An empirical investigation of technology strategy in computer software ...

J. Eng. Technol. Manage. 16 Ž1999. 147–169

An empirical investigation of technology strategy in computer software initial public offering firms Anthony D. Wilbon

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The George Washington UniÕersity, School of Business and Public Management, Washington, DC, USA

Abstract Strategic management of technological resources plays a significant role in the success of firms in computer-related industries. To expand the literature on technology management in growing organizations, this paper presents a study of the relationships among select technology strategy dimensions and perceived performance of initial public offering ŽIPOs. computer software firms. Using content analysis, technology strategy data were collected from the prospectus of 31 computer software firms who committed IPOs in 1996. Empirical analysis shows support for propositions that a firm’s technology posture and executive level technology experience influence investor reactions to IPOs. q 1999 Elsevier Science B.V. All rights reserved. Keywords: Technology management; Technology strategy; R&D management; Initial public offering ŽIPO.; Content analysis

1. Introduction Successful firms make management of technology resources a central focus of their business strategy and understand that poor technological choices may effect firm performance and survival. Moreover, most understand that to enhance competitive posture one of the most important organizational capabilities that any firm must develop is the ability to constantly evaluate the evolution of relevant technologies. Based on the current view that technology management must address not only a firm’s product technologies but process technologies and that both affect all aspects of an organization’s value chain ŽPorter, 1985a,b., more integrative theories have emerged that consider management of technology beyond the research and development ŽR & D. areas and in a )

14201 Christian Street, Upper Marlboro, MD 20772, USA. Tel.: q1-301-627-8074 ŽHome., q1-202-4523530 ŽWork.; E-mail: [email protected] 0923-4748r99r$ - see front matter q 1999 Elsevier Science B.V. All rights reserved. PII: S 0 9 2 3 - 4 7 4 8 Ž 9 9 . 0 0 0 0 3 - X

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A.D. Wilbonr J. Eng. Technol. Manage. 16 (1999) 147–169

more strategic context ŽMaidique and Patch, 1988; Burgelman and Rosenbloom, 1989; Zahra et al., 1994.. Most strategy theorists would agree that a coherent technology strategy, at a minimum, articulates a firm’s plans to effectively develop, acquire, and deploy technological resources in a way to ensure an integrated business and technology vision that leads to better performance ŽZahra, 1996a.. Adler Ž1989. suggests that: ‘‘technology strategy is a pattern of decisions that sets the technological goals and principal technological means for achieving both those technological and business goals of the organization’’ Žp. 26.. However, only a few empirical studies are found in the literature to investigate technology strategy’s influence in firm performance. As Miller Ž1988. notes: ‘‘Several streams of research exist which link bits of technology to pieces of strategy or performance, but too little effort has been given to integrating such works. The result of their disparity is that while we may feel certain that strategy and performance are strongly tied to technology, we probably feel uncertain as to how various links mesh with one another in some ‘big-picture’ sense’’ Žp. 239.. In response to this recognized gap in the literature, some empirical studies have recently emerged that explore technology strategy’s relationship to firm performance ŽHampson, 1994; McGee and Dowling, 1994; Zahra, 1996a; Deeds et al., 1997.. Several of these theories have been empirically explored in smaller firms as well ŽLefebvre et al., 1992; Zahra, 1996a; Lefebvre et al., 1997.. More specifically, Lefebvre et al. Ž1997. empirically found that an aggressive technology strategy leads to more innovative efforts in smaller organizations. Additionally, Zahra Ž1996b. identified a significant relationship between several technology strategy dimensions Že.g., pioneering, R & D portfolio, and internal R & D. and new venture performance ŽNVP. in the biotechnology industry. Nevertheless, more studies are needed to understand the dynamics of the technology strategy–performance relationship, particularly as it relates to small to medium sized ventures. As a result, this paper provides further empirical support for the aforementioned concepts in its investigation of technology strategy’s impact on investor reaction to IPOs in computer software-related industries. To set the stage for this study’s propositions, Section 2 provides an overview of the determinants of initial public offering ŽIPO. performance followed by a detailed discussion on the technology strategy literature. The research propositions and the development of a multidimensional measure for the construct are presented in Section 3. A description of the study’s methodological design and research results are provided in Sections 4 and 5. A discussion of the results, limitations, and research implications are discussed in Sections 6–8, respectively. 2. Theoretical framework and relevant literature 2.1. Determinants of IPO performance IPO firms tend to be smaller, rapidly growing companies with the potential to create a large number of jobs and introduce new technology ŽBirch, 1987.. They also experience an increase in sales growth and capital expenditures relative to other firms in the same industry ŽJain and Kini, 1994.. On the other hand, a few studies focusing on


