It is increasingly apparent in today's economy that earlier success has little to do with a corporation's longevity. Furthermore, entrepreneurial startup firms often seriously challenge once-powerful large organizations. As a result, many established firms are attempting to build on their existing knowledge base to create and capture new opportunities. Corporate managers have often concluded that they must adjust and
sometimes transform themselves to keep pace with environmental changes and increasing competition. However, entrepreneurial activity, defined as attempts to exploit
opportunities others have not identified or exploited (seeIreland et al. (2001)for a parallel definition of entrepreneurial actions), presents a significant challenge for larger corporations because their core competencies do not always extend into the areas of new development and management and incentive systems frequently stifle entrepreneurial initiatives. This presents a significant dilemma for most organizations. On the one hand,
established core competencies and inertia can be persistent forces that lead to core rigidities (Leonard-Barton, 1992) making change difficult, particularly in larger
organizations (Barkema and Vermeulen, 1998). On the other hand, change is imperative for keeping pace with the competitive environment. Sometimes established core
competencies can provide a foundation from which to build new advantages while other times very different skills and capabilities need to be obtained to engage in the desired entrepreneurial activity. To deal with these dilemmas, numerous organizational
arrangements and new hybrids have evolved to address these needs. The most common organizational arrangements or modes of entry include internal new ventures, joint ventures, and acquisitions.
This chapter develops a framework for understanding when these various organizational entry mode choices are most likely to be appropriate (and inappropriate), given different entrepreneurial settings. In recognition of the growing importance of entrepreneurial activity within today's rapidly changing environment, we attempt to bring further
understanding to the different types of entry strategies seeking to foster entrepreneurship.
We contend that the entry strategies chosen in the pursuit of various forms of corporate entrepreneurship can be better understood by examining the linkages between the requirements to pursue uncertain market opportunities with the capabilities and learning needs necessary to achieve the opportunity visualized. Stated differently, for various entrepreneurial strategies to be successfully implemented at the corporate level, there needs to be a fundamental understanding of the market context in which the potential invention or innovation resides and the learning capabilities and needs of the focal organization when entrepreneurial entry is contemplated. We now define the two
dimensions that we consider central to entrepreneurial entry, market uncertainty and firm capabilities and learning distance.
Market uncertainty
Uncertainty is often described as a perceptual phenomenon derived from the inability to assign probabilities to future events, a lack of information about the cause and effect relationship, and the inability to predict the outcome of a decision (Milliken, 1987;Miller and Shamsie, 1999). More specifically, we define market uncertainty as the state of not knowing or a lack of knowledge about the future direction of a given market. As strategic managers contemplate the future, they often face many complexities, making it very difficult to know in advance what the appropriate response should be in regard to entering a given market (Leifer and Mills, 1996). Furthermore, markets are often unstable as entrepreneurial startup firms enter the market and as competitors become more
aggressive. As new products or services are being developed, unanticipated anomalies invariably emerge. The receptivity of a new invention or innovation once it is released to the market is extremely difficult to predict. Often intended markets reject a new
alternative while unanticipated markets can emerge to adopt it. The market environment can be very turbulent in regard to the acceptance and implementation of entrepreneurial endeavors.
These issues suggest that market uncertainty has a substantial impact on the development, introduction, and commercialization of entrepreneurial opportunities. More specifically, market uncertainty is characterized as an interaction between complexity
(simple/complex) and stability (stable/unstable) (Duncan, 1972;Daft, 1995). Complexity addresses the number of market elements a venture faces, the extent of their dissimilarity along with the frequency and unpredictability of change. With many inventions and innovations, there is great heterogeneity in the elements and components that are potentially relevant to the business venture and there may be numerous unknown interactions between the components as well.
The degree of stability in the market also influences uncertainty. Stability addresses the dynamic nature of the elements in the environment. If technology has remained largely unchanged over time along with the way competitors respond to one another, the market environment is usually characterized as fairly stable. However, when new technology such as the World Wide Web develops, the emergence of new competitors and aggressive actions of existing competitors tend to create unstable markets. In the context of a
complex and unstable environment, managers must reconcile differing opinions, cope with irrational decision making, and struggle with imperfect attempts to implement decisions regarding entrepreneurial activity. Thus, market uncertainty increases the probability of failure.
