The second implication is for what is taught in business schools. The implicit assumption is that graduates from business schools are likely to find employment as managers in large or middle-sized companies. In that case it was appropriate for them to be educated in Administrative Management since the key issue was “control.” The major strategic issue was to ensure that,withinthe company, decisions made were implemented. This contrasts starkly with the issues facing a smaller firm, primarily those of a lack of legitimacy and market power.
The skills required to overcome lack of legitimacy, market power, and other uncertainties outside the firm are rarely taught in business schools. Indeed there is even a debate about whether they can be taught. For example, we observe the fundamental importance of
“niches” in explaining the exceptional performance of entrepreneurial firms. We see that such firms are nearly always “leader driven” and that the leader is an individual who sees it to be their task to have the big picture. Yet, while every business school has courses on financial control and pricing, on HRM, on productions management, there remain
virtually none on “Big Pictures,” on “Niches,” on “Moving the Boat,” or on “Maintaining the Entrepreneurial Fires while growing the business.” The third key implication is for the research community. It is the key research finding that those making the key
decisions in entrepreneurial firms are, in practice, struggling to avoid the suffocating and controlling influences of Administrative Management. They want to avoid meetings, formality, procedures, plans and policies. Indeed many of them established their businesses to get away from such practices. Clearly, most recognize that increasing formality is inevitably associated with larger size, but the key issue for them is to ensure that the tail does not wag the dog. For them the business has experienced rapid growth because of its Entre-preneurialism, and not because of its expertise in Administrative Management.
A central research issue is therefore how this trade-off between Entrepreneurial and Administrative Management is delivered in practice and how it changes as the business grows. The problem is that, by the standards of Administrative Management,
entrepreneurial firms look to be (often very) badly managed. However, we have argued that Administrative Management expertise is not an appropriate criterion on which to assess the management skills of entrepreneurial firms. Alternatively expressed, the Administrative Management toolkit does not currently contain the appropriate equipment for this analysis. It needs the explicit inclusion of the mindset of the Entrepreneur and Entrepreneurial Management.
Knowledge management
How the firm organizes what its members know, and utilizes it across different projects and markets, is an important part of organizational innovation. It is also driven by an intensely practical problem and an intensely practical constituency: many consulting firms face exactly this problem, and have developed very sophisticated best practices databases and information-sharing devices.
This is important and good work. But the orientation is still fundamentally one of administrative management. The problem of knowledge management is usually expressed as a problem of coordination, how to allow individuals to link up their knowledge in order to take advantage of experience and, also, to transfer that research into organizational learning. This has the virtue of allowing research to build on the older phenomenon of the learning curve, and again of helping to solve an intensely practical problem. But the overall point of view is still one of efficiency. Existing literature in entrepreneurship has typically viewed the problem differently, as one of opportunity recognition. The analysis begins from the perspective of Austrian economics. Unlike Neoclassical economics, where information is assumed to be costless and common knowledge to market participants, Austrian economists note that information is in fact dispersed, uncovered at a cost, and in some cases not uncovered at all. Therefore the question becomes how people come into the knowledge of an opportunity – a human need not yet met that can be met by the proper application of technology.
This point of view is fundamentally different – and potentially more fruitful – than a knowledge management approach. Knowledge management presumes the knowledge is there – the entrepreneurial management approach presumes it is not. Knowledge
management does not suggest market research, sessions on creativity, or experiments – all of which can help to uncover information previously unknown to the entrepreneurial manager.
Resource-based view of the firm
The basic insights of the resource-based view of the firm are well known. The resource- based view of the firm (RBV) has argued that the firm is best viewed as a bundle of resources or factors of production that management must deploy systematically to add value (Barney, 1991;Wernerfelt, 1984). Resources can yield sustained competitive advantage when they are relatively valuable, scarce, hard to imitate, and hard to replace (Barney, 1986;Mahoney and Pandian, 1992). In short, factors that yield sustainable competitive advantage are not easily traded on markets. The RBV is a powerful tool, and has yielded insights in many distinct areas. Typically, the existing application of this reasoning in entrepreneurial management has been to focus on managerial, marketing, operational, or technological resources, e.g., to measure those skills in some way in a new venture and examine their effects. For example,Deeds, DeCarolis, and Coombs (2000) examine whether technological resources (measured by the usual suspects of patent citations and CEOs with Ph.Ds) positively affect new product development. But this approach, however insightful, may be incomplete. Working in the traditional functional
areas may blind us to the different resources and capabilities of entrepreneurial
management. Studies in entrepreneurship repeatedly argue that crucial resources of the entrepreneur or startup are not captured by these functional models. Indeed, they first presume an organization. To what extent are we talking about the resources of an organization? The resources of entrepreneurial management include not just traditional functional areas (grounded in administrative management) but information, social capital, and startup experience. As one example, existing strategic management research often assumes that financing is or can be made available because of the hypothesis of perfect capital markets. Such a hypothesis is inappropriate in the case of entrepreneurial management. An additional resource may be the ability to gather funding.
