Description
In this description in relation to entrepreneurial opportunity identification and new firm development processes a comparison.
12 Int. J. Entrepreneurship and Innovation Management Vol. 13, No. 1, 2011
Copyright © 2011 Inderscience Enterprises Ltd.
Entrepreneurial opportunity identification and new
firm development processes: a comparison of family
and non-family new ventures
James Hayton*
Centre for Knowledge, Innovation, Technology & Enterprise (KITE),
Newcastle University Business School,
Citywall, Citygate, St. James Boulevard,
Newcastle upon Tyne, NE1 4JH, UK
Fax: +44 (0)191 243 0814
E-mail: [email protected]
*Corresponding author
Gaylen N. Chandler
Center for Entrepreneurship,
Wichita State University,
1845 Fairmount, Wichita, KS 76260-1047, USA
E-mail: [email protected]
Dawn R. DeTienne
Department of Management,
Colorado State University,
207 Rockwell Hall, Fort Collins, CO 80523, USA
E-mail: [email protected]
Abstract: This research examines differences between family and non-family
firms with respect to new venture creation processes. We invoke a social
embeddedness explanation of differences between family and non-family firms
with respect to opportunity identification processes and outcomes and new
venture development processes. In a sample of 183 family and non-family
firms, we find that family firms are less likely to report an opportunity
identification process that is sudden, spontaneous and creative. The new
opportunities thus identified are less innovative than those identified by
non-family firms. Finally, family firms are somewhat more likely to follow
effectuation processes and significantly less likely to follow causation
processes during new venture creation. Implications for research and practice
are discussed.
Keywords: family firm; opportunity identification; entrepreneurship;
effectuation.
Reference to this paper should be made as follows: Hayton, J., Chandler, G.N.
and DeTienne, D.R. (2011) ‘Entrepreneurial opportunity identification and new
firm development processes: a comparison of family and non-family new
ventures’, Int. J. Entrepreneurship and Innovation Management, Vol. 13,
No. 1, pp.12–31.
Entrepreneurial opportunity identification and new firm development processes 13
Biographical notes: James C. Hayton, PhD, is a Goldman Professor of
Innovation & Enterprise, the Director of Centre for Knowledge, Innovation,
Technology & Enterprise (KITE) at Newcastle University Business School,
UK, an External Research Fellow at Max Planck Institute for Economics,
Entrepreneurship and Growth Group, Jena, Germany and Executive Editor of
Human Resource Management. His research has been published in a number of
journals including Strategic Entrepreneurship Journal, Journal of Business
Venturing, Organisational Research Methods, Entrepreneurship Theory and
Practice, Human Resource Management and R&D Management. His research
focuses on the impact of HRM systems and intellectual capital on
organisational learning and corporate entrepreneurship.
Gaylen N. Chandler is a Professor of Entrepreneurship at Wichita State
University where he holds the Barton Distinguished Chair of Entrepreneurship.
Previously, he was the Robert B. and Beverlee Zollinger Murray Professor of
Entrepreneurial Studies at Utah State University. He received his Doctorate
from the University of Utah. His work has been published in the Journal of
Business Venturing, Academy of Management Learning and Education,
Entrepreneurship Theory and Practice and the Journal of Management. His
research interests include the operationalisation of opportunity as a construct
and the development of human and intellectual capital in emerging firms.
Dawn R. DeTienne is an Associate Professor at Colorado State University. She
received her PhD in 2002 from the University of Colorado. For 15 years prior
to pursuing her PhD, she Founded, Co-Owned and successfully exited a
small business venture. Her research has been published in the Journal of
Business Venturing, Academy of Management Learning and Education,
Entrepreneurship Theory and Practice, Journal of High Technology
Management and IEEE Transactions on Engineering Management. Her current
research areas include entrepreneurial exit, opportunity identification and
corporate entrepreneurship.
1 Introduction
Family business is acknowledged to be the dominant form of business organisation
globally (e.g., Gersick et al., 1997; Heck and Trent, 1999; Sharma, 2004). Since new
ventures are responsible for at least 75% of all new jobs (Small Business Administration,
2006), 50% of innovation and 95% of radical innovation (Timmons, 1999) clearly, family
firms are influential in job creation and innovation.
Research on family firms has indicated that these organisations possess characteristics
that can provide unique sources of competitive advantage relative to non-family firms.
Sources of advantage proposed in the literature include reduced agency costs (e.g.,
Demsetz and Lehn, 1985; Short, 1994), a longer time frame of investment (Adams et al.,
2002), greater transaction cost-efficiency and more flexible organisational structures
(e.g., Geeraerts, 1984; Gersick et al., 1997; Ouchi, 1980) and the control of unique
intangible assets such as ‘familiness’ (e.g., Habbershon et al., 2003; Zahra et al., 2004).
While a number of differences have been identified, the significance of the family
dimension of business has rarely been explored from the perspective of the new venture
creation processes. Do family firms utilise different decision-making processes than
non-family firms? Do they approach opportunity identification differently? Are family
firms likely to identify products and services that are more or less innovative than
non-family firms?
14 J. Hayton et al.
Opportunity identification occurs early in the life of the firm and is a critical
organisational capability at the heart of entrepreneurship (Ardichvili et al., 2003). It is
generally acknowledged that entrepreneurs are able to identify unique opportunities
because of distinctive life circumstances. Thus, the education, work and life experiences
of entrepreneurs are an important source of knowledge about entrepreneurial
opportunities (Shane and Venkataraman, 2000; Venkataraman, 1997). It is reasonable to
expect that entrepreneurs in ventures identified as family firms will experience
‘idiosyncratic life circumstances’ that differ as a direct result of the embeddedness of the
venture in the family system (Aldrich and Cliff, 2003; Shane and Venkataraman, 2000).
In this study, we fill the gap in the literature regarding how family firms differ
systematically from non-family firms in terms of the entrepreneurial processes that are at
the heart of new venture creation (Kellermanns and Eddleston, 2006). Previous research
has pointed out that family firms appear to be less willing to take risks normally
associated with entrepreneurial processes (Naldi et al., 2007). However, it is also
apparent that many family firms outperform non-family firms and compete using
entrepreneurial strategies (e.g., Kellermanns and Eddleston, 2006; Zahra et al., 2004).
This study’s research question asks whether three key entrepreneurial variables are
influenced by the family/non-family business status of a firm: the opportunity
identification process that is used; the innovativeness of opportunities identified and the
extent to which the venture develops following a causal versus an effectual logic
(Sarasvathy, 2001). The following section expands on our theoretical discussion and
presents a set of hypotheses. We then present the results of an empirical study designed to
test these hypotheses followed by a discussion of our findings.
2 Literature review and hypothesis development
There is little research focusing on how family and non-family firms differ in the
emergent stages of the business. We address the opportunity identification process, the
level of innovation in the initial product or service and the new venture development
process. Figure 1 summarises the relationships and variables that this study will focus
upon.
Figure 1 The research framework
Spontaneity and creativity
of opportunity identification
process
Family firm status
Innovativeness of
opportunities identified
Effectuation in venture
development process
Entrepreneurial opportunity identification and new firm development processes 15
2.1 Opportunity identification processes
Opportunity identification is emerging as a critical component of the entrepreneurial
process (Ardichvili et al., 2003; Gaglio and Katz, 2001; Shane and Venkataraman, 2000)
representing the ‘most distinctive and fundamental entrepreneurial behaviour’ [Gaglio
and Katz, (2001), p.95]. One of the fundamental entrepreneurship research questions is
why, when and how some people discover opportunities (Shane and Venkataraman,
2000) because this is one of the most important abilities of successful entrepreneurs
(Ardichvili et al., 2003).
