The evolution of vertical boundaries in new high technology ventures

• Published date: 01 September 2018
• Date: 01 September 2018
• DOI: http://doi.org/10.1002/sej.1292
• Author: Niron Hashai,Ivo Zander

RESEARCH ARTICLE

The evolution of vertical boundaries in new high

technology ventures

Niron Hashai

1,2,3

| Ivo Zander

4

1

Arison School of Business, The

Interdisciplinary Center, Herzliya, Israel

2

School of Business Administration, The

Hebrew University of Jerusalem, Jerusalem,

Israel

3

Blavatnik School of Government, University

of Oxford, Oxford, U.K.

4

Department of Business Studies, Uppsala

University, Uppsala, Sweden

Correspondence

Ivo Zander, Department of Business Studies,

Uppsala University, 751 20 Uppsala, Sweden.

Email: ivo.zander@fek.uu.se

Funding information

Asper Center for Entrepreneurship at the

Hebrew University

Research Summary: We argue that interrelated processes of knowl-

edge codification and uncertainty reduction lead to the contraction

of vertical firm boundaries of new high technology ventures over

time. Consistent with our arguments, we show that, over time, out-

sourcing of R&D is slower than outsourcing of manufacturing, while

outsourcing of marketing and sales is the fastest. Further, we show

heterogeneity in the pace of vertical boundary contraction, where

new high technology ventures that engage in knowledge explora-

tion and those whose founders have strong technological back-

grounds exhibit slower vertical boundary contraction. Typically, the

slowdown in the pace of outsourcing, once again, is the strongest

for R&D and the weakest for marketing and sales.

Managerial Summary: Cash-constrainedmanagers in new high tech-

nology ventures often wish to outsource their R&D, manufacturing,

and marketing and sales activities, but initially may be limited in

doing so. This likely happens because these new ventures rely

heavily on founders' tacit knowledge about new products and how

to commercialize them and because uncertainty makes it difficultto

reach contractual agreements with external partners. We showthat

with time, such outsourcing becomes increasingly possible, espe-

cially for marketing and sales activities but less so for R&D. Yet,

when new high technology ventures experiment with new products

and in new high technology ventures whose founders have techno-

logical backgrounds,the pace of outsourcing is slower.

KEYWORDS

founders, knowledge tacitness, new high technology ventures,

outsourcing, uncertainty, vertical firm boundaries

1|INTRODUCTION

One fundamental strategic question new ventures face is how to devise and adjust their vertical firm boundaries

(Baron & Hannan,2002; Mayer & Salomon, 2006;Santos & Eisenhardt, 2009). Howthese boundaries develop overtime

Received: 7 January 2016 Revised: 5 March 2018 Accepted: 21 March 2018 Published on: 10 July 2018

DOI: 10.1002/sej.1292

Copyright © 2018 Strategic Management Society

Strategic Entrepreneurship Journal. 2018;12:287–315. wileyonlinelibrary.com/journal/sej 287

is of particular concern for new high technology ventures, which must carefully consider how to allocate the limited

financialand other resources at theirdisposal (Oviatt & McDougall, 1997; Stevenson & Jarillo,1990).

Despite the importance of adjusting activities to scarce resources in evolving new high technology ventures,

empirical observations of how these new ventures devise their vertical firm boundaries over time have been absent

from the literature. In this article, we document in detail the evolution of verticalboundaries of new high technology

ventures taking part in three key value chain activities—research and development (R&D), manufacturing, and market-

ing and sales. We argue that, over time, interrelated processes of knowledge codification and uncertainty reduction

are likely to contract thevertical boundaries of new ventures and that the pace of outsourcingdiffers across functional

areas. We specifically predict that the outsourcingof R&D will be slower than the outsourcing of manufacturing, while

the outsourcing of marketing and sales will be the fastest. Analyzing a unique sample of 144 Israel-based, new high

technology ventures, we indeed show a systematic contraction in the vertical boundaries of the new ventures over

time, with increasing relative levelsand pace of outsourcing across R&D, manufacturing, and marketing and sales.

We further study heterogeneity in these patterns of vertical boundary contraction. We show that the rate of

change in outsourcing is negatively moderated by the extent to which new high technology ventures engage in tech-

nological knowledge exploration (Levinthal & March, 1993; March, 1991), with the most profound effect on R&D

and the smallest effect on marketing and sales. A similar pattern is observed when the founders of new ventures

have strong technological backgrounds. In this case, once again, the slowdown in vertical firm boundary contraction

is more profound for R&D than for manufacturing and marketing and sales.

We make two main contributions in this article. First, we develop a conceptual framework that captures the spe-

cific conditions and processes of vertical boundary change in new high technology ventures. The framework extends

the literature on vertical firm boundaries, which traditionally reflects the relative costs that guide one-off choices

between internal and external organizations (Klein, Crawford, & Alchian, 1978; Teece, 1986; Williamson, 1975,

1985; Zenger, Felin, & Bigelow, 2011) but pays only scant attention to why and how these boundaries change and

evolve over time (Langlois, 1992). Second, we document a number of important contingencies in the evolution of

vertical firm boundaries in new high technology ventures. In particular, we show that new ventures that engage

heavily in technological knowledge exploration and new ventures whose founders have technological backgrounds

are likely to be the slowest to outsource their value chain activities. These observations suggest room for strategic

choices that impinge on the ability to define the organizational boundaries of new high technology ventures.

The next section describes the origin of new high technology ventures and outlines how knowledge codification

and uncertainty reduction are likely to influence their vertical firm boundaries. The following section puts forward a

set of hypotheses that summarizes how the pace of change in new high technology ventures' vertical boundaries is

expected to vary across functional areas, with the extent to which new ventures engage in technological knowledge

exploration, and with the backgrounds of their founders. A presentation of data and methods is followed by the

empirical findings and a discussion of our contributions to extant literatures.

2|CONCEPTUAL FRAMEWORK

2.1 |The origin of new high technology ventures and the formation of vertical firm

boundaries

New ventures in general and new high technology ventures in particular are created by individuals who believe they

have identified unique and hitherto unexplored business opportunities.

1

They act upon personal and, in large part,

1

Our conceptual framework does not pertain to new high technology ventures that are spinoffs from existing firms, management

buy-outs, or joint ventures of existing firms. To simplify the presentation, we also do not distinguish between new ventures launched

by single individuals/owners or groups of individuals/owners. The question of whether vertical boundary evolution differs between

the two types is interesting in its own right, but extends beyond the scope of the present article.

288 HASHAI AND ZANDER