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the post-issue stock performance of IPO firms found that IPO firms exhibit a decline in operating performance when using measures such as return on assets and cash flows deflated by assets ŽLang, 1991; Ritter, 1991; Degeorge and Zeckhauser, 1993.. The decline in operating performance is attributed to factors such as agency costs of transitioning from a private to public ownership, attempts at timing the offering to coincide with unusually high performance that generally decrease after the offering, and efforts by owners of the firm to enhance their accounting numbers prior to going public. Due to the pre- and post-offering performance dynamics of IPO stocks, several efforts have been made to accurately measure firm performance in this context. Since the goal of the IPO is to raise capital through obtaining the highest stock price, one way to evaluate IPO performance is through the initial investor reaction to the firm’s offering. Although investors are generally overoptimistic in evaluating IPO firms’ value, they tend to measure investment potential based on analyzing considerable data gathered on the firm’s history and its perceived market potential. This research is designed to determine whether data regarding technology strategy explicated in the company’s prospectus has an impact on how investors perceive the firms’ potential. 2.2. Technology strategy dimensions Strategic management theorists have long maintained that those firms who strategically exploit the broad effects of emerging technologies significantly contribute to creating substantial and sustainable competitive advantage ŽAnsoff and Stewart, 1967; Rumelt, 1974; Porter and Millar, 1985; Teece, 1986.. In industries such as information technology, technology evolution is a major force affecting strategic behavior in firms through changing or influencing drivers of cost or uniqueness ŽPorter, 1985a,b.. Itami and Numagami Ž1992. suggest that ‘‘Technology is the most fundamental of the core capabilities of a firm’’ Žp. 199. and that the interaction between strategy and technology has been treated as too narrow and static in the past, focusing more on the effect of current technology on current strategy in the firm. In other words, the authors posit that traditional strategy research focused on how strategy capitalized on technology while focus on how technology drives cognition of strategy may result in a more visionary perspective and a realistic and comprehensive strategy for today’s businesses. The growing recognition that technology and business strategy must be closely integrated to achieve market success has alerted many to the need to focus on formulating technology policies or strategies. Failure to create this integrated strategic vision results in what Wang Ž1994. defines as the technology disconnect or the inability to make effective use of technology to implement successful business strategies and increase performance. Also, Zahra and Covin Ž1993. found that business strategy moderates the relationship between technology policy and performance and technology policy tends to align with business strategies. After a comprehensive analysis of the technology strategy literature, Zahra and Covin Ž1994. found at least three areas of needed improvement. First, more empirical analysis is needed because the bulk of existing literature on technology strategy is conceptual ŽPorter, 1985a,b; Teece, 1986; Maidique and Patch, 1988; Adler, 1989; Burgelman and Rosenbloom, 1989; West, 1992; Ali, 1994.. Second, any conceptual model proposed for analyzing a firm’s technology strategy must be multidimensional and not limited to

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Fig. 1. Framework for studying technology strategy and perceived IPO performance.

R & D management only. Finally, the financial performance implications of matching technology strategy and business strategy are not well documented in the literature. Some empirical studies have emerged to address the needs mentioned above, yet more evidence is needed to support the many theories. To contribute to the literature, the framework for this research Žsee Fig. 1. builds on the theories articulated by several authors on the technology strategy and performance relationship ŽMaidique and Patch, 1988; Burgelman and Rosenbloom, 1989; Zahra et al., 1994.. Seven specific measures of technology strategy based on the dimensions used in previous research are examined in this study. As Fig. 1 illustrates, the seven dimensions are: Ž1. technology posture; Ž2. scope of research and development; Ž3. technological options; Ž4. technology portfolio; Ž5. intellectual property rights; Ž6. R & D spending; and Ž7. technology executives. The dimensions used in this study have been validated in other research which predicates their usefulness. For example, Zahra Ž1996b. developed a survey and used orthogonal factor analysis techniques on the responses to identify and validate composite measures for the technology pioneering, product and process portfolio, R & D investment, technology sourcing, and forecasting dimensions. In another study, Zahra Ž1996a. correlated the results of his survey responses to industry data Že.g., trade publications, annual reports, newsletters, etc.. and found significant relationships to support the validity of the pioneering, R & D investment, research portfolio, technology sourcing, and patenting dimensions. Zahra et al. Ž1994. also recognized organizational mechanisms, such as a technology-experienced executive or committee as an important dimension for consideration in technology strategy research. In Section 3, each of the seven dimensions along with the propositions tested in this study will be discussed in detail. 3. Research propositions 3.1. Technology posture According to Burgelman and Rosenbloom Ž1989., an aspect that is very important to technology strategy is the competitive positioning of a firm. One measure of this


