does business planning facilitate the ... business planning facilitate the development of new...

Strategic Management JournalStrat. Mgmt. J., 24: 1165–1185 (2003)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.349

DOES BUSINESS PLANNING FACILITATE THEDEVELOPMENT OF NEW VENTURES?

FREDERIC DELMAR1 and SCOTT SHANE2*1 Center for Entrepreneurship and Business Creation, Stockholm School ofEconomics, Stockholm, Sweden2 Weatherhead School of Management, Case Western Reserve University, Cleveland,Ohio, U.S.A.

Many prior researchers have criticized business planning, arguing that it interferes with theefforts of firm founders to undertake more valuable actions to develop their fledgling enterprises.In this paper, we challenge this negative view of business planning, arguing that businessplanning is an important precursor to action in new ventures. By helping firm founders to makedecisions, to balance resource supply and demand, and to turn abstract goals into concreteoperational steps, business planning reduces the likelihood of venture disbanding and acceleratesproduct development and venture organizing activity. Empirically, we examine 223 new venturesinitiated in the first 9 months of 1998 by a random sample of Swedish firm founders and providesupport for our hypotheses. Copyright 2003 John Wiley & Sons, Ltd.

INTRODUCTION

Although some exceptions exist (see, for example,Matthews and Scott, 1995; McGrath and MacMil-lan, 2000), the prior literature generally contendsthat business planning offers little advantage tonew venture founders (Bhide, 2000; Carter, Gart-ner, and Reynolds, 1996). Arguing that planninginterferes with the efforts of firm founders toundertake more valuable firm organizing actionsto develop their fledgling enterprises, the extantliterature views business planning as a form of‘administrative behavior’ that is harmful to newventure creation (Bhide, 2000). Instead of engag-ing in business planning, the literature generallyargues that firm founders should move directly toaction—buying facilities and equipment, seekingexternal capital, and initiating marketing and pro-motion (Bhide, 2000; Carter et al., 1996).

Key words: entrepreneurship; business plans; panel data*Correspondence to: Scott Shane, Weatherhead School of Man-agement, Case Western Reserve University, Room 282, 11119Bellflower Rd., Cleveland, OH 44106, U.S.A.

In this paper, we challenge prior criticism ofbusiness planning. We define business planning asthose efforts by firm founders to gather informa-tion about a business opportunity and to specifyhow that information will be used to create a neworganization to exploit the opportunity (Castro-giovanni, 1996). Following prior researchers, weinclude as part of business planning the processesof gathering and analyzing information, evaluat-ing required tasks, identifying risks and strategy,projecting financial developments, and document-ing these things in a written plan (Castrogiovanni,1996; Sexton and Bowman-Upton, 1991).

We examine the effect of business planning onthree aspects of new venture development: prod-uct development, which we define as the cre-ation of the product or service that the venturewill sell; venture organizing activity, which wedefine as activities to establish the organizationthat will provide the new product or service;and disbanding, which we define as the cessa-tion of efforts to develop the new venture. Wefocus on these three dimensions because they are

Copyright 2003 John Wiley & Sons, Ltd. Received 20 August 2001Final revision received 10 April 2003

1166 F. Delmar and S. Shane

necessary conditions for the creation of a newfirm.

We argue that business planning helps firmfounders to undertake venture development activ-ities because planning facilitates goal attainmentin many domains of human action (Cyert andMarch, 1964; Simon, 1964; Smith, Locke, andBarry, 1990). Specifically, we argue that plan-ning helps firm founders to make decisions morequickly than with trial-and-error learning; to man-age resource supply and demand in ways thatminimize time-consuming bottlenecks; and to turnabstract goals into concrete operational activitiesmore efficiently.

Empirically, we examine the hazard of disband-ing and the level of new product developmentand venture organizing activity in 223 new ven-tures initiated in the first 9 months of 1998 by arandom sample of Swedish firm founders and fol-lowed over their first 30 months. We first explorethe effects of planning on the hazard of new ven-ture disbanding, controlling for the effects of time,industry, venture strategy, and venture perfor-mance, using piece-wise exponential event historymodels. We then explore the effects of planning onproduct development and venture organizing activ-ity, controlling for the effects of time, industry,venture strategy, venture performance, and unob-served venture-level heterogeneity, using fixed-effects regression. We find that business planningreduces the hazard of disbanding, and facilitatesboth product development and venture organizingactivity.

Our empirical effort is important for several rea-sons. First, we provide insight into the creation ofnew organizations, an important but little under-stood aspect of business (Aldrich, 1999). Priorresearch has shown that the factors that explainthe ongoing operations of established organizationsoften do not explain the creation of new organi-zations (Gartner, Bird, and Starr, 1992; Katz andGartner, 1988), and that very little research actu-ally explores the creation of new organizations(Aldrich, 1999). The development of a product orservice, the creation of the organization that willdeliver that product or service, and the continua-tion of the venture are three central parts of thenew organization creation process (Bhave, 1994).By examining the relationship between businessplanning and product development, venture orga-nizing activity, and venture disbanding, we provideinsight into an important but poorly understood

business phenomenon: the creation of new orga-nizations.1

Second, we fill a void in the existing literature,which offers little in the way of a theoreticallygrounded explanation for why business planningshould enhance product development, organizingactivity, or the survival of new ventures (for aninteresting exception see McGrath and MacMillan,2000). By offering an explanation for why businessplanning is a useful activity, and then testing thatargument empirically, we fill an important gap inthe literature.

Third, we seek to offset a bias present inthe existing literature. Although some researchersargue in favor of business planning (see, for exam-ple, Matthews and Scott, 1995; McGrath andMacMillan, 2000; Risseeuw and Masurel, 1994),the existing literature generally holds that busi-ness planning is not a worthwhile activity for firmfounders (Bhide, 2000; Carter et al., 1996). Citingevidence from retrospective studies (Bhide, 2000;Shuman, Shaw, and Sussman, 1985), the litera-ture generally argues that firm founders are betteroff relying on intuition than engaging in businessplanning (Allinson, Chell, and Hayes, 2000; Bird,1988). By demonstrating that undertaking businessplanning reduces the hazard of venture disband-ing and enhances venture organizing and productdevelopment activities, we hope to offset this bias.

Fourth, we seek to provide evidence of the rela-tionship between business planning and the devel-opment of new ventures (Castrogiovanni, 1996).Most prior researchers have examined the relation-ship between strategic planning and financial mea-sures in small, established firms (see Boyd, 1991,and Schwenk and Shrader, 1993, for reviews).However, this research offers little insight into thevalue of business planning in new ventures, par-ticularly as it facilitates the venture developmentprocess. As a result, we have little information onthe value of business planning activities to newventure development.2

1 Although a variety of factors likely influence disbanding, prod-uct development, and organizing efforts in new ventures, wefocus on the role of planning because previous research indicatesthat trial-and-error learning is ineffective for these activities inthe early stages of a new venture (Van de Ven and Polley, 1992).2 Moreover, the limited empirical results we do have often comefrom static cross-sectional regression analyses that confound theventure opportunity with business planning activity. The needfor panel data with techniques to partial out these sources ofheterogeneity in empirically testing this question is described ingreater detail in the methodology section.

Copyright 2003 John Wiley & Sons, Ltd. Strat. Mgmt. J., 24: 1165–1185 (2003)

Business Plans and Venture Development 1167

THEORETICAL DEVELOPMENT

Many prior researchers have argued that businessplanning is not very helpful under the uncertainconditions that surround new venture formation.Four explanations for this have been offered inthe literature. First, business planning takes timeaway from more valuable firm organizing actionsthat signal the ‘reality’ of the new venture tostakeholders. For example, Carter et al. (1996:154) explain:

Behavior such as buying facilities and equipmentmight be a more significant indicator to others thata nascent business is real than undertaking a behav-ior such as planning. Buying facilities may showothers that the entrepreneur has made a significantcommitment to creating a new business comparedto what might be a less public demonstration ofcommitment like planning.

Second, firm founders have limited downsiderisk if they make a mistake. As Bhide (2000: 57)explains: ‘entrepreneurs do not have much to losefrom an erroneous forecast of relative ability ormarket size . . . They usually do not put much cap-ital at risk.’ Third, firm founders possess attributesthat make them better off relying on intuition thanengaging in planning. Allinson et al. (2000) arguethat entrepreneurial intuition makes firm foundersbetter able than other people to identify and eval-uate opportunities. Fourth, the uncertainty and fastpace of entrepreneurial situations undermine thevalue of business planning (Bird, 1988). As aresult, entrepreneurs are better off relying on intu-ition than seeking information that is likely to beinaccurate or outdated (Allinson et al., 2000).

