This research investigates the evolution of venture opportunities, from recognition forward through the venture opportunity exploitation process. I formally test and reject the opportunity exploitation invariance hypothesis. Empirical results indicate that exploiting an innovative venture opportunity is systematically different from exploiting an equilibrium venture opportunity. Data in this research comes from the Swedish panel study of business start-ups—a random sample of Swedish nascent entrepreneurs. I study individual variation in the opportunity exploitation process using Longitudinal Growth Modeling.

The purpose with this research is to investigate whether the opportunity exploitation process is systematically different for different types of venture opportunities. The two types of venture opportunities that are investigated are innovative opportunities—defined as opportunities with routines and competencies varying significantly from those of existing organizations (Schumpeter, 1934; Picot et al., 1989) versus equilibrium opportunities with routines and competencies varying imperceptibly from those of existing organizations (Arrow, 1974; Aldrich and Kenworthy, 1999). A venture opportunity is defined as a perceived opportunity to profitably create future goods and services (Shane and Venkataraman, 2000). Essentially, a venture opportunity consists of venture specific information about change in supply and demand (Hayek, 1945). Two types of economic change may explain venture opportunity variation. The first type of economic change expresses a creative aspect, which originates developmental innovative venture opportunities. The second type of economic change expresses an optimizing aspect, which generate equilibrium adjustments in the form of equilibrium venture opportunities (Knight, 1921; Hayek, 1945; Kirzner, 1973). Two kinds of indeterminism arise from economic change, one from the actor’s limited skill in computation, and the other from the phenomenon’s inherent uncertainty. The former kind of indeterminism, characterizing market equilibrium dynamics, is at least heuristically captured in economics, by Frank Knight’s (1921) notion of risk. For example, when the different plans of individuals are mutually compatible and it would be possible to calculate the odds of surviving (Cf. Hayek, 1945). The latter kind of indeterminism, expressing innovativeness, is analogous to Knight’s notion of uncertainty. The properties of the subject are unknown, and exploiting such, a venture opportunity means going into the unknown. Based on this argument, the overall hypothesis in this study is that exploiting innovative venture opportunities are systematically different than exploiting equilibrium venture opportunities.

The Venture Exploitation Process

Building on Weick’s (1979) theory of organizing, I study the venture opportunity exploitation from an evolutionary perspective. The venture exploitation process starts with the discovery of an opportunity to use resources (e.g., capital, labor, and materials) differently than they are currently being used (Shane and Venkataraman, 2000). However, the venture is not created instantaneously, but develops through a gestation period. During which enterprising actors engage in venturing activities such as the acquisition of the requisite competences and resources to realize the venture opportunity’s commercial value (Teece et al., 1997). Organizing gestation activities successfully may lead to the creation of a new firm (Carter et al., 1996; Delmar and Shane, forthcoming). Theory suggests that exploiting equilibrium venture opportunities will be different from exploitation innovative venture opportunities because the latter activity involves the creation of new transactions and the former activity involves existing market transactions (Arrow, 1974). Actors pursuing equilibrium venture opportunities do not differ from each other in terms of attributes and the actor serve no other purpose than that of the optimizing rational manager (Hayek, 1945; Kirzner, 1973). Population knowledge concerning products and markets is widely available. Hence, equilibrium venture opportunities will suffer less from “liability of newness” (Stinchcombe, 1965). This implies that exploiting equilibrium venture opportunities should be a shorter and more straightforward process.

On the other hand, innovative venture opportunities represent a particular form of entrepreneurial behavior in which individuals create or are among the first to enter a new product-market arena that others have not yet recognized or actively sought to exploit. By entering this unexploited arena, the pursuing actors hope to gain first mover advantage and some basis for sustainable competitive advantage (Schumpeter, 1934; Kirzner, 1985). Innovative venture opportunities suffer more from ”liability of newness” because there is no common knowledge base. Therefore, more activities are needed to make the new venture more reliable and increase legitimacy with important stakeholders (Hannan and Freeman, 1984). This argument leads to the first formally stated hypothesis.

