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Niche and Performance

Niche and Performance

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Published by: Henry Dong on May 01, 2009
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Strategic Management Journal
Strat. Mgmt. J.
,
26
: 219–238 (2005)Published online 22 December 2004 in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.443
NICHE AND PERFORMANCE: THE MODERATINGROLE OF NETWORK EMBEDDEDNESS
ANN ECHOLS* and WENPIN TSAI
Smeal College of Business Administration, Pennsylvania State University, University Park, Pennsylvania, U.S.A.
What is the relationship between niche and performance? We identify two types of niche positions—product niche and process niche—de
 fi
ned by the extent to which a
rm offersdistinctive products and has distinctive operational processes, respectively. We argue that theeffect of each niche on
rm performance is contingent upon network embeddedness—the extent to which a
rm is involved in a network of interconnected inter-
 fi
rm relationships. Using datacovering the period 1995–98 pertaining to venture capital
rms and their holdings in initial public offerings (IPOs), we show that both product niche and process niche interact with network embeddedness to determine
rm performance. Our 
ndings suggest that the extent to which a
rmoffers distinctive products or processes will be more positively associated with
rm performancewhen network embeddedness is high.
Copyright
2004 John Wiley & Sons, Ltd.
A key to understanding inter-
rm competition isthe concept of niche. A niche represents a
rm’sdistinctiveness relative to other players in the com-petitive arena. As such, a niche describes not onlya
rm’s competitive environment, but also howit competes with others (Carroll, 1985). A nicheallows a
rm to establish differences by offer-ing a product or set of products that few, if any,other
rms offer (Porter, 1980; Stuart, 1998), orby doing business using operational processes thatfew, if any, other
rms practice (Baum and Oliver,1996; Carroll, 1984, 1985).
1
Firms in a niche
Keywords: network embeddedness; product niche; pro-cess niche; venture capital
Correspondence to: Ann Echols, Smeal College of BusinessAdministration, Pennsylvania State University, 403 BusinessAdministration Building, University Park, PA 16801, U.S.A.E-mail: aiel@psu.edu
1
Obviously, a
rm could maintain a number of different niches,including
both
a product and process niche, but for the purposesof this paper our study is limited to the concept of 
rms in asingle niche—either a product or process niche.
(niche-
rms) thus create value by way of offer-ing products or practicing processes that differ insome signi
cant way from those of rivals.The concept of niche has attracted considerableinterest in management research. Population ecol-ogists have examined properties of a
rm’s niche(Hannan and Freeman, 1977; McPherson, 1983)and the impact of a niche position on competitivedynamics. For example, in a study of the world-wide semiconductor industry, Podolny, Stuart, andHannan (1996) have shown that niche-
rms haveenhanced
rm survival rates. Strategic manage-ment scholars have also identi
ed the niche posi-tion as a way of competing in the marketplace.For example, in studying strategic groups, Harri-gan (1985) investigated the heterogeneity of strate-gic positions among
rms and emphasized thevalue of holding a distinctive position in an indus-try. Drawing extensively from industrial organiza-tion economics, Porter (1980, 1996) has analyzedcompetitive positioning of 
rms and argued thatniche-
rms can justify charging higher prices. A
Copyright
2004 John Wiley & Sons, Ltd.
Received 30 July 2001Final revision received 23 July 2004
 
220
A. Echols and W. Tsai
niche-
rm gains economic pro
t because it worksin a relatively uncontested market. Being in a nichemeans the
rm is not under pressure to reduceprices, because the more distinctive the
rm’sproducts or processes, the less competition the
rmfaces.Although the convergence of organizationalecology and strategic management research hashighlighted the importance of the niche conceptin understanding different aspects of competitivedynamics, it has not clari
ed the performanceeffect of a
rm’s niche. Several scholars haveidenti
ed advantages as well as disadvantages thataccrue to niche-
rms (e.g., Carroll, 1984). Forexample, a niche may have negative consequenceswhen a market dries up, rendering a
rm’sproducts or practices obsolete (Liles, 1977). Inthis study, we test the performance implicationsof a
rm’s niche, where a niche is a continuumof relative distinctiveness describing what productsthe
rm offers or how the
rm does business.To understand how niche is associated withdifferent performance outcomes, we use a con-tingency perspective and argue that the effect of niche on performance is contingent upon networkstructure. The network structure describing withwhom
rms interact is an important contingencyfactor, because
rms do not make key decisionsabout what product(s) to offer and how to dobusiness in a social vacuum without consideringother
rms (Burt, 1992; Granovetter, 1985). Thus,the niche–performance relationship can be betterunderstood by simultaneously examining a
rm’sniche and network structure. By considering a
rm’s network structure, we are able to speci
callyanswer our research question: Under what con-ditions does the distinctiveness of a
rm’s nicheprovide performance bene
t to the
rm?The central tenet of our argument is that howwell a niche-
rm performs is contingent upon theextent to which it is embedded in an inter-
rm net-work. To examine this, we focused on the U.S.venture capital industry as our research setting.The U.S. venture capital industry provides an idealsetting because this is an industry with high com-petitive pressure motivating many
rms to be nicheplayers. In addition, this is an industry in which
rms frequently form networks of inter-
rm work-ing relationships. By simultaneously investigatinga
rm’s niche position and network embeddednessin the venture capital industry, our paper advancesa theory of competitive positioning in strategicmanagement and provides a more re
ned under-standing of how venture capital
rms compete.
THEORY AND HYPOTHESES
A niche implies a ‘way of earning a living’ (Elton,1927: 63–64): an explanation from animal ecol-ogy, whereby niches are identi
ed by looking atthe key attributes of earning a living in terms of what the animal eats and how it preys (Ricklefs,1979). Similarly, in the business context, a
rm’sniche can be studied by investigating how a
rmdiffers from its rivals in terms of what productsit offers and how it does business (e.g., the opera-tional processes it chooses to practice) (Day, 1981;Porter, 1996). As such, a niche is de
ned by theextent to which a
rm’s product offering or oper-ational processes are unlike what rivals offer orpractice, respectively. In this research, we focuson two kinds of niches or ways a
rm ‘earns itsliving’ distinctively: its product offerings or oper-ational processes.
Product niche
The concept of product niche describes a
rm’scompetitive position based on an analysis of thecompetitive intensity surrounding
what 
productsthe
rm offers. A
rm in a product niche positionoffers products that—because they differ consid-erably in ways that are economically meaningfulfrom those of its rivals—create value. By offer-ing a product or set of products that differ fromthose of competitors, a
rm can reduce its compet-itive pressures, increasing its likelihood of gaininga competitive advantage (Porter, 1980). There aremany examples of distinctive product offerings. Inthe automobile industry, Audi TT, an all-wheel-drive coupe, is a distinctive product, since veryfew automobile manufacturers offer a vehicle thatcombines a sports-look coupe body with all-wheel-drive capability. In the vision care industry, John-son & Johnson’s 1-day ACUVUE is a distinctiveproduct, since it is the only UV-blocking daily dis-posable lens in the marketplace. These examplesare of single products, which are easy to explain;yet multi-product
rms can also create a nicheby offering a distinctive product mix identi
ed byaggregating the distinctiveness of individual prod-uct offerings to the
rm level. By examining therelative distinctiveness of each product in a
rm’s
Copyright
2004 John Wiley & Sons, Ltd.
Strat. Mgmt. J.
,
26
: 219–238 (2005)
 