Different ontological perspectives exist to explain opportunity identification. Some
scholars propose that opportunities exist in the external environment and it is the role of
the entrepreneur to ‘discover’ these opportunities (e.g., Drucker, 1998). Processes of
discovery might include active search (Fiet, 2002) and passive search (Ardichvili et al.,
2003). Others contend that opportunities are created by entrepreneurs [Schumpeter,
(1934), p.65] suggesting that ‘It is… the producer who as a rule initiates economic
change and consumers are educated by him if necessary; they are, as it were, taught to
want new things.’
Building upon previous scholars, Companys and McMullen (2007) explain that
different schools (e.g., economic, cultural-cognitive) have emerged to explain the
identification of entrepreneurial opportunities. The economic school views opportunities
as objective phenomena that exist within the environment (Companys and McMullen,
2007). In the economic school, entrepreneurs who have better information (Hayek, 1945;
Shane and Venkataraman, 2000), greater prior knowledge (Shane and Venkataraman,
2000; Shepherd and DeTienne, 2005) and/or are more alert (Gaglio and Katz, 2001;
Kirzner, 1979) are more likely to discover opportunities. This suggests a gradual learning
process (Dimov, 2003) wherein entrepreneurs accumulate information, knowledge and
experiences that provide a competitive advantage when searching for entrepreneurial
opportunities.
According to the cultural-cognitive school, entrepreneurial opportunities are
subjective and dependent upon individuals to create them. ‘Proponents of this view
suggest that entrepreneurial opportunities exist once they are defined and enacted by
individuals and firms’ [Companys and McMullen, (2007), p.305; Weick, 1979]. As such,
an opportunity does not exist until an entrepreneur ‘creates’ it.
We contend that family firms are less likely than non-family firms to identify
opportunities through a creation approach (the cultural cognitive perspective on
opportunity recognition). George et al. (2005, p.210) demonstrate that ‘internal owners
tend to be risk averse and have a lower proclivity to increase scale and scope of
internationalisation than external owners’ suggesting that family firms are less likely to
assume riskier opportunities (Naldi et al., 2007). There is more uncertainty involved in
the opportunity creation approach since, by definition, no market yet exists. Family firms
have multiple constituencies to respond to as they identify opportunities for new venture
creation. The number of constituents to which family firms must answer and their
concern with survival for future generations makes it less likely that family firms will use
a creative approach to opportunity identification and less likely to create a new product
for which there does not appear to be an existing demand:
Hypothesis 1 Family firms are less likely to report opportunity identification as a
spontaneous, creative event.
16 J. Hayton et al.
A number of scholars have pointed to the importance of social capital as critical to the
entrepreneurial opportunity identification processes (Ardichvili and Cardozo, 2000;
Birley, 1985; Davidsson and Honig, 2003). From this perspective, ‘social capital provides
networks that facilitate the discovery of opportunities….’ Davidsson and Honig (2003,
p.309) found that both strong and weak ties to be robust predictors of entrepreneurial
opportunity identification. Ardichvili and Cardozo (2000) found that both access to
extended social networks and prior knowledge to be prerequisites for successful
opportunity identification. The ‘social embeddedness’ perspective holds that
entrepreneurs are not isolated, ‘atomised decision-makers’ (Aldrich and Cliff, 2003), but
are linked in social networks that provide sources of information, knowledge and
influence (Aldrich and Zimmer, 1986; Aldrich and Cliff, 2003; Barney et al., 2003).
What is unique to the family business is the addition of kinship ties to the traditional
dichotomy of strong and weak network ties (Granovetter, 1973). Barney et al. (2003)
propose these family ties represent a special type of strong tie between individuals.
According to Granovetter (1973, p.1361) ‘the strength of a tie is a (probably linear)
combination of the amount of time, the emotional intensity, the intimacy (mutual
confiding) and the reciprocal services which characterise that tie.’ Family ties may be
understood as possessing uniquely high levels of time, emotional intensity, intimacy and
reciprocity relative to all other forms of social connection. This distinction of kinship ties
has been acknowledged in the resource acquisition literature, where the uniquely strong
ties provided by kinship are viewed as an important source of material resources required
in venture start-up (Aldrich, 1999; Aldrich and Zimmer, 1986; Starr and MacMillan,
1990.
Research on social networks typically starts from the assumption that each individual
has a limited amount of resources (e.g., time) to spend on the development and
maintenance of social ties. Further, strong ties require more resources than weak ties and
that this implies an individual may trade more weak ties for fewer strong ties or
vice-versa (Granovetter, 1973). When family ties are also considered, it is expected that
the maintenance of stronger family ties will also involve a direct trade-off in the
time available to build and maintain alternative social connections. Thus, to the extent
that diverse benefits arise from different types of social connection, individuals may
obtain different outcomes according to the networks in which they are embedded (Burt,
1992).
Consistent with both the social embeddedness and economic perspectives, wherein
opportunity identification is the result of the accumulation of information, we propose
that family firms are more likely than non-family firms to utilise a gradual learning
approach to opportunity identification. An advantage of family ties over weak ties and
even strong ties is that they increase the probability that important private information
about an opportunity will be shared (Barney et al., 2003). Thus, the family firm, in
addition to being less willing to rely on a sudden, spontaneous creative event, is also
more likely to have greater flows of information available to it regarding entrepreneurial
opportunities (Barney et al., 2003). The combination of a disutility for a sudden,
spontaneous event and the availability of information increase the likelihood that an
opportunity recognition process that is consistent with the economic model will be
followed in family firms:
Hypothesis 2 Family firms are more likely to report a gradual, emergent learning
process of opportunity identification.
Entrepreneurial opportunity identification and new firm development processes 17
2.2 Level of innovation
A related issue is whether there are systematic differences with respect to the
innovativeness of the identified opportunities. There has long been concern that family
firms may be less willing to accept risk and engage in innovation in contrast with
non-family firms (e.g., Dertouzos et al., 1989; Naldi et al., 2007; Nooteboom, 1994). We
have already discussed how family social ties may influence opportunity identification
processes. The other side of the story regarding the impact of different types of social ties
is that weak ties are a superior method for diffusion of novel information (Granovetter,
1973). This is because it is only weak ties that bridge unrelated networks (Burt, 1992).
When ties are strong, there is a greater probability that other redundant ties will link
subparts of the network, therefore eliminating their network position as bridges
(Granovetter, 1973). This is because of homophily and cognitive balance.
Homophily predicts that similar people will tend to form stronger ties and strong ties
will tend to exist between similar people. There is extensive evidence that when ties are
strong, similarity between people is also high. Similarly, the theory of cognitive balance
(Heider, 1958) predicts that when a third person is introduced to a network, ties with each
of the two original members will need to be in balance (i.e., consistently positive or
consistently negative) or else a powerful psychological ‘strain’ will be introduced
(Granovetter, 1973). The notion that strong ties tend to be also redundant ties means that
while these ties offer a trustworthy, reliable conduit for information about new
opportunities, they also are less likely to be a source of novel information that may lead
to an innovative business idea.
In family firms, on average, the business environment of the family firm will include
a greater number of kinship connections than in the non-family firm. While the strong
kinship ties present in family business may provide a trusted source of information on
new opportunities, there may also be more redundancy in the information that they
provide (Burt, 1992; Granovetter, 1973). Therefore, family ties may increase the
likelihood that information about entrepreneurial opportunities is shared in a family
venture. However, more redundant ties imply less direct access to bridging positions that
cross ‘structural holes’ in knowledge networks. This is significant with respect to the
types of information to which decision-makers in family firms have access. Proponents of
the structural holes perspective (Burt, 1992) argue that value is created when connections
are formed between previously unconnected knowledge domains. Unique and
non-redundant ties are more likely than redundant ties to produce information leading to
truly innovative opportunities:
Hypothesis 3 Opportunities recognised by family firms will be less innovative than
those recognised by non-family firms.
