ENTREPRENEURSHIP entrepreneurial strategic processes

ENTREPRENEURIAL STRATEGIC PROCESSES ADVANCES IN ENTREPRENEURSHIP, FIRM EMERGENCE AND GROWTH Series Editors: Jerome A Katz and G T Lumpkin Recent Volumes: Volumes 3–4: Edited by Jerome A Katz Volume 5: Edited by Jerome A Katz and Theresa M Welbourne Volumes 6–8: Edited by Jerome A Katz and Dean A Shepherd Volume 9: Edited by Johan Wiklund, Dimo Dimov, Jerome A Katz and Dean A Shepherd ADVANCES IN ENTREPRENEURSHIP, FIRM EMERGENCE AND GROWTH VOLUME 10 ENTREPRENEURIAL STRATEGIC PROCESSES EDITED BY G T LUMPKIN Texas Tech University, USA JEROME A KATZ Cook School of Business, Saint Louis University, USA Amsterdam – Boston – Heidelberg – London – New York – Oxford Paris – San Diego – San Francisco – Singapore – Sydney – Tokyo JAI Press is an imprint of Elsevier JAI Press is an imprint of Elsevier Linacre House, Jordan Hill, Oxford OX2 8DP, UK Radarweg 29, PO Box 211, 1000 AE Amsterdam, The Netherlands 525 B Street, Suite 1900, San Diego, CA 92101-4495, USA First edition 2007 Copyright r 2007 Elsevier Ltd All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher Permissions may be sought directly from Elsevier’s Science & Technology Rights Department in Oxford, UK: phone (+44) (0) 1865 843830; fax (+44) (0) 1865 853333; email: permissions@elsevier.com Alternatively you can submit your request online by visiting the Elsevier web site at http://www.elsevier.com/locate/permissions, and selecting Obtaining permission to use Elsevier material Notice No responsibility is assumed by the publisher for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions or ideas contained in the material herein Because of rapid advances in the medical sciences, in particular, independent verification of diagnoses and drug dosages should be made British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-0-7623-1429-4 ISSN: 1074-7540 (Series) For information on all JAI Press publications visit our website at books.elsevier.com Printed and bound in the United Kingdom 07 08 09 10 11 10 CONTENTS vii LIST OF CONTRIBUTORS AN INTRODUCTION TO THE SPECIAL VOLUME ON ENTREPRENEURIAL STRATEGIC PROCESSES G T Lumpkin and Jerome A Katz A MODEL OF CORPORATE ENTREPRENEURSHIP AS A STRATEGIC ADAPTATION MECHANISM Robert P Garrett and Jeffrey G Covin EXPLOITATION OF ENTREPRENEURIAL OPPORTUNITIES IN THE CORPORATION: AN EXPLORATION OF FUNCTIONAL-LEVEL SUPPORT, DECISION AUTONOMY, AND PERFORMANCE Dilene R Crockett, G Tyge Payne and Jeffrey E McGee INTERPRENEURSHIP: HOW THE PROCESS OF COMBINING RELATIONAL RESOURCES AND ENTREPRENEURIAL RESOURCES DRIVES COMPETITIVE ADVANTAGE Curt B Moore, Chad W Autry and Barry A Macy MODELING THE ROLE OF INTRAPRENEURIAL STRATEGY-MAKING IN SMALL FIRM PERFORMANCE Martie-Louise Verreynne and Denny Meyer v 33 65 103 vi CONTENTS MAKING LEMONADE OUT OF LEMONS: THE ROLE OF INFORMATION PROCESSING AND STRATEGY IN MANAGING ‘‘MISPERCEIVED’’ START-UPS Mark Simon, Susan M Houghton and G T Lumpkin THE NEW VENTURE INNOVATION PROCESS: EXAMINING THE ROLE OF ABSORPTIVE CAPACITY Alexander McKelvie, Johan Wiklund and Jeremy C Short 131 159 TIME AND CORPORATE ENTREPRENEURSHIP Miri Lerner, Shaker A Zahra and Yael Gal Kohavi 187 WHERE DO ENTREPRENEURIAL ORIENTATIONS COME FROM? AN INVESTIGATION ON THEIR SOCIAL ORIGIN Haibin Yang and Gregory G Dess 223 THE CONTEXT OF ENTREPRENEURIAL PROCESSES: ONE SIZE DOES NOT FIT ALL Frances Fabian and Hermann Achidi Ndofor 249 LIST OF CONTRIBUTORS Chad W Autry M J Neeley School of Business, Texas Christian University, Fort Worth, TX, USA Jeffrey G Covin Kelley School of Business, Indiana University, Bloomington, IN, USA Dilene R Crockett Department of Business Administration, Northeastern State University, Tahlequah, OK, USA Gregory G Dess School of Management, University of Texas at Dallas, Richardson, TX, USA Frances Fabian Belk College of Business Administration, University of North Carolina at Charlotte, University City Boulevard, College Station, Charlotte, NC, USA Robert P Garrett Kelley School of Business, Indiana University, Bloomington, IN, USA Susan M Houghton Associate Professor, North Carolina Agricultural & Technology University, Greensboro, NC, USA Yael Gal Kohavi Human Capital Manager, SAP Israel Miri Lerner The Academic College of Tel-Aviv Yaffo, The School of Management and Economics, Tel-Aviv, Israel G T Lumpkin Area of Management, Rawls College of Business, Texas Tech University, Lubbock, TX, USA vii viii LIST OF CONTRIBUTORS Barry A Macy Texas Tech University, Jerry S Rawls College of Business Administration, Area of Management, Lubbock, TX, USA Jeffrey E McGee College of Business Administration, University of Texas at Arlington, Arlington, TX, USA Alexander McKelvie Department of Entrepreneurship & Emerging Enterprises, Whitman School of Management, Syracuse University, Syracuse, NY, USA Denny Meyer Faculty of Life and Social Sciences, Swinburne University