Hypothesis 1: Exploiting innovative venture opportunities includes more legitimating activities than does exploiting equilibrium opportunities.

In order for venture legitimating activities to be effective, they need to be reinforced by other actors. Behaviors that operate on the environment to produce effects that strengthens (reinforce) them are more likely to occur in the future (Skinner, 1971). Two types of reinforcement are important for enterprising actors. Informational reinforcement is symbolic, usually mediated by the responsive actions of others. It is verbal and mediated through other people or through one-self’s assessment of current behavior (Foxall, 1997). Informational reinforcement is important early in the exploitation process where no product or market exists only intentions (Katz and Gartner, 1988). Enterprising actors need to formulate and legitimate an idea and not an established product or service. If this idea is socially reinforced, the exploitation process is more likely to advance. This argument leads to the second hypothesis.

Hypothesis 2: The relationship between informational reinforced behavior and the exploitation process is significantly positive for innovative opportunities but not for equilibrium opportunities.

If the opportunity is found to be legitimate, enterprising actors are likely to engage in more venturing activities such as the acquisition of the requisite competencies and resources to realize the venture opportunity’s commercial value (Teece et al., 1997). This process of organizing is more instrumental and strengthened by utilitarian reinforcement. Utilitarian reinforcement consists in practice of the entrepreneurial behavior that could be reported or observed. It is a functional benefit, instrumental in scope, consisting in it and for it self (Cf. Foxall, 1997). From a resource perspective, utilitarian reinforcement is more concrete and consists of specific resources needed to exploit the venture opportunity. To get access to resources and to gain legitimacy for their venturing activities, actors develop social networks (Stinchcombe, 1965). Network resources are then used to establish successful new ventures (Burt, 1992). However, theory gives little advice on when, where and how utilitarian reinforcement affect the exploitation process over time (Lawrence, 1997). Therefore, the third hypothesis is general in nature. Instead, empirical results may reveal differences between opportunity types.

Hypothesis 3: Positive utilitarian reinforcement will have a positive impact on the exploitation process for both innovative and equilibrium opportunities.

Informational and utilitarian reinforcement help us understand the accumulation of venture activities over time. In addition to this, knowledge explains why certain actors are more suited to discover and exploit different types of venture opportunities (Shane and Venkataraman, 2000; Shane, forthcoming). Knowledge is cumulative and involves the assimilation of complementary knowledge from other sources (Dosi, 1982; Teece, 1992). Knowledge can be tacit or codified (Polyani, 1966). Tacit knowledge can be shared among people but not easily articulated. The most likely sources of tacit knowledge are previous work experience and advice from experts (Vesper, 1996). When no blueprint is available, as in innovative venture opportunities, exploiting actors become more efficient as experience is gained (Teece, 1998). Codified knowledge, on the other hand, is easier to share and is effectively transmitted through text media. Formal education may act as a complementary source of knowledge that might be helpful in marshalling needed resources in the exploitation process (Teece, 1998). An education may improve enterprising actors’ information processing skill, and enhance actors’ capacity to access and assess venture specific information, especially in situations with well-diffused population knowledge. This argument leads to the fourth and fifth hypotheses.

Hypothesis 4: The relationship between tacit knowledge and the exploitation process is significantly positive for innovative opportunities but not for equilibrium opportunities.

Hypothesis 5: The relationship between codified knowledge and the exploitation process is significantly positive for equilibrium opportunities but not for innovative opportunities.

It is not enough for enterprising actors to formulate strategies based on the possession of valuable and rare resources. To be competitive, resources need to be costly to imitate. Actors can use their knowledge base to implement strategies that will be costly or impossible for other to imitative (Barney, 1997). Successful strategies are also assumed contingent on the opportunity. The “specialist” perspective maintains that opportunity-exploiting actors should seek a niche in the marketplace where they can avoid direct competition with already established firms. Accordingly, new firms lack resources for effective organizational learning, and this “liability of newness” (Stinchcombe, 1965) limits the firms’ ability to compete because of price (Deeks, 1976). Advocates of this perspective caution that new ventures should become “specialists” by targeting narrow market segments that have been overlooked by established firms and serve those customers through specially designed, high quality products or services (Hosmer, 1957). This argument leads to the sixth hypothesis.

