The genesis of strategy in new ventures: escaping the constraints of founder and team knowledge

Although an entrepreneur's initial strategy choices have a critical effect on a new venture's survival, growth, and long‐term performance, few studies have explored how pre‐founding experience influences these choices. Founders who over rely on their historical industry experiences may simply replicate the strategies of legacy firms. In turn, little is known about how founders can break these experience‐based constraints, if they exist. In an empirical analysis of 120 prospective entrants in air transportation from 1995–2005 we find that a founder's past experience strongly constrains choices, and the effect depends on the form of experience and type of strategy choice. Diversity of experience, at the level of the founder and founding team, lessens these constraints. Our results have valuable implications for research in strategy and entrepreneurship. Copyright © 2011 John Wiley & Sons, Ltd.     

Towards a theory of ecosystems

Research Summary: The recent surge of interest in “ecosystems” in strategy research and practice has mainly focused on what ecosystems are and how they operate. We complement this literature by considering when and why ecosystems emerge, and what makes them distinct from other governance forms. We argue that modularity enables ecosystem emergence as it allows a set of distinct yet interdependent organizations to coordinate without full hierarchical fiat. We show how ecosystems address multilateral dependences based on various types of complementarities—supermodular or unique, unidirectional or bidirectional—which determine the ecosystem's value‐add. We argue that at the core of ecosystems lie nongeneric complementarities, and the creation of sets of roles that face similar rules. We conclude with implications for mainstream strategy and suggestions for future research. Managerial Summary: We consider what makes ecosystems different from other business constellations, including markets, alliances, or hierarchically managed supply chains. Ecosystems, we posit, are interacting organizations, enabled by modularity, not hierarchically managed, bound together by the nonredeployability of their collective investment elsewhere. Ecosystems add value as they allow managers to coordinate their multilateral dependence through sets of roles that face similar rules, thus obviating the need to enter into customized contractual agreements with each partner. We explain how different types of complementarities (unique or supermodular, generic or specific, uni‐ or bi‐directional) shape ecosystems and offer a “theory of ecosystems” that can explain what they are, when they emerge, and why alignment occurs. Finally, we outline the critical factors affecting ecosystem emergence, evolution, and success—or failure.     

The fog of feedback: Ambiguity and firm responses to multiple aspiration levels

This study examines firms' responses to performance assessments relative to multiple aspiration levels. We argue that comparisons of performance to multiple aspiration levels over time affects the interpretative clarity of feedback and, consequently, shapes a firm's responsiveness. We further conceptualize the relationship between performance relative to social and historical aspirations as ambiguous, inconsistent, and consistent performance feedback. Empirically, we examine the effects—on firms' responsiveness—of weak, negative, and positive correlations between performance relative to social and historical aspirations, where responsiveness is measured in terms of new product introductions. We find that both inconsistent and consistent feedback increase a firm's responsiveness, whereas ambiguous feedback dampens responsiveness. Our focus on this type of feedback ambiguity is novel, and it establishes the functional form of the relationship between feedback clarity/ambiguity and responsiveness. This paper augments the behavioral theory of the firm and research on performance feedback; it also extends previous work on ambiguity in strategic decision making. Copyright © 2014 John Wiley & Sons, Ltd.     

Toward a behavioral theory of real options: Noisy signals,bias, and learning

Research Summary: We develop a behavioral theory of real options that relaxes the informational and behavioral assumptions underlying applications of financial options theory to real assets. To do so, we augment real option theory's focus on uncertain future asset values (prospective uncertainty) with feedback learning theory that considers uncertain current asset values (contemporaneous uncertainty). This enables us to incorporate behavioral bias in the feedback learning process underlying the option execution/termination decision. The resulting computational model suggests that firms that inappropriately account for contemporaneous uncertainty and are subject to learning biases may experience substantial downside risk in undertaking real options. Moreover, contrary to the standard option result, greater uncertainty may decrease option value, making commitment to an investment path more effective than remaining flexible. Managerial Summary: Executives recognize the need to make uncertain investments to grow their business while mitigating downside risk. The analogy between financial options and real corporate investments provides an appealing method to consider the practical challenge of such investment decisions. Unfortunately, the “real options” analogy seems to break down in practice. We identify how a second form of uncertainty confounds real options intuition, leading managers to overestimate the value of uncertain investments. We present a behavioral real options model that accounts for both forms of uncertainty and suggest how uncertainty interacts with behavioral bias in the option execution/termination decision. Our model facilitates assessment of the conditions under which investments in uncertain opportunities are usefully considered as real options, and provides a means to evaluate their attractiveness.     

