Strategy is the primary building block of competitive distinctiveness and advantage. As an organizational process, this encompasses a range of activities in which firms engage to establish and sustain a competitive advantage. Compared to established firms, entrepreneurial firms may face many challenges that diminish their likelihood of success and survival, thus, research on entrepreneurial strategy largely focuses on the particular challenges of entrepreneurs.
Strategy is a primary building block of competitive distinctiveness and advantage. (Casadesus-Masanell and Ricart 2011) Classical arguments characterize strategy formulation as an organizational-level process that encompasses a range of activities firms engage in to establish and sustain a competitive advantage. These activities include market and industry analysis, product/service design and development, operations and technology management, customer development, and other varied aspects of the new firm’s culture, shared value system, and vision (Hart, 1992). Through the years, scholars have devoted significant effort and academic rigor to developing integrative frameworks of strategy-making processes (Ansoff, 1961). (Andrews 1971) (Chandler 1962) (Mintzberg 1978) (Mintzberg 1987) (Porter 1991) (Porter 1996) (Rumelt 1974) (Rumelt 1984)
Compared to established firms, entrepreneurial firms face many challenges that diminish their likelihood of success and survival. (Stinchcombe and March 1965) Specifically, entrepreneurs lack resources; they may not have well-accepted markets for their products and services; and they often operate in highly ambiguous contexts. Research on entrepreneurial strategy is largely focused on dealing with these unique challenges. For example, scholars have shown that entrepreneurs either undertake resource acquisition strategies to convince other organizations to partner with them or give them money, or they recombine rejected elements from their environments to ‘make do’ within constraints. They have also shown that entrepreneurs enact market creation strategies to draw attention to their novel activities, establish infrastructures for economic exchange, and help people understand why a new market is warranted. Finally, they engage in learning/adaptation strategies to deal with ambiguity so they can move quickly past less attractive opportunities and then select and exploit more valuable ones.
While there has been significant progress in this field, research has paid scant attention to: the drawbacks of resource acquisition strategies (when do they backfire and any unintended consequences), how entrepreneurs position themselves (in the market they are creating), and how they develop new business models (as opposed to how business models impact performance).
A subfield of strategic management, entrepreneurial strategy is premised on three overlapping assumptions: (1) entrepreneurial firms differ from other firms in important ways; (2) these differences affect both how entrepreneurs compete and the sources of their competitive advantage, and (3) theories and prescriptions derived from studying strategy in established firms may not apply to entrepreneurial firms. What are these differences and how do they matter for strategy?
Entrepreneurial strategy is affected by initial endowments. Unlike established firms, entrepreneurial firms often begin with few resources, (Hallen and Eisenhardt 2012) and face many challenges that reduce their chances of survival and success. (Stinchcombe and March 1965) As a result, entrepreneurs attempt to deal with resource deficiencies such as having few partners, limited financial capital, and no significant market presence in several ways. First, they seek to form partnerships with established firms to obtain: financial capital, (Katila Rosenberger and Eisenhardt 2008) mentoring related to about business models and commercializing technology, (Hsu 2006) networks for accessing future resources, (Ozcan and Eisenhardt 2009) (Stuart, Hoang and Hybels 1999) and social standing. (Gulati and Higgins 2003) (Pollack and Gulati 2007) Second, they try to secure financial resources from external parties. For example, entrepreneurs carry out a variety of low-cost actions designed to convince individuals and established organizations to invest in their business. (Martens, Jennings and Jennings 2007) (Lounsbury and Glynn 2001) (Zott and Huy 2007) Third, they ‘make due’ with the realities of their resource-constrained environments. For example, they engage in improvisation and bricolage, recombining elements that others have ignored in order to get by (Powell & Baker, 2014). (Baker, Miner and Eesley 2003) (Baker and Nelson 2005) Overall, these strategies for dealing with resource constraints center on solving the problem of disadvantaged initial endowments.
Entrepreneurial strategy is also affected by the fact that markets may not yet exist. Unlike for established firms, entrepreneurial firms may not have well-accepted markets and customers for their products and services. Venkataraman has argued that the nature of entrepreneurship involves “understanding, how, in the absence of markets for future goods and services, these goods and services manage to come into existence.” (Venkataraman 1997) This has several implications for entrepreneurial strategy because it means that markets must get created where none existed previously. Here, researchers have argued that market formation occurs when skilled entrepreneurs collectively mobilize followers, challenge incumbent firms in related markets, and free up space for their markets. (Weber, Heinze and DeSoucey 2008) (Sine and Lee 2009) They have also shown how pioneers use rhetoric strategically and persuasively to gain powerful endorsements and convince other market participants that existing markets are inadequate and new ones are warranted. (Hiatt, Sine and Tolbert 2009) (Khaire and Wadhwani 2010) Navis and Glynn’s study of satellite radio as a new market category examined radio executives’ narratives that enabled audiences such as customers, advertisers, and the media to make sense of the new category. (Navis and Glynn 2010) Similarly, Santos and Eisenhardt identified strategies such as stories, templates, and labels, by which entrepreneurs tried to define the boundaries of nascent technology markets. (Santos and Eisenhardt 2009) Resource constrained entrepreneurs try to connect with broader societal themes and gain attention for their novel activities. (Aldrich and Fiol 1994) (Rindova, Ferrier and Wiltbank 2010) Overall, these strategies are used by entrepreneurs to create the actual infrastructure and cognitive understandings for new markets to emerge and grow.
