Recognizing opportunity is a critical activity that occurs in the earliest stages of wealth creation (Venkataraman, 1997). Entrepreneurs are able to generate economic rents, according to Kirzner (1973), because they have a distinctive ability to perceive and act upon unique opportunities stemming from market disequilibriums that others fail to identify. Often these innovative opportunities stem from a discontinuous environmental event, which the entrepreneur is able to take advantage of as a function of a superior ability to employ a higher-level learning (Cope, 2003, 2005). They are able to reinvent existing means–ends frameworks (Gaglio & Katz, 2001) and unlike the market in general, engage in framebreaking or double loop learning (Argyris & Schon, 1978; Cope, 2003; Miner & Mezias, 1996).
Double loop learning requires a reconceptualization of a situation to arrive at a new underlying logic, or premise, from which to make decisions. Single loop learning, in contrast, takes place incrementally, within an existing premise, to fill out the current understanding more richly (Argyris & Schon, 1978). This double loop capability may be a key source of competitive advantage for new ventures (Mosakowski, 1998). Furthermore, some suggest that it is these very innovative opportunities that are missed by others that have the greatest potential for large returns (Kirzner, 1973).
Innovative opportunities, however, may be difficult to investigate fully pre-startup because accurate and relevant information is often unavailable, precisely because the opportunities are novel (Simon & Houghton, 2003).
This suggests that the entrepreneurs’ understandings are often incomplete in this situation. Instead, the entrepreneurs rely on metaphors, cognitive biases, and heuristics that, while beneficial to gain an initial understanding and motivation upon which to act, are often overly simplistic, highly abstract, and imprecise (Hill & Levenhagen, 1995). Thus, the conclusions reached by the double loop process may be false. Thus, we suggest that these potentially promising opportunities are often especially risky and, to an extent, misperceived at the outset. In fact, Busenitz and Barney (1997, p. 26) explain that although the use of heuristics in strategic decision making may create advantages during start-up, ‘‘it may also lead to the demise of a business as a firm matures.’’
Despite this seemingly bleak scenario, we do not believe that ventures that are formed on the basis of misperceived opportunities are destined to fail.
Instead, in this paper we address reasons why the link between venture formation and venture success does not depend on the accuracy of initial perceptions or the quality of the inputs that went into the original decision to form the venture. The business press is rife with examples of companies that arguably began with misperceived information that later became MARK SIMON ET AL.
132
enormously successful. In Collins and Porras’ (1997) study,Built to Last, for example, a number of their ‘‘visionary’’ companies, including Sony, 3M, and Hewlett-Packard, were dismal start-ups. In fact, only 3 of the 18 great companies were successful with their initial product or service. Thus, the question becomes, ‘‘How does a start-up emerge from dismal beginnings to become an outstanding success?’’ Of course, correcting early misperceptions is far from automatic and many entrepreneurs fail to make adjustments to their initial idea quickly enough (McCarthy, Schoorman, & Cooper, 1993).
Furthermore, conclusions reached as a function of biases are often difficult to change (Hogarth, 1987).
One key to understanding the transition from misperceived beginning to eventual success lies in the fact that most innovative opportunities begin in the mind of a single entrepreneur, but with the passage of time an entire top management team (TMT) and firm will grow around implementing and possibly shaping this idea. As such, the venture may become a learning- oriented information processing system that analyzes the venture’s ongoing experiences, responds quickly to feedback, and develops more accurate assessments (Lyles & Schwenk, 1992), thereby correcting the initial errors made by the entrepreneur. Thus, the organizational system itself must be oriented toward a double loop learning capability to create new interpretations or knowledge from the unfolding situation. This new knowledge can be used to make the adjustments that a firm needs to improve and sustain its competitive position. Schindehutte, Morris, and Kuratko (2000) specifically argue that this adaptive behavior is a function of the entrepreneur and the firm, and that those firms with greater adaptive capacity will have better performance.
Our key contention is that insights from the domain of strategic mana- gement can be used to explain how a new venture’s characteristics can facilitate the entrepreneur’s double loop learning ability. We suggest that by assembling TMT with certain characteristics and using organizational structures that facilitate communication, founders increase the double loop learning through their effects on the firm’s information processing system (Hambrick & Mason, 1984; Lant, Milliken, & Batra, 1992; Meyer, 1982; Milliken, 1990; Thomas & McDaniel, 1990). Specifically, the past experiences and prior knowledge of TMTs create frameworks and filters through which new information is noticed, interpreted, and acted upon, thereby influencing the organization’s capacity to relearn (Hambrick &
Mason, 1984; Lant et al., 1992; Thomas & McDaniel, 1990). Further, decentralized and organic organizational structures will influence learning by determining who and how many people receive information, when they get it, and whether it will be used to adapt to new conditions (Meyer, 1982;
Milliken, 1990). We argue, therefore, that by adjusting these factors, information processing systems become double loop learning oriented and allow ventures to rapidly adapt and eventually to succeed (Thomas, Clark, & Gioia, 1993) even if the initial opportunity was based on an entrepreneur’s inaccurate perceptions.
The remainder of the paper is divided into four parts. In the next section, we turn to an example from business practice that demonstrates how an entrepreneurial firm used strategic insights to resolve a ‘‘crisis of partial misperception.’’ We then briefly review the literature in three related areas:
entrepreneurial cognitions, learning capabilities, and information proces- sing. We then discuss how the use of TMTs and organizational structure influence the nature and effectiveness of an entrepreneurial firm’s informa- tion processing system and offer propositions that relate these ideas to venture performance. Finally, the article discusses the theoretical and practical implications of the model as well as future research directions.