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dimension is the technological posture, sometimes referred to as the pioneer-follower posture of the firm ŽPorter, 1985a,b; Adler, 1989; Utterback, 1994.. According to Maidique and Patch Ž1988., determining whether to be a first or second mover is one of the fundamental strategic choices facing firms in technology-intensive industries. A pioneering firm is one that is the first to introduce a product to the market using radical innovation, while a follower is one that decides to pursue a follow-the-leader strategy by copying its rivals’ technologies using incremental innovation ŽAli, 1994.. The pioneering firm is generally characterized by a highly sophisticated technical ability that results in substantial competitive advantages. The many advantages in being first to market include establishing product standards, capturing premium segments of the market, controlling distribution channels, creating rules of competition, enhanced reputation, and high profits from its early position ŽPorter, 1985a,b; Pavitt, 1990; Schmalensee, 1992; Golder and Tellis, 1993; Zahra et al., 1995.. These benefits also impress investors who are looking to maximize returns on their investment in the short term by selecting those firms who are early leaders in technology-related markets. However, there are risks associated with pioneering which includes heavy investment in product and market development, bearing the risk of uncertainty in demand, and educating the customers on technologies without any guarantee of success ŽPorter, 1985a,b.. Teece Ž1986. has demonstrated that although there are many advantages to being first to market, it is sometimes advantageous to be second. Late entry into the market allow firms to recognize the attractiveness and key success factors of the market and have a lower cost of entry ŽYip, 1982.. This sometimes allows the follower to learn from, and quickly take advantage of, the mistakes of the leader. Lieberman and Montgomery Ž1988. also indicate that one benefit of being a follower is the ability to take advantage of a pioneer’s R & D investments. To the stock investor, the investment returns are lower in the short term due to the relatively lower risk of the follower posture. On the other hand, the risks that make firms pursue a follower strategy may also temper some investor’s enthusiasm for pioneering firms. It is often difficult to speculate whether a firm with a breakthrough product can sustain its pioneering advantage and continue producing high returns. Nevertheless, considering that the focus of investors in the stock market are mainly on maximizing returns from their investment and that risk is inherent in pursuit of that goal, pioneering firms provide the best opportunity for this result. Empirical research supports this premise finding that pioneers have higher returns ŽKunkel, 1991; DeCastro and Chrisman, 1995; Zahra, 1996a. and market share advantages ŽKalyanaram and Urban, 1992.. Investors generally understand that higher risk is associated with higher profits and returns and, therefore, may value pioneering firms more than followers. This is particularly true in technology-intensive industries which are characterized by rapid technological change, frequent introductions of new products, changes in customer demands and evolving industry standards which sometimes prohibit long term speculation. Recent examples, such as Netscape’s IPO in 1995, demonstrate that firms on the leading edge are more likely to have greater perceived value, mainly due to their pioneering posture, even if they have many of the characteristics that some consider high risk. In Netscape’s case, they were the leaders in developing World Wide Web browsers

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and captured a solid customer following through the free distribution of the Netscape Navigator product. Due to its pioneering efforts in this new technology, investors valued the firm at nearly US$2 billion eventhough it had limited assets, resources, experience and outlined twelve pages of risks factors in its IPO prospectus. From an investor’s perspective, the benefits of investing in a pioneering firm Ži.e., higher returns, higher profits. far outweigh the risk, at least in the short term. Therefore, this study expects that the technology posture of software technology firms has an impact on the perceived value of firms in the IPO market. Proposition 1: The technology posture of computer software-related firms will haÕe a direct positiÕe relationship with perceiÕed market potential by IPO inÕestors.