of Technology, Australia Curt B Moore M J Neeley School of Business, Texas Christian University, Fort Worth, TX, USA Hermann Achidi Ndofor Mays College of Business, Texas A & M University, TX, USA G Tyge Payne Area of Management, Rawls College of Business, Texas Tech University, Lubbock, TX, USA Jeremy C Short Department of Management, Rawls College of Business Administration, Texas Tech University, Lubbock, TX, USA Mark Simon Department of Management and Marketing, School of Business Administration, Oakland University, Rochester, MI, USA Martie-Louise Verreynne University of Queensland Business School, Brisbane, Australia Johan Wiklund Jo¨nko¨ping International Business School, Jo¨nko¨ping, Sweden Haibin Yang Department of Management, City University of Hong Kong, Kowloon, Hong Kong, China Shaker A Zahra Strategic Management and Organization Department, Carlson School of Management, University of Minnesota, Minneapolis, MN, USA AN INTRODUCTION TO THE SPECIAL VOLUME ON ENTREPRENEURIAL STRATEGIC PROCESSES G T Lumpkin and Jerome A Katz This tenth volume in the series Advances in Entrepreneurship, Firm Emergence, and Growth focuses on entrepreneurial strategic processes Papers related to strategic processes in entrepreneurship have been a recurring feature of the Advances series, starting with the second volume, which included Slevin and Covin’s (1995) article of record on entrepreneurial strategic behavior, as well as process-related strategy articles by Carsrud and Kruerger (1995) and Bloodgood, Sapienza, and Carsrud (1995) Subsequent explorations included Volume 7’s material on corporate entrepreneurship, Fernhaber and McDougall’s (2005) work on strategic adaptation in Volume 8, as well as Salvato, Lassini, and Wiklund’s (2006) acquisition process model and Samuelsson’s innovative-imitative process comparison in Volume Common to all of these has been the central intent of the strategy approach: the pursuit of organizational success This quest to understand what makes entrepreneurial organizations successful has, over the years, highlighted numerous possible explanations The characteristics of the entrepreneur(s), the content of their strategies, the compositions of teams, the availability and type of resources, and Entrepreneurial Strategic Processes Advances in Entrepreneurship, Firm Emergence and Growth, Volume 10, 1–7 Copyright r 2007 by Elsevier Ltd All rights of reproduction in any form reserved ISSN: 1074-7540/doi:10.1016/S1074-7540(07)10001-5 The Context of Entrepreneurial Processes 265 Munificence, which captures the level of resources in the environment, (Castrogiovanni, 1991) and dynamism, which refers to the unpredictability of market change (McNamara, Vaaler, & Devers, 2003) are both heavily studied constructs in both management research in general and entrepreneurship in particular (Castrogiovanni, 1996) Moreover, using environmental constructs as potential moderators between firm processes and firm performance has a fairly extensive legacy in management research (Hart & Banbury, 1994; Tegarden, Sarason, & Banbury, 2003) Indeed, a recent study by Liao and Gartner (2006) provides a template for thinking about modeling relationships between environmental dimensions, processes and performance Their work found that perceived uncertainty moderated the relationship between the timing of venture plans and their performance In particular, early plans were more important in uncertain environments while later plans were more important in stable environments This implies that the environment provides boundary conditions on the effectiveness of different new venture processes Munificence Munificence refers to the ‘‘magnitude of the opportunity’’ in the environment (Castrogiovanni, 1996) and in particular deals with variables such as the level of demand or availability of funding that can help new ventures succeed When gaining resources from the environment is relatively easy, firms need to emphasize new venture implementation processes that stress other imperatives than external resource acquisition to gain competitive advantage This is because all competitors in munificent environments may be able to access these resources easily as well, resulting only in attaining competitive parity Formulating Business Plans One way of gaining legitimacy from outsiders may be through communicating a compelling vision through a formal, written business plan Indeed, citing recent work, Liao and Gartner (2006) noted that startup entrepreneurs might ‘‘create a plan as a way to legitimate the viability of the prospective new business with those stakeholders with the resources required to develop the venture.’’ Yet, even in their own study, they found over 75% of their respondents who claimed to use planning did not draft formal written plans, but rather relied on plans ‘‘in their head’’ or ‘‘informal plans.’’ Still, business plans are considered an important symbolic step toward gaining resources from external parties (Castrogiovanni, 1996) 266 FRANCES FABIAN AND HERMANN ACHIDI NDOFOR In contrast, in very munificent environments, entrepreneurs may find less need to invest time in this process Another aspect of munificent environments may be that they are capable of generating the necessary cash flow as a substitute for efforts to tap external parties Castrogiovanni (1996) argued that other important rationales for business planning – learning, symbolism and efficiency – are unlikely to be as necessary in munificent environments Moreover, entrepreneurs may feel pressured to take action, rather than invest in formal planning, to respond to the immediate munificent opportunity His proposition in this regard, then, argued that a munificent environment would cause less planning by entrepreneurs A slightly different question, then, is whether planning in munificent environments is positively or negatively related to performance – in other words, is planning in a munificent environment likely to be less successful, or even detrimental, to performance as compared to not planning? A reevaluation of data in three recent studies which had combined formal and informal business planning processes (Delmar & Shane, 2003; Liao & Gartner, 2006) might allow for some insight as to whether formal written plans are necessary to gain the positive planning effect Honig and Karlsson (2004) found that indeed such written plans were products of external institutional pressures, and did not evidence any positive survival or profitability performance effect We propose: Proposition The munificence of the environment will negatively moderate the relationship between formulating a business plan and new venture performance Building Social Networks Shane and Stuart (2002) argue that when stakeholders are unable to evaluate a venture due to its newness, they can still provide resources to the venture based on their relationship with the entrepreneur These relationships can provide a conduit through which a venture can acquire environmental resources until it is able to establish its reputation and legitimacy The relevance of social networking in accessing environmental resources will, however, depend on the level of other resources (or lack thereof) possessed by the entrepreneur The ‘‘compensation hypothesis’’(Bruderl & Preisendorfer, 1998) argues that entrepreneurs use an extended network to make up for a lack of other human and financial capital assets Thus, the value of (and proclivity toward) utilizing social networking to access external resources will be less to entrepreneurs who already possess the requisite resources due The Context of Entrepreneurial Processes 267 to a munificent environment Conversely, hostile environments require that the entrepreneur spend more effort in the area of building social networks to create relationships that are their own form of resource, or social capital, to launch the firm (Ahlstrom & Bruton, 2006) We propose: Proposition The munificence of the environment will negatively moderate the relationship between building a social network and new venture performance Seeking Venture Capital The potential link between environmental context and success of an implementation process is especially salient in the area of seeking venture capital For instance, local geographical munificence is strongly related to the success of gaining venture financing (Green, 2004) One explanation of why geographical munificence in venture assets occurs is based on the idea of ‘‘agglomeration economies of scope’’ and has become one of the more common terms for explaining why venture capital is likely to be concentrated in its disbursal Thus, the venture capital literature suggests that regional disparities exist in the success of seeking venture capital, and that these disparities are related to munificence In particular, it appears that seeking venture capital is more likely to be successful in geographically munificent environments, and thus more likely to contribute to performance in this arena We propose: Proposition Munificence will positively moderate the relationship between seeking venture capital and performance This fairly straightforward assertion recommends further related research that may engage the issue of whether all munificence is ‘‘created equal’’ across firms For instance, recent work linked startup financing and success to the ‘‘spawning’’ practices of existing corporations In a comparison of the relatively successful Fairchild against Xerox, it was found that undiversified, originally venture-backed firms are more likely to spawn new entrepreneurs than other technology firms (Gompers, Lerner, & Scharfstein, 2005) Thus, more theorizing about why munificence improves venture performance may offer some surprising insights In the case of Fairchild and