However, these arguments conflict with the prin-ciples of organization theory, which holds thatplanning before taking action improves the qual-ity of most human action (Ansoff, 1991; Lockeand Latham, 1980), and suggest that businessplanning should facilitate new venture develop-ment. Planning is an important precursor to actionbecause it provides a framework within which sub-sequent action takes place (Ansoff, 1991), therebyfacilitating the achievement of goals (Locke andLatham, 1980). In particular, planning providesthree benefits to people engaged in new ven-ture development: (a) planning facilitates fasterdecision making by identifying missing informa-tion without first requiring the commitment of

resources; (b) planning provides tools for man-aging the supply and demand of resources in amanner that avoids time-consuming bottlenecks;and (c) planning identifies action steps to achievebroader goals in a timely manner.

First, planning allows people to make fasterdecisions than they would with trial-and-errorlearning by facilitating the rapid discovery ofmissing information (Ansoff, 1991). By planningfirst and then acting second, people can testtheir assumptions without undertaking the time-consuming process of first expending resources(Armstrong, 1982). For example, a person can usea plan for building a house to decide whether to usewood or steel framing. By planning, the person cantest assumptions about the design without havingto build the structure to examine those assump-tions.

Second, planning helps people to manage thesupply and demand of resources, minimizing bot-tlenecks that slow their activity. By helping peo-ple recognize the relationship between actions andresource flows, planning allows people to moreaccurately estimate the timing of resource needsand resource slack (Armstrong, 1982). By allow-ing people to better estimate the timing of resourceflows in the activity in which they are engaged(Bracker et al., 1988), planning minimizes theoccurrence of bottlenecks that cause delays.

Third, by setting concrete objectives for thefuture, planning helps people develop specificsteps for the achievement of their goals (Brewsand Hunt, 1999), thereby facilitating the timelypursuit of their objectives. In particular, planninghelps people approach their goals in a system-atic way (Shrader et al., 1989), and keeps themfrom focusing on other activities that sidetracktheir efforts (Robinson, 1984).3 Moreover, whenoutcomes deviate from stated goals, planning facil-itates the rapid correction of that deviation byallowing people to identify the source of deviationmore quickly (Smith et al., 1990). Furthermore,planning allows people to make clear their prefer-ences for timetables in ways that can be transmit-ted to others (Bird, 1992). Finally, planning helpspeople communicate their goals to others (Lockeand Latham, 1980), thereby enhancing the pace atwhich others can act on those goals.

3 Research in both psychology and organizational behavior hasconfirmed that setting objectives enhances people’s ability toachieve their goals by focusing their attention (see Locke andLatham, 1980, and Rousseau, 1997, for reviews).



HYPOTHESES

Although the above arguments suggest that plan-ning is beneficial for all business activity, weposit that business planning is particularly use-ful in the context of new venture developmentfor three reasons. First, new venture developmentis based on self-set goals (e.g., complete prod-uct development), rather than relative performancegoals (e.g., make greater profits than other firms).When people perceive that they have the opportu-nity and ability to influence the outcome of theirown behavior, as is the case with the formation ofa new venture, self-set goals have greater motiva-tional properties than relative performance goals(Locke and Latham, 1980). Second, planning ismore effective when the time span between plan-ning and feedback is short (Locke and Latham,1980). Because the time plan between businessplanning and feedback is much shorter during thenew venture start-up process than is the case inoperation of a large, mature organization, planningmay be more valuable in this context. Third, plan-ning is more valuable when the ratio of assumptionto actual information is higher. When people donot have a track record of past performance to useas a guide, other tools become more important inevaluating the accuracy of assumptions. Becausenew ventures are new, much of the informationon which founders make decisions takes the formof unproven assumptions rather than past results.By checking the internal consistency of differentassumptions (e.g., is the hiring plan consistent withthe projected level of sales?), business planningcan improve the accuracy of founders’ assump-tions.

Consistent with the general argument presentedabove, business planning helps a firm foundermake more timely venture development decisions;manage resource flows in a way that minimizestime-consuming bottlenecks; and turn broad ven-ture goals into concrete operational steps that canbe achieved in a timely manner. We describe eachof these relationships in turn.

First, business planning speeds venture develop-ment decisions by helping firm founders anticipateproblems and information needs. By anticipatingpotential problems and information needs, firmfounders can identify solutions without engaging inslower trial-and-error learning. For example, a firmfounder might evaluate the feasibility of devel-oping two different types of launch vehicles for

space tourism in his or her business plan. If theplan reveals that the development of launch vehi-cle A would be too costly, but launch vehicle Bwould not, developing a business plan allows thefounder to develop the appropriate launch vehi-cle more quickly than if he or she had to developboth vehicles to make this decision. Similarly, afirm founder might evaluate the feasibility of pur-chasing different inputs for the development of thenew venture. If the plan reveals that certain inputswould be too costly given the sales projections ofthe venture, the firm founder can shift to obtainingdifferent inputs without the time-consuming detourof purchasing the wrong inputs.

Second, developing a business plan helps afirm founder manage the supply and demandfor resources in product development and ven-ture organizing activity, thereby minimizing bot-tlenecks that slow these processes. As MacMillanand Narasimha (1987) explain, business planninghelps a firm founder determine when to focus effortand attention in different areas (product devel-opment, marketing, purchasing, etc.). By help-ing the founder determine when to focus effortand attention, business planning helps determinethe best ordering of different organizing activities(e.g., marketing and promotion, obtaining inputs,and searching for capital), thereby minimizing thelikelihood that the venture will be delayed byundertaking activities in an ineffective sequence.Moreover, Bird (1992) explains that the act ofbusiness planning makes more concrete people’sexpectations for the timing of venture developmentactivities, thereby facilitating understanding of theappropriate sequence. For example, the identifica-tion of a critical development path in a businessplan allows a firm founder to identify the mile-stones that should be achieved before resourcesare committed to other activities, thereby reducingbottlenecks.

Third, business planning allows a firm founderto create a blueprint for the venture develop-ment processes that turn broad goals into concreteaction steps (Castrogiovanni, 1996). The creationof ‘blueprints’ for these processes speeds venturedevelopment because it creates timetables for howlong the founders expect that it will take to com-plete tasks, such as obtaining inputs or buildinga prototype (Bird and Jelinek, 1988). Because afirm founder’s preferences influence, at least inpart, the pace at which these activities take place,



a founder can alter the pace of venture develop-ment by setting certain time horizons for particularaction steps in his or her plans.

In addition, business planning communicatesspecific goals to others performing the tasks,thereby enhancing the rate of transfer of thefounder’s overall vision to others responsible foracting on that vision. In particular, the establish-ment of particular timeframes for milestones (e.g.,approach investors) aligns expectations and makesthose milestones into symbolic events that focusthe attention of stakeholders, further enhancingventure development (Bird, 1992).

Furthermore, by specifying operational steps toachieve a broader goal, business planning keepsfounders from diverting their attention to otheractivities that sidetrack their efforts. Because firmfounders have many responsibilities, their abilityto achieve venture development goals requires afocus on key activities. By establishing a planwith specific operational steps outlined ahead oftime, the founder is better able to focus attentionon those actions that will help achieve venturedevelopment goals, and is thus more likely tocomplete those activities in a timely manner.

Finally, business planning facilitates the rapidcorrection of deviation from objectives by pro-viding the founder with a framework in which toput feedback about the venture’s progress (Smithet al., 1990). For example, dividing the goal ofdeveloping a ‘high-quality product’ into concretemilestones, like completing design, developinga prototype, and testing the prototype, identifiesactionable steps that firm personnel can follow andthat can be tracked. This identification of actionsteps allows the founder to learn whether com-pleting design, developing a prototype, or testingthe prototype was the source of deviations fromthe goal and helps him or her make timely correc-tions. These arguments lead to the following threehypotheses:

Hypothesis 1: Business planning reduces thehazard of new venture disbanding.

Hypothesis 2: Business planning facilitates pro-duct development in new ventures.

Hypothesis 3: Business planning facilitates ven-ture-organizing activity in new ventures.

METHODOLOGY

Design and sample

Examination of the relationship between planningand venture disbanding, product development, andventure organizing activity requires longitudinaldata from the earliest days of a new venture’s exis-tence forward in time because neither planning norventure development takes place instantaneouslyat firm founding (Katz and Gartner, 1988). Stan-dard cross-sectional evaluations of the effects ofbusiness planning on venture development fromretrospective survey data are problematic (Shrader,Taylor, and Dalton, 1984). Not only does thisapproach introduce hindsight and recall biases thatundermine the validity of the evidence, it precludesexamination of the effects of the ordering of activ-ities, which are important for accurate estimationof the effects of planning on venture disband-ing, product development, and venture organizingactivity (Castrogiovanni, 1996; Smith et al., 1990).