Decision making and uncertainty: The role of heuristics and experience in assessing a politically hazardous environment

Heuristics have long been associated with problems of bias and framing error, often on the basis of simulation and laboratory studies. In this field study of a high‐stakes strategic decision, we explore an alternative view that heuristics may serve as powerful cognitive tools that enable, rather than limit, decision making in dynamic and uncertain environments. We examine the cognitive efforts of senior decision makers of an inexperienced multinational, as they assessed a potential acquisition in a politically hazardous African country. They applied a diversity of heuristics, some with clear building block rules, to build small world representations of this very uncertain strategic context. More expert individuals drew on experiential learning to build richer representations of the political hazard environment. Copyright © 2014 John Wiley & Sons, Ltd.     

The role of managerial learning and interpretation in strategic persistence and reorientation: An empirical exploration

This study uses a managerial learning framework to build and test a model of the decisionmaking process that drives decisions to strategically reorient an organization. The model examines the effects of past performance, managerial interpretations, and top management team characteristics on the likelihood of strategic reorientation in two distinct environmental contexts. The results indicate that poor past performance, environmental awareness, top management team heterogeneity, and CEO turnover increased the likelihood of reorientation. There are some differences in the ways in which these variables affect reorientation across the two environmental contexts. Poor past performance was more strongly associated with reorientation in the stable environment than in the turbulent environment. The tendency to make external attributions for poor performance outcomes decreased the likelihood of reorientation in the turbulent environment, but not in the stable environment.     

Entrepreneurial strategy making and firm performance: tests of contingency and configurational models

This field study explores the nature of entrepreneurial strategy making (ESM) and its relationship with strategy, environment and performance. In the first phase, we assess the independence of entrepreneurially oriented strategy-making processes through factor analysis. The second phase, using moderated hierarchical regression anlaysis, investigates the relative predictive power of two approaches for exploring the ESM–performance relationship: contingency and configuration. Findings from a sample of 32 firms competing in a wide variety of industries indicate that configurational approaches that align ESM, strategy, and environment have greater predictive power than contingency approaches. However, not all high performing configurations are consistent with normative theory. Thus, alternate theories linking entrepreneurial strategy making to competitive advantage should be developed and tested. © 1997 John Wiley & Sons, Ltd.     

The strategy/governance structure fit relationship: theory and evidence in franchising arrangements

Despite widespread recognition of the importance of strategy–structure fit, e.g., diversification and divisionalization, research has yet to address the possibility of similar fit issues for other structural forms of organization, such as the choice of franchised vs. company‐owned governance structures. In this study, we depart from the usual debates regarding the superiority of one governance structure over another and argue that performance differences between these two alternative governance structures may be attributable more to the matching of one structure with a correspondingly appropriate strategy. Specifically, we posit that stores will act in fit‐enhancing ways by pursuing strategies that are more congruent with their governance structure; i.e., that franchised stores, with their more flexible and decentralized structures, will be more likely to pursue strategies that emphasize flexibility and local adaptation, whereas company‐owned stores will tend to pursue strategies that emphasize predictability and control. We also argue that those stores acting in such a manner will enjoy subsequent performance benefits. We develop these ideas around strategy/governance structure fit and test our hypotheses using longitudinal data from over 6000 stores within one of the biggest U.S. restaurant chains from 1991 to 1997. Copyright © 2004 John Wiley & Sons, Ltd.     

Towards a model of dynamic capabilities in innovation-based competitive strategy: Insights from project-oriented service firms

With the growing significance of services in most developed economies, there is an increased interest in the role of service innovation in service firm competitive strategy. Despite growing literature on service innovation, it remains fragmented reflecting the need for a model that captures key antecedents driving the service innovation-based competitive advantage process. Building on extant literature and using thirteen in-depth interviews with CEOs of project-oriented service firms, this paper presents a model of innovation-based competitive advantage. The emergent model suggests that entrepreneurial service firms pursuing innovation carefully select and use dynamic capabilities that enable them to achieve greater innovation and sustained competitive advantage. Our findings indicate that firms purposefully use create, extend and modify processes to build and nurture key dynamic capabilities. The paper presents a set of theoretical propositions to guide future research. Implications for theory and practice are discussed. Finally, directions for future research are outlined.     

The marketing strategy of a project-based firm: The Four Portfolios Framework

The purpose of this paper is to address the simultaneous management of multiple business relationships and multiple projects in the marketing strategy of the project-based firm. The research question is: How can the essence and interdependencies between the portfolios of relationships and projects be conceptualized as the marketing strategy of a project-based firm? We address this question by constructing a framework including two portfolios of relationships and two portfolios of projects, and by discussing how these portfolios may be interrelated. Combining the approaches of relationship management in project marketing on the one hand and the management of project portfolios on the other contributes a novel viewpoint to project marketing.     