2.3 Venture development processes
The conceptual framework developed by Sarasvathy (2001) distinguishes between two
decision-making approaches that may occur during new venture creation. Entrepreneurs
may utilise a causation process, which starts with a particular given goal (e.g., starting an
internet grocery firm) and determines what means (resources) are needed to achieve
this goal (Sarasvathy, 2001). The causation process is a linear, rational approach to
decision-making. Entrepreneurs following such a process may make a decision to create a
18 J. Hayton et al.
venture and then systematically seek opportunities, examining developed industries and
evaluating opportunities using data on market demand and existing and anticipated levels
of competition (Fiet, 2002; Herron and Sapienza, 1992).
Conversely, an effectuation process emphasises the selection of different possible
effects that may be achieved with a given set of resources (Sarasvathy, 2001). This
approach suggests that the entrepreneur is ‘…An imaginative actor who seizes contingent
opportunities and exploits any and all means at hand… many of which are shaped and
created through the process of economic decision-making and not given a priori’
[Sarasvathy, (2001), p.262]. This distinction in decision-making orientation may be
relevant to understanding a systematic difference between family and non-family firms
for two reasons. First, the context of non-family firms may tend to induce formal, causal
reasoning more strongly than in family firms. Second, in family firms, the desire to retain
control and the lower reliance on external financial resources may combine to reduce
pressures towards causal reasoning.
A preference for retaining control over the destiny of the organisation may be related
to a desire for pursuing the long-term goal of building a business that can provide for
financial security over multiple generations. There is significant empirical evidence that
family firms are more cautious with respect to the financing of their venture
(e.g., Agrawal and Nagarajan, 1990; Anderson and Reeb, 2003; Gersick et al., 1997;
Mishra and McConaughy, 1999).
We suggest that this desire to retain control leads to an environment that is more
supportive of an effectual model than a causal one. A result of greater control over the
business is that family firms also have greater freedom and flexibility to define their
business in less formal ways. There is evidence that family firms tend to formalise less
quickly and typically resist the process of professionalisation, which includes
formalisation of organisational structures, strategic planning and management of human
resources (e.g., Geeraerts, 1984; Leon-Guerrero et al., 1998; Reid et al., 2000). Family
firms are also less likely to seek external financial support as a direct result of this desire
to retain control (e.g., Agrawal and Nagarajan, 1990; Mishra and McConaughy, 1999).
All of these conditions reduce the pressures for the kind of formal, causally oriented
planning that is required in order to obtain external financial support. We propose that the
desire to retain control, a tendency to avoid formalisation and a lower reliance on sources
of financial support, will lead naturally to an organisational environment more conducive
to effectual processes than to causal ones:
Hypothesis 4 Family firms are less likely to utilise causation processes and more
likely to utilise effectuation processes than non-family firms.
3 Methods
3.1 Study sample and data collection
The study’s hypotheses are tested empirically using a sample of 183 firms in two
industries:
1 medical devices
2 electronic measuring devices.
Entrepreneurial opportunity identification and new firm development processes 19
These industries were selected as they are contexts in which innovation may be important
to firm competitiveness and therefore, it is likely that at least some firms would be
seeking innovative opportunities. Consistent with prior literature, we use three criteria for
defining family firms (Astrachan and Kolenko, 1994; Litz, 1995; Sharma et al., 1996):
1 they say they are a family firm
2 one family owns 50% or more of the stock
3 one family member is engaged as an active manager of the firm.
The sampling frame for this study was selected from the 2002 Dun and Bradstreet
directory, which contains information on over 132,500 companies (90% of which are
private). The database contained contact information and secondary data such as three
years of sales figures, employment figures, SIC Codes and start-up date. We selected two
four-digit codes – electrical measurement instruments (SIC 3825) and surgical medical
instruments (SIC 3841). This resulted in a nationwide sample frame of 1334 two to
five-year old firms. The selection of two to five year old firms was based on an
assumption that start-up processes may take a year or two (or sometimes more). We
truncated the age at five years to reduce the instability of recall data.
We conducted initial interviews with 35 firm founders – 43% from the electrical
measurements industry and 57% from the surgical medical instruments industry. Mean
firm age for those firms included in the initial interviews was 4.6 years, mean number of
employees was 8.2 and mean sales were $757,000. 63% of the founders had been
involved in previous ventures and 40% had an advanced educational degree. From these
interviews and reviews of the literature, we developed constructs and measures
specifically for this study. After survey development, the instrument was pre-tested with
18 members of an on-campus MBA class. We asked them to provide insight into difficult
questions, survey design, etc. The initial pre-test led to several changes in the survey.
A second pre-test was conducted with ten of the original 35 interviewees. Few changes
resulted from the second pre-test indicating entrepreneurs were able to complete the
revised survey.
In order to improve response rates, we telephoned potential respondents to elicit
participation and to ascertain correct mailing addresses. We eliminated 272 firms from
the sample due to duplications, incorrect addresses and disconnected phone numbers,
leaving a sampling frame of 1,062 firms. Following the total design method described by
Dillman (2000), we mailed questionnaires, accompanied by prepaid return envelopes and
cover letters, to the chief executive officers (chairman, CEO and president) of the firms in
the sample frame. The cover letters served to identify the sponsor of the study and to
explain its purpose and importance. We assured executives of confidentiality and
promised them a report of the aggregated findings once the study was completed. A
follow-up postcard and reminder letter with a replacement survey questionnaire followed
the initial mailing. 183 firms responded with usable surveys for a response rate of 17%.
Our research uses responses from a single respondent in each company along with
secondary data from Dun and Bradstreet. Our approach of using one informant per
organisation has been supported when survey instruments were well designed and
executed (Starbuck and Mezias, 1996) and the key respondent is the owner/manager of
the business (Chandler and Lyon, 2001). In addition, frequently in new firms, the lead
entrepreneur is the only person with the requisite knowledge. Non-response bias is
20 J. Hayton et al.
always a concern when response is voluntary; non-responding firms, however, did not
differ significantly from responding firms on measures included in the Dun and
Bradstreet data with respect to annual sales, geographic area or SIC code.
3.2 Operationalisation
3.2.1 Family firms
There have been a number of operationalisations of the family firm construct (Litz, 1995;
Sharma et al., 1996). It is important to distinguish family-owned firms from
lone-entrepreneur led firms, as the distinguishing characteristics of family firms most
salient in the present study would not be expected to apply to such a context (Miller et al.,
2007). In this study, a family firm is defined in terms of three measures. First,
respondents were asked a yes/no question ‘is this a family firm?’ Second, because these
were privately held companies, we followed Astrachan and Kolenko’s (1994) definition
of family firms based upon ownership and asked ‘does any one family own more than
50% of stock?’ Third, acknowledging the importance of family influence in the business,
we asked ‘what is the number of family members in decision-making roles?’ (Having
more than one family member in a decision-making role was considered a necessary but
not sufficient requirement for definition as a family firm). Firms were then defined as
being family businesses when, in addition to having multiple family members involved in
decision-making, they also either defined themselves as a family firm or reported that a
single family owned more than 50% of the firm. The final sample included 96 family
firms and 80 non-family firms.
3.2.2 Opportunity identification processes
We developed two, three-item scales to measure opportunity identification processes. The
first scale measures the degree to which the opportunity identification process was the
result of a ‘gradual learning process’ and is comprised of three items:
1 my/our recognition of a market need was the result of a gradual learning process
2 the recognition of this opportunity was the result of a process that emerged over time
3 our opportunity identification process was a single discrete event that occurred in a
very short time period (reverse scored).