To overcome these problems, we track longi-tudinally a random sample of 223 new venturesestablished in Sweden in 1998 from the exploita-tion of the venture opportunity forward in time.Because no defined sampling frame of new ven-tures exists, during the first 9 months of 1998we initially contacted 35,971 individuals randomlyselected from the general population between theages of 16 and 70 living in Sweden who couldbe contacted by telephone. This sampling effortyielded 30,427 individuals (84.6%) who were will-ing to participate in the study.

We asked each respondent a series of questionsto identify those individuals who had initiated anew venture in the first 9 months of 1998. To beconsidered a founder of a new venture during thistime period, the respondent had to answer that:(1) they were in the process of starting a newbusiness either alone or jointly with others, (2) thefirst activity that they took to start the new ven-ture occurred during the first 9 months of 1998,4

4 Because our research design assumes that firm founders canbegin their ventures by initiating a variety of different activities,we cannot ask the respondents when they first began particularactivities. Instead, we asked the respondents when they firstbegan work on the venture. We distinguish when the respondentsbegan work on the venture from when they began thinking aboutthe venture by also asking them when they first began thinkingabout the venture opportunity. In all cases the respondentsindicated that they began work on the venture at the same timeor after they began thinking about it, lending confidence to thisapproach.



(3) the new venture was not part of an effort byan existing organization,5 and (4) the respondentwas a member of the founding team as opposedto a consultant or passive investor.6 The 35,971individuals screened yielded 223 people who hadinitiated a new venture in the first 9 months of1998.

We treated the 223 ventures that these individu-als initiated as the sample for our study. We askedthe 223 founders to participate in a structured,telephone survey about their ventures. Althoughresearchers studying large, established organiza-tions often seek information from several respon-dents about their organizations, we used a singlerespondent approach in this study because a mul-tiple respondent approach is not necessary, andfrequently not possible, in the case of a new ven-ture. A single respondent in a large organizationmay lack information about many parts of the orga-nization because of the division of labor, or maydisagree with other respondents about the appro-priate answers to questions. However, neither ofthese conditions is present in the new ventures weexamine. In 40 percent of the ventures we study,the entire staff consists of a single founder. In thesecases, the views of the founders are the same asthe average views of the venture’s staff. Moreover,the scale of new ventures is so small at the pointin time that we study them that the respondentspossess detailed information about the activities ofall aspects of the ventures.

Because we sought to gather panel data about theventures over time, we resurveyed the respondentsafter 6, 12, 18, and 24 months or until the venturehad been disbanded.7 We obtained high responserates for the successive waves: 90.5 percent at6 months, 91.9 percent at 12 months, 98.5 percentat 18 months, and 96.1 percent at 24 months. In

5 Respondents had the option of indicating that their new venturewas undertaken on behalf of their employer or other existingorganization. Those individuals who indicated that their start-upeffort was not independent were excluded from the sample.6 Because we randomly sample the Swedish workforce, we donot collect information from all founders of a given venture forthose ventures with multiple founders. However, we do not faceany bias from contacting only some of the founders because therandom selection of the founder with whom we speak avoidssystematic biases that occur from speaking to particular types offounders (e.g., the technical founder, the CEO, etc.).7 We analyzed the duration between the month of survey and themonth of venture initiation to determine if the interval betweenthe two influenced our outcome measures. We found that thetiming of the survey did not have a large or a statisticallysignificant effect on the outcome measures.

fact, only 12 of the ventures that ceased to partic-ipate at one of the waves of data collection neverreturned to participation. We examined the differ-ences for responses on all of the variables in ourstudy between the 12 ventures that dropped out ofparticipation and the 211 ventures that continued toparticipate. We find that the only statistically sig-nificant difference between the two groups was onthe expectation of competition (the ventures thatceased to participate in the study expected lesscompetition).

Over the 30 months that we observe the newventures, 82 of the ventures disbanded. This rateof disbanding is fairly typical and is consistent withdata on new venture failure rates as provided by theU.S. Small Business Administration and academicresearchers (See Aldrich, 1999, for a discussion ofnew venture failure rates).

Event history models

Because approximately one-third of the ventures inour sample disband during the observation period,we first examine the hazard of venture disband-ing. To predict the hazard of venture disbanding,we analyze our data using piece-wise exponen-tial event history models with robust clusteringon each venture. We use the piece-wise exponen-tial specification because it allows the hazard rateto vary with venture age (assuming that they areconstant within each piece) without demandingparametric assumptions. We selected age piecesthat matched the waves of the survey: less than7 months old, 7–12 months old, 12–18 monthsold, and 19–24 months old.8 Because we askedrespondents to indicate the month in which theventure was disbanded (if it was disbanded), theevent history models have monthly spells.

Selection correction

To predict product development and venture orga-nizing activity, we need to correct our sample forthose ventures that were disbanded because thedisbanding of a venture precludes business plan-ning from enhancing venture organizing activityand product development. We use Lee’s (1983)

8 To confirm the accuracy of our choice of distribution, wealso analyzed our regression model with other distributions. Theresults were qualitatively the same across all distributions tested,indicating the robustness of our choice of distribution.



generalization of the Heckman selection model tocreate a selection variable to control for venturedisbanding in the fixed effects regression modelsused to predict product development and ventureorganizing activity. The inclusion of this controlallows us to obtain more precise estimates for ourindependent variables than would be the case if wedid not correct for venture disbanding because fail-ure to correct for selection effects leads to omittedvariable bias (Greene, 2000). Specifically, we usethe probabilities of disbanding from the piecewiseexponential model to predict venture disbandingfor our 223 ventures to generate a sample correc-tion variable lambda:

λit = φ[�−1(Fi(t))]

1 − Fi(t)

where Fi(t) is the cumulative hazard function forproject i at time t , φ is the standard normal densityfunction, and �−1 the inverse of the standardnormal distribution function (Lee, 1983).

To properly construct the disbanding correc-tion variable, it is important to include at leastone variable that should affect venture disband-ing, but does not have a direct effect on productdevelopment or venture organizing activity. Weinclude the number of prior start-ups of the ventureteam as an additional exogenous covariate. Thisvariable should predict venture disbanding (Bates,1990; Schoonhoven, Eisenhardt, and Lyman, 1990)because decisions to disband ventures are influ-enced by the founders’ tacit knowledge of the firmcreation process. λit is then included as a variablein the fixed effects regression models to predictproduct development and firm organizing activity.

Venture fixed effects

Research on new venture development generallyinfers effects from static cross-sectional analysesthat confound differences between venture oppor-tunities and the actions taken by the founders(Shane, 2000). This confounding introduces biasinto efforts to examine the effect of business plan-ning on the development of new ventures. Specif-ically, the effects of planning proxy for unob-served characteristics about the opportunity whenthe characteristics of an opportunity are correlatedwith business planning, as would be the case if firmfounders’ with larger-scale business opportunities,

were more likely to write business plans (Heck-man, 1981). As a result, prior empirical evidencefor the effects of business planning tends to bebiased because firm size, firm growth, and the qual-ity of business opportunities are all correlated withbusiness planning (Goldenberg and Kline, 1999;Orser, Hogarth-Scott, and Riding, 2000; Shraderet al., 1989).

This problem is mitigated by the employmentof panel data techniques that control for venturefixed effects. By comparing business planning andnew venture development at various points in time,while controlling for unobserved characteristicsabout the venture, fixed effects regression partialsout the effect of venture-level factors, such as thequality of the venture opportunity, and allows foran unbiased estimate of the relationship betweenbusiness planning and the outcome under investi-gation (Griliches, 1986). Therefore, we incorporatefixed effects regression in our analysis.

We adopt a fixed effects regression model of thefollowing form:

yit = Xitβ + υi + vt + εit

where

yit = the level of product development from 1 to5 (the level of venture organizing activityfrom 1 to 8) for venture i at time t ;

Xit = the effect of the measured covariates forventure i at time t ;

υi = the fixed effect of venture i’s opportunity;vt = the effect of the time period on all ventures;εit = unobserved variance that affects venture i

at time t .

Advantages of the design

Our approach to generating the sample providesthree major advantages over other efforts to exam-ine new ventures. First, we avoid the sample selec-tion bias inherent in examining new ventures fromlists of new firms provided in industry directo-ries or government records, which fail to recordnew ventures that fail very early in their existence(Aldrich and Wiedenmayer, 1993; Aldrich et al.,1989; Carroll and Hannan, 2000; Katz and Gart-ner, 1988). By drawing upon a random sample ofthe adult Swedish population, we can construct asample of new ventures that accurately representsthe population of new ventures initiated in Swe-den in the first 9 months of 1998. This allows us



to generalize more accurately to the overall popu-lation of firms than is the case with conveniencesamples of new ventures.

Second, we observe all new ventures at repeatedintervals from the time that they were initiated.This approach allows for the examination of theevolution of planning and venture developmentduring earliest days of the ventures’ lives anddocuments the actual timing of these activities.By tracking new ventures longitudinally over time,our tests of the effects of planning on venturedevelopment are more conservative than cross-sectional tests that necessarily overstate the effectof business planning.

