So commonplace is it that growing businesses have to adapt to the changing environment that the “pivot” has become a part of entrepreneurial lore. A recent study from Carnegie Mellon suggests that diverse teams are more likely to make successful pivots than their more homogenous peers.
The research reveals that businesses established in dynamic environments tend to have a longer survival rate when their founding teams exhibit greater functional diversity. Conversely, functionally homogeneous teams, characterized by a limited number of distinct roles and perspectives, perform better in more predictable environments.
“Predicting the course of environmental change is difficult, but entrepreneurs who can synchronize their predictions with their decisions about team composition perform better,” the researchers explain.
Environmental changes
While previous research has focused on the influence of recent events on business ventures in response to environmental change, the interplay between a venture’s historical context, including the environmental conditions present during its inception, and performance outcomes remains unexplored.
“If environmental conditions at founding have a lasting influence on ventures’ internal processes, and recent environmental conditions determine the effectiveness of these processes, it is crucial for our theories of environmental change to account for both periods,” the authors continue.
In order to shed light on this issue, researchers combined studies on the lasting effects of founding conditions with research on the consequences of environmental change.
Team dynamics
The study surveyed over 140,000 alumni from Stanford University, resulting in a dataset of more than 1,000 entrepreneurs who founded ventures across 19 industries from 1960 to 2011, ranging from agriculture to energy and utilities. Respondents’ self-reported data were verified by cross-checking their information against lists of public and private companies.
The survey evaluated the duration of the ventures and whether they achieved positive liquidity events, such as an observed initial public offering or a merger or acquisition. Founders were also questioned about the functional roles present in their founding teams, including sales and marketing, general administration, operations, and finance.
The study found that functionally diverse teams, with members occupying a variety of roles and focusing on different areas such as sales, marketing, manufacturing, and distribution, were better equipped to cope with high environmental dynamism, which refers to the degree to which environmental changes are unpredictable for firms’ decision-makers. These teams also tended to exchange a large amount of information and engage in diverse perspectives.
However, the same founding conditions led to a reduced likelihood of positive exit when environmental dynamism increased over the lifetime of the venture. Overall, the study integrated insights from different research areas to provide a nuanced understanding of how the interplay of founding conditions and environmental change affects the survival and success of ventures.
“Our findings highlight the importance of firms developing capabilities to enable flexibility in decision-making processes, which are often inflexible, which limits firms’ ability to take advantage of unique opportunities provided by environmental change,” the researchers conclude.
