The antecedents and consequences of product variety in new ventures: An empirical study
| Author | Jayanth Jayaram,Pankaj C. Patel |
| Published date | 01 January 2014 |
| DOI | http://doi.org/10.1016/j.jom.2013.07.002 |
| Date | 01 January 2014 |
Journal
of
Operations
Management
32
(2014)
34–50
Contents
lists
available
at
ScienceDirect
Journal
of
Operations
Management
jo
ur
nal
ho
me
pa
ge:
www.elsevier.com/locate/jom
The
antecedents
and
consequences
of
product
variety
in
new
ventures:
An
empirical
study
Pankaj
C.
Patela,1,
Jayanth
Jayaramb,∗
aDepartment
of
Marketing
and
Management,
Miller
College
of
Business,
Ball
State
University,
Muncie,
IN
47306,
USA
bManagement
Science
Department,
Moore
School
of
Business,
University
of
South
Carolina,
1705
College
Street,
Columbia,
SC
29208,
USA
a
r
t
i
c
l
e
i
n
f
o
Article
history:
Received
1
June
2012
Received
in
revised
form
14
June
2013
Accepted
8
July
2013
Available
online
18
July
2013
Keywords:
Product
variety
Product
modularity
Process
modularity
Manufacturing
flexibility
Performance
New
ventures
Entrepreneurship
a
b
s
t
r
a
c
t
Despite
the
known
benefits
of
greater
product
variety
for
large
firms,
less
is
known
about
how
new
ventures
pursue
product
variety.
Liabilities
of
newness
and
smallness
could
possibly
impede
the
ability
of
new
ventures
to
develop
the
product
design
capabilities
needed
to
increase
product
variety.
Draw-
ing
on
the
design
principles
of
product
modularity,
we
posit
that
new
ventures
with
modular
product
designs
tend
to
have
higher
product
variety.
The
benefits
of
product
variety,
however,
are
not
monotonic,
and
at
higher
levels
of
product
variety,
increasing
internal
operational
costs
lead
to
an
inverted-U
type
relationship
between
product
variety
and
operational
performance.
We
posit
that
process
modularity,
a
systems-level
capability,
and
manufacturing
flexibility,
an
operations
capability,
enhance
the
benefits
from
product
variety
and
mitigate
the
costs
that
arise
from
increasing
product
variety
further.
Based
on
a
sample
of
141
new
ventures
and
using
latent
moderated
structural
model
(LMS),
we
find
support
for
the
proposed
model.
The
findings
are
robust
against
alternate
model
specifications.
Academic
and
managerial
implications
from
the
findings
are
discussed.
©
2013
Elsevier
B.V.
All
rights
reserved.
1.
Introduction
In
the
past
two
decades,
the
manufacturing
base
in
the
US
has
declined.
The
contribution
of
manufacturing
to
US
GDP
declined
from
17.5%
in
1986
to
12.1%
in
2006.2Yet,
small
manufactur-
ing
firms
remain
a
vibrant
and
growing
part
of
the
US
economy.
The
Kauffman
Foundation
reported
(Fairlie,
2011)
that
the
num-
ber
of
manufacturing
startups
increased
by
65%
between
2000
and
2006.
This
number
is
particularly
significant
given
that
70%
of
all
US
manufacturers
have
fewer
than
20
employees.
Furthermore,
according
to
the
US
Census
Bureau,1sales
of
small
manufacturing
firms
grew
by
20%
between
2002
and
2006.
While
large
manufac-
turers
have
focused
on
cost
cutting,
downsizing,
and
outsourcing,
smaller
manufacturers
are
relying
increasingly
on
innovation
and
customization
to
revitalize
the
US
manufacturing
base.
Although
the
academic
literature
assumes
that
small
firms
lack
economies
of
scale
and
scope
to
compete
against
larger
firms
high-growth
manufacturing
ventures
in
the
Inc.