3.2. Scope of research and deÕelopment The scope of R & D measure analyzes the projects in place for developing new products and enhancements to existing products. A broad R & D scope is important in defending against threats of new entrants in the industry and also positions a firm to be a viable competitor in future evolutions of its core or peripheral technologies. Although no firm can cover all technologies relevant to their operations, particularly those that have limited resources, having R & D projects in place that investigate possible new technologies and product enhancements provide the flexibility to react to changes as they occur in the market. In addition, researchers have recognized the importance of having both basic and applied R & D projects as part of the technology strategy ŽMaidique and Patch, 1988; Christensen, 1992; West, 1992.. Basic research focuses on investing in scientific discoveries that bring long term gains while applied research looks to develop products that have immediate commercialization. However, Zahra Ž1996a. indicated that due to the large investment associated with basic research and the need to ensure investors an immediate return, independent new firms tend to focus more on applied research. All of these factors have the potential to impress investors and enhance IPO value. The following is thereby derived. Proposition 2: The scope of R & D will haÕe a direct positiÕe relationship with perceiÕed market potential by IPO inÕestors.

3.3. Technology options This variable assesses the breadth of options available to firms and the capabilities and experience of the organization. Technology options determines the ability of the firm to adapt to changes that may occur in the industry that could cause serious competitive problems. McKelvey Ž1982. posits that firms that lack variety are likely to have a reduced capability to cope with and adapt to changing situations, ultimately leading to a weaker organization. From a technology perspective, successful organizations are often involved in many simultaneous activities to avail themselves to organiza-


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tional and product diversity or technology options ŽGoodman and Lawless, 1994.. Examples include extensions of product lines or capacity utilization, exploration of new markets or products, and managerial activities along each phase of a product life cycle to ensure maximum growth. Firms that cover more areas of their core technology are less vulnerable to attacks from new entrants to the market ŽBurgelman and Rosenbloom, 1989.. Therefore, firms with diverse technology projects that are exploring areas outside of their core technologies and those that investigate opportunities to extend current product lines to other markets are expected to have better perceived value. Proposition 3: Technology options of computer software-related firms will haÕe a direct positiÕe relationship with perceiÕed market potential by IPO inÕestors.

3.4. Technology portfolio Pappas Ž1988. defines technology portfolio as ‘‘a tool that can be used to identify and systematically analyze key corporate technology alternatives and to set technology priorities’’ Žp. 231.. In simpler terms, the technology portfolio may be defined as the breadth or number of product and process technologies the firm invests in combined with the maturity of the core technologies ŽMalekzadeh et al., 1989.. Overall, the technology portfolio establishes a common overview of the priorities for product development by a firm and provides a basis for focusing resources on internal technological strengths that could lead to competitive advantage. Firms that have a wide scope of technologies in their portfolio are more adept at producing new products and can fight off attacks from potential new entrants into the market ŽBurgelman and Rosenbloom, 1989.. Therefore, one way of assessing the technology portfolio of a firm is to look at the product development emphasis through the number of new products in its portfolio. The breadth of the product line influences many aspects of a firm including manufacturing operations, human resources, and strategic decisions ŽZahra and Covin, 1993.. Although, larger firms typically have more diverse product portfolios than smaller ones, those firms that have active product development strategies should generally have larger product lines than their competitors. Zahra and Covin Ž1993. provide evidence to support this theory finding that product line breadth is directly related to an aggressive new product development strategy. A broad technology portfolio enables a firm to pursue more opportunities in the market. Further, introducing products to the market rapidly also enhances the ability of smaller firms to differentiate themselves from their competitors ŽAcs and Audretsch, 1990.. Roberts Ž1995. found that both the timeliness of technical results and newness of the company’s portfolio have a strong effect on the R & D performance and revenues for new products. Product diversification allows firms to realize profits in complementary product as well as its core product lines which make them more attractive to investors. The downside is that a broader portfolio is more administratively demanding on the organization and expensive and risky to pursue. This issue is of particular importance to smaller ventures; however, as Roberts Ž1995. points out, maintaining a broader portfolio

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relative to competitors, as opposed to an expansive portfolio, provides competitive advantage that may result in enhanced financial performance. Proposition 4: The technology portfolio of computer software-related firms, in terms of the number of products, will haÕe a direct positiÕe relationship with perceiÕed market potential by IPO inÕestor.