Xerox, the proliferation of a firm strategic logic to its spinoffs may be more successful at explaining how environments become munificent and attract venture capital than a perspective on the relative abundance of financial resources on a geographical scale 268 FRANCES FABIAN AND HERMANN ACHIDI NDOFOR Dynamism New industries are likely to have unique dynamics, which will determine the number and type of entrepreneurs that will succeed in the environment (Miles, Heeley, & Covin, 2000; Vanderwerf, 1993) Yet how dynamism moderates the effectiveness of firm processes provides mixed results (Miller & Cardinal, 1994) One explanation may be that different kinds of performance metrics, like quality versus innovation, will perform differently in dynamic environments under the same type of process (Tegarden et al., 2003) Similarly, because the type of performance entrepreneurial firms pursue (e.g., the creation of new markets) may differ from that of large firms, dynamic environments may hold unique implications for the performance of entrepreneurial implementation processes Below we offer some considerations about how dynamism may affect the performance of new venture processes Formulating Business Plans The effectiveness of planning in dynamic environments is contentious, though the research for a relationship between large firm planning and dynamism suggests that planning is more positive in dynamic environments (Tegarden et al., 2003) Bhide (1994) argued that the premise for formulating business plans for smaller entrepreneurial firms is at least twofold: first, it focuses strategy for the startup in a coherent form; and second, it serves as necessary documentation for external capital applications In regard to the second premise, many entrepreneurial studies acknowledge that a considerable number of entrepreneurs not use external capital to fund their startups (Baker & Nelson, 2005; Carter & Van Auken, 2005) Thus, for this sizable population the question becomes, does pursuing a formal business plan improve effectiveness by focusing on the creation of a coherent strategy? Schwenk and Schrader (1993) assessed 14 studies and concluded that they indicated a small, but positive relationship between planning and performance in small businesses The role of environmental conditions in affecting business plan performance has been mixed, with evidence falling both ways for planning in turbulent environments (Brews & Hunt, 1999) Brews and Hunt’s (1999) positive effect for planning in turbulent environments was associated with a 4-year lag, leading them to conclude that there may be a considerable period of learning how to plan required Even recent studies that have suggested that business planning per se improves performance under increased perceived uncertainty is not ironclad For instance, Liao & Gartner (2006) found that only one-third The Context of Entrepreneurial Processes 269 of their entrepreneurs that were identified as having business plans actually made formal plans and the remaining two-thirds referred to their plans as either informally written or in their head Mintzberg (1994), for example, argues against the use of formal strategic planning and contends that it can actually be counterproductive, potentially forestalling necessary adaptation Others have argued that it is critical to encourage entrepreneurial actions that can uncover important information (Baker & Nelson, 2005; ogilvie & Hauge, 1998), and which may even be more impressive to external actors (Gumpert, 2003) Castrogiovanni (1996) similarly proposed that while environmental dynamism may prompt greater planning, it also potentially impedes the advantages of planning by making the collected information more costly and difficult to interpret Yet, 10 years later, we believe the moderating effect of the usefulness of formal planning when objective environmental conditions are changing is relatively untested Thus, we propose: Proposition 10 Environmental dynamism will negatively moderate the relationship between formulating written business plans and venture performance Building Social Networks Social networks are thought to offer some of their greatest advantages in their ability to enable information transfer (Maurer & Ebers, 2006) Thus, the usefulness of exploiting social networks may be related to the ability for this process to inform an entrepreneur on the key strategic choices facing the organization Black and Fabian (2000) posited that new entrepreneurs select different subsets of entrepreneurial orientations, and these differences may be theoretically linked to differential value in tapping social networks For instance ‘‘honing’’ is defined as refining ‘‘practices within a market structure by emphasizing the acquisition and use of information available from the relevant economic agents in the marketplace’’ while ‘‘enterprising’’ orientations are more aimed at