Third, our design enables us to obtain infor-mation from respondents about both independentand dependent variables without problems of com-mon method or single source bias that affectcross-sectional designs of similar questions. Thisis important because new ventures often involveonly founders at the very early stages. Becauseno informants other than the founders are avail-able to provide information about the venture,researchers must obtain information from respon-dents about both the independent and dependentvariables. We mitigate the effects of commonmethod and single source bias because longitudi-nal designs greatly reduce these problems (Lindelland Whitney, 2001). In addition, we use fixedeffects regression to control for venture effects.Because the same ventures are measured repeat-edly over time, the tendency of the respondents toanswer questions about the independent and depen-dent variables in a systematic way is captured bythe venture effect variable (Greene, 2000). There-fore, common method and individual level biases,if present, will not influence the coefficients onthe hypothesized variables, but will overstate theeffect of the venture fixed effect.

Dependent variables

Because we examine new ventures from the pointof their initiation forward over their first 30 monthsof life, we focus on the period before the firmfounder pursues financial performance goals, butinstead seeks to achieve such milestones as thedevelopment of a product or service, or the orga-nization of the company (Block and MacMillan,1992). For this reason, our dependent variables are

venture disbanding, the level of product develop-ment, and the level of venture organizing activity,rather than measures of financial performance.

We predict the dependent variables at each pointin time as a function of a variety of covari-ates described below. The dependent variables arelagged by 1 month to ensure that the predictor vari-ables occurred before the dependent variables.

Venture disbanding

We define venture disbanding as the cessation ofthe venture by all members of the team pursuing it.We require the entire venture team to cease pursuitof the opportunity to define a venture as disbandedbecause the composition of venture teams oftenchanges over time and the cessation of effort bythe respondent does not necessarily indicate thedisbanding of the venture.

We identify disbanding by asking respondentsat each wave of the survey whether all partiespursuing the venture have ceased their effort topursue it and, if so, in what month that effortended. By identifying the specific month of ces-sation, we can create event history models thatmeasure monthly spells for the new ventures. Inthe month that all members of the venture teamceased pursuit of the venture, we code the ven-ture with a ‘1.’ Otherwise, we code this variableas ‘0.’ Those ventures not disbanded by the endof our 30-month observation were treated as cen-sored.

Product development

We measured product development as follows:every 6 months we asked respondents, ‘At whatstage of development is the product or service thisstart-up will be selling?’ The scale of responseswas ‘1’ equals ‘No work has been done to developa product or service;’ ‘2’ equals ‘Work to developthe product or service is still in the idea stage;’‘3’ equals ‘A model or procedure is being devel-oped;’ ‘4’ equals ‘A prototype or procedure hasbeen tested with customers;’ and ‘5’ equals ‘Theproduct or service is completed and ready for salesor delivery.’ By measuring the stage of productdevelopment repeatedly over time, we capture bothimprovements and decreases in product develop-ment.



Venture organizing activity

Venture organizing consists of those activities thatestablish the physical structure and organizationalprocesses of a new firm (Bhave, 1994). We mea-sure venture organizing activity by generating thetotal score to eight dichotomous questions thatprior research has shown are steps founders taketo organize new ventures (Carter et al., 1996;Reynolds and White, 1997). We administer thequestions in dichotomous form to be consistentwith prior research on new venture organizingactivities (see Carter et al., 1996; Reynolds andWhite, 1997). We note that prior research hasshown that these dimensions can be combined intoan overarching measure (Carter et al., 1996; Gate-wood, Shaver, and Gartner, 1995).

Every 6 months, beginning with the initial sur-vey, we asked respondents the following ques-tions, coded as ‘1’ if the respondent answered‘yes’ and ‘0’ if the respondent answered ‘no’:(1) ‘Has the venture filed the necessary forms withthe tax authorities?’ (2) ‘Has the venture registeredwith government authorities?9 (3) ‘Has discussionabout the product or service the start-up will sellbeen initiated with potential customers?’ (4) ‘Haveany raw materials, inventory, supplies, or compo-nents for the start-up been purchased?’ and ‘Haveany major items like equipment, facilities, or prop-erty been purchased, leased, or rented for the newstart-up (major was defined as an item with aretail value of greater than U.S. $1000)?’ (5) ‘Hasthe venture sought to obtain a patent, copyrightor trademark?’ (6) ‘Has the venture sought toobtain necessary permits or licenses to operate?’(7) ‘Has the venture sought to obtain financing?’(8) ‘Has the venture initiated marketing or promo-tion efforts?’ To mitigate the possibility that therespondents would overstate that they had com-pleted these activities when, in fact, they had not,the interviewers requested information that con-firmed the respondents’ statements. We obtainedno information that disconfirmed the respondents’statements.

Predictor variables: Business planning

We use two operationalizations of a business plan-ning measure in our study. First, we include a

9 In Sweden, like many European countries, firm founders arerequired by law to register their ventures with governmentauthorities when the venture is initiated.

dichotomous variable: ‘Has a business plan beencompleted?’ We use the dichotomous variablebecause the different components of our compositemeasure may not be of equal importance, suggest-ing that a single dichotomous measure may besuperior to a hierarchical measure.

However, a non-dichotomous hierarchical mea-sure also has methodological advantages. There-fore, in alternative regressions, we also use acomposite measure of business planning based onfour questions about different activities that priorresearch has indicated are important componentsof business planning, and that prior research hasshown can be combined to create a compositemeasure (Gatewood et al., 1995).10 We administerthe questions in dichotomous form to be consis-tent with prior research on new venture organizingactivities (see Carter et al., 1996; Reynolds andWhite, 1997).

To create the non-dichotomous measure, every6 months, beginning with the initial survey, weasked respondents the following questions, codedas ‘1’ if the respondent answered ‘yes’ and ‘0’ ifthe respondent answered ‘no’: (1) ‘Have financialprojections been developed?’ (2) ‘Has the venturegathered information about the market and compe-tition?’ (3) ‘Has a business plan been completed?’(4) ‘Has a formal, written business plan documentbeen prepared?’ In scoring the business planningmeasure, we created a scale that added these scorestogether. If the information on the market and com-petition had been gathered by the time of the wave,the venture received a score of one. The venturealso received a score of one if the financial pro-jections had been completed by the time of thewave. If these two sections had been combinedinto a completed business plan the venture receivedan additional score of one. Finally, the venturereceived another score of one if the business planhad been completed in a written form suitable forpresentation to others. Because the score on thisvariable can increase over time, it captures the ideaof ongoing maintenance and updating of plans.

We used the response to the question ‘Has abusiness plan been completed?’ rather than the

10 We do not examine many dimensions of strategic planningbecause prior research has indicated that these activities are notimportant to firm organizing or product development in newventures (Castrogiovanni, 1996). We also do not examine manydimensions of operational planning, such as specific plans foracquiring facilities, layout of space, or the design of manufac-turing plants, because these are industry and opportunity specific.



response to the question ‘Has a formal, writtenbusiness plan document been prepared?’ as ourdichotomous measure of business planning forthree reasons. First, business plans can be com-plete even if they are not presented in the formal,written form suitable for presentation to others. Infact, many respondents to our survey consideredtheir business plans complete even though theydid not yet take the form expected by investors orgovernment agencies. Second, our survey protocolused nested questions. To make the administrationof the survey efficient, the instrument asked cer-tain questions only if the respondent had answered‘yes’ to other questions. As a result, the ques-tion ‘Has a formal, written business plan documentbeen prepared?’ was only asked if the respondenthad indicated, ‘A business plan has been com-pleted.’ Given the nested structure of the surveyprotocol, the completed plan question is a moreappropriate choice of a single-item measure ofbusiness planning than the formal plan question.Third, our discussions with entrepreneurs indicatedthat a formal, written document was much morelikely to be prepared if the respondent was seek-ing outside capital because investors had specificrequirements about the form of a business planthat was not necessarily the same as that used byrespondents to manage their own operations. As aresult, we believe that the question ‘Has a businessplan been completed?’ is a better single item tomeasure the concept business planning than ‘Hasa formal, written business plan document been pre-pared?’

Definitions of ‘financial projections,’ ‘gatheredinformation on the market and competition,’ ‘com-pleted business plan,’ and ‘written, formal busi-ness plan document’ were provided to ensure thatthe respondents understood these concepts. Forinstance, to ensure that respondents understood themeaning of the term ‘business plan’ and did notconfuse it with other terms, such as ‘operationalplan,’ the interviewers provided a clear definitionof a business plan when surveying the respondents.To ensure that the respondents understood the term‘financial projections,’ the interviewers explainedthat financial projections included projected bal-ance sheets, cash flows, income statements, andbreak-even analyses. Moreover, to mitigate thepossibility that the respondents would overstatethat they had completed these activities when, infact, they had not, the interviewers requested infor-mation that confirmed the respondents’ statements.