3.5. Intellectual property rights Another way of establishing competitive positioning is through use of intellectual property laws to protect investments in R & D and technology development ŽTeece, 1986; Adler, 1989; Kotabe, 1990; Utterback, 1994.. Intellectual property rights are effective in discouraging imitators from introducing similar products to the market to take advantage of R & D investments made by others. Firms that hold registered intellectual property rights create greater barriers to entry for competitors in the market. Patents are the most widely used process to protect technology innovations. However, firms in the software industry rely primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect their proprietary rights. Although enforcement of intellectual property rights is not always effective and can be very costly, using this legal process is particularly effective for new ventures ŽLevin et al., 1987.. In fact, Levin et al. Ž1987. indicate that patents held by technologically oriented ventures are often their most marketable asset. Using intellectual property rights as a technology strategy measure is important because focusing strictly on R & D expenditures does not provide a complete view of the technological knowledge of a firm. Investments in R & D do not always result in immediate product innovation, but generally provides more longer term results ŽMitchell and Hamilton, 1988.. Further, Pegels and Thirumurthy Ž1996. argued that patent-related measures are useful to assess the technological competitiveness of the firm and is a good indication of advances in technical knowledge. They also found empirical support that the number of patents contribute significantly to increased firm performance. Eventhough, smaller firms tend to hold fewer patents than larger firms, efforts to apply for any intellectual property rights should result in favorable valuation by investors. Thus, the following proposition will be tested. Proposition 5: Intellectual property rights efforts for computer software-related firms will haÕe a direct positiÕe relationship with perceiÕed market potential by IPO inÕestors.

3.6. R & D spending The depth of technology strategy, measured by the R & D spending relative to revenue, allows a firm to respond to competition and anticipate technological development in the industry ŽBurgelman and Rosenbloom, 1989.. Pegels and Thirumurthy Ž1996. suggest that ‘‘It is the accumulation of knowledge and technological strength


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resulting from R & D efforts that determines the performance of the firm’’ Žp. 246.. Pavitt Ž1990. posits that if firms do not invest in basic research, the future cost of understanding the results from such research from other sources may be much higher. This dimension focuses on the investment in technological resources through a firm’s committed expenditures in internal R & D. Substantial empirical research on the impact of R & D investment and firm success has been published. More specifically, a great deal of research in recent years has emerged to support the premise that the R & D spendingrsales ratio has a positive impact on firm performance ŽChakrabarti and Weisenfeld, 1991; Dowling and McGee, 1994; Mosakowski, 1991; Dowling and Ruefli, 1992; Pegels and Thirumurthy, 1996; Zahra, 1996a.. Mansfield Ž1981. finds that investment in internal R & D is positively related to technical output, while Capon et al. Ž1990. found a strong relationship between R & D investment and profitability. Others have also found strong direct relationships between R & D intensity and sales growth, profit, and employee productivity ŽParasuraman and Zeren, 1983; Brenner and Rushton, 1989; Morbey and Reithner, 1990.. Malekzadeh et al. Ž1989. show that consistent investment in R & D generates positive performance results for the organization. Other researchers have demonstrated that R & D spending depends on the competitive environment ŽScherer and Huh, 1992; Spital and Bickford, 1992.. In other words, the more dynamic the environment, the more large R & D investments influence the direction and speed of technological change and competitive advantage. Considering the dynamic market environment of computer technology-related industries, one would expect R & D spending to greatly affect the competitive position and long term survival of the firm. Spital and Bickford Ž1992. support this premise in their study that found that the level of R & D spending is higher in environments characterized by product technology dynamism which is certainly the case in the software industry. Although there is substantial evidence that R & D spending contributes to greater long term performance, investors do not always view this measure positively, particularly if they have short term profit motives. One reason is that R & D spending is typically charged as direct expenses as they incurred which takes away from company profits. Therefore, investors may likely view large investments in R & D negatively if they are perceived as too excessive. Proposition 6: R & D spending to reÕenue ratios in computer software-related firms will haÕe a direct negatiÕe relationship with perceiÕed market potential by IPO inÕestors.

