management pattern on the other. We collected data from 345 firms, employing four to 99 employees, operating in four northeastern states. Self-reported return on assets (ROA), annual sales, business strengths, competitive strategies, and management practices were compared for OS, BO, and FF firms. Performance was found to vary with owner's mode of entry. The 227 OS firms' average ROA was significantly higher than that of the 61 family firms and the 57 BO firms. Successful start-up owners may have enjoyed greater profits because they assumed greater risk compared to those who opted to buy an existing venture or took over a family firm. Annual sales were highest for FFs, second for OS firms, and the lowest for BOs. In terms of management patterns, owner-started firms rated themselves significantly higher on business strengths and tended to have higher self-ratings for competitive strategies and operations strengths than did FFs or BOs. All of these differences were significant after controlling for the age and size differences among the firms, indicating that mode of entry did directly impact performance as well as the management patterns. Examining the impact of mode of entry versus management patterns on venture performance, we found that while the OS mode of entry was associated with greater ROA, this was primarily due to the different management patterns adopted by the OSs. Looking at annual sales, the FF mode of entry was associated with higher sales, and this was independent of the types of management patterns adopted by the firms. A priori, BOs would appear to be in a better position to achieve superior performance, but this was not so in this sample. Further analysis revealed different paths to profitability for the three entry modes. For OS firms, high ROA was associated with operating in the service and retail sectors, developing a broad range of business strengths, and offering competitively priced but higher quality customized products. For OSs, ROA was also enhanced by using informal and personalized management practices. Sales performance was greatest when OSs employed trained staff for functions such as budgeting and sales. For FFs, ROA was enhanced by broad-ranging strengths, but it was hurt by price and quality competitiveness—mainly because on average, their lower prices were not supported by a competitive cost of goods. Sales performance was greatest when FFs had owner-managers with extensive industry experience, were conservative in adding workers, emphasized product customization, relied on written reports, but avoided long-range operations planning. Management patterns of BOs were not related to their ROA, but their annual sales were marginally higher when the acquiring owners had extensive industry background and employed a large workforce. Thus, this study confirms our hypotheses that performance and management patterns vary across mode of entry as does the effectiveness of strategic management patterns. Further, our findings concurred with previous studies which suggested that sales performance and profitability were likely to be influenced by different management actions. This study demonstrates that owner's mode of entry is an important explanatory variable for variations in performance as well as management patterns. Venture CEOs need to recognize that different management approaches may be needed for success depending upon whether they founded, purchased, or inherited their firms.