Description
Detailed description pertaining to strategies for the entrepreneurial millennium1 raphael amit.
Strategies for the Entrepreneurial Millennium 1
Introduction
The most striking features of business life at the turn of the millennium are volatility,
turbulence, and unpredictability. New winners emerge quickly and unexpectedly;
established leaders decline or disappear. Foster and Kaplan (2001), for example, found
that turnover in the S&P 90 increased from about 1.5 percent per year during the
1920s and 1930s to nearly 10 percent in 1998. Economy-wide tsunamis occur like the
six-year “New Economy:” from the IPO of Netscape through John Chamber’s lament
about the “hundred-year flood” that washed out Cisco’s consistent earnings increases
(Anders, 2001). Decisions by courts and regulators redirect the path of industry evo-
lution such as repelling Napster’s attack on the music industry, slowing the application
of biotechnology to agriculture, blocking General Electric’s dominance of the aero-
space industry, and the two-year (unsuccessful) battle by the government to break up
Microsoft. Other examples include disruptive technologies like the Internet that pro-
duce not only hype and uncertainty in the short term but also lasting changes like
dominant new competitors (AOL–Time Warner) and new business models (e.g., auc-
tions and exchanges) and new hybrid organizational structures designed to capture
the benefits of integrating traditional off-line business operations with on-line opera-
tions while leveraging the deep interconnectivity (enabled by the Internet).
Stakeholders demand increasingly higher levels of performance. Shareholders ex-
pect all companies – not only high technology firms – to increase revenues more quickly
than the overall economy and to increase earnings even faster than revenues. George
David, CEO of United Technologies, calls it the “5/15 problem:” how can a com-
pany sustain annual growth in earnings of 15 percent when business units are in indus-
tries growing at only 5 percent? The reality of the 5/15 problem is demonstrated by
table 1.1, which summarizes the performance during the 1990s of each quintile of the
S&P 500 (sorted by total returns to shareholders, including stock price appreciation
and dividends). Among the above-average performers, the median company gener-
CHAPTER ONE
Strategies for the Entrepreneurial
Millennium
1
Raphael Amit, Charles E. Lucier, Michael A. Hitt, and
Robert D. Nixon
2 R. Amit, C. E. Lucier, M. A. Hitt, and R. D. Nixon
ated annual revenue increases of 12.9 percent and average annual earnings increases of
19.3 percent.
The “war for talent” in employees has not only increased compensation for the
highest performers, but also increased the expectation that work will be interesting
and personally fulfilling. When large companies are unable to meet these expectations,
the free agent economy of part-time or self-employed workers is an increasingly avail-
able option, especially in the United States.
The expectations of citizens and governments are even higher than for others. For
example, rising standards for safety (both legal standards and public expectations) are
apparent in the mad cow disease and genetically-modified organism regulations and
reaction in Europe, in the asbestos litigation-related bankruptcies at Fortune 500 com-
panies like Owens-Corning, Johns Manville, Eagle Picher, Armstrong, and USG, in
the tobacco industry reshaping settlements in the United States, and in the termina-
tion of the long-standing relationship between Ford and Bridgestone/Firestone over
responsibility for accidents of Ford Explorers caused by tread separation. Of course,
the public’s expectations are high in many areas other than safety, including: environ-
mental responsibility, accessibility for the economically or physically disadvantaged,
privacy, and loss of control because of globalization.
While this new landscape is highly turbulent and uncertain (Hitt et al., 1998; Hitt,
2000), it also presents entrepreneurial opportunities (McGrath and MacMillan, 2000;
Shane and Venkataraman, 2000). For example, there are opportunities to take market
share from less innovative competitors by offering new and better goods and services
to the market. Entrepreneurial firms may capture existing markets with innovative
goods and services but also may create new markets (Hamel, 2000).