5000
list3increas-
ingly
provide
greater
product
variety,
with
faster
turnaround
times,
∗Corresponding
author.
Tel.:
+1
803
777
5976.
E-mail
addresses:
pcpatel@bsu.edu
(P.C.
Patel),
jayaram@moore.sc.edu
(J.
Jayaram).
1Tel.:
+1
765
285
3194.
2http://www.bea.gov/national/index.htm.
3http://www.inc.com/inc5000/list/2012/industry/manufacturing.
higher
quality,
and
a
smaller
employee
base.
For
example,
with
its
40
employees,
Packrite
provides
a
wide
range
of
packaging
and
design
solutions
to
consumer
goods
companies.
Lumitec,
a
15-
employee
firm
with
$3.4
million
in
sales,
manufactures
marine
lights
for
recreational
and
law
enforcement
boats.
Evolve
Manufac-
turing,
a
manufacturer
of
electrochemical
assemblies
and
systems
for
industries
ranging
from
robotics
and
semiconductors
to
med-
ical
equipment,
had
57
employees
in
2012
and
a
revenue
base
of
$41.4
million.
Valley
Rubber,
with
105
employees,
manufactures
molded
products
used
in
industries
ranging
from
marine
and
off-
shore
drilling
to
railroads
and
bridges.
All
of
these
examples
point
to
a
common
question:
How
do
small
and
new
ventures
manage
a
diverse
product
portfolio
with
a
small
employee
and
resource
base?
Given
the
increasing
role
that
small
and
young
manufacturing
ventures
play
in
the
US
economy,
we
explore
the
important
issue
of
how
new
ventures
manage
increasing
product
variety.
Product
variety
is
defined
as
“the
breadth
of
products
that
a
firm
offers
at
a
given
time”
(Fisher
et
al.,
1999:
297).
Whereas
larger
and
more
established
firms
can
manage
product
variety
effectively,
for
new
ventures,
product
variety
can
be
a
double-edged
sword.
On
the
one
hand,
product
variety
allows
new
ventures
to
increase
product
differentiation,
efficiency,
and
product
quality
(Closs
et
al.,
2008;
Kekre
and
Srinivasan,
1990;
Swaminathan
and
Tayur,
1998).
On
the
other
hand,
lower
product
variety
renders
new
ventures
less
com-
petitive
(Li
and
Atuahene-Gima,
2001).
Also,
new
ventures
face
the
liabilities
of
both
newness
and
smallness
(Aldrich
and
Fiol,
1994)
and
therefore
have
limited
resources
and
capabilities
to
expand
0272-6963/$
–
see
front
matter
©
2013
Elsevier
B.V.
All
rights
reserved.
http://dx.doi.org/10.1016/j.jom.2013.07.002
P.C.
Patel,
J.
Jayaram
/
Journal
of
Operations
Management
32
(2014)
34–50
35
their
product
offerings
or
manage
increases
in
design,
inventory,
rework,
and
overhead
costs.
Ramdas
(2003)
indirectly
confirmed
by
finding
mixed
effects
of
product
variety
on
performance.
It
is
likely
that
increased
product
variety
could
very
quickly
lead
to
declin-
ing
returns
in
some
ventures.
For
example,
adding
three
products
would
be
less
burdensome
for
a
large
firm,
whereas
for
a
new
venture
to
add
the
same
level
of
three
products
could
require
signif-
icant
investments
and
realignments
that
could
lead
to
a
significant
decline
in
performance
and
even
failure.
This
begs
the
question
of
how
small
manufacturing
firms
can
sustain
growth
and
increasingly
contribute
to
the
US
economy
by
offering
greater
product
variety,
when
adding
such
variety
could
lower
operational
performance.
To
explain
this
paradox,
we
pro-
pose
that
product
modularity
can
increase
product
variety
in
new
ventures,
whereas
process
modularity
and
manufacturing
flexibility
mitigates
the
inverted-U
type
relationship
between
product
vari-
ety
and
operational
performance.