Hypothesis 6: The relationship between a “specialist” strategy and the exploitation process is significantly positive for innovative opportunities but not for equilibrium opportunities.

However, for example Carter et al. (1996) suggest that meeting competition head to head with broad “generalist” strategies will lead to better survival chances. Biggadike (1976) concurs with the “generalist” perspective and suggests that entrepreneurs need to adopt an aggressive posture when entering markets and match the broad appeal offered by competitors. Other researchers support this view stating that new ventures penalize themselves unless they compete directly with the market leaders, including competing on the basis of price (Cooper et al., 1986, MacMillan and Day, 1987). This argument leads to the seventh hypothesis.

Hypothesis 7: The relationship between a “generalist” strategy and the exploitation process is significantly positive for equilibrium opportunities but not for innovative opportunities.

Sample

The data in this study come from the Swedish panel study of business start-ups. The sample consists of 233 venture opportunities discovered in 1997 and the first eight-month of 1998. Included in the analysis are those opportunities that we were able to track over a period of at least 18 months. We obtained venture specific information by first identifying individuals from the general population who was in the opportunity exploitation process. To qualify enterprising actors need to simultaneously initiate or complete two of the start-up activities identified by Reynolds (1997) and complete four full interviews. We conducted interviews every sixth month to receive longitudinal information about the venture (See Delmar and Davidsson, 1998; Reynolds, 1997 for more information about the research design).

Although we made a considerable effort to receive high response rates, we suffer from missing data. Out of the original sample of 516 opportunities, I excluded 129 (25%) opportunities abandoned during the initial 12 months of the study and 154 opportunities (29.8%) that suffered heavily from internal missing data. This leads to an effective response rate of 45.2%. A missing data analysis revealed that both abandoned opportunities and opportunities we failed to track, show less variation from the beginning. At the time for the first interview, abandoned efforts were significantly less likely to adopt a price strategy, performed fewer gestation activities, and reported less work and start-up experience compared to opportunities we were able to track over time. Abandoned opportunities were excluded because they failed to support longitudinal information about the exploitation process. The cases were classified as innovative (n = 34, 14.5%) and equilibrium (n = 199, 85.5%), based on a latent class analysis of four indicators of innovativeness (See Samuelsson, forthcoming).

Variables

Building on an evolutionary perspective, I argue that exploiting a venture opportunity is an evolutionary process of resource acquisition and organizing (Cf. Weick, 1979). In the early part of this process, the milestones that actors seek to reach are not traditional performance measures like sales, profit or equivalent. However, are all those activities needed to assembly and organize resources in order to commercialize the venture opportunity (Katz and Gartner, 1988) The dependent variable in this study is the venture exploitation process per se. This process is captured by a summation of 34 different gestation activities needed to exploit a venture opportunity (See Reynolds, 1997 and Carter et al., 1996 for a description of the activities; they are also listed in Table 1). This measure is time varying and measured every six month. Building on the evolutionary perspective, the exploitation process includes an accumulation of gestation activities. This accumulation of activities is here assumed analogous with growth. The independent variables are listed in Table 2 together with measurement descriptions. Independent variables are time invariant and generated from the initial interview except utilitarian reinforcement that is time varying and measured every sixth month.

Controls

In addition to venture level explanations, I control for environmental factors. Population ecology explains how a new venture opportunity is selected for survival by its environment (Aldrich, 1979; Low and MacMillan, 1988). Economic growth increases the aggregated demand because spending power in an economy increase and actors may capture new demand through the exploitation of venture opportunities, thus positively influencing the opportunity exploitation process. I also control for industry competitiveness. The traditional belief is that greater competitiveness results in barriers to enter and will have a negative effect on exploitation rates (Orr, 1974; Dean & Meyer, 1996). I also recognize that enterprising actors in the exploitation process suffer from time constraints that preclude them from undertaking all venture organizing activities simultaneously (Gifford, 1992). Therefore spending more time in the exploitation process may increase the number of initiated and completed activities.