Entrepreneurs who seize the opportunity in volatile environments to create success-
ful new businesses or to revitalize existing businesses are the central figures in the new
economic landscape. In fact, the number of new business start-ups reached record
levels in the USA in 1998–9, especially in the high technology sector. Also, the number
of companies funded and the amounts provided by venture capital firms reached un-
precedented levels ($15.59 billion in 1997, $27.73 billion in 1998 and $46.1 billion
in 1999). Those firms that accessed public markets for capital (growing from
119 companies in 1997 to 246 in 1999) represent only the tip of the entrepreneurial
iceberg. A better indication of the pervasive impact of entrepreneurs is the study of
Table 1.1 Performance of S&P 500, 1990–9
Quintile of Annual returns to Annual growth in Annual growth in
performance for shareholders earnings revenue
shareholders (%) (%) (%)
Top 34.0 29.3 20.6
Above average 21.8 14.6 8.3
Average 14.7 9.8 5.2
Below average 10.0 4.7 4.9
Bottom 3.2 1.1 5.2
Strategies for the Entrepreneurial Millennium 3
1,335 large companies publicly traded in the United States from 1965 to 1995 by
Lucier et al. (1997). They found that more than 90 percent of the companies that
provided long-term returns ranked in the top decile for shareholders had pioneered
the successful application of a disruptive technology or a fundamentally new business
model in an industry – the hallmarks of the most successful entrepreneurs.
The Entrepreneurial Millennium
The bursting of the Internet bubble and the decline of the IPO market in 2000 and
2001 do not mean that the importance of entrepreneurs is decreasing. In fact, we
argue that the impact and ubiquity of entrepreneurs will increase, driven by the posi-
tive feedback cycle of today’s entrepreneurial success, thereby creating even more op-
portunities for future entrepreneurs. In turn, this will attract more entrepreneurs and
serve as a catalyst for a greater amount of entrepreneurial activity.
Successful entrepreneurs represent the new winners who change the economic land-
scape and cause much of the turbulence. They create new-to-the-world industries,
shift the boundaries of existing industries, and cause industries to converge. They
challenge legislators and regulators to address new questions (e.g., is cloning legal for
humans, other animals, or plants?) and to redefine “intellectual property” in new set-
tings. Their successful commercialization of disruptive technologies (e.g., microproc-
essors) accelerates the development of additional technologies (e.g., genomics) that,
in turn, disrupt additional industries. The new business models they develop in one
industry stimulate the development of analogous business models in other industries,
such as the propagation of power retailing format created by Toys “R” Us across
16 other retailing industries. Thus, opportunities for entrepreneurs continue to in-
crease exponentially.
Past success and current opportunities are expanding the supply of potential entre-
preneurs. Well-publicized extraordinary rewards for successful entrepreneurs like Bill
Gates, Richard Branson, and Larry Ellison attract additional entrepreneurs. Increas-
ingly effective support infrastructures – incubators, angel investors, venture capitalists,
and networks of experienced entrepreneurs – are evolving not only in Silicon Valley
but globally (Reynolds et al., 2000). Established companies are trying to enhance
entrepreneurship as well, for example, through corporate venturing groups (some-
times in partnership with venture capitalists) or new business pilot ventures.
This spiral of entrepreneurial success, greater opportunities, and increasing numbers
of entrepreneurs shapes the new millennium. Large companies are likely to become
more entrepreneurial but with the turbulent landscape and increasing entrepreneurial
activity, we can also expect greater turnover among Fortune 500 companies.
Strategy for the Millennium
Twenty years ago, strategists shared a paradigm: a consistent set of concepts, processes
and tools grounded in Marshallian microeconomics and industrial organization
economics. However, the traditional paradigm is not effective in explaining behavior
R
4 R. Amit, C. E. Lucier, M. A. Hitt, and R. D. Nixon
in a volatile, discontinuous environment where increasing stakeholder expectations
demand innovation more than optimization. Although an effective and widely ac-
cepted strategy paradigm for the entrepreneurial millennium has not yet emerged,
some new concepts, processes, and tools are available.
One example is the concept of strategic entrepreneurship explained in a recent spe-
cial issue of the Strategic Management Journal (Hitt et al., 2001) and a forthcoming
book (Hitt et al., 2002). Essentially, this concept suggests entrepreneurial actions be
taken using a strategic framework. In other words, entrepreneurial ventures develop
and implement new business models within which entrepreneurial opportunities are
identified and exploited through the application of strategic discipline to create wealth
(Hitt et al., 2001). Thus, opportunity-seeking and advantage-seeking behaviors are
integrated (Hitt et al., 2002).
In the emerging world of continuous structural change, competitive advantage may
be defined by the extent and duration of abnormal profits during disequilbrium condi-
tions as compared to a defensible position in equilibrium. Linear industry value chains
are disappearing, replaced by webs of complex relationships where a firm can simulta-
neously serve as an alliance partner, competitor, customer, and supplier. A company’s
competitive cost position is determined less by structural factors like scale than by its
business model. Furthermore, competition is based on knowledge and capabilities
derived from a firm’s resources.