3.7. Technology-experienced executiÕes The entrepreneurship literature generally posits that new venture success is directly related to experienced management teams who are able to assess the market for opportunities and threats and make the strategic decisions that best interests the firm ŽKiehl, 1988; Feeser and Willard, 1990.. In the case of high technology firms, the relationship between the management team experience and performance becomes a crucial part of the firm’s competitive strategy ŽStuart and Abetti, 1987; Roure and Keeley, 1990.. However, Chatterji Ž1994. found that there is a perception in lower level

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staff that chief executive officers ŽCEOs. do not understand technology trends and opportunities, support R & D efforts with appropriate resources, and in general, distrusted technologists. In cases where the CEO lacks the knowledge and experience regarding technology-related issues, some firms are recruiting a senior technologist, either Chief Technology Officer ŽCTO. or Chief Information Officer ŽCIO., with direct access to the CEO and intimately involved in the development of the business strategy. The challenge of the technology officer is to find ways to not only implement technology to enhance internal efficiencies, but to participate in the development and implementation of the corporate strategy by providing a visionary perspective of how the firm may exploit various technologies to its advantage. There is empirical support to suggest that technology experience at the executive levels of an organization has a bearing on the ultimate success of firms, particularly those in technology-intensive industries. For example, Thong and Yap Ž1995. found empirical support for the hypotheses that chief executives, who are more innovative, have better attitudes toward information technology adoption, and who are more knowledgeable about information technology are more likely to adopt these technologies which may enhance operations. Further, Lefebvre and Lefebvre Ž1992. determined that CEOs with experience in engineering and production have a higher degree of innovativeness than those experienced in accounting and finance. McGee and Dowling Ž1994. also found a direct relationship between prior technical experience of the management team and average sales growth in high technology new ventures. Therefore, this study expects that firms with higher degrees of technical literacy at the executive level, if not in the CEO then in a CTOrCIO, are valued more by investors. Proposition 7: Technology experience of executiÕes in computer software-related firms will haÕe a direct positiÕe relationship with perceiÕed market potential by IPO inÕestors.

4. Research design and measures 4.1. Sample Due to varying environmental influences, firms pursue different technology strategies across industries ŽMiller, 1988; Zahra, 1996a.. Therefore, the sample for this research focuses on one industry sector. To test the propositions, 40 firms in the Computer Programming, Data Processing, and other computer-related industries ŽSIC Code 737. who completed IPOs by the end of 1996 were randomly identified for this study. Twenty-nine of the firms in the sample were in the Prepackaged Software sector ŽSIC Code 7372., while the others were in Computer Programming Services sector Ž7371., Computer Integrated Systems and Design Ž7373., and Computer Processing and Data Preparation Ž7374.. Nine of the firms were eliminated due to the lack of specific technology strategy-related data provided in their prospectus, resulting in a sample of 31 IPO firms for this study. Table 1 provides more detail on the sample characteristics.


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Table 1 Sample characteristics SIC codes of businesses included in the study 7371—Computer programming services Žfour firms. 7372—Prepackaged software Ž21 firms. 7373—Computer integrated systems design Žfive firms. 7374—Computer processing and data preparation Žtwo firms. Sizes of businesses included in the study Annual sales volume Smallest approximately US$1.12 million Largest approximately US$246.2 million Average approximately US$31.77 million Number of employees Smallests14 employees Largests 2181 employees Average approximately 185.8 employees Age of businesses included in the study Youngest: 1 year Oldest: 29 years Average: 10 years Standard deviation: 7.28 years

The software industry sector was selected because in recent years many new ventures have emerged due to the fast paced evolution of computer programming technologies. In this decade, computer and communication technologies have become the fourth major, and some might argue, most important resource for firms along with its people, money, and machines. The growth of the personal computer industry during the last decade has been dramatic as a result of rapid technological advances and increased functionality, combined with price decreases for entry level systems. The competitive dynamics of the software industry are interesting in that large firms often find themselves in battles for competitive position in some market sectors with smaller, newly formed ventures using creative strategies to enhance their market presence. The industry also has great growth potential and has seen many firms, such as Netscape, enter the IPO market and reap large profits, in most cases after a short existence and very little operating history. On the down side, this massive growth also leads to a large number of failures and profit losses by unstable firms that cannot remain competitive. IPO firms were selected for this study because they present a unique opportunity to evaluate firms that are undergoing significant change. These organizations are moving from a privately held enterprise to the public domain by offering their stock to the public market for the first time. Frequently, this transition is to raise capital to fund growth strategies. The effort requires at least a year to prepare and market the company to potential investors. During this process, firms undergo an enormous transformation from keeping its financial data closely held to subjecting its records to scrutiny by shareholders, investment bankers, and the Security Exchange Commission ŽSEC.. The dynamics associated with private-to-public transformation combined with the computer industry

