Entrepreneurial Firms And Strategic Decisions

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The discussion of the discovery and exploitation of opportunities expands often from individuals' actions to the actions of firms and organizations. Gartner (1985, 1990) argues that entrepreneurship is about "organizing" and that the entrepreneurial process is more likely to be understood through the study of firms' behavior. Thus, research on the characteristics, context and actions of the individual entrepreneur leads to research into the nature, antecedents and effects of firm-level entrepreneurial activities.

The identification of entrepreneurial behavior at the firm level is a difficult task though some consensus exists around the idea that entrepreneurship is a resource for the firm and, when properly exploited, contributes to the firm's profitability and competitive position. In recent years, the literature in industrial organization, strategy, and organization theory has moved from discussing how to re-engineer firms to how to "re-invent" them, a process in which firms are continuously refocused as they search for new opportunities (Oster, 1999). In this area, entrepreneurship becomes a strategic capability of the firm and the integration between entrepreneurship, industrial organization and strategy occurs naturally (McGrath & MacMillan, 2000). Along similar lines, Barney (2002) defines the field of strategy as the study of firms' theories about how to gain competitive advantages. Indeed, one way for firms to earn economic profits is to see and seize new lucrative opportunities before entry has accomplished its profit leveling function in the industry. Firms exhibiting this ability are entrepreneurial firms. In particular, entrepreneurial firms may be described as those exhibiting openness to new ideas, the willingness to commit resources to the exploitation of these ideas, and the ability to match opportunities to their core competencies (Oster, 1999).

The bulk of this research belongs in the realm of organization theory and of the theory of the firm. Although strong links exist, a review of works in these areas is beyond the scope of a survey on entrepreneurship studies. An exception, however, must be made for recent studies on corporate entrepreneurship. Research on corporate entrepreneurship tries to identify organizational and environmental factors that affect a company's entrepreneurial activities (Peterson & Berger, 1972; Zahra, 1991). Earlier researchers in this area give special attention to the process by which established firms venture into new business fields and discuss the factors that influence the success of corporate ventures (Burgelman, 1983a, b, c). More recently, however, researchers have begun examining the linkages between environmental, strategic, and organizational variables, and a company's entrepreneurial activities (Miller, 1983).

Stopford and Baden-Fuller (1994) summarize how the strategy literature identifies three types of corporate entrepreneurship. The first type is the creation of new ventures within an existing organization. The second type is the broader activity associated with transforming the structure of an existing firm. The third type is found when a firm is able to change the competitive environment of its industry, for example, by introducing a significant innovation in product or process. Finally, additional works distinguish between entrepreneurial disposition (Covin & Slevin, 1988; Miller, 1983), orientation (Lumpkin & Dess, 1996) and actions (Zahra, 1995) in the context of corporate competitive behavior.

Clearly, it is not easy for a firm to behave "entrepreneurially." Organizations, especially large ones, tend to be characterized by significant inertia. It is a human tendency to shape expectations about the future on the basis of the past and, as a result, to create incentives that promote an entrepreneurial attitude at the level of organization is difficult. To behave entrepreneurially, in addition to a flexible organizational structure, firms need a variety of tangible and intangible assets. Stevenson and Jarillo (1990), for example, focus on the principal-agent issues related to the fact that, for a firm to behave entrepreneurially, management is dependent on other individuals and groups within the firm and discuss to the importance of firm culture. Guth and Ginsberg (1990) develop a more specific argument and claim that firm-level entrepreneurship embodies the two key components of innovation and new venture creation. Among other things, firms need the ability to match perceived opportunities with their core competencies and the willingness and ability to commit resources to the exploitation of those opportunities. On the latter point, the literature in strategy and organization theory has become increasingly aware of the importance of heterogeneous firm assets in achieving a firm's sustainable competitive advantage. In particular, the role of entrepreneur-ship as one of the heterogeneous assets available to the firm has been addressed in the context of the resource-based and transaction costs views of the firm (Alvarez, 2003).