We found no cases in which the additional infor-mation disconfirmed the statements made by therespondents.

Control variables

Start-up experience

We control for the start-up experience of thefounders of the ventures with a count of the num-ber of firms previously established by the ventureteam.

Number of employees

We include a measure of the number of employeesat each wave of the interviews. We count part-timeemployees as one half of each full time employee.

Received external capital

We include a dummy variable to indicate whetheror not the venture had received external capital atthe time of each wave of interviews.

Competitive advantage

We measure the founder’s perception of a compet-itive advantage with a dichotomous variable askedof the founder at each wave: ‘Does your new ven-ture have a competitive advantage?’

Level of competition

We measure the founders’ perception of com-petition with a four-point scale administered ateach wave. The scale is: ‘0’ equals ‘expect nocompetition,’ ‘1’ equals ‘expect low competition,’‘2’ equals ‘expect moderate competition,’ and ‘3’equals ‘expect strong competition.’

Attractive products/services

We measure the founders’ perception that it isimportant for the new venture to have more attrac-tive products and services than its competition byemploying a four-point scale administered at eachwave. The scale is: ‘1’ equals ‘insignificant,’ ‘2’equals ‘marginal,’ ‘3’ equals ‘important,’ and ‘4’equals ‘critical.’



Manufacturing

We control for manufacturing businesses with adummy variable one for manufacturing firms (ser-vice firms was the omitted case). This dummyvariable is generated from information collectedat the time of the first survey.

Average firm age in industry

We control for the average age of firms in theindustry using data collected from Statistics Swe-den11 that measure the average age of all regis-tered firms in the new venture’s five-digit StandardIndustrial Code in that year.

Average firm size in industry

We control for the average size of firms in theventure’s industry with data from Statistics Swe-den that measure the average number of employeesin all registered firms in the venture’s five-digitStandard Industrial Code in that year.

Exit rate in the industry

We control for the exit rate of venture’s industrywith data from Statistics Sweden that measure thepercentage of registered firms in the new venture’sfive-digit Standard Industrial Code that exited inthat year.

Industry level of sales

We control for the level of sales in the industrywith data from Statistics Sweden that measure thetotal value of revenues of all registered firms in thenew venture’s five-digit Standard Industrial Codein that year. The industry level of sales is reportedin Swedish crowns.

Start-up rate in the region

We control for the new firm formation rate in theregion with data from Statistics Sweden that mea-sure the total number of new firms per workforce-aged inhabitant launched in the region in that year.

11 All firms in Sweden that conduct legal economic activity arelisted in Statistics Sweden’s business register. This databaseis updated every 2 weeks with information from the Swedishtax authorities. The business register data can be divided byfive-digit standard industrial codes, which we use to create theindustry variables. We update these annually, using data for1998, 1999, and 2000.

Time effects

Because we expect a natural trend towards plan-ning, disbanding, venture organizing activity, andproduct development over the lives of new ven-tures, these variables could be correlated simplyas an artifact of the passage of time. To mitigatethis problem, we control for the effect of time witha series of age pieces in the event history modelsand a series of dummy variables for each of thewaves of data collection in the fixed effects mod-els. By including these variables, we partial out theportion of the variance that is explained solely bythe passage of time.

RESULTS

Table 1 presents the descriptive statistics for theentire panel and by wave. This table provides sup-port for the use of fixed effects regression to con-trol for variation across ventures in opportunities.First, the table indicates that sufficient progress ismade in product development and venturing orga-nizing over their first 30 months to justify paneldata analysis. The mean on the product develop-ment variable rises from 3.13 at the time of thefirst wave of data collection to 4.67 at the timeof the fifth wave, 2 years later. The mean on theventure organizing variable rises from 1.55 at thetime of the first wave to 5.06 at the time of thefifth wave. Second, the low level of differencesacross the five waves on the variables measuringthe venture opportunity/strategy suggests that con-trolling for unobserved heterogeneity through fixedeffects is appropriate and will minimize bias in theregression analysis.12

Table 2 provides a correlation matrix. This tableprovides several interesting insights into the data.First, the significant positive correlation betweenplanning and receiving external capital suggeststhe importance of controlling for the receipt ofexternal capital to partial out the portion of plan-ning that may operate indirectly through effortsto persuade external stakeholders to support theventure. Second, the absence of high levels of

12 We also asked the respondents at each wave if the ventureopportunity that they were pursuing had changed since the timeof the last interview. We found that the opportunity changed foronly 15 of the 223 ventures between any of the waves. Thisinformation provides additional support for the assumption thatwe could control for the nature of the opportunity through theuse of fixed effects regression.



Tabl

e1.

Des

crip

tive

stat

istic

s

Ove

rall

sam

ple

Wav

e1

Wav

e2

Wav

e3

Wav

e4

Wav

e5

Mea

nS.

D.

Mea

nS.

D.

Mea

nS.

D.

Mea

nS.

D.

Mea

nS.

D.

Mea

nS.

D.

Prod

uct

deve

lopm

ent

4.43

1.01

3.13

1.19

4.46

0.94

4.63

0.87

4.67

0.83

4.67

0.87

Ven

ture

orga

nizi

ngac

tivity

3.72

2.16

1.55

1.39

3.51

1.73

4.61

1.76

4.89

1.77

5.06

1.79

Bus

ines

spl

anni

ng1.

911.

310.

800.

901.

721.

102.

411.

182.

581.

192.

631.

19C

ompl

eted

plan

0.40

0.49

0.06

0.23

0.25

0.43

0.59

0.49

0.64

0.48

0.66

0.48

Num

ber

ofem

ploy

ees

1.11

12.6

90.

170.

870.

512.

170.

733.

323.

2028

.86

1.62

9.43

Obt

aine

dex

tern

alca

pita

l0.

180.

380.

000.

070.

100.

290.

250.

440.

300.

460.

340.

48A

ttrac

tive

prod

ucts

impo

rtan

t2.

490.

952.

560.

932.

460.

902.

480.

982.

450.

982.

451.

00E

xpec

tco

mpe

titio

n2.

040.

931.

980.

971.

990.

962.

060.

962.

100.

852.

120.

88C

ompe

titiv

ead

vant

age

0.60

0.49

0.59

0.49

0.61

0.49

0.59

0.49

0.63

0.48

0.61

0.49

Ave

rage

firm

age

inin

d.6.

552.

606.

462.

526.

452.

506.

642.

686.

542.

666.

752.

70A

vera

gefir

msi

zein

ind.

2.97

5.45

3.05

6.73

2.83

5.28

2.97

5.05

3.00

5.22

3.03

4.04

Indu

stry

sale

s(’

000)

159.

6021

2.76

147.

7719

7.54

153.

5820

2.88

162.

0422

0.30

163.

4722

4.39

179.

1922

8.31

Exi

tra

tein

indu

stry

1.80

8.60

3.05

12.2

43.

0612

.29

0.56

0.93

0.60

0.98

0.79

1.67

Man

ufac

turi

ngfir

m0.

140.

340.

140.

350.

140.

340.

130.

340.

140.

350.

120.

33Fi

rmfo

rmat

ion

rate

inre

gion

0.67

0.21

0.65

0.18

0.65

0.18

0.67

0.22

0.67

0.22

0.73

0.25

Team

star

t-up

expe

rien

ce2.

5311

.59

2.14

10.3

62.

3110

.95

2.69

12.0

92.

8512

.51

2.85

12.5

1



Tabl

e2.

Cor

rela

tion

mat

rix

for

the

pane

lda

taan

alys

is

12

34

56

78

910

1112

1314

1516

1718

19

1.Pr

oduc

tde

v.1.

002.

Org

aniz

ing

activ

ity0.

33∗

1.00

3.B

usin

ess

plan

ning

0.32

∗0.

61∗

1.00

4.A

ttrac

tive

prod

ucts

−0.0

9∗0.

040.

07∗

1.00

5.C

ompe

titio

n0.

050.

050.

10∗

0.13

∗1.

006.

Com

petit

ive

adv.

0.02

0.14

∗0.

13∗

0.03

−0.0

51.

007.

Team

star

t-up

exp.

−0.0

2−0

.03

0.06

0.01

0.05

0.05

1.00

8.E

mpl

oyee

s−0

.02

0.12

∗0.

040.

08∗

0.03

0.06

0.00

1.00

9.R

ecei

ved

capi

tal

0.13

∗0.

47∗

0.32

∗ −0.

06−0

.06

0.01

−0.0

10.

13∗

1.00

10.

Man

ufac

turi

ng−0

.04

0.00

0.02

−0.0

4−0

.02

0.07

∗ −0.

010.

08∗

0.03

1.00

11.