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revolution provides an opportunity to investigate small to medium sized firms who, based on the fact that they have made it to the IPO stage, have fairly stable operations but are also experiencing extensive environmental turbulence. 4.2. Technology strategy measure A content analysis was performed on the firm’s IPO prospectus to obtain a value for each of the technology strategy dimensions. The definition of Berelson Ž1952. states that ‘‘content analysis is a research technique for the objective, systematic, and quantitative description of the manifest content of communication’’ Žp. 18.. Weber Ž1990. defines it as ‘‘a systematic research method for analyzing textual information in a standardized way that allows evaluators to make inferences about that information’’ Žp. 9.. This method has been successfully deployed in the past on studies of strategic management ŽJauch et al., 1977; Romenelli, 1987; Kunkel, 1991; Mosakowski, 1991; Dowling and McGee, 1994; McGee and Dowling, 1994; Welbourne and Andrews, 1996.. Use of content analysis is appropriate for this study because the SEC establishes strict guidelines for the preparation of a firm’s prospectus in accordance with the Securities Exchange Act of 1934. In general, each prospectus describes the firm, its business plan, financial data, management structure, products, risks, and many other detailed data. Although potential for positive bias exists in the prospectus, firms are legally liable for any data that may mislead investors ŽO’Flaherty, 1984.. Therefore, the issue of content validity of the IPO prospectus is minimized. The scrutiny of the SEC also ensures reliability of the content data due to strict reporting requirements and sanctions for falsification ŽMarino et al., 1989.. The owners of IPO firms must be very explicit about their operations in their prospectus to ensure that investors are aware of all risks associated with the firm. Based on the SEC requirements, all of the prospectus documents contain the same level of detail regarding the firm’s management and operations making an assessment of the technology strategy consistent across all firms. The research process for designing this content analysis study followed three primary steps that were performed by a single rater. First, the content analysis coding instrument was developed to gather the theoretically relevant information for analyzing the technology strategy for each firm. Abbreviations for each variable were created and key phrases or themes that represent appropriate technology strategy areas were identified from the literature in this area. Second, each IPO prospectus was read very carefully and the margins were coded with the proper abbreviated technology strategy dimension. For instance, if a company made statements in its prospectus positing that it was first to market with its product, participated in industry standards committees, or that members of the industry considered the product as the defacto standard, and the prospectus provided evidence to support these statements, this was considered technology posture ŽTECH-POST.-related data. As another example, the intellectual property rights ŽIP-RIGHT. variable was categorized based on whether the firm’s prospectus stated that they had intellectual properties registered, pending, or none at all. Table 2 provides a description on how each technology strategy variable was coded.

Table 2 Technology strategy dimensions and scoring Highs 5

Medium s 3

Low s1

Technology posture ŽTECH-POST.

Pioneering efforts; first to market; sets industry standards; involved in standards setting; breakthrough type products; award winning products; large percentage of market; products are unique and differentiation from others

Displays leadership potential; has plans in place to become leader in market; products are unique but depend on others; uses 3rd party licensed technology; products used on limited platforms

Follower; copies others technology through incremental innovations; adds to proven technology; no product uniqueness; used on single platform

Intellectual property rights ŽIP-RIGHT.

Has registered intellectual rights for its products

property

Has intellectual property rights pending

Has no intellectual property rights

Scope of R&D ŽRD-SCOPE.

Current projects in place for developing new products and enhancements to existing products

Current projects in place focused strictly on product enhancements

Limited development scope; no current projects in place

Technology executives ŽTECH-EXEC.