Entrepreneurial strategy is also affected by the nature of the opportunities they encounter. Unlike firms in well-established markets, entrepreneurial firms operate in ambiguous contexts marked by fast-moving flows of opportunities. (Chen, Katila, McDonald, and Eisenhardt 2010) They face uncertain technologies, unclear products and features, and extreme ambiguity about opportunities and customer demand. (Benner and Tripsas 2012) Therefore, effective entrepreneurial strategies are focused on learning and adapting to ambiguous environments so entrepreneurs can select and exploit the most valuable opportunities. (Rindova and Fombrun 2001) (Gavetti and Rivkin 2007) For example, entrepreneurs constantly change their strategies and structures to adapt to changing market circumstances (i.e., “continuous morphing”), (Rindova and Kotha 2001) develop heuristics (i.e., “simple rules”) for pursuing growth opportunities, (Bingham and Eisenhardt 2011) and test out product and service offerings with customers (i.e., “purposeful experimentation”). (Murray and Tripsas 2004) Rather than focus on stock price or market share, they often emphasize more immediate strategic objectives such as business model design (Zott and Amit 2007) and achieving product market fit. (Zott and Amit 2008) Collectively, entrepreneurs employ these strategies to resolve ambiguities and capture fleeting market opportunities before they run out of money.
Time plays an important, albeit less understood, role in this process of opportunity recognition and capture. For example, research on time suggests that people respond negatively when gains are delayed yet respond positively when losses are delayed. (Frederick, Loewenstein and O’Donoghue 2002) Because entrepreneurs base decisions partly on their expectations about future outcomes, it is important to understand how they process information about time. (Ancona, Goodman, Lawrence and Tushman 2001) Like other investment decisions, (Souder and Bromiley 2012) opportunity exploitation involves near-term choices that are expected, yet not guaranteed, to yield financial returns at various points in the future. In this case, the timing of the expected returns shapes entrepreneurs’ subjective valuation of, and preferences for, those returns. This is a particularly important challenge for new ventures because these firms typically lack a track record of performance.
Finally, researchers in a related stream of literature try to understand why established firms do not exploit all profitable opportunities. (Garvin 1983) (Anton and Yao 1995) (Freeman and Engel 2007) (Cassiman and Ueda 2006) (Klepper and Thompson 2010) The new firm formation and the ability of existing firms to exploit all profitable ideas are inherently connected. We are only starting to understand these interdependencies. Existing work has proposed that many opportunities, albeit profitable, are not used by existing firms for strategic reasons. (Cassiman and Ueda 2006) This may be because these opportunities lack complementarities with the existing activities of the firm. Other explanations revolve around inefficiencies and frictions that exist within established firms. (Freeman and Engel 2007) (Hellman 2007) (Klepper and Thompson 2010) Established firms may be underutilizing knowledge and ideas because they inefficiently undervalue them. (Klepper and Thompson 2010) Currently, we lack a good understanding of which theoretical explanation is more pronounced in reality. The interaction between the established firms and their ability to innovate and introduce new products and entrepreneurial firms that compete with established players remains a growing area of research with a significant future potential.