Indu

stry

sale

s0.

040.

10∗

0.01

0.03

0.07

0.03

−0.0

40.

060.

04−0

.03

1.00

12.

Indu

stry

exit

rate

−0.0

8∗ −0.

11∗ −

0.07

∗0.

04−0

.05

−0.0

60.

00−0

.01

−0.0

3−0

.03

−0.1

3∗1.

0013

.A

vera

gefir

mag

e−0

.04

0.08

∗ −0.

03−0

.08∗ −

0.05

0.01

−0.0

4−0

.02

0.00

0.02

−0.0

1−0

.36∗

1.00

14.

Ave

rage

firm

size

0.00

0.05

0.03

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010.

10∗ −

0.01

−0.0

1−0

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−0.0

40.

02−0

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0.26

∗1.

0015

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egio

nal

star

t-up

s0.

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0.05

0.01

−0.0

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18∗ −

0.02

−0.0

7∗ −0.

05−0

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∗ −0.

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0.03

1.00

16.

7m

onth

s0.

02−0

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8∗ −0.

01−0

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0.01

−0.0

1−0

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−0.1

2∗0.

00−0

.02

−0.0

8∗ −0.

02−0

.01

−0.0

51.

0017

.13

mon

ths

0.09

∗0.

20∗

0.18

∗ −0.

000.

01−0

.01

0.01

−0.0

10.

09∗ −

0.01

0.01

−0.0

7∗ −0.

02−0

.00

−0.0

0−0

.26∗

1.00

18.

19m

onth

s0.

11∗

0.25

∗0.

23∗ −

0.02

0.03

0.02

0.01

0.07

∗0.

15∗

0.01

0.01

−0.0

60.

000.

000.

00−0

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0.22

∗1.

0019

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mon

ths

0.11

∗0.

28∗

0.24

∗ −0.

020.

040.

00−0

.02

0.02

0.19

∗0.

020.

04−0

.05

0.03

0.00

0.12

∗ −0.

24∗ −

0.21

∗ −0.

20∗

1.00

∗p

<0.

05



correlation between independent variables suggeststhat problems of multicollinearity are likely notmanifest in this analysis. Third, the low level ofcorrelation between team start-up experience andproduct development and venture organizing activ-ity indicates that this variable meets the exogeneityrequirements for use in creating the selection cor-rection lambda.

Table 3 presents the results for the piece-wiseexponential models to predict the hazard of ven-ture disbanding. Model 1 provides the base modelwithout the business planning variable included.Model 2 adds the continuous measure of businessplanning. Overall this model is significant (χ 2 =47.29, p < 0.0001). Among the control variables,team start-up experience has a significant nega-tive effect (coefficient = −0.25, p < 0.01), whichtranslates to a 22 percent reduction in the haz-ard of venture disbanding. In addition, the 7-to 12-month age piece has a significant posi-tive effect (coefficient = 1.44, p < 0.001), whichtranslates to a hazard rate for the 7- to 12-monthage piece that is four times as high as the haz-ard for the 25- to 30-month age piece. Model2 also provides support for Hypothesis 1. Busi-ness planning has a significant negative effect(coefficient = −0.21, p < 0.05), which translates

to a 19 percent reduction in the hazard of disband-ing.

These results are confirmed by Model 3, whichsubstitutes the dichotomous measure of businessplanning for the continuous measure. Overall thismodel is significant (χ 2 = 58.71, p < 0.0001).Team start-up experience again has a negativeeffect (coefficient = −0.25, p < 0.01), whichtranslates to a 22 percent reduction in the hazardof disbanding. The 7- to 12-month age piece hasa positive effect (coefficient = 1.33, p < 0.01),which translates to a hazard of disbanding in the 7-to 12-month age piece that is almost four times ashigh as it is in the 25- to 30-month age piece. Moreimportantly, having completed a business plan hasa negative effect (coefficient = −0.91, p < 0.01),which translates to a 60 percent reduction in thehazard of disbanding.

Table 4 provides the fixed effects regression topredict product development and venture organiz-ing activity. Models 1–3 test Hypothesis 2. Models4–6 test Hypothesis 3. The results show the impor-tance of controlling for venture-level fixed effectsin examining the effect of planning on productdevelopment. Venture effects explain 72 percentof the variance in product development (ρ = 0.72in Model 2) and 74 percent of the variance inventure organizing activity (ρ = 0.74 in Model

Table 3. Piece-wise exponential models to predict the hazard of venture disbanding

Variable Model 1 Coeff. (S.E.) Model 2 Coeff. (S.E.) Model 3 Coeff. (S.E.)

Less than 7 months 0.88 (0.51)t 0.63 (0.52) 0.51 (0.50)7–12 months 1.57 (0.48)∗∗∗ 1.44 (0.49)∗∗ 1.33 (0.48)∗∗

13–16 months 0.62 (0.55) 0.59 (0.55) 0.58 (0.55)17–24 months −0.09 (0.63) −0.09 (0.63) −0.09 (0.63)Business planning # −0.21 (0.10)∗ #Completed business plan # # −0.91 (0.31)∗∗

Start-up experience −0.27 (0.10)∗∗ −0.25 (0.10)∗ −0.25 (0.10)∗∗

Competitive advantage −0.17 (0.22) −0.11 (0.23) −0.13 (0.22)Level of competition −0.05 (0.13) −0.02 (0.13) −0.01 (0.13)Attractive product 0.03 (0.12) 0.04 (0.12) 0.04 (0.12)Number of employees −0.99 (0.63) −0.93 (0.60) −0.90 (0.57)Obtained external capital −0.55 (0.43) −0.47 (0.43) −0.37 (0.44)Industry exit rate 0.01 (0.01) 0.01 (0.01) 0.01 (0.01)Average firm age 0.02 (0.04) 0.01 (0.04) 0.01 (0.04)Average firm size 0.01 (0.02) 0.01 (0.02) 0.01 (0.02)Industry sales 0.01 (0.01) 0.01 (0.01) 0.01 (0.01)Manufacturing business −0.12 (0.34) −0.10 (0.34) −0.09 (0.34)Start-up rate in region −0.02 (0.61) −0.09 (0.61) 0.13 (0.62)Log-likelihood −214.45 −212.54 209.63χ 2 47.29∗∗∗∗ 54.35∗∗∗∗ 58.71∗∗∗∗

∗∗∗∗ p < 0.0001; ∗∗∗ p < 0.001; ∗∗ p < 0.01; ∗ p < 0.05; t p < 0.10 in two-tailed tests. The analysis file contains 5093 firm–monthobservations, 223 cases and 82 failures. # Variable not in the regression.



Table 4. Fixed effects regression to predict new venture development

Model 1Product Dev.Coeff. (S.E.)

Model 2Product Dev.Coeff. (S.E.)

Model 3Product Dev,Coeff. (S.E.)

Model 4Venture Org.Coeff. (S.E.)



Business planning # 0.13 # # 0.47 #(0.04)∗∗∗∗ (0.05)∗∗∗∗

Completed business plan # # 0.17 # # 0.53(0.08)∗ (0.12)∗∗∗∗

Competitive advantage −0.01 0.01 −0.01 −0.06 −0.01 −0.04(0.08) (0.08) (0.08) (0.12) (0.11) (0.12)

Level of competition 0.02 0.04 0.03 −0.09 −0.04 −0.05(0.04) (0.04) (0.04) (0.07) (0.06) (0.06)

Attractive product −0.05 −0.05 −0.05 0.03 0.03 0.03(0.04) (0.04) (0.04) (0.06) (0.06) (0.06)

Number of employees −0.01 −0.01 −0.01 0.01 0.01 0.01(0.01) (0.01) (0.01) (0.02) (0.01) (0.01)

Obtained external capital −0.25 −0.28 −0.27 1.32 1.22 1.25(0.09)∗∗ (0.09)∗∗ (0.09)∗∗ (0.14)∗∗∗∗ (0.13)∗∗∗∗ (0.14)∗∗∗∗

Industry exit rate 0.01 0.01 0.01 −0.01 −0.01 −0.01(0.01) (0.01) (0.01) (0.01) (0.01) (0.01)

Average firm age −0.03 −0.03 −0.03 −0.14 −0.14 −0.15(0.04) (0.04) (0.04) (0.06)∗ (0.06)∗ (0.06)∗

Average firm size −0.02 −0.02 −0.02 −0.02 −0.01 −0.01(0.02) (0.02) (0.02) (0.03) (0.03) (0.03)

Industry sales −0.01 −0.01 −0.01 −0.01 −0.01 −0.01(0.01) (0.01) (0.01) (0.01) (0.01) (0.01)

Manufacturing business −0.19 −0.20 −0.20 −0.02 −0.03 −0.03(0.07)∗∗ (0.07)∗∗ (0.07)∗∗ (0.10) (0.10) (0.11)