The second scale measures the degree to which the opportunity was ‘created’ by the
entrepreneur. It is also comprised of three items:
1 my/our recognition of a market need came suddenly through a stroke of insight
2 I/we created a product or service to solve a particular problem
3 I/we innovatively created a product or service.
The items measuring gradual learning process factored together as did those measuring
creation. There were not strong cross-loadings with non-target factors.
Entrepreneurial opportunity identification and new firm development processes 21
3.2.3 Degree of innovation
The innovativeness of the opportunities was established based upon a scale developed by
Fiet (2002) and utilised by DeTienne and Chandler (2007). We asked, ‘which of the
following best describes your initial product/service?’ Possible responses were:
1 a replication of existing products/services used in similar applications
2 a new application for an existing product/service with little or no modification
3 a minor modification to an existing product/service
4 a significant improvement to an existing product/service
5 a combination of two or more existing products into one unique product/service
6 a product/service that is new to the world.
3.2.4 Venture development processes
Sarasvathy (2001) identifies causation and effectuation as two different venture
development processes.
Causation
Causation refers to a process of new venture creation that ‘…take a particular effect as
given and focus on selecting between means to create that effect’ [Sarasvathy, (2001),
p.245]. Causation is a linear, rational approach to decision-making in which
entrepreneurs have access to perfect or near-perfect information; thus, they can follow a
systematic approach to new venture creation. As there is no established measure of the
causation construct in the extant literature, we developed an 8-item Likert-scale measure
based on the description given by Sarasvathy (2001). Respondents were asked to
‘indicate the degree to which you agree or disagree with each of the following
statements’:
1 We analysed the long-run opportunities and selected what we thought would provide
the best returns.
2 Our decision-making has been largely driven by expected returns.
3 We researched and selected target markets and did meaningful competitive analysis.
4 We designed and planned business strategies.
5 We designed and planned production and marketing efforts.
6 We organised and implemented control processes to make sure we met objectives.
7 The product/service that we used to launch this business was very similar to our
original conception.
8 We had a clear and consistent vision of where we wanted to go.
22 J. Hayton et al.
Effectuation
Effectuation refers to processes that ‘take a set of means as given and focus on selecting
between possible effects that can be created with that set of means’ [Sarasvathy, (2001),
p.245]. An effectuation process is one that allows individuals to make use of
contingencies in the environment and adjust their path as new information becomes
available. As with causation, there is no established measure of the effectuation construct
in the extant literature. Therefore, we developed a 9-item Likert-scale measure based on
the description given by Sarasvathy (2001). Effectuation was measured by asking
respondents to ‘please indicate the degree to which you agree or disagree with each of the
following statements’:
1 We evaluated the set of resources and means we had at our disposal and thought
about different options.
2 We experimented with different products and/or business models.
3 It was impossible to see from the beginning where we wanted to end.
4 We have allowed the business to evolve as opportunities have emerged.
5 We started very flexibly and tried to take advantage of unexpected opportunities as
they arose.
6 We have used a substantial number of agreements with customers, suppliers and
other organisations to reduce the amount of uncertainty.
7 Our decision-making has been largely driven by how much we could afford to lose.
8 The ultimate product/service used to launch this business was quite different than
originally conceptualised.
9 We developed a strategy to best take advantage of our resources and capabilities.
The items represented a Likert scale with a five point, agree-disagree response format.
4 Results
4.1 Preliminary analysis
Preliminary analyses involved assessments of the factor structures of the measures of
opportunity identification sources and processes and the measures of causation and
effectuation. We used principal components analysis with factor retention determined by
parallel analysis (Hayton et al., 2004) in combination with screen analysis. Discriminant
validity of the two measures of opportunity identification sources and processes was
assessed by including them in a single factor analytic model. Scale reliability was
assessed using Cronbach’s coefficient alpha. Table 1 shows the results of this analysis.
The results of the analysis of opportunity identification items show a two factor solution.
The solution of the principal components analysis, followed by oblique rotation is
shown in Table 1. The simple structure confirms that this solution is a good fit to the
data. The first two factors represent the two process dimensions of opportunity
identification:
Entrepreneurial opportunity identification and new firm development processes 23
1 a spontaneous creative act
2 a gradual learning process.
This is consistent with our a priori expectations.
Table 1 Principal components analysis of opportunity recognition items
Item Process: creation Process: learning
Process – creation 0.87
Process – created 0.85
Process – sudden stroke of insight 0.53
Process – emergent process 0.88
Process – single discrete event –0.79
Process – gradual process 0.64
Eigenvalue 2.35 1.85
Percent of variance explained 21.38 16.78
Table 2 Factor analysis of causation and effectuation items
Item description Factor 1 Factor 2 Factor 3
We analysed long-run opportunities and selected what we
thought would provide the best returns.
0.75
We developed a strategy to best take advantage of
resources and capabilities.
0.75
We designed and planned business strategies. 0.68
We organised and implemented control processes to make
sure we met objectives.
0.60
We researched and selected target markets and did
meaningful competitive analysis.
0.57
We used a substantial number of agreements with
customers, suppliers and other organisations and people to
reduce the amount of uncertainty.
0.55
We evaluated the set of resources and means we had at our
disposal and thought about different options.
0.55
We designed and planned production and marketing
efforts.
0.53
The ultimate product/service that I used to launch this
business was quite different from my original conception.
0.77
The ultimate product/service that I used to launch this
business was very similar to my original conception
(reverse coded).
0.75
It was impossible to see from the beginning where we
wanted to end.
0.64
We have allowed the business to evolve as opportunities
have emerged.
0.56
Eigenvalues 3.76 1.76 1.44
Percent of variance explained 31.30 14.64 11.98
24 J. Hayton et al.
The results of the analysis of the causation and effectuation items are shown in
Table 2. This analysis revealed three factors. In this case, the mineigen greater than one
criterion suggested five factors to be retained. However, parallel analysis (Hayton et al,
2004) and screen analysis, coupled with examination of the results for simple structure,
revealed that a three factor solution is most appropriate. The first factor reflects
‘causation processes,’ the second reflects ‘effectuation: product evolution’ and the third
reflects ‘effectuation: business evolution.’ Therefore, one factor reflects causation and a
remaining two reflect differing aspects of effectuation. The causation scale is the
eight-item scale listed above.
Effectuation: product evolution is measured by a two-item scale:
1 the ultimate product/service that I used to launch this business was quite different
from my original conception
2 the ultimate product/service that I used to launch this business was very similar to
my original conception (reverse coded).
Effectuation: business evolution is also measured by two items:
1 it was impossible to see from the beginning where we wanted to end
2 we have allowed the business to evolve as opportunities have emerged.
Table 3 Means, correlations and standard deviations
Variable Mean SD 1 2 3 4 5 6
1 Family firm 1.52 1.27 0.67
2 Causation 3.61 0.69 –0.21 0.81
3 Effectuation 1: product
evolution
2.13 0.99 –0.09 0.01 0.72
4 Effectuation 2:
business evolution
3.16 0.96 0.12 –0.11 0.10 0.41
5 Opportunity
identification
process 1: sudden
3.22 1.01 –0.22 0.17 0.08 0.16 0.65
6 Opportunity
identification
process 2: gradual
3.24 0.56 –0.04 0.17 –0.05 0.12 0.18 0.70
7 Level of
innovativeness*
3.46 1.71 –0.27 0.16 0.22 0.06 0.49 –0.07
Notes: Coefficient alpha statistics in diagonal; italics denotes significance p
In this description in relation to entrepreneurial opportunity identification and new firm development processes a comparison.