The traditional theory of entrepreneurship has focused on the discovery and exploitation of opportunities. Opportunities were theorized to reside at the individual-opportunity “nexus” – intersection of personal passion, commitment, capabilities, skills and attractive opportunity (which is assumed to be, at least partially, objective and exogenous). (Shane 2000) (Shane and Venkataraman 2000) (Shane 2003) However, significant debate has emerged about the nature of opportunities – i.e., whether they are objective or subjective. (McMullen, Plummer and Acs 2003) Similarly, scholars have focused on whether and which opportunities are discovered or created by entrepreneurs. (Alvarez and Barney 2007) More recently, some scholars have challenged whether the notion of entrepreneurial opportunities is useful as a theoretical construct at all and suggested abandoning it and focusing on (entrepreneurial) judgment. (Foss and Klein 2012)
Decisions vs. Judgments
While strategy formulation may be an organizational-level phenomenon, even in an entrepreneurial setting, it reflects judgments and decisions by individuals and thus reflect interactions between the human information-processing system that guides judgmental decision making and the social and economic context in which these judgmental decisions are made. More specifically, while normative theory suggests that entrepreneurs should optimize their cognitive resources to make informed, rational judgments, descriptive theory and evidence suggests that they do otherwise (e.g., Busenitz and Barney; Simon, Houghton, and Aquino). (Busenitz and Barney 1997) (Simon, Houghton and Aquino 2000) Nevertheless, many entrepreneurship scholars treat judgmental decision making as a black box, examining its antecedents and effects without examining the process itself, in part because judgments are subjective, tacit, and difficult to articulate (e.g., Casson and Wadeson, 2007; Foss et al., 2007). (Shane 2003) Others treat judgmental decision making as an organized set of linear processes (e.g., Campbell, 1992; Herron and Sapienza) (Herron and Sapienza 1992) or treat judgments and decisions as interchangeable constructs (e.g., McKelvie et al.). (McKelvie, Haynie and Gustavsson 2011) However, judgments differ from decisions in important ways. Judgment refers to “assessing, estimating, and inferring what events (outcomes) will occur and what (one’s) evaluative reactions to those outcomes will be”. (Hastie 2001)
Decisions, by contrast, refer to the choice of one or more courses of action over others. Hastie describes decisions as “situation-behavior combinations” that involve “(a) courses of action (choice options and alternatives); (b) beliefs about objective states, processes, and events in the world (including outcome states and means to achieve them); and (c) desires, values, or utilities that describe the consequences associated with the outcomes of each action”. (Hastie 2001) In this sense, judgmental decision making describes the entire course of identifying, evaluating, and selecting a course of action involving means-end combinations that one could bring to market. Action refers to the resulting “behavior in response to a judgmental decision under uncertainty”. (McMullen and Shepherd 2006) Because entrepreneurs face limits in their ability to conduct exhaustive analyses and to know with certainty ex ante the benefits of those analyses (Simon, 1955), (Fiske and Taylor 1991) they rely on sufficiency judgments to guide what strategies they should use, how much effort they should invest, and whether and, if so, when they should act. But we know even less about how sufficiency judgments at the individual-level guide and/or inform strategies new firms enact at the organizational-level.
A possible starting point for theory to explain strategy formulation in an entrepreneurial setting is to consider how judgments and decisions about the given choice context form and specifically to what extent to situational factors (i.e., information congruency/ambiguity, complexity, time/speed, etc.) and individual factors (i.e., cognitive capacity, information processing strategy, task relevance, motives/intentionality, etc.) influence (shape?) judgmental decision outcomes that drive entrepreneurial strategy. In this context, judgmental decision making reflects a set of dynamic, loosely coupled, recursive, and discontinuous cognitive and behavioral processes rather than an orderly, linear, and rational process that assumes objective and comprehensive scrutiny of information about a given choice context. Understanding what motivates and gives rise to the effort that entrepreneurs devote to this “messy” process would provide at least two important contributions. First, understanding how individual and situational conditions affect reasoning in this context will help show the extent to which entrepreneurs’ processing of information about a given choice context is influenced by the confidence judgments that drive effort and by the conclusions they hope to achieve. Second, evidence that individual cognitive factors have an intervening effect on judgmental decision outcomes through its influence over the processes that drive reasoning has important implications for understanding the judgments and decisions of entrepreneurs in other settings where uncertainty makes it difficult to know what they truly believe.
We are starting to have a good understanding of the upsides of partnering for entrepreneurial firms, but have limited understandings of the risks or drawbacks. By now, researchers have also identified several strategies by which entrepreneurs create new markets, but have yet to explore what strategies they use to try to “stand out” in the markets they are creating. Research has also shown that novel business models drive performance in entrepreneurial firms, and while there have many attempts to define or categorize business models and a few investigations of their performance implications, there has been almost no attention to how firms develop one.
Perhaps the most fruitful research examining entrepreneurial strategy will be research that crosses levels and time. Indeed, whereas firm- and industry-level factors influence key performance outcomes for all firms, Short, McKelvie, Ketchen, and Chandler found that young firms experience substantially greater year-to-year changes in performance than established firms. (Short, McKelvie, Ketchen and Chandler 2009) While such irregularity may reflect sensitivity to changes in firm effects such as resources or strategic choice, it may also suggest the influence of environmental contingencies on the saliency of these relationships. Moreover, extant research provides empirical evidence that time conditions new ventures’ ability to adapt. Specifically, the liability of newness that imposes greater capacity for change upon young firms declines over time (Venkataraman & Van de Ven, 1998). (Bamford, Dean and Douglas 2004) (Gresov, Haveman and Terence 1993) This suggests that cross-sectional and longitudinal differences in firm- and industry-level conditions may create very different performance expectations for new ventures. As a result, a better understanding of these relationships requires investigations that cross levels and time simultaneously