imposing new definitions into the marketplace Thus, depending on the type of dynamism in the marketplace – either high uncertainty which can be resolved through greater information or high ambiguity which is resolved by firm strategies – may determine whether social networks are of greater importance in the former situation The implication of this perspective is that social networks will be differentially effective based on the type of dynamism in the environment and the ability for the network to provide venture-enhancing information For instance, Eckhardt and Shane (2003) argue strongly for examining the 270 FRANCES FABIAN AND HERMANN ACHIDI NDOFOR context of opportunity and stress the issue of asymmetries of information in a substantial set of theories about entrepreneurial opportunities In particular, asymmetries of information may significantly alert entrepreneurs to new opportunities by early access to new information Their arguments also suggest that some kinds of dynamism are likely to have information dispersed unequally across various market participants, while other types of dynamism may not make social networks as useful in informing the entrepreneur, because of the novelty of the dynamic opportunities Thus, we propose: Proposition 11 Dynamism moderates the relationship between building social networks and new venture performance Dynamism characterized by uncertainty resolution will positively moderate the performance implications of social networks, while disruptive dynamism will be more amenable to unique firm strategies Seeking Venture Capital We found little theory in the management literature that linked the success of seeking venture financing to the dynamism of the environment, with one anecdotal exception Writing from the perspective of an ‘‘ex’’ venture capitalist, MIT Lecturer Howard Anderson (2005, p 43) stated, in reference to the current stagnate funding climate, that ‘‘y these changes in venture funding are structural, not cyclical VCs are actually like cyclical markets; we can buy in cheaply and wait for exuberance to bail us out.’’ Dynamic environments, due to greater inherent uncertainty in the value of ventures, may increase the span of ventures deemed acceptable for funding, and thus increase the value for an entrepreneur of seeking such investments Baum and Silverman (2004) noted that while venture capital funds in general not succeed, research does indicate an advantage to new ventures that receive these funds In their own study, they found that alliance and technological resources were of greater value than top management resources in both attracting venture capital funds and startup performance In dynamic environments, it may be that these same technological and alliance resources become more difficult to formulaically evaluate, thus increasing the ‘‘hit rate’’ for entrepreneurs seeking to gain venture capital While our theorizing is only formative at this juncture, the potential for understanding what environments have the greatest potential for entrepreneurs to gain funding ‘‘at the edge’’ is of great interest to entrepreneurs Thus, we tentatively offer: Proposition 12 Dynamism positively moderates the relationship between seeking venture capital and venture performance The Context of Entrepreneurial Processes 271 DISCUSSION AND IMPLICATIONS Entrepreneurship is central to the vitality of economies through the creation of new jobs, businesses, and opportunities (Shane & Venkataraman, 2000) Entrepreneurial success, therefore, is important for the continuous growth and rejuvenation of economies Yet despite this centrality, there is a preponderance of new venture exits, with 34 percent of US startups closing within their first years (Headd, 2004) Similarly, research findings on what leads to entrepreneurial success have been inconsistent at best, and more often contradictory (Shook et al., 2003) For example, while business researchers, economists, entrepreneurs, and venture capitalists all agree that the entrepreneur is central to the performance of a venture, research linking the entrepreneur to venture performance has been equivocal More recently, consensus has developed that research focusing on both processes (e.g., Shane & Delmar, 2004) and a combination of factors (Baum et al., 2001) provide better insights into new venture performance We build on these recent advancements to propose the existence of a plurality of entrepreneurial processes, which recognizes different approaches to implementation in entrepreneurial ventures There is equifinality in the performance implications of these different processes because their success depends (among other things) on the entrepreneur and the environment Thus, we argue that the effectiveness of entrepreneurial processes is contextdriven by examining the role of the entrepreneur and environmental context in determining the appropriateness and