12 Int. J. Entrepreneurship and Innovation Management Vol. 13, No. 1, 2011
Copyright © 2011 Inderscience Enterprises Ltd.
Entrepreneurial opportunity identification and new
firm development processes: a comparison of family
and non-family new ventures
James Hayton*
Centre for Knowledge, Innovation, Technology & Enterprise (KITE),
Newcastle University Business School,
Citywall, Citygate, St. James Boulevard,
Newcastle upon Tyne, NE1 4JH, UK
Fax: +44 (0)191 243 0814
E-mail: [email protected]
*Corresponding author
Gaylen N. Chandler
Center for Entrepreneurship,
Wichita State University,
1845 Fairmount, Wichita, KS 76260-1047, USA
E-mail: [email protected]
Dawn R. DeTienne
Department of Management,
Colorado State University,
207 Rockwell Hall, Fort Collins, CO 80523, USA
E-mail: [email protected]
Abstract: This research examines differences between family and non-family
firms with respect to new venture creation processes. We invoke a social
embeddedness explanation of differences between family and non-family firms
with respect to opportunity identification processes and outcomes and new
venture development processes. In a sample of 183 family and non-family
firms, we find that family firms are less likely to report an opportunity
identification process that is sudden, spontaneous and creative. The new
opportunities thus identified are less innovative than those identified by
non-family firms. Finally, family firms are somewhat more likely to follow
effectuation processes and significantly less likely to follow causation
processes during new venture creation. Implications for research and practice
are discussed.
Keywords: family firm; opportunity identification; entrepreneurship;
effectuation.
Reference to this paper should be made as follows: Hayton, J., Chandler, G.N.
and DeTienne, D.R. (2011) ‘Entrepreneurial opportunity identification and new
firm development processes: a comparison of family and non-family new
ventures’, Int. J. Entrepreneurship and Innovation Management, Vol. 13,
No. 1, pp.12–31.
Entrepreneurial opportunity identification and new firm development processes 13
Biographical notes: James C. Hayton, PhD, is a Goldman Professor of
Innovation & Enterprise, the Director of Centre for Knowledge, Innovation,
Technology & Enterprise (KITE) at Newcastle University Business School,
UK, an External Research Fellow at Max Planck Institute for Economics,
Entrepreneurship and Growth Group, Jena, Germany and Executive Editor of
Human Resource Management. His research has been published in a number of
journals including Strategic Entrepreneurship Journal, Journal of Business
Venturing, Organisational Research Methods, Entrepreneurship Theory and
Practice, Human Resource Management and R&D Management. His research
focuses on the impact of HRM systems and intellectual capital on
organisational learning and corporate entrepreneurship.
Gaylen N. Chandler is a Professor of Entrepreneurship at Wichita State
University where he holds the Barton Distinguished Chair of Entrepreneurship.
Previously, he was the Robert B. and Beverlee Zollinger Murray Professor of
Entrepreneurial Studies at Utah State University. He received his Doctorate
from the University of Utah. His work has been published in the Journal of
Business Venturing, Academy of Management Learning and Education,
Entrepreneurship Theory and Practice and the Journal of Management. His
research interests include the operationalisation of opportunity as a construct
and the development of human and intellectual capital in emerging firms.
Dawn R. DeTienne is an Associate Professor at Colorado State University. She
received her PhD in 2002 from the University of Colorado. For 15 years prior
to pursuing her PhD, she Founded, Co-Owned and successfully exited a
small business venture. Her research has been published in the Journal of
Business Venturing, Academy of Management Learning and Education,
Entrepreneurship Theory and Practice, Journal of High Technology
Management and IEEE Transactions on Engineering Management. Her current
research areas include entrepreneurial exit, opportunity identification and
corporate entrepreneurship.
1 Introduction
Family business is acknowledged to be the dominant form of business organisation
globally (e.g., Gersick et al., 1997; Heck and Trent, 1999; Sharma, 2004). Since new
ventures are responsible for at least 75% of all new jobs (Small Business Administration,
2006), 50% of innovation and 95% of radical innovation (Timmons, 1999) clearly, family
firms are influential in job creation and innovation.
Research on family firms has indicated that these organisations possess characteristics
that can provide unique sources of competitive advantage relative to non-family firms.
Sources of advantage proposed in the literature include reduced agency costs (e.g.,
Demsetz and Lehn, 1985; Short, 1994), a longer time frame of investment (Adams et al.,
2002), greater transaction cost-efficiency and more flexible organisational structures
(e.g., Geeraerts, 1984; Gersick et al., 1997; Ouchi, 1980) and the control of unique
intangible assets such as ‘familiness’ (e.g., Habbershon et al., 2003; Zahra et al., 2004).
While a number of differences have been identified, the significance of the family
dimension of business has rarely been explored from the perspective of the new venture
creation processes. Do family firms utilise different decision-making processes than
non-family firms? Do they approach opportunity identification differently? Are family
firms likely to identify products and services that are more or less innovative than
non-family firms?
14 J. Hayton et al.
Opportunity identification occurs early in the life of the firm and is a critical
organisational capability at the heart of entrepreneurship (Ardichvili et al., 2003). It is
generally acknowledged that entrepreneurs are able to identify unique opportunities
because of distinctive life circumstances. Thus, the education, work and life experiences
of entrepreneurs are an important source of knowledge about entrepreneurial
opportunities (Shane and Venkataraman, 2000; Venkataraman, 1997). It is reasonable to
expect that entrepreneurs in ventures identified as family firms will experience
‘idiosyncratic life circumstances’ that differ as a direct result of the embeddedness of the
venture in the family system (Aldrich and Cliff, 2003; Shane and Venkataraman, 2000).
In this study, we fill the gap in the literature regarding how family firms differ
systematically from non-family firms in terms of the entrepreneurial processes that are at
the heart of new venture creation (Kellermanns and Eddleston, 2006). Previous research
has pointed out that family firms appear to be less willing to take risks normally
associated with entrepreneurial processes (Naldi et al., 2007). However, it is also
apparent that many family firms outperform non-family firms and compete using
entrepreneurial strategies (e.g., Kellermanns and Eddleston, 2006; Zahra et al., 2004).
This study’s research question asks whether three key entrepreneurial variables are
influenced by the family/non-family business status of a firm: the opportunity
identification process that is used; the innovativeness of opportunities identified and the
extent to which the venture develops following a causal versus an effectual logic
(Sarasvathy, 2001). The following section expands on our theoretical discussion and
presents a set of hypotheses. We then present the results of an empirical study designed to
test these hypotheses followed by a discussion of our findings.
2 Literature review and hypothesis development
There is little research focusing on how family and non-family firms differ in the
emergent stages of the business. We address the opportunity identification process, the
level of innovation in the initial product or service and the new venture development
process. Figure 1 summarises the relationships and variables that this study will focus
upon.
Figure 1 The research framework
Spontaneity and creativity
of opportunity identification
process
Family firm status
Innovativeness of
opportunities identified
Effectuation in venture
development process
Entrepreneurial opportunity identification and new firm development processes 15
2.1 Opportunity identification processes
Opportunity identification is emerging as a critical component of the entrepreneurial
process (Ardichvili et al., 2003; Gaglio and Katz, 2001; Shane and Venkataraman, 2000)
representing the ‘most distinctive and fundamental entrepreneurial behaviour’ [Gaglio
and Katz, (2001), p.95]. One of the fundamental entrepreneurship research questions is
why, when and how some people discover opportunities (Shane and Venkataraman,
2000) because this is one of the most important abilities of successful entrepreneurs
(Ardichvili et al., 2003).