Operational
performance
refers
to
outcomes
related
to
operational
costs,
product
quality,
and
inventory
management
and
delivery.
Modularity
in
products
or
processes
refer
to
“a
continuum
describing
the
degree
to
which
.
.
.
components
can
be
separated
and
recombined,
and
it
refers
both
to
the
tightness
of
coupling
between
components
and
the
degree
to
which
the
‘rules’
of
the
system
architecture
enable
(or
prohibit)
the
mixing
and
matching
of
components”
(Schilling,
2000:
312).
Product
modularity
enhances
product
variety
by
increasing
possible
reconfigurations
to
yield
new
product
combinations.
Prod-
uct
modularity
helps
increase
internal
variety
to
manage
external
variety.
According
to
Tu
and
colleagues
(2004:
151)
process
modula-
rity
refers
to
“standardizing
manufacturing
process
modules.
.
.so
that
they
can
be
resequenced
easily
or
new
modules
can
be
added
quickly”
to
manufacture
a
variety
of
products.
It
includes
process
standardization,
or
standard
subprocesses;
process
resequencing,
or
ability
to
reorder
processes;
and
process
postponement,
or
delayed
differentiation
(Feitzinger
and
Lee,
1997).
Process
stan-
dardization
reduces
internal
variety
of
tasks,
tools,
and
processes;
process
resequencing
allows
reconfiguration
of
manufacturing
pro-
cesses
to
reduce
retooling,
setup,
and
reordering
costs;
and
process
postponement
allows
moving
manufacturing
processes
closest
to
their
most
pertinent
point
in
the
value
chain.
For
example,
Xtreme
Power,
a
startup
with
231
employees
and
$22.2
million
in
sales
in
2011,
designs,
engineers,
manufactures,
and
operates
energy
stor-
age
and
power
management
systems
for
wind
and
solar
power
producers,
transmission
firms,
and
end
users.
Through
highly
stan-
dardized
manufacturing
processes,
the
company
is
able
to
use
standard
processes
to
make
both
wind
and
solar
energy
storage
systems
to
lower
costs.
Because
it
caters
to
producers,
transmit-
ters,
and
end
users,
it
leverages
postponement
by
customizing
the
installation
and
operations
of
equipment
and
systems
at
various
points
along
the
value
chain.
Manufacturing
flexibility,
an
operations-level
capability,
helps
new
ventures
cope
with
fluctuating
customer
demands
through
increased
range-number
and
range-heterogeneity
of
manufac-
turing
components
(Nemetz
and
Fry,
1988).
Whereas
process
modularity
provides
the
broad
design
rules
for
manufactur-
ing
processes,
manufacturing
flexibility
strategies
deal
with
the
detailed
operational-level
decisions
that
should
comply
with
broad
design
rules.
For
example,
range-mobility
strategies
reduce
tran-
sition
losses
in
manufacturing
a
wide
variety
of
products,
and
a
range-uniformity
strategy
ensures
consistent
product
quality.
Megan
Summerville
of
SewSister
is
an
apparel
manufacturer
that
provides
fast
turnaround
for
small
orders
from
designers
and
manufacturers.
Her
firm
completes
a
vast
range
of
apparel
jobs
on
machines
such
as
single-
and
double
needle,
serger,
zigzag,
and
labeling
devices
that
provide
a
fast
turnaround
of
three
to
four
weeks
for
quantities
of
100
or
fewer
pieces
of
clothing.
Manufacturing
flexibility
enhances
the
benefits
of
increasing
prod-
uct
variety
and
mitigates
costs
that
typically
increase
at
higher
levels
of
product
variety.
Overall,
we
propose
that
new
ventures
can
increase
product
variety
by
using
more
modular
product
designs
and
can
manage
decreasing
returns
from
product
variety
by
using
process
modularity
and
manufacturing
flexibility
strate-
gies.