In short, the resources of entrepreneurial management may be different from the resources of administrative management.
Organizing for innovation
The current literature on organizing for innovation as a part of entrepreneurial
management contains at its heart a contradiction. A number of authors have argued that entrepreneurial management to facilitate innovation requires a different kind of
organization than administrative management. The organization needs to empower individuals to act on opportunities (Amit, Brigham, and Markman, 2000). They need to develop creativity and an ability to improvise within rules (Eisenhardt, Brown and Neck, 2000). They need to develop the cellular organization (Miles et al., 1997), an
organizational form in which each cell shares characteristics with the other cells. But a research stream with many different sources both old and new argues that these
characteristics cannot coexist with the traditional organization.Burns and Stalker (1961) argued that organizations cannot be both “organic” and “mechanistic.”Ghemawat and Ricart i Costa (1993)argued that an organization cannot be efficient in both a static sense and a dynamic sense.March (1991)argues that organizations must trade off gains in average performance through “exploration” (similar to discovery, or entrepreneurial management) against the reduction in variance in returns gained through “exploitation”
(similar to coordination, or administrative management). Organizational learning
increases the return to exploitation in the short run but is likely to weaken overall returns in the long run. AndBaker, Gibbs, and Holmstrom (1994)argued that powerful forces in organizations limit the amount of salary dispersion tolerated in organizations, which may play against the need to compensate entrepreneurial managers with incentive
compensation rather than traditional salary. Therefore, it may not be possible for an organization to be both administrative and entrepreneurial.
Limited as we are in focusing on existing organizations, preferably theFortune500, we may be missing the need to form new and independent organizations. This is obvious in the case of a startup venture, of course, but it is also true within existing organizations. If the above authors are correct, a new organization, outside the existing one, must be founded in order to take advantage of an opportunity. How should the two be joined?
Only through an equity relationship? Shared personnel? Common personnel policies?
Organizational learning
Organizational learning is the creation of new knowledge within the firm that can improve performance (Hitt and Ireland, 2000). Many different conceptualizations of organizational learning exist (Miller, 1996). Perhaps the most significant of these models is learning by doing (see for exampleLieberman, 1984;Darr, Argote and Epple, 1995).
Beginning from observations on airframe production costs during wartime, the observed fact that costs decline with cumulative experience has been a staple of the strategy
literature for many years (as well as the foundation of a successful consulting practice). A second model has emphasized organizational memory, the constant repetition of activities within organizations (Nelson and Winter, 1982). Such repetition and related codifications into rules and procedures allow for the lessons of experience to be retained and
accumulated over time despite organizational transitions (Levitt and March, 1988). Such routines are necessary to develop dynamic core competencies in order to continue with innovation (Teece, Písano, and Shuen, 1997).
But the concept of organizational learning runs the risk of reifying the organization
(Simon, 1964). It may be true that large organizations create through organized repetition.
Smaller organizations, and in particular startups, with a team of perhaps five people, are likely to combine their knowledge without such complicated procedures. Repetition may be the death of creativity in such situations. At a broader level, how do small groups of individuals combine their collective experiences to identify new opportunities? Is it through formal or informal methods? How can these processes be facilitated?
The role of small groups as the fundamental creators of innovation creates considerable tension with the rest of the organization, as shown in the discussion of organizing for innovation. One key finding of entrepreneurial management is that small, autonomous groups must separate from the main body of (administrative) work of the firm for innovation, whether it is described as the innovator's dilemma (Christensen, 1997), an incentive problem (Holmstrom, 1989), or in other terms. Then how is organizational learning supposed to take place? How can dynamic core competencies be created in the organization? Indeed, how can they even exist if the inevitable pressure of a successful product brings with it the tendency toward administrative management?
Entrepreneurial finance
Strong links have been forged between finance and strategic management. One link not previously discussed has been the theory of efficient capital markets: firms can access capital at whatever level they need, given that information is available to convince investors to invest. All, or at least most, positive net present value projects are funded.
This is implicit in the assumptions of many strategic management papers. For example, the widespread use of event studies assumes the market can price information correctly.
Whatever the merits of this in the context of larger firms and administrative management, it is not correct in the context of entrepreneurial management, and certainly not startups.
Technology entrepreneurs in the UK reported significant financial constraints on their
businesses (Westhead and Storey, 1996). And an analysis of US entrepreneurs found that entrepreneurs have access to capital that is only 50 percent beyond that of their personal wealth (Evans and Jovanovic, 1989). These empirical facts call attention to the theoretical difficulties involved in demonstrating the viability of an opportunity. Opportunities suffer from the paradox of information (Arrow, 1975), that the value of the information cannot be determined without revealing the information, and in turn making it possible for someone to use it without paying for it. In addition, individuals with opportunities face the problem of adverse selection, of credibly signaling their capabilities to execute the idea (Amit, Glosten, and Muller, 1990;Sahlman, 1990). So funding and finance are different under entrepreneurial management.