To deal with varying amounts of uncertainty associated with entrepreneurial pursuits, real options reasoning has recently been introduced. Entrepreneurial initiatives have been characterized asreal options, where the value of the initiative is fundamentally
influenced by the level of uncertainty involved (McGrath, 1999). In the financial markets, the purchase of an option contract gives one the right but not the obligation to purchase specific assets. This allows for the staging of investments in a way that allows for the truncation of further investments under poor conditions and enhancement if the prospects remain positive. Furthermore, a limited downside investment is a way of providing access to future opportunities before the window of opportunity closes. As with financial options, the greater the uncertainty, the more the option is worth because the cost of acquiring the option remains constant while the maximum potential for upside benefit increases
(McGrath, 1999). Because the very nature of entrepreneurial initiatives is characterized by large amounts of uncertainty and substantial variations in their potential returns (Shane and Venkataraman, 2000), real options reasoning is used below to shed light on the differences between entrepreneurial entry modes.
Firm capabilities and learning distance
Organizational learning theorists are interested in how and when organizations learn because it is assumed that better knowledge and understanding will improve actions (Fiol and Lyles, 1985). Strategy scholars have become increasingly interested in a better understanding of the learning process and how it may be a source of competitive advantage (Conner and Prahalad, 1996), particularly as a firm pursues entrepreneurial activities in the context of rapidly changing environments and hyper competition (Hagedoorn, 1995;Mezias and Glynn, 1993). The key assumption is that learning
specifically, and gaining access to resources more generally, are key sources of competitive advantage (Stuart, 2000). Faster learning that builds on firm-specific knowledge and causal beliefs can lead to a unique understanding of an entrepreneurial situation. Stated differently, a competency-based view of the firm is at least partially linked to a firm's learning ability that has evolved from earlier learning opportunities.
Stuart (2000)refers to a type of learning where two or more partners contribute complementary skills and knowledge to a new application. From this perspective, learning primarily occurs for participating firms because knowledge from their core competencies is being applied and extended in new ways. Learning occurs not so much from the participating partner(s) current capabilities within their own firm environments but by extending their capabilities into a new context or setting. In particular, this chapter focuses on learning related to the extension of existing capabilities. This is important because firms that are pursuing entrepreneurial entry and such complementary or
combined capabilities (Amit and Schoemaker, 1993) are needed to realize the opportunity perceived.
To further articulate the framework in this chapter and the learning needs associated with pursuit of innovative activities, we address the idea of learning distance. Learning
distance has reference to the proximity of a firm's knowledge base and causal beliefs stemming from previous business activities (March and Simon, 1958). Stated differently, this issue addresses the extent to which a firm's current capabilities are adjacent to the capabilities needed to create the desired inventions and innovations. Entrepreneurial opportunities that are in the immediate neighborhood of existing capabilities face fewer risks and are unlikely to significantly alter current performance (Gavetti and Levinthal, 2000). Close-in neighborhood innovations would usually attempt to further exploit current capabilities whereas more distant learning is likely to substantially stretch existing capabilities as a means to exploiting greater but currently undeveloped opportunities.
Partial capabilities that become complete only in combination with a partner, such as through acquisitions or joint ventures, are complementary capabilities (Dyer and Singh, 1998). Entrepreneurial entry often requires firms to seek partnership arrangements in order to complete partial capabilities needed to realize the perceived opportunity. This co-specialization brings together the skills and firm-specific resources of two or more firms (Doz and Hamel, 1998). Many markets, for example, are converging due to market opportunities on the Internet which combines telecommunication (networks), computers, and media content. To realize more complete capabilities in emerging Internet market opportunities, acquisitions and joint ventures are pursued. When a firm has capabilities that represent only part of the total capabilities needed to realize an emerging market opportunity, learning distance exists.