Start-up rate in region −0.50 −0.37 −0.45 −1.75 −1.28 −1.58(0.64) (0.63) (0.64) (0.93)t (0.88) (0.92)t

Month 7 0.52 0.38 0.48 2.01 1.51 1.89(0.06)∗∗∗∗ (0.08)∗∗∗∗ (0.07)∗∗∗∗ (0.09)∗∗∗∗ (0.11)∗∗∗∗ (0.10)∗∗∗∗

Month 13 0.67 0.50 0.61 2.50 1.87 2.28(0.08)∗∗∗∗ (0.09)∗∗∗∗ (0.09)∗∗∗∗ (0.11)∗∗∗∗ (0.13)∗∗∗∗ (0.12)∗∗∗∗

Month 19 0.61 0.46 0.56 2.41 1.87 2.23(0.10)∗∗∗∗ (0.11)∗∗∗∗ (0.10)∗∗∗∗ (0.15)∗∗∗∗ (0.15)∗∗∗∗ (0.15)∗∗∗∗

Month 25 0.67 0.51 0.61 2.69 2.09 2.49(0.12)∗∗∗ (0.12)∗∗∗ (0.12)∗∗∗∗ (0.17)∗∗∗∗ (0.17)∗∗∗∗ (0.17)∗∗∗∗

Selection lambda 0.20 0.08 0.15 0.70 0.29 0.55(0.11)t (0.11) (0.11) (0.16)∗∗∗∗ (0.16)t (0.16)∗∗∗

Constant 4.64 4.46 4.61 3.52 2.85 3.43(0.58)∗∗∗∗ (0.58)∗∗∗∗ (0.58)∗∗∗∗ (0.85)∗∗∗∗ (0.80)∗∗∗∗ (0.84)∗∗∗∗

Sigma u 0.96 0.94 0.95 1.48 1.37 1.42Sigma e 0.60 0.59 0.59 0.87 0.82 0.86Rho 0.72 0.72 0.72 0.74 0.74 0.73R2 within 0.21 0.22 0.21 0.73 0.77 0.74R2 between 0.03 0.05 0.04 0.28 0.36 0.32R2 overall 0.04 0.07 0.06 0.40 0.48 0.44Change in overall R2 # 0.03 # # 0.08 #F -value 10.31∗∗∗∗ 10.61∗∗∗∗ 9.95∗∗∗∗ 110.69∗∗∗∗ 122.58∗∗∗∗ 108.17∗∗∗∗

F -test that all u i = 0 7.09∗∗∗∗ 6.95∗∗∗∗ 6.71∗∗∗∗ 8.26∗∗∗∗ 8.49∗∗∗∗ 7.61∗∗∗∗

N 881 881 881 881 881 881

t p < 0.10; ∗ p < 0.05; ∗∗ p < 0.01; ∗∗∗ p < 0.001; ∗∗∗∗ p < 0.0001 in two-tailed tests. # Variable not in the regression.

5). Moreover, the assumption that all unobservedfirm-level characteristics were equal was stronglyrejected (in Model 2, F = 6.95, p < 0.0001, andin Model 5, F = 8.49, p < 0.0001). Because most

of the variance in product development and ventureorganizing activity is explained by differencesbetween ventures rather than by differences inthe planning activities undertaken by the ventures



over time, failure to control for venture-level fixedeffects would result in biased estimation of theeffects of planning on product development andventure organizing activity. This observation isparticularly important because none of the priorliterature on business planning in new venturescontrols for venture-level variation in opportuni-ties.

The results also show the importance of lon-gitudinal examination of the effects of planningon venture development. The effect of the timedummy variables is extremely strong (B = 0.38to 0.51 in Model 2 and 2.01 to 2.69 in Model 5and significant at the p < 0.001 or better in allcases). These results indicate that examination ofthe effect of business planning on product devel-opment and venture organizing activity withoutcontrolling for the passage of time will generateupward biased estimates of the effect of businessplanning.

The results also show some interesting patternsfor the control variables. Consistent with previousresearch, product development progresses moreslowly for manufacturing businesses than for ser-vice businesses (B = −0.19 to −0.20, p < 0.01 inModels 1–3). Similarly, venture organizing activ-ity progresses more slowly in industries in whichfirms are older on average (B = −0.14 to −0.15,p < 0.05 in Models 4–6). In contrast, obtainingexternal capital appears to have opposite effectson product development and venture organizingactivity. The receipt of external capital has a sig-nificant negative effect on product development(B = −0.25 to −0.28, p < 0.01 in Models 1–3)and a significant positive effect on venture orga-nizing activity (B = 1.22 to 1.32, p < 0.0001 inModels 4–6). Finally, several of the control vari-ables have no significant effect on product devel-opment or venture organizing activity, including:whether the founder perceives that he or she has acompetitive advantage; the expected level of com-petition; the importance of having more attractiveproducts/services than the competition; the num-ber of employees in the venture; the average firmsize in the industry; the exit rate in the industry;the level of sales in the industry.

The results also demonstrate the importance ofcorrecting for the selection of new ventures thatdisbanded during their first 30 months of life.Although the selection lambda has a significanteffect on product development only in Model

1 (B = 0.20, p < 10), it has a significant pos-itive effect on venture organizing activity in allthree models (B = 0.29 to 0.70, p < 0.10 to p <

0.0001), indicating that failure to correct for selec-tion would yield biased estimates in the predictionof the effect of business planning on venture orga-nizing activity.

The results provide support for Hypothesis 2.Consistent with this hypothesis, Model 2 showsthat business planning increases product devel-opment (B = 0.13, p < 0.0001). Model 3 showsthat operationalizing business planning with thedichotomous measure of having a completed busi-ness plan also increases product development (B =0.17, p < 0.05). Moreover, the addition of thebusiness planning variable improves the overallr2 of the product development model by 0.03, aneffect larger than the addition of any other singlevariable in our model that is under the control offirm founders.

The results provide support for Hypothesis 3.Consistent with this hypothesis, Model 5 showsthat business planning increases the level of ven-ture organizing activity (B = 0.47, p < 0.0001).Model 6 shows that operationalizing business plan-ning with the dichotomous measure of having acompleted business plan also increases venturedevelopment (B = 0.53, p < 0.0001). Moreover,the addition of the business planning variableimproves the overall r2 of the venture organizingactivity model by 0.08, an effect larger than theaddition of any other single variable in our modelthat is under the control of firm founders.

DISCUSSION

Many researchers have criticized business plan-ning as a distraction, arguing that it interferes withthe efforts of time-constrained firm founders toundertake more valuable actions to develop theirfledgling enterprises (Baron, 1998; Bhide, 2000;Carter et al., 1996). In contrast to this literature,we proposed that business planning would enhancefounders’ product development and venture orga-nizing activities and would reduce the hazard ofventure disbanding. We examined 223 new ven-tures initiated in Sweden in the first 9 monthsof 1998 by a random sample of Swedish firmfounders over their first 30 months and found sup-port for our arguments.



Theoretical implications

From a theoretical perspective, the results of thisstudy have useful implications for research onbusiness planning. Although many entrepreneur-ship researchers have criticized business planningas a distraction from more important firm orga-nizing activity (Bhide, 2000; Carter et al., 1996),other researchers have argued that planning helpspeople to overcome limits on their cognitive capac-ity (Simon, 1976). Our results show that businessplanning is a valuable activity, even in uncertainand ambiguous situations like firm formation.

The results of this study provide a bridgebetween the planning literature and the entrepre-neurship literature. Much of the research onplanning at the organizational level has focusedlargely on strategic planning (Castrogiovanni,1996). However, new firms engage in less strategicplanning than mature organizations (Boyd, 1991),focusing instead on business planning. Inrecent years, entrepreneurship researchers havedocumented a structural shift toward a higherrate of new firm formation in developedeconomies (Gartner and Shane, 1995; Shane,1996). This transformation has led to an interestin understanding the factors that enhance thedevelopment of new organizations. Prior planningresearch has not focused on explaining therelationship between business planning and thedevelopment of new organizations. This studyprovides a step in that direction by showingthe value of business planning to new venturedevelopment.

Business planning may be a more effectivetool during the start-up of a new business thanduring the maintenance of an established busi-ness and therefore may warrant greater theoret-ical attention in the entrepreneurship literaturethan in the organization theory or strategy lit-eratures. Two reasons underlie this proposition.First, new venture development is based on self-set goals (e.g., complete product development ororganize a company), rather than relative perfor-mance goals (e.g., make greater profits than otherfirms). When people perceive that they have theopportunity and ability to influence the outcomeof their own behavior, as is the case with theformation of a new venture, self-set goals havegreater motivational properties than relative per-formance goals (Locke and Latham, 1980). Sec-ond, planning is more effective when the time

span between planning and feedback is short(Locke and Latham, 1980). Because the timeperiod between business planning and feedbackis much shorter during the new venture start-upprocess than in the operation of a large, matureorganization, planning may be more valuable inthis context.