Different ontological perspectives exist to explain opportunity identification. Some
scholars propose that opportunities exist in the external environment and it is the role of
the entrepreneur to ‘discover’ these opportunities (e.g., Drucker, 1998). Processes of
discovery might include active search (Fiet, 2002) and passive search (Ardichvili et al.,
2003). Others contend that opportunities are created by entrepreneurs [Schumpeter,
(1934), p.65] suggesting that ‘It is… the producer who as a rule initiates economic
change and consumers are educated by him if necessary; they are, as it were, taught to
want new things.’
Building upon previous scholars, Companys and McMullen (2007) explain that
different schools (e.g., economic, cultural-cognitive) have emerged to explain the
identification of entrepreneurial opportunities. The economic school views opportunities
as objective phenomena that exist within the environment (Companys and McMullen,
2007). In the economic school, entrepreneurs who have better information (Hayek, 1945;
Shane and Venkataraman, 2000), greater prior knowledge (Shane and Venkataraman,
2000; Shepherd and DeTienne, 2005) and/or are more alert (Gaglio and Katz, 2001;
Kirzner, 1979) are more likely to discover opportunities. This suggests a gradual learning
process (Dimov, 2003) wherein entrepreneurs accumulate information, knowledge and
experiences that provide a competitive advantage when searching for entrepreneurial
opportunities.
According to the cultural-cognitive school, entrepreneurial opportunities are
subjective and dependent upon individuals to create them. ‘Proponents of this view
suggest that entrepreneurial opportunities exist once they are defined and enacted by
individuals and firms’ [Companys and McMullen, (2007), p.305; Weick, 1979]. As such,
an opportunity does not exist until an entrepreneur ‘creates’ it.
We contend that family firms are less likely than non-family firms to identify
opportunities through a creation approach (the cultural cognitive perspective on
opportunity recognition). George et al. (2005, p.210) demonstrate that ‘internal owners
tend to be risk averse and have a lower proclivity to increase scale and scope of
internationalisation than external owners’ suggesting that family firms are less likely to
assume riskier opportunities (Naldi et al., 2007). There is more uncertainty involved in
the opportunity creation approach since, by definition, no market yet exists. Family firms
have multiple constituencies to respond to as they identify opportunities for new venture
creation. The number of constituents to which family firms must answer and their
concern with survival for future generations makes it less likely that family firms will use
a creative approach to opportunity identification and less likely to create a new product
for which there does not appear to be an existing demand:
Hypothesis 1 Family firms are less likely to report opportunity identification as a
spontaneous, creative event.
16 J. Hayton et al.
A number of scholars have pointed to the importance of social capital as critical to the
entrepreneurial opportunity identification processes (Ardichvili and Cardozo, 2000;
Birley, 1985; Davidsson and Honig, 2003). From this perspective, ‘social capital provides
networks that facilitate the discovery of opportunities….’ Davidsson and Honig (2003,
p.309) found that both strong and weak ties to be robust predictors of entrepreneurial
opportunity identification. Ardichvili and Cardozo (2000) found that both access to
extended social networks and prior knowledge to be prerequisites for successful
opportunity identification. The ‘social embeddedness’ perspective holds that
entrepreneurs are not isolated, ‘atomised decision-makers’ (Aldrich and Cliff, 2003), but
are linked in social networks that provide sources of information, knowledge and
influence (Aldrich and Zimmer, 1986; Aldrich and Cliff, 2003; Barney et al., 2003).
What is unique to the family business is the addition of kinship ties to the traditional
dichotomy of strong and weak network ties (Granovetter, 1973). Barney et al. (2003)
propose these family ties represent a special type of strong tie between individuals.
According to Granovetter (1973, p.1361) ‘the strength of a tie is a (probably linear)
combination of the amount of time, the emotional intensity, the intimacy (mutual
confiding) and the reciprocal services which characterise that tie.’ Family ties may be
understood as possessing uniquely high levels of time, emotional intensity, intimacy and
reciprocity relative to all other forms of social connection. This distinction of kinship ties
has been acknowledged in the resource acquisition literature, where the uniquely strong
ties provided by kinship are viewed as an important source of material resources required
in venture start-up (Aldrich, 1999; Aldrich and Zimmer, 1986; Starr and MacMillan,
1990.
Research on social networks typically starts from the assumption that each individual
has a limited amount of resources (e.g., time) to spend on the development and
maintenance of social ties. Further, strong ties require more resources than weak ties and
that this implies an individual may trade more weak ties for fewer strong ties or
vice-versa (Granovetter, 1973). When family ties are also considered, it is expected that
the maintenance of stronger family ties will also involve a direct trade-off in the
time available to build and maintain alternative social connections. Thus, to the extent
that diverse benefits arise from different types of social connection, individuals may
obtain different outcomes according to the networks in which they are embedded (Burt,
1992).
Consistent with both the social embeddedness and economic perspectives, wherein
opportunity identification is the result of the accumulation of information, we propose
that family firms are more likely than non-family firms to utilise a gradual learning
approach to opportunity identification. An advantage of family ties over weak ties and
even strong ties is that they increase the probability that important private information
about an opportunity will be shared (Barney et al., 2003). Thus, the family firm, in
addition to being less willing to rely on a sudden, spontaneous creative event, is also
more likely to have greater flows of information available to it regarding entrepreneurial
opportunities (Barney et al., 2003). The combination of a disutility for a sudden,
spontaneous event and the availability of information increase the likelihood that an
opportunity recognition process that is consistent with the economic model will be
followed in family firms:
Hypothesis 2 Family firms are more likely to report a gradual, emergent learning
process of opportunity identification.
Entrepreneurial opportunity identification and new firm development processes 17
2.2 Level of innovation
A related issue is whether there are systematic differences with respect to the
innovativeness of the identified opportunities. There has long been concern that family
firms may be less willing to accept risk and engage in innovation in contrast with
non-family firms (e.g., Dertouzos et al., 1989; Naldi et al., 2007; Nooteboom, 1994). We
have already discussed how family social ties may influence opportunity identification
processes. The other side of the story regarding the impact of different types of social ties
is that weak ties are a superior method for diffusion of novel information (Granovetter,
1973). This is because it is only weak ties that bridge unrelated networks (Burt, 1992).
When ties are strong, there is a greater probability that other redundant ties will link
subparts of the network, therefore eliminating their network position as bridges
(Granovetter, 1973). This is because of homophily and cognitive balance.
Homophily predicts that similar people will tend to form stronger ties and strong ties
will tend to exist between similar people. There is extensive evidence that when ties are
strong, similarity between people is also high. Similarly, the theory of cognitive balance
(Heider, 1958) predicts that when a third person is introduced to a network, ties with each
of the two original members will need to be in balance (i.e., consistently positive or
consistently negative) or else a powerful psychological ‘strain’ will be introduced
(Granovetter, 1973). The notion that strong ties tend to be also redundant ties means that
while these ties offer a trustworthy, reliable conduit for information about new
opportunities, they also are less likely to be a source of novel information that may lead
to an innovative business idea.
In family firms, on average, the business environment of the family firm will include
a greater number of kinship connections than in the non-family firm. While the strong
kinship ties present in family business may provide a trusted source of information on
new opportunities, there may also be more redundancy in the information that they
provide (Burt, 1992; Granovetter, 1973). Therefore, family ties may increase the
likelihood that information about entrepreneurial opportunities is shared in a family
venture. However, more redundant ties imply less direct access to bridging positions that
cross ‘structural holes’ in knowledge networks. This is significant with respect to the
types of information to which decision-makers in family firms have access. Proponents of
the structural holes perspective (Burt, 1992) argue that value is created when connections
are formed between previously unconnected knowledge domains. Unique and
non-redundant ties are more likely than redundant ties to produce information leading to
truly innovative opportunities:
Hypothesis 3 Opportunities recognised by family firms will be less innovative than
those recognised by non-family firms.