Has Chief Technology Officer or Chief Information Officer

More than 50% of executives and directors have technology-related background relative to total number

Less than 50% of executives and directors have technology-related background relative to total number

Technology options ŽTECH-OPT.

Diverse technology projects in place outside of core product technology

Exploring other areas of core technology; evaluating opportunities to extend current products to new technology

Committed to one core set of technologies; one product line


Code

159

160


Once coding of all prospectus were completed, the data were extracted and placed into a separate document Žapproximately four to five pages. for each firm, thus providing a consolidated view of the data associated with each technology strategy dimension. Next, the summary documents were reviewed in detail and numerical values were assigned to the textual data resulting in a value for five of the dimensions based on the ratings shown in Table 2. Two of the variables, R & D spending and technology portfolio were measured differently. The R & D spending dimension was calculated simply based on the ratio of R & D expenses to end of year revenues averaged over three years. The technology portfolio dimension was the number of products introduced to the market by the firm as explicated in the prospectus. 4.3. IPO performance measure Since IPO firms are new to the stock market they typically lack the history and stability to use traditional measures of firm performance. For example, since some have no direct sales, many of the traditional performance ratios that depend on revenue data would provide meaningless information. Some of the firms also lack data on productivity and because of their short operating history, determining the future value of the firms is very difficult ŽWat, 1983; Altman, 1988.. To measure IPO performance, a traditional measure of perceived potential of the firm, known as Tobin’s Q, was used to indicate how potential investors value the firm. The Tobin’s Q formula is calculated as: Tobin’s Q s stock pricerbook value. Smilock et al. Ž1984. have recommended that the stock price to book value ratio provides a good measure of investor reaction to the firm. With this measure, the higher the ratio, the more a firm is valued by investors ŽDavis, 1991; Davis and Stout, 1992.. 4.4. Control Õariables Two control variables were selected for this study. The intent is to determine if there are variations in the technology strategy and IPO performance relationship based on these factors. The variables are: Ž1. firm size—measured by the number of employees; and Ž2. firm age—measured by the number of years from incorporation to the end of 1996. 4.5. Data analysis Correlation analysis was used to evaluate the relationships between the individual technology strategy measures and IPO investor reaction ŽTobin’s Q value. as well as the control variables. The expected result from this analysis is a view of whether the technology strategy dimensions are positively or negatively related to IPO performance as well as the strengths of the relationships. The analysis also determined the significance of the control variables to the technology strategy–performance relationships. A linear regression analysis was performed to test the propositions and to provide a mathematical description of a predictive relationship between the dependent and independent variables through a linear equation.

1. TECH-POST 2. RD-SCOPE 3. TECH-OPT 4. TECH-PORT 5. IP-RIGHT 6. RD-SPEND 7. TECH-EXEC 8. IPO-PERF 9. Age 10. Size Mean S.D. UU U

p- 0.05. p- 0.1.

1

2

3

4

5

6

7

8

9

10

0.035 0.325U 0.040 0.138 y0.263 0.029 0.378UU 0.045 y0.089 3.71 1.22

0.335U y0.050 y0.154 y0.193 0.312U 0.059 0.157 0.188 3.65 1.4

0.020 y0.188 y0.027 0.256 0.417UU 0.015 y0.168 2.35 1.2

0.149 y0.174 y0.272 0.129 0.093 y0.009 9.32 8.78

0.096 y0.133 y0.320U 0.091 0.309U 2.29 1.51

0.074 y0.240 y0.059 y0.181 30.28 26.46

0.312U y0.051 y0.145 2.74 1.61

y0.052 y0.056 5.3 2.03

0.471UU 10.0 7.28

185.81 376.31


Table 3 Pearson correlation and descriptive statistics for variables used in the analysis

161

162


5. Results Table 3 represents the results of the Pearson correlation analysis in addition to the means and standard deviations for each of the independent variables. The analysis indicates that several of the variables are positively correlated to one another. Although the correlation values are relatively low, a test for multicollinearity was performed to ensure that the proposed explanatory variables are independent Žsee Table 4.. Four parameters were evaluated to identify multicollinearity: Ž1. the pairwise relationships between variables, Ž2. the tolerance of variance, Ž3. the variance inflation factor ŽVIF., and Ž4. the eigenvalues. In evaluating the first parameter, the variables may be strongly interrelated if the r values are greater than