Analysis

Enterprising actors organize and perform different activities in their pursuit to commercialize a venture opportunity. This organizing process is analogous to growth in terms of the accumulation of venturing activities over time. The purpose with this research is to model differences in the opportunity exploitation over time. This is also the basic idea behind latent growth modeling. Growth curve analysis is most useful when we attempt to explain individual variation in initial status and growth rate, over time, using different background variables (For a technical description see Muthen and Khoo, 1998).

Table 3 contains descriptive statistics of both independent and dependent variables for both classes of venture opportunities. Fit statistics at the top of  Table 4 show that both models, when estimated separately, fit the data reasonably well (Innovative venture opportunities with a Chi-square value of 34.540 with 31 d.f’s, p-value = .3024 RMSEA estimate .058, equilibrium opportunities with a Chi-square value of 42.932 with 31 d.f’s, p-value = .0752 RMSEA estimate .044. General rules of thumb for overall fit are Chi-square>.05 and RMSEA estimate<.05 (Maruyama, 1998). The initial model with opportunity variance on all parameters fit and is used as a baseline model (Chi-square value of 77.472 with 62 d.f.’s, p-value = 089, RMSEA estimate .046).

To test opportunity invariance, I impose full invariance across the two types of opportunities. Testing this model against the model with parameter variance leads to the rejection of the invariant model (chi-square value for H1 is 439.789 with 113 d.f’s, with a chi-square difference test value of 357.978 with 51 d.f’s, p = 0.000). In other words, a model with only one class of opportunities do not fit the data at all; hence, it is possible to reject the opportunity invariance hypothesis. The next step is to investigate differences in individual model parameters.

Table 5 shows individual parameter estimates starting with the estimation of initial mean status. Both innovative and equilibrium opportunities start from approximately the same status (innovative = 11.59, equilibrium = 11.24). Comparing growth rate scores and means show that exploiting innovative venture opportunities require on average more gestation activities than equilibrium opportunities (4.796 vs. 3.547). According to the growth scores, innovative venture opportunities have a more non-linear growth trajectory compared to equilibrium opportunities. This is consistent with hypothesis 1.

To further investigate the sources of variance different parts of the model are relaxed, starting with the covariates. Informational reinforcement has a positive impact on the exploitation process for innovative opportunities. This gives empirical support for hypothesis 2. Utilitarian reinforcement also has a positive impact on the growth process for both types of opportunities supporting hypothesis 3. However, for innovative opportunities the exploitation process is only influenced late in the process compared to equilibrium opportunities that are positively influenced throughout the exploitation process.

The results shown in Table 5 further indicate that tacit knowledge in the form of work experience in the opportunity industry has a negative impact on initial status and a positive impact on growth for innovative venture opportunities. The other indicator of tacit knowledge – start-up experience has a negative impact on initial status and a positive impact on growth for innovative venture opportunities and no impact on equilibrium opportunities. This result gives empirical support for hypothesis 4. Codified knowledge in the form of formal education has a positive effect on initial status and a negative effect on growth for innovative opportunities. For equilibrium venture opportunities the results are the opposite. Instead, formal education has a negative impact on initial status and a positive on growth rate. This partly support hypothesis 5.

Table 5 shows that a “specialist” strategy has a positive impact on the exploitation process giving support for hypothesis 6. However, a ”generalist” strategy does not influence the exploitation process.

Among the controls, there are some interesting results. The relationship between initial status and economic growth is insignificant. A perceived high level of industry competitiveness has a significant positive impact on the exploitation process for equilibrium opportunities. In addition, time in the process has a positive impact on initial status for equilibrium opportunities. Overall, the covariates explain 43.1% of the variance of initial status for innovating opportunities and 7.9% for equilibrium opportunities. The same covariates explain 94.9% of the variance in growth for the innovating opportunities and only 4.3% of the equilibrium opportunity growth variance. Table 5 shows further a significant amount of individual variation in initial status for both types of opportunities. Equilibrium opportunities show a significantly larger amount of residual variation in initial status and growth rate compared to innovative opportunities. Equilibrium opportunities also show a negative correlation between initial status and growth rate.