 Niche and Performance
221
product portfolio and aggregating this information,we can determine the
rm’s overall product niche.
Process niche
The concept of process niche describes a
rm’scompetitive position based on an analysis of 
how
the
rm operates its business. A
rm in a pro-cess niche position engages in business operationsthat—because they differ considerably in waysthat are economically meaningful from those of its rivals—create value. A process niche rests onthe distinctiveness of the
rm’s operating know-how or ways of practicing business. Whether ornot it offers distinctive products, a process niche-
rm practices a different way of operating itsbusiness, including managing the processes relatedto its value chain activities in an innovative way(Chatterjee, 1998). For example, some online retailstores are classi
ed as process niche-
rms whenthey provide a distinctive online ordering pro-cess that allows customers to perform real-timeinventory checking and shipment tracking in aconvenient, reliable, and timely fashion. Althoughoffering the same name-brand products as competi-tors do, these online stores differentiate themselveswith a distinctive operational process that attractscustomers. The distinctive operational process hasresulted in a proprietary business model that showsthe importance of a process niche. The idea of process niche is also illustrated in a recent articleby Markides (1998), showing how a small Dan-ish bank called Lan & Spar altered its operationalprocesses to employ a unique, real-time system,enabling it to conduct business differently and,hence, become a niche-
rm.
Network embeddedness as a moderator of theniche–performance relationship
How does a
rm’s niche position affect its perfor-mance? The above discussions on product nicheand process niche describe a
rm’s decisions con-cerning
what 
to offer and
how
to operate. How-ever, a
rm’s performance is not simply a functionof these decisions. Instead, these decisions and the
rm’s resulting performance are contingent uponanother important factor: the
rm’s social structurethat describes
who
connects to whom in the
rm’snetwork. A
rm’s competitive position, includingdecisions regarding whether or not to be a prod-uct or process niche-
rm, is not formed in a socialvacuum. When making decisions about what tooffer and how to operate, a
rm must, at thesame time, take into account the social context inwhich it interacts with other
rms. Through col-laborations with other
rms in the industry, a
rminvolves itself in an inter-
rm network that con-tains useful information and resource
ows. Thestructure of such a network is a critical factor indetermining the success of any
rm’s niche posi-tion.Research in economic sociology has highlightedthe importance of social networks in economicactions (Granovetter, 1985; Coleman, 1990). The‘performance of 
rms can be more fully under-stood by examining the network of relationshipsin which they are embedded’ (Gulati, Nohria, andZaheer, 2000: 203). Networks of inter-
rm rela-tionships provide channels for sharing valuableinformation and resources. A
rm can use its net-work channels to search for advice and gain accessto key resources needed to deal with its compet-itive challenges. As many scholars have argued,network relationships are an important aspect of the social capital that determines a
rm’s abil-ity to create value or to achieve economic goals(e.g., Coleman, 1990; Tsai and Ghoshal, 1998;Tsai, 2000). Drawing on social network theory, weuse the concept of network embeddedness to exam-ine the impact of a niche-
rm’s relationships on itsability to perform well.Network embeddedness describes the structureof a
rm’s relationship with other
rms—speci
c-ally, the extent to which a
rm is connected toother
rms and how interconnected those
rmsare, in turn, to each other (Granovetter, 1992;Nahapiet and Ghoshal, 1998). Network embedded-ness means the extent to which a
rm is surroundedby other
rms in such a way that its network struc-ture is redundant or not. At one extreme, highnetwork embeddedness means that a
rm belongsto a dense network among other
rms, many of which are tightly connected with each other. Insuch a dense network,
rms tend to know eachother well through recurring interactions and inter-connected ties that engender familiarity and trust(Gulati, 1995; Gulati
et al
., 2000). At the otherextreme, low network embeddedness means thata
rm belongs to a sparse network in which fewof its contacts are not connected to each other.In such a sparse network,
rms may instrumen-tally work with a variety of other
rms that are
Copyright
2004 John Wiley & Sons, Ltd.
Strat. Mgmt. J.
,
26
: 219–238 (2005)

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