The study also enhances our understanding ofproduct development and venture organizing activ-ities in new ventures. Much of the work on prod-uct development has not examined the topic inthe context of new ventures. Moreover, the lit-erature on organization theory has focused rela-tively little on the process of organization creation,and has focused instead on the design of maturefirms (Aldrich, 1999). As a result, we have lit-tle understanding about the factors that enhanceproduct development and organizing activity innew ventures. However, identifying these factorsis important because they are a necessary con-dition of new venture survival and thus subse-quent financial performance. In this study, weprovide empirical evidence that business planningenhances new venture survival, product develop-ment and organizing activity in new ventures. Asa result, the study provides guidance for futureresearchers interested in explaining why and howsome new ventures are better than others at theseprocesses.

Methodological implications

This study also makes useful methodological con-tributions to both the entrepreneurship and plan-ning literatures. The study shows how panel datacan be used to overcome the methodologicalproblems generated by unobserved heterogene-ity about the qualities of venture opportunities.Although firm founders’ decisions likely influ-ence new venture performance, unmeasured dif-ferences in the attributes of venture opportuni-ties likely influence both founder decisions andperformance measures. Previous researchers haveshown evidence of the latter scenario, demon-strating that firm founders that pursue larger andmore valuable opportunities are more likely todevelop business plans, and have faster grow-ing ventures (Castrogiovanni, 1996; Schwenk andShrader, 1993).

This correlation causes bias in cross-sectionalstudies of the effect of planning on new venture



performance. Heckman (1981) showed that empir-ical tests that fail to control for important sourcesof heterogeneity that affect both the choices madeby actors and their performance introduce system-atic omitted variable bias that overstates the effectsof actors’ choices on performance. However, accu-rate estimates of the effects of entrepreneurialaction on new venture performance can be foundif researchers use panel data sets with repeatedobservations for each venture. By repeatedly mea-suring a venture over time, researchers can partialout the effect of fixed characteristics of the venture(e.g., the value of the opportunity) when examiningthe effect of choices on performance. As a result,researchers can measure the variance attributableto entrepreneurial decisions with greater accuracy.

The study also provides a contribution to thedesign of research on planning. Prior researchhas focused largely on the relationship betweenplanning and financial measures (see Boyd, 1991,and Schwenk and Shrader, 1993, for reviews).While examination of the relationship betweenpredictor variables, such as planning, and financialperformance is an effective approach for the studyof mature organizations, this approach is much lesseffective for the study of new ventures (Stuart,Huang, and Hybels, 1999). Because new ventureshave often not yet reached positive cash flow orprofitability, the objectives that their founders seekto achieve during their earliest months are notfinancial goals, but milestones such as completingproduct development or organizing a firm (Blockand MacMillan, 1992). This study demonstratesthe value of focusing on these types of outcomemeasures when examining the effect of planningin new ventures.

Furthermore, measurement of the relationshipbetween planning and new venture developmentis enhanced by the use of longitudinal data fromthe earliest days of a new venture’s existence for-ward in time. Planning generally does not takeplace instantaneously at firm founding, but tendsto occur over time as new ventures evolve (Katzand Gartner, 1988). The dynamic nature of theplanning process means that efforts to examine theeffects of planning on performance with longitu-dinal data yield better results than efforts madewith cross-sectional data (Shrader et al., 1989).Not only does the longitudinal approach mitigatehindsight and recall biases, it more accurately esti-mates the effects of planning on outcomes when

the two do not take place simultaneously (Castro-giovanni, 1996; Smith et al., 1990).

Implications for practitioners

This study also has implications for practitioners.The results show that firm founders will enhancethe likelihood of their new venture’s survival andfacilitate product development and venture orga-nizing efforts if they engage in business planning.This finding is important because product develop-ment and venture organizing are important activi-ties in which all firm founders must engage. More-over, given that a major focus of entrepreneurshipprograms in business schools lies in teaching peo-ple how to undertake these activities, it is useful toknow that they are beneficial to the practitionersthat will use them.

However, we caution that business planning isan insufficient condition for venture success. Thecontent of business plans and the implementationof these plans could have a more important role ininfluencing disbanding, venture organizing activ-ity, and product development than the simple actof planning. Moreover, our results show that busi-ness planning is not the most important factor ininfluencing disbanding, product development, orventure organizing activity. Several factors out-side the control of the firm founder, most notablythe passage of time and the nature of the ventureopportunity, appear to explain more variance inthese outcomes than does business planning. Nev-ertheless, our results show that the simple act ofundertaking business planning matters more forventure disbanding, product development, and ven-ture organizing activity than any other single factorunder the control of firm founders that we couldidentify.

Limitations

One of the limitations of this study is the relativelycrude way in which the predictor variables wereoperationalized. The desire to overcome method-ological problems with selection bias, static anal-ysis, and failure to control for unobserved hetero-geneity across ventures necessitated the collectionof data on planning, venture disbanding, ventureorganizing, and product development at five inter-vals over a 30-month period. As a result, the mea-sures used in this study were more coarse-grainedthan measures used in many cross-sectional studies



on planning. In particular, the product develop-ment construct was measured with a single item,raising questions of reliability. Nevertheless, themethodological problems overcome in this studysuggest the importance of future work using simi-lar longitudinal designs on random samples of newventures measured from their initiation using morefine-grained measures.

Future directions

The results of our study suggest several direc-tions for future research on business planning innew ventures. First, our study does not determinewhether the value of business planning lies inthe process of planning or in the quality of theactual plans themselves. Given the evidence thatour study unearthed about the value of planning,future research on new ventures should examinethe relative importance of planning as a processand plans as an outcome.

Second, our study did not measure the contentof the information contained in the plans, the qual-ity of implementation efforts, the percentage ofinformation gathered, or the amount of time spentplanning. However, because our results indicatethat the act of planning matters to new venturedevelopment, they suggest that investigation of theeffects of these four dimensions of planning wouldbe a valuable area for future research. In particu-lar, researchers might wish to examine the effectsof the amount of time spent on business planningbecause that factor could have a non-monotonicrelationship with disbanding, firm organizing activ-ity, and product development in new ventures.

Third, our study examined business planningand new venture development in Sweden. Webelieve that the questions we examine are uni-versal and not subject to institutional or culturalfactors that would preclude our results from gen-eralizing to other locations. Our theory for thevalue of business planning is based on the generalcharacteristics of human beings and the venturesthey organize and does not depend on the cultureor institutional environment in which new venturecreation occurs. Moreover, we know of no spe-cific cultural or institutional characteristics uniqueto Sweden that affect new venture disbanding, ven-ture organizing activity, product development, orbusiness planning. Nevertheless, the generalizabil-ity of our results is ultimately an empirical ques-tion. Future research that validated our results in

other countries would be necessary to determine ifour arguments are generalizable to other settings.

Lastly, our analysis provided evidence of bivari-ate correlations between business planning, ven-ture organizing activities, and product develop-ment. These bivariate correlations suggest thatbusiness planning might facilitate organizing activ-ities, which, in turn, might facilitate product devel-opment. Such a relationship would indicate a morenuanced view of the benefits of planning to newventure development than that presented in theliterature and would refute the traditional argu-ment that planning and organizing activities aresubstitutes. To try to tease out the nature of therelationship between business planning, ventureorganizing activities, and product development, wetested whether business planning and venture orga-nizing activities were complements in predictingproduct development. Unfortunately, our analy-sis did not provide evidence of complementaritybetween business planning and venture organiz-ing activity. However, the evidence that businessplanning reduces the likelihood of venture dis-banding, and increases venture organizing activityand product development, suggests that researchersshould develop more nuanced views of the rela-tionship between business planning and new ven-ture development. Given the evidence presentedin this study, we believe that an investigation ofcomplementarities between business planning andother venture development activities is warranted.Clearly, much more work on the role of businessplanning in new venture development remains tobe done.

ACKNOWLEDGEMENTS

The research design owes an intellectual debtto the Panel Study of Entrepreneurial Dynam-ics undertaken by the Entrepreneurial ResearchConsortium, a temporary voluntary association of30+ U.S. and non-U.S. universities. The Knutand Alice Wallenberg Foundation, the SwedishFoundation for Small Business Research, and theSwedish National Board for Industrial and Tech-nical Development financed the study. The firstauthor worked at the Entrepreneurship and SmallBusiness Research Institute at Stockholm Univer-sity during the development of this paper. Wethank Jerry Katz, Wes Sine, and Ken Smith and



seminar participants at Imperial College, Univer-sity of Kentucky, McGill University, National Uni-versity of Singapore, and Purdue University forhelpful comments on an earlier draft of this paper.

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