2.
Theoretical
development
and
hypotheses
Product
variety
not
only
includes
the
number
of
unique
product
classes
in
a
firm’s
product
portfolio
but
also
the
number
of
unique
product
varieties
within
each
product
class4(Fisher
et
al.,
1999).
Organization
theory
discusses
the
generalist–specialist
tradeoff
(Aldrich
and
Fiol,
1994).
Generalist
new
ventures
increase
their
chance
of
survival
by
meeting
the
needs
of
a
variety
of
customers.
However,
generalist
ventures
lack
the
experience
and
resources
of
a
large
firm
and
therefore
exacerbate
risk
of
failure
by
offering
broader
product
variety.
Conversely,
specialist
new
ventures
face
higher
risks
as
they
occupy
narrow
market
niches
and
cannot
adapt
to
changing
customer
demands.
Product
variety
in
new
ventures
is
therefore
a
double-edged
sword.
By
expanding
product
offerings,
new
ventures
increase
the
horizontal
scope
or
“the
set
commercial-
ization
efforts.
Focusing
on
a
smaller
assortment
of
products
could
increase
competitive
response
(Chatain
and
Zemsky,
2007:
550).
The
ability
to
provide
product
variety
comparable
to
levels
com-
petitors
could
increase
the
legitimacy
of
the
venture
and
ensure
a
steady
inflow
of
resources
to
undertake
future
stability
in
the
short
run,
but
render
ventures
less
competitive
in
the
long
run.
Investors
react
positively
to
product
launches
by
smaller
firms
(Lee
and
Chen,
2009).
Greater
product
variety
increases
legitimacy
among
stake-
holders,
increases
the
flow
of
resources,
and
hedges
the
fledgling
technical
core
of
a
venture
against
environment
changes.
Product
variety
spreads
the
loci
of
commercialization
as
a
coping
mecha-
nism
against
changing
market
demands.
On
the
other
hand,
due
to
the
liabilities
of
newness
(younger
firms
face
a
higher
risk
of
mortality)
and
smallness
(smaller
firms
face
a
higher
risk
of
mortality),
small
firms
may
not
realize
the
full
benefits
of
product
variety
and
could
realize
lower
perfor-
mance
and
ultimately
failure.
The
liability
of
newness
refers
to
age
dependence;
that
is,
younger
firms
face
a
higher
risk
of
mor-
tality
(Freeman
et
al.,
1983).
Younger
ventures
require
scale
and
scope
economies
to
mitigate
costs
under
greater
product
variety
(Shelton,
2005).
Not
only
do
limited
resources
hinder
commer-
cialization
efforts,
but
limited
organizational
cognitive
capabilities
reduce
comprehensive
decision-making
and
the
ability
to
seek
and
combine
the
knowledge
needed
to
increase
product
vari-
ety.
Internal
learning
curves
are
less
able
to
cope
with
changing
needs.
Furthermore,
gains
from
product
variety
could
be
real-
ized
to
a
lesser
extent
because
of
limited
economies
of
scope
and
scale.
A
lower
ability
to
recoup
expenses
for
R&D,
operations,
and
marketing
due
to
lower
scale
efficiencies
further
constrains
new
product
commercialization.
Ventures
must
judiciously
manage
the
tradeoffs
between
competitive
gains
from
differentiating
through
greater
product
variety
and
increasing
costs
from
higher
product
variety.
2.1.
Product
modularity
and
product
variety
Both
conceptual
(Krishnan
and
Ulrich,
2001)
and
norma-
tive
(e.g.
Chen
and
Hausman,
2000)
research
highlights
the
4Product
variety,
traditionally
measured
as
the
number
of
stock
keeping
units
(SKUs),
differs
from
product
portfolio
breadth,
defined
as
the
number
of
unique
product
classes
in
which
a
firm
offers
products.
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