Barney (1986) and Dierickx and Cool (1989) were the first to draw attention to the importance of tacit, socially complex, assets, and to argue that the behavior of the entrepreneurial firm is best understood using the resource-based and the transactions cost views of the firm (Alvarez, 2003). The resource-based approach to firm behavior suggests that the returns earned by firms are largely attributable to the resources they held. Specifically, the resource-based view implies that firm resources, capabilities, and competencies facilitate the development of sustainable competitive advantages (Barney, 1986, 1991; Hitt & Ireland, 1985; Rumelt, 1991). The intuition is that strategic behavior is contingent and dependent upon the specific resources available to a firm and that competitive advantages are achieved when firms are successful in leveraging the resources. Winter has argued that an organization's knowledge, for example, is a profitable strategic asset if meets three criteria: (1) the knowledge is tacit rather than articulate; (2) the knowledge is not observable in use; and (3) the knowledge is complex rather than simple (Winter, 1987). But if it is true that a firm's competitive position is defined by its unique resources and their continuous adjustment over time in response to competitive pressures, then entrepreneurship and resource heterogeneity become complementary (Alvarez, 2003). Kirzner (1997) too argues that heterogeneous resources are a necessary condition for entrepreneurial behavior to exist. In addition, entrepreneurial opportunities exist if, and only if, individuals perceive resources as having different values, and if individuals with high perceived values are willing and capable of mobilizing the unexploited potential (Casson, 1982; Kirzner, 1979).

While the resource-based view of the firm focuses on the role played by heterogeneous resources on entrepreneurial behavior, the transaction costs approach to the firm provides a way to analyze the relationship between entrepreneurial behavior and firm profitability. Both Kirzner (1979) and Schumpeter (1934) describe the entrepreneur as an individual capable of improving upon the current allocation of resources by directing inputs into certain processes rather than others. In this context, the role of the entrepreneur is to use his knowledge to redistribute undervalued resources thereby improving allocative and productive efficiency. The transactions cost approach addresses the production and organizational activities of the firm as unique coordination activities in which entrepreneurial actions result in superior firm performance and a potential source of competitive advantage.

Coase (1937) suggests that as a firm's size increases, the costs of organizing additional internal transactions rise and, as a result, the returns to entrepreneurial behavior decrease. Thus, Coase (1937) attributes to the entrepreneur the role of coordinator of production within the firm. The need for coordination arises from the fact that the internal allocation of resources is not subject to the discipline imposed by the market. The transaction cost view illustrates how, as the size of the firm increases, the critical role played by the entrepreneur is lost because the knowledge the entrepreneur possesses about the resource structure within the firm is diluted. Williamson (1975, 1985) develops this point further and argues that a primary role of the firm is to economize on transaction costs and that, as a result, innovation is more likely to occur in smaller than larger firms though larger firms are more effective at manufacturing and distributing innovations (Oster, 1999).

Unfortunately, no general agreement exists on what makes a firm entrepreneurial. Even more, no general agreement exists on the role played by entrepreneurship on firm profitability. Jennings and Seaman (1994), for example, argue that there may be no performance differences between entrepreneurial and conservative firms. Although it is easy to see that first-mover firms that incur the greatest risk and expenditure on innovative activities are often rewarded in the marketplace, it is also true that firms may enjoy greater long-term benefits from imitation strategies than from high levels of innovation (Nelson & Winter, 1982).

As the discussion about entrepreneurship progresses and moves from the individual to the firm level, the question of the potential aggregate effects of entrepreneurial behavior arises. Is more entrepreneurship desirable? Is there a relationship between entrepreneurial behavior and economic growth? Recent empirical studies have shown that economic activity in the 1980s shifted from large firms to small firms (Acs & Audretsch, 1993; Carlsson, 1992) and that the amount of entrepreneurial activity differs significantly across countries and across different regions of the same country (Reynolds et al., 2001).

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