Initially, I argued that enterprising actors change an economy in two fundamentally different ways. They change it either through the exploitation of innovative venture opportunities or through the exploitation of equilibrium venture opportunities. Exploiting innovative venture opportunities is a disequilibrating process, creating new markets. Whereas exploiting equilibrium venture opportunities is an equilibrating process, optimizing supply and demand in established markets. I test this main argument on a unique longitudinal data set capturing the development of 233 venture opportunities exploited by enterprising actors in Sweden from 1998 and forward. Empirical findings show that the innovative exploitation process is longer and more non-linear compared to the equilibrium exploitation process. Innovative opportunities initial status is predicted by informational reinforcement and codified knowledge. Innovative opportunity growth is predicted by a ”specialist” strategy, tacit knowledge, and utilitarian reinforcement. At the other end, equilibrium opportunities tend to imitate existing ventures. Therefore, the exploitation process is shorter and more linear over time. Utilitarian reinforcement from the beginning of the process is also important to the equilibrium opportunity exploitation process. Overall, the empirical result gives ample support for most of the tested hypotheses and I am able to reject the opportunity invariance hypothesis—Exploiting an innovative venture opportunity is systematically different from exploiting an equilibrium venture opportunity.

Implications for an Opportunity Based Theory of Entrepreneurship

The central implication of this paper is straightforward—the venture opportunity is important. Heterogeneity among opportunities has a profound effect on the exploitation process. Theories based on the Schumpeterian tradition explain the innovative exploitation well but not the equilibrium exploitation process. An inclusive conceptual entrepreneurship framework needs to include opportunity variation. To really understand the vast majority of all new ventures researchers need to develop theory, models and measures that improve our understanding of the equilibrium exploitation process. Such a theory most likely includes contingency factors related to a person’s private and professional history together with future income options. Moving the level of analysis from actors to the venture itself also improves our understanding of the exploitation process.

Implications for the Dynamic Resource Perspective

This research extends the dynamic aspects of the resource-based view of the firm (Wernerfelt; 1984, Dierickx and Cool, 1989). Looking into the “black box” of firm specific knowledge development, I show that knowledge and utilitarian reinforcement vary as a function of both time and the opportunity type. This adds to the growing literature on when, where, and how resources may be useful in the emerging venturing process (Miller and Shamsie, 1996). Building on those findings, it is possible to model also the effect specific types of resources have on the exploitation process and beyond. The next step in this research process will be to investigate how different types of knowledge-based competencies relate to different stages in the exploitation process.

Implications for Entrepreneurship Research Designs and Methods

As the analysis of the exploitation process have illustrated, growth modeling provides researchers with an interesting way to discover and describe individual differences in development over time. In contrast, mean values from Table 3 merely give an aggregated view of the exploitation process over time. Table 3 did not show significant mean differences between the innovative and equilibrium venture opportunities at any stage of the exploitation process, but the growth model is able to quantify the amount of individual differences in growth and relate the individual variation in growth to background variables.

Implications for Entrepreneurs

The present research has several important implications for actors willing to exploit venture opportunities. Growth models can be used to predict growth. For a given model, it is of interest to use an individual’s background information to predict the individual’s future growth. In addition, with results from this study it is possible to distinguish between innovative and equilibrium venture opportunities. Based on this knowledge, it is possible to advice entrepreneurs and match their specific competencies with a particular opportunity or give guidelines on the needed competencies.

Limitations

This research is not without limitations. First, although the sample is representative of the population of venture opportunities, this research is exploratory. A limited sample size and crude measures make generalization hap hazardous. Replications and larger sample sizes are needed to confirm findings from this research. Second, my results do not permit me to make statements of either the discovery of opportunities or the future “success” of the venture.

CONTACT: Mikael Samuelsson, Jönköping International Business School, P.O. Box 1026 SE-55111 Jönköping Sweden; (T) +4636157550; (F) +4636161069; Mikael.Samuelsson@ihh.hj.se

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