An integrated entrepreneurial and strategic process balances commitment to a stra-
tegic intent with the ability to sense and seize opportunities as they arise: neither an
inflexible plan nor pure opportunism. Coherence and coordination across the enter-
prise are provided less by formal strategic plans than by sharing the vision, priorities,
and assumptions about the competitive landscape and environment and information.
Adaptation and innovation are stimulated by an organization’s culture and the provi-
sion of ba (loosely translated as “space”). The result is a true learning organization
involving scanning, adapting, learning, and launching new businesses.
Applied game theory and dynamic modeling tools such as complex adaptive systems
are in transition from research tools to use in the strategic management and operations
of a business. Options are a powerful metaphor for the future potential of current
business positions and possible moves. Options may prove to be a more powerful tool
than net present value in evaluating decisions.
A strategy paradigm for the new millennium (integrating these concepts, processes,
and tools) should logically center on entrepreneurs. Such a paradigm should help new
entrepreneurs emulate other successful entrepreneurs. However, it should also be
for entrepreneurs, thereby enhancing their success. Entrepreneurs have made little
use of the traditional strategy paradigm, utilizing neither the concepts, the strategic
planning process, nor the strategic management analytical tools. A powerful paradigm
that increases the success of entrepreneurs can accelerate the dynamic environment
and economic development by creating more opportunities, expanding the supply of
entrepreneurs, intensifying volatility, and increasing the performance of the businesses
for shareholders, employees, and society.
Strategies for the Entrepreneurial Millennium 5
Wealth-Creating Business Models and Identifying Opportunities
Several scholars, including Hitt and Ireland (2000) and McGrath and MacMillan (2000),
have argued that e-commerce presents an opportunity to integrate entrepreneurship
and strategic management research streams. However, academic research on e-com-
merce is sparse, with little articulation regarding the central issues related to this new
phenomenon or with insufficiently developed theory that captures the unique features
of virtual markets. In particular, there has been little research on the new business
models needed to create wealth in the new economic landscape. Chapter 2 by Amit
and Zott begins to address this need. First, they derive a relatively new business-model
construct by building on the value chain framework (Porter, 1985), strategic network
theory (Dyer and Singh, 1998), and the transaction cost perspective (Williamson, 1975).
A business model refers to the structure, content, and governance of transactions that
are enabled by a network of firms, suppliers, complementors, and customers. Amit and
Zott argue that this new construct, the business model, provides a deeper understand-
ing of value creation than is possible with other units of analysis (e.g., firm or industry)
and is especially useful in analyzing interactive, rapid growth electronic markets. Sec-
ond, the authors develop a model to describe the value drivers (i.e., factors that en-
hance the total value created by a business model) of e-commerce business models.
They argue that the total value created is the sum of all the values that can be appropri-
ated by the participants in a business model – the firm, its partners, and its customers
(Brandenburger and Stuart, 1996). Amit and Zott examined the business models of
59 European and American e-firms and found the major value drivers of novelty, lock-
in, complementarities, and efficiency to be critical for value creation in an e-commerce
environment.
Chapter 3 by Peng and Wang introduces an intermediation-based view of entrepre-
neurship to explain why entrepreneurs act to take advantage of market opportunities,
and why some entrepreneurs outperform others. Integrating transaction cost theory
and resource-based theory, they argue that many entrepreneurial activities can be ap-
propriately conceptualized as intermediations which are, in essence, market makers by
connecting complicated sets of suppliers and customers. The authors present examples
of entrepreneurial activities in financial, labor, distribution, and technology markets
showing that the information asymmetries (and thus high transaction costs) between
transaction parties create opportunities for entrepreneurial intermediation. Those en-
trepreneurs who can reduce transaction costs for both sides can carve out new market
niches. Thus, the large amounts of intermediation needs in the new economy create
entrepreneurial opportunities. From a resource-based perspective, Peng and Wang
suggest that entrepreneurs who possess and bundle resources to help buyers/sellers
reduce search, negotiation, and monitoring costs provide an important service to the
markets and have a high probability of creating wealth.