SBU strategy and performance: The moderating effects of the corporate-SBU relationship

This study suggests that the link between an SBU strategy and performance is moderated by the SBU's relationship with corporate management. Information processing arguments suggest that this relationship, typically characterized by general measures of centralization, has been inappropriately conceptualized in prior research. An alternative view, one that considers which decisions and activities should be controlled by the individual SBU, is proposed and tested. The results of a study of 496 SBUs indicate that SBU performance is enhanced when: (1) SBUs with an external strategic orientation control environmental monitoring activities and strategic decision analysis, and (2) SBUs with an intraorganizational orientation control those activities relating to operations. Weaker SBU performance is associated with SBU control over those functions and activities not central to the SBU's business strategy. Therefore, it is suggested that the corporate-SBU relationship can either facilitate or inhibit the implementation of the SBU's intended strategy.     

The routine may be stable but the advantage is not: competitive implications of key employee mobility

We extend our theoretical understanding of the effect of key employee mobility on organizational performance. We find that when an organization with an advantageous set of routines loses a key employee to a competitor, the advantaged organization's competitive position is reduced vis‐à‐vis the hiring competitor. What is more interesting is that we also show that the diffusion of an advantageous set of routines through the mobility of key employees may affect competitive advantage in at least two additional ways. Our findings result from an analysis of 412 competitive events between the San Francisco 49ers and all other teams in the National Football League during the 24‐year period when the San Francisco 49ers perfected the routines of a strategic innovation that has become known as the West Coast Offense. First, we find that there is a loss of advantage for the organization when competitors increasingly compete against additional organizations that hired key employees from it. Second, we find that there is a loss of advantage for the organization when competitors expect future competition against additional organizations that hired key employees from it. Our results challenge the traditional argument that socially complex routines create sustainable competitive advantages because they are not easily imitated and do not rely on any single individual. Instead, we show that routines are stable to the loss of key employees, but the advantages derived from them are not. Copyright © 2009 John Wiley & Sons, Ltd.     

The economic modeling of strategy process: ‘clean models’ and ‘dirty hands’

We argue that our model of learning in alliances ( Khanna, Gulati and Nohria, 1998 ) is an economic model of strategy process. We discuss implications of this view for the strategy process vs. content debate, for the appropriate testing of models of strategy process, and for the role of economics in helping understand strategy process. We propose that the ‘clean models’ from economics and ‘dirty hands’ of traditional process inquiries offer research designs that are complementary rather than incompatible ( Hirsch, Michaels and Friedman, 1987 ). Copyright © 2000 John Wiley & Sons, Ltd.     

The capital structure implications of pursuing a strategy of innovation

In this paper, we argue that consideration of firm strategy can help illuminate the choices managers make between debt and equity financing. Within an industry, the form of competition that each firm chooses will determine the strategic value to the firm of maintaining financial slack. Our empirical analysis yields strong support for the proposition that financial slack should be a particularly critical strategic imperative for firms pursuing a competitive strategy premised on innovation. We also demonstrate that firms pursuing such a strategy that fail to recognize the value of financial slack are likely to perform poorly. Copyright © 2003 John Wiley & Sons, Ltd.     

Top management team incentive heterogeneity,strategic investment behavior,and performance: A contingency theory of incentive alignment

Research summary : We develop and test a contingency theory of the influence of top management team (TMT) performance‐contingent incentives on manager–shareholder interest alignment. Our results support our theory by showing that although TMTs engage in significantly higher levels of acquisition investment when their average incentive levels increase, investors' responses to those large investments are generally negative. More importantly, however, we further find that within‐TMT incentive heterogeneity conditions that effect, such that investors evaluate TMTs' large acquisition investments more positively as the variance in those top managers' incentive values increases. Thus, within‐TMT incentive heterogeneity appears to increase manager–shareholder interest alignment, in the context of large acquisition investments. Managerial summary : We find that as the average value of TMTs' incentives increase, relative to their total pay, they invest more in acquisitions and investors' respond negatively to the announcement of those deals. However, we further show that investors respond more positively to acquisitions announced by TMTs whose members' incentive values vary (some TMT members hold higher incentives and others hold lower). Results imply that when TMT members hold differing incentives levels, they approach investments from divergent perspectives, scrutinize those investments more heavily, and make better decisions, relative to TMTs with similar incentives. They also suggest that boards seeking tighter manager–shareholder interest alignment may benefit from introducing variance into TMT members' incentive structures, as doing so appears to create divergent preferences that can improve team decision making. Copyright © 2016 John Wiley & Sons, Ltd.     

Fast and expensive: the diffusion of a disappointing innovation

Firms seek to imitate innovations that yield competitive advantage, but imitation can presage disappointment when the innovation value is below expectations. Empirical research has only rarely examined the diffusion of such disappointing innovations, and it is not known whether negative information from past adopters will halt the diffusion process. Likewise, the effect of heterogeneity in the innovation value on its spread has not been systematically investigated. Here, a unique dataset on a disappointing innovation is used to examine how adoption decisions are imitated, but actual use and subsequent abandonment can yield information that reduces the likelihood that others will adopt. The findings show imitation of the adoptions of other firms, but avoidance of the innovation once these firms start using the innovation or abandon it. Copyright © 2011 John Wiley & Sons, Ltd.