2.3 Venture development processes
The conceptual framework developed by Sarasvathy (2001) distinguishes between two
decision-making approaches that may occur during new venture creation. Entrepreneurs
may utilise a causation process, which starts with a particular given goal (e.g., starting an
internet grocery firm) and determines what means (resources) are needed to achieve
this goal (Sarasvathy, 2001). The causation process is a linear, rational approach to
decision-making. Entrepreneurs following such a process may make a decision to create a
18 J. Hayton et al.
venture and then systematically seek opportunities, examining developed industries and
evaluating opportunities using data on market demand and existing and anticipated levels
of competition (Fiet, 2002; Herron and Sapienza, 1992).
Conversely, an effectuation process emphasises the selection of different possible
effects that may be achieved with a given set of resources (Sarasvathy, 2001). This
approach suggests that the entrepreneur is ‘…An imaginative actor who seizes contingent
opportunities and exploits any and all means at hand… many of which are shaped and
created through the process of economic decision-making and not given a priori’
[Sarasvathy, (2001), p.262]. This distinction in decision-making orientation may be
relevant to understanding a systematic difference between family and non-family firms
for two reasons. First, the context of non-family firms may tend to induce formal, causal
reasoning more strongly than in family firms. Second, in family firms, the desire to retain
control and the lower reliance on external financial resources may combine to reduce
pressures towards causal reasoning.
A preference for retaining control over the destiny of the organisation may be related
to a desire for pursuing the long-term goal of building a business that can provide for
financial security over multiple generations. There is significant empirical evidence that
family firms are more cautious with respect to the financing of their venture
(e.g., Agrawal and Nagarajan, 1990; Anderson and Reeb, 2003; Gersick et al., 1997;
Mishra and McConaughy, 1999).
We suggest that this desire to retain control leads to an environment that is more
supportive of an effectual model than a causal one. A result of greater control over the
business is that family firms also have greater freedom and flexibility to define their
business in less formal ways. There is evidence that family firms tend to formalise less
quickly and typically resist the process of professionalisation, which includes
formalisation of organisational structures, strategic planning and management of human
resources (e.g., Geeraerts, 1984; Leon-Guerrero et al., 1998; Reid et al., 2000). Family
firms are also less likely to seek external financial support as a direct result of this desire
to retain control (e.g., Agrawal and Nagarajan, 1990; Mishra and McConaughy, 1999).
All of these conditions reduce the pressures for the kind of formal, causally oriented
planning that is required in order to obtain external financial support. We propose that the
desire to retain control, a tendency to avoid formalisation and a lower reliance on sources
of financial support, will lead naturally to an organisational environment more conducive
to effectual processes than to causal ones:
Hypothesis 4 Family firms are less likely to utilise causation processes and more
likely to utilise effectuation processes than non-family firms.
3 Methods
3.1 Study sample and data collection
The study’s hypotheses are tested empirically using a sample of 183 firms in two
industries:
1 medical devices
2 electronic measuring devices.
Entrepreneurial opportunity identification and new firm development processes 19
These industries were selected as they are contexts in which innovation may be important
to firm competitiveness and therefore, it is likely that at least some firms would be
seeking innovative opportunities. Consistent with prior literature, we use three criteria for
defining family firms (Astrachan and Kolenko, 1994; Litz, 1995; Sharma et al., 1996):
1 they say they are a family firm
2 one family owns 50% or more of the stock
3 one family member is engaged as an active manager of the firm.
The sampling frame for this study was selected from the 2002 Dun and Bradstreet
directory, which contains information on over 132,500 companies (90% of which are
private). The database contained contact information and secondary data such as three
years of sales figures, employment figures, SIC Codes and start-up date. We selected two
four-digit codes – electrical measurement instruments (SIC 3825) and surgical medical
instruments (SIC 3841). This resulted in a nationwide sample frame of 1334 two to
five-year old firms. The selection of two to five year old firms was based on an
assumption that start-up processes may take a year or two (or sometimes more). We
truncated the age at five years to reduce the instability of recall data.
We conducted initial interviews with 35 firm founders – 43% from the electrical
measurements industry and 57% from the surgical medical instruments industry. Mean
firm age for those firms included in the initial interviews was 4.6 years, mean number of
employees was 8.2 and mean sales were $757,000. 63% of the founders had been
involved in previous ventures and 40% had an advanced educational degree. From these
interviews and reviews of the literature, we developed constructs and measures
specifically for this study. After survey development, the instrument was pre-tested with
18 members of an on-campus MBA class. We asked them to provide insight into difficult
questions, survey design, etc. The initial pre-test led to several changes in the survey.
A second pre-test was conducted with ten of the original 35 interviewees. Few changes
resulted from the second pre-test indicating entrepreneurs were able to complete the
revised survey.
In order to improve response rates, we telephoned potential respondents to elicit
participation and to ascertain correct mailing addresses. We eliminated 272 firms from
the sample due to duplications, incorrect addresses and disconnected phone numbers,
leaving a sampling frame of 1,062 firms. Following the total design method described by
Dillman (2000), we mailed questionnaires, accompanied by prepaid return envelopes and
cover letters, to the chief executive officers (chairman, CEO and president) of the firms in
the sample frame. The cover letters served to identify the sponsor of the study and to
explain its purpose and importance. We assured executives of confidentiality and
promised them a report of the aggregated findings once the study was completed. A
follow-up postcard and reminder letter with a replacement survey questionnaire followed
the initial mailing. 183 firms responded with usable surveys for a response rate of 17%.
Our research uses responses from a single respondent in each company along with
secondary data from Dun and Bradstreet. Our approach of using one informant per
organisation has been supported when survey instruments were well designed and
executed (Starbuck and Mezias, 1996) and the key respondent is the owner/manager of
the business (Chandler and Lyon, 2001). In addition, frequently in new firms, the lead
entrepreneur is the only person with the requisite knowledge. Non-response bias is
20 J. Hayton et al.
always a concern when response is voluntary; non-responding firms, however, did not
differ significantly from responding firms on measures included in the Dun and
Bradstreet data with respect to annual sales, geographic area or SIC code.
3.2 Operationalisation
3.2.1 Family firms
There have been a number of operationalisations of the family firm construct (Litz, 1995;
Sharma et al., 1996). It is important to distinguish family-owned firms from
lone-entrepreneur led firms, as the distinguishing characteristics of family firms most
salient in the present study would not be expected to apply to such a context (Miller et al.,
2007). In this study, a family firm is defined in terms of three measures. First,
respondents were asked a yes/no question ‘is this a family firm?’ Second, because these
were privately held companies, we followed Astrachan and Kolenko’s (1994) definition
of family firms based upon ownership and asked ‘does any one family own more than
50% of stock?’ Third, acknowledging the importance of family influence in the business,
we asked ‘what is the number of family members in decision-making roles?’ (Having
more than one family member in a decision-making role was considered a necessary but
not sufficient requirement for definition as a family firm). Firms were then defined as
being family businesses when, in addition to having multiple family members involved in
decision-making, they also either defined themselves as a family firm or reported that a
single family owned more than 50% of the firm. The final sample included 96 family
firms and 80 non-family firms.
3.2.2 Opportunity identification processes
We developed two, three-item scales to measure opportunity identification processes. The
first scale measures the degree to which the opportunity identification process was the
result of a ‘gradual learning process’ and is comprised of three items:
1 my/our recognition of a market need was the result of a gradual learning process
2 the recognition of this opportunity was the result of a process that emerged over time
3 our opportunity identification process was a single discrete event that occurred in a
very short time period (reverse scored).