effectiveness of a selected set of new venture processes Incorporating the contingency of context in entrepreneurial processes will not only improve the consistency of research findings, but will also improve the quality of normative prescriptions and thus (hopefully) reduce the exorbitant rate of new venture failures Successful empirical examination of the propositions in this chapter will entail adhering to recent calls by entrepreneurship researchers for the utilization of multi-level (e.g., Baum et al., 2001) and integrated (e.g., Eisenhardt & Schoonhoven, 1990) models to gain a better understanding of the determinants of new venture performance Individual-level factors (e.g., entrepreneur’s characteristics), firm-level factors (e.g., venture business plan, resources) and environmental-level factors (e.g., industry characteristics such as dynamism) will all have to be integrated in any meaningful empirical test of the propositions A compelling research effort would entail a longitudinal multi-industry study of nascent ventures beginning at the formative stages to a target event (such as first sale or IPO) Such a longitudinal approach addresses the damaging potential for 272 FRANCES FABIAN AND HERMANN ACHIDI NDOFOR survival bias (because the unsuccessful ventures will drop out) in relying on cross-sectional efforts In developing the propositions, we assumed that the various entrepreneurial processes were independent Future research will benefit from examining how the various entrepreneurial processes interact with each other in addition to interacting with the entrepreneurial and environmental contexts It could be, for example, that superior social capital from the successful networking of an entrepreneur may reduce the need for a formal business plan in seeking external financing A close relationship between an entrepreneur and key individuals who possess resources needed by the new venture (such as angel investors, venture capitalists and potential suppliers) provides an informal conduit through which the venture can access these resources This conduit may reduce or eliminate the necessity of a very formal business plan Furthermore, while we develop propositions on how the entrepreneurial and environment context would influence the effectiveness of various new venture processes, these relationships could be recursive Is it possible for new venture processes to shape or affect their contexts? If new venture processes are examined as iterative processes with feedback loops, then the possibility exists for these processes to shape their contexts For instance, it was noted that the process of undergoing the composition of formal business plans might improve the entrepreneur’s performance and ability (Shane & Delmar, 2004) Also, the notion of micro-level actions shaping macro-structure is also not new Within the sociology literature for example, Gidden’s (1984) structuration theory examines the process through which individual-level actions shape and change the structure of the institutional environment This is more likely to be the case in nascent industries (usually populated by new ventures) where the norms of competition, industry structure, etc have not become rigidly institutionalized Extending research by Hendershott (2004), perhaps periods of an inordinate reliance on venture capital could increase the dynamism of market shakeouts, for instance Thus, future research could benefit from taking our propositions one step further and examining the iterative relationship between context and process Finally, this chapter offers the opportunity to step back from the entrepreneurship literature and identify some of the pressing demands in our understanding of entrepreneurial processes As entrepreneurship educators as well as researchers, we realized that the variance in the contexts of our audience (entrepreneurs and soon-to-be entrepreneurs) necessitates a customized approach to prescribing entrepreneurial processes Entrepreneurial The Context of Entrepreneurial Processes 273 processes are more or less likely to lead to success based on the characteristics of the founding entrepreneur and the dynamics of the environment To the extent that the effectiveness of entrepreneurial processes is context-driven, then our prescriptions have to be adjusted accordingly While our science may tell us that in a sample of ventures the formulation of business plans may be related to improved new venture performance, we would be wise to recognize that perhaps some entrepreneurs and ventures may not be best suited to following the crowd One ‘‘size’’ certainly could not fit all! 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CORPORATE ENTREPRENEURSHIP AS A STRATEGIC ADAPTATION MECHANISM Fig depicts our model of corporate entrepreneurship as a strategic adaptation mechanism Strategic adaptation is an outcome of corporate entrepreneurship