The second scale measures the degree to which the opportunity was ‘created’ by the
entrepreneur. It is also comprised of three items:
1 my/our recognition of a market need came suddenly through a stroke of insight
2 I/we created a product or service to solve a particular problem
3 I/we innovatively created a product or service.
The items measuring gradual learning process factored together as did those measuring
creation. There were not strong cross-loadings with non-target factors.
Entrepreneurial opportunity identification and new firm development processes 21
3.2.3 Degree of innovation
The innovativeness of the opportunities was established based upon a scale developed by
Fiet (2002) and utilised by DeTienne and Chandler (2007). We asked, ‘which of the
following best describes your initial product/service?’ Possible responses were:
1 a replication of existing products/services used in similar applications
2 a new application for an existing product/service with little or no modification
3 a minor modification to an existing product/service
4 a significant improvement to an existing product/service
5 a combination of two or more existing products into one unique product/service
6 a product/service that is new to the world.
3.2.4 Venture development processes
Sarasvathy (2001) identifies causation and effectuation as two different venture
development processes.
Causation
Causation refers to a process of new venture creation that ‘…take a particular effect as
given and focus on selecting between means to create that effect’ [Sarasvathy, (2001),
p.245]. Causation is a linear, rational approach to decision-making in which
entrepreneurs have access to perfect or near-perfect information; thus, they can follow a
systematic approach to new venture creation. As there is no established measure of the
causation construct in the extant literature, we developed an 8-item Likert-scale measure
based on the description given by Sarasvathy (2001). Respondents were asked to
‘indicate the degree to which you agree or disagree with each of the following
statements’:
1 We analysed the long-run opportunities and selected what we thought would provide
the best returns.
2 Our decision-making has been largely driven by expected returns.
3 We researched and selected target markets and did meaningful competitive analysis.
4 We designed and planned business strategies.
5 We designed and planned production and marketing efforts.
6 We organised and implemented control processes to make sure we met objectives.
7 The product/service that we used to launch this business was very similar to our
original conception.
8 We had a clear and consistent vision of where we wanted to go.
22 J. Hayton et al.
Effectuation
Effectuation refers to processes that ‘take a set of means as given and focus on selecting
between possible effects that can be created with that set of means’ [Sarasvathy, (2001),
p.245]. An effectuation process is one that allows individuals to make use of
contingencies in the environment and adjust their path as new information becomes
available. As with causation, there is no established measure of the effectuation construct
in the extant literature. Therefore, we developed a 9-item Likert-scale measure based on
the description given by Sarasvathy (2001). Effectuation was measured by asking
respondents to ‘please indicate the degree to which you agree or disagree with each of the
following statements’:
1 We evaluated the set of resources and means we had at our disposal and thought
about different options.
2 We experimented with different products and/or business models.
3 It was impossible to see from the beginning where we wanted to end.
4 We have allowed the business to evolve as opportunities have emerged.
5 We started very flexibly and tried to take advantage of unexpected opportunities as
they arose.
6 We have used a substantial number of agreements with customers, suppliers and
other organisations to reduce the amount of uncertainty.
7 Our decision-making has been largely driven by how much we could afford to lose.
8 The ultimate product/service used to launch this business was quite different than
originally conceptualised.
9 We developed a strategy to best take advantage of our resources and capabilities.
The items represented a Likert scale with a five point, agree-disagree response format.
4 Results
4.1 Preliminary analysis
Preliminary analyses involved assessments of the factor structures of the measures of
opportunity identification sources and processes and the measures of causation and
effectuation. We used principal components analysis with factor retention determined by
parallel analysis (Hayton et al., 2004) in combination with screen analysis. Discriminant
validity of the two measures of opportunity identification sources and processes was
assessed by including them in a single factor analytic model. Scale reliability was
assessed using Cronbach’s coefficient alpha. Table 1 shows the results of this analysis.
The results of the analysis of opportunity identification items show a two factor solution.
The solution of the principal components analysis, followed by oblique rotation is
shown in Table 1. The simple structure confirms that this solution is a good fit to the
data. The first two factors represent the two process dimensions of opportunity
identification:
Entrepreneurial opportunity identification and new firm development processes 23
1 a spontaneous creative act
2 a gradual learning process.
This is consistent with our a priori expectations.
Table 1 Principal components analysis of opportunity recognition items
Item Process: creation Process: learning
Process – creation 0.87
Process – created 0.85
Process – sudden stroke of insight 0.53
Process – emergent process 0.88
Process – single discrete event –0.79
Process – gradual process 0.64
Eigenvalue 2.35 1.85
Percent of variance explained 21.38 16.78
Table 2 Factor analysis of causation and effectuation items
Item description Factor 1 Factor 2 Factor 3
We analysed long-run opportunities and selected what we
thought would provide the best returns.
0.75
We developed a strategy to best take advantage of
resources and capabilities.
0.75
We designed and planned business strategies. 0.68
We organised and implemented control processes to make
sure we met objectives.
0.60
We researched and selected target markets and did
meaningful competitive analysis.
0.57
We used a substantial number of agreements with
customers, suppliers and other organisations and people to
reduce the amount of uncertainty.
0.55
We evaluated the set of resources and means we had at our
disposal and thought about different options.
0.55
We designed and planned production and marketing
efforts.
0.53
The ultimate product/service that I used to launch this
business was quite different from my original conception.
0.77
The ultimate product/service that I used to launch this
business was very similar to my original conception
(reverse coded).
0.75
It was impossible to see from the beginning where we
wanted to end.
0.64
We have allowed the business to evolve as opportunities
have emerged.
0.56
Eigenvalues 3.76 1.76 1.44
Percent of variance explained 31.30 14.64 11.98
24 J. Hayton et al.
The results of the analysis of the causation and effectuation items are shown in
Table 2. This analysis revealed three factors. In this case, the mineigen greater than one
criterion suggested five factors to be retained. However, parallel analysis (Hayton et al,
2004) and screen analysis, coupled with examination of the results for simple structure,
revealed that a three factor solution is most appropriate. The first factor reflects
‘causation processes,’ the second reflects ‘effectuation: product evolution’ and the third
reflects ‘effectuation: business evolution.’ Therefore, one factor reflects causation and a
remaining two reflect differing aspects of effectuation. The causation scale is the
eight-item scale listed above.
Effectuation: product evolution is measured by a two-item scale:
1 the ultimate product/service that I used to launch this business was quite different
from my original conception
2 the ultimate product/service that I used to launch this business was very similar to
my original conception (reverse coded).
Effectuation: business evolution is also measured by two items:
1 it was impossible to see from the beginning where we wanted to end
2 we have allowed the business to evolve as opportunities have emerged.
Table 3 Means, correlations and standard deviations
Variable Mean SD 1 2 3 4 5 6
1 Family firm 1.52 1.27 0.67
2 Causation 3.61 0.69 –0.21 0.81
3 Effectuation 1: product
evolution
2.13 0.99 –0.09 0.01 0.72
4 Effectuation 2:
business evolution
3.16 0.96 0.12 –0.11 0.10 0.41
5 Opportunity
identification
process 1: sudden
3.22 1.01 –0.22 0.17 0.08 0.16 0.65
6 Opportunity
identification
process 2: gradual
3.24 0.56 –0.04 0.17 –0.05 0.12 0.18 0.70
7 Level of
innovativeness*
3.46 1.71 –0.27 0.16 0.22 0.06 0.49 –0.07
Notes: Coefficient alpha statistics in diagonal; italics denotes significance p