As noted earlier, a strategic options approach can be useful to entrepreneurs when
assessing future opportunities and the value of potential entrepreneurial actions. Chapter
4 by Reuer presents a real options-based perspective that allows entrepreneurs to gain
access to upside opportunities in the future while at the same time limiting downside
risk in entrepreneurial activities such as investing in a new technology or exploring
6 R. Amit, C. E. Lucier, M. A. Hitt, and R. D. Nixon
new markets. Reuer examines the application of real options in international joint
ventures. He suggests that through discretionary investments, corporate entrepreneurs
can enhance value by embracing, rather than avoiding, uncertainties; that multina-
tional networks are distinctive in enabling shifts in multinational firms’ value-chain
activities across borders in response to changes in product, factor, and currency mar-
kets; and that using a real options logic allows entrepreneurship to overcome an anti-
failure bias. In addition, Reuer argues that joint ventures can be helpful in entrepreneurial
undertakings intended to test new products, technologies, or foreign markets as part
of a sequential investment approach. While firms also use joint ventures to leverage
existing assets, from a corporate entrepreneurship perspective, joint ventures can be
useful in implementing exploratory initiatives by taking on partners with different and
needed resources. With data from 121 international joint ventures, Reuer explores the
likelihood that a call opportunity (to buy out a partner) is present and how cultural
differences, relevance to the firm’s core business, and the host environment affect that
likelihood. Therefore, Reuer’s chapter provides a useful introduction to the applica-
tion of real options thinking to entrepreneurial opportunities.
Along with the creation of new ventures and the emergence of new industries, new
organizational forms (intentional and unintentional) have appeared. One of these is
the strategic network that involves the development of strategic alliances. Chapter 5
by Rothaermel and Deeds focuses on three types of strategic alliances in the biotech-
nology industry: (1) vertical-upstream alliances with universities, research institutions,
government labs, hospitals, and industry associations; (2) horizontal alliances with other
biotechnology firms; and (3) vertical-downstream alliances with pharmaceutical and
chemical firms. The authors argue that previously hybrid forms of organization such as
alliances were generally limited to non-critical projects with relatively low levels of
complexity and uncertainty. Projects that were critically important or had high levels
of uncertainty and complexity were internalized because of fear that partner firms
would be opportunistic. However, while many new high technology ventures have the
knowledge resources and creativity to create valuable new products, they often lack
other important resources to fully develop and commercialize them. As such, the young
technology ventures have turned to strategic alliances for access to the complementary
resources necessary for complex, uncertain, and costly research and development
projects. However, this argument is not unique to the literature. Other research has
suggested and found a relationship between strategic alliances and innovative activity
(e.g., Stuart, 2000). Alternatively, all firms have limited managerial and financial re-
sources and, eventually, the costs of simultaneously managing a large number of alli-
ances exceed the gains obtained from the alliances. Rothaermel and Deeds hypothesize
that the number of strategic alliances into which a firm enters and its new product
development will be related in a curvilinear (inverted-U) manner; that the type of
alliance will affect the inflection point of the relationship, and that the firm’s experi-
ence will influence the number of alliances it can manage. Rothaermel and Deeds use
data from 2,226 strategic alliances entered between 1975 and 1997 by 325 new bio-
technology firms. Finding general support for their hypotheses, they conclude that
there are limits to a firm’s ability to manage alliances. Past a certain point, one more
vertical-upstream, horizontal or vertical-downstream alliance may reduce new product
development. In addition, they argue that different types of alliances pose different
Strategies for the Entrepreneurial Millennium 7
types and amounts of challenges to managers and, for different types of alliances, de-
clining returns occur at different levels of alliance intensity. Rothaermel and Deeds
also conclude that there exists an experience curve in alliance management; more ex-
perienced firms can successfully manage a larger number of alliances than less experi-
enced firms.
In their chapter on knowledge creation and utilization, Nonaka and Reinmoeller
suggest that creative renewal in industries, organizations, and teams is critical for effec-
tive strategic actions in the entrepreneurial millennium. Routines of creative renewal
involve the processes that create and exploit knowledge within large organizations.
When new ventures and start-ups threaten incumbents, the management of knowl-
edge, its creation and use, increase in importance. They argue, however, that explicit
knowledge and best practices often diffuse quickly and personal knowledge of employ-
ees can be lost with unplanned turnover, if this is not embedded in patterns of interac-
tion. To embed such knowledge, Nonaka and Reinmoeller develop the concept of
creative routines that emphasize dialogue and improvising. Creative routines make
complex idiosyncratic relationships in dynamic business systems visible, trigger prag-
matic action and contribute to competitive advantage because they drive knowledge
conversions, even of authentic, hidden and difficult-to-imitate tacit knowledge. Using
three case studies, the authors illustrate how dynamic business systems and creative
routines affect information technology, organizational systems, and procedural sys-
tems through dialogue, improvising, and distributed leadership. They conclude that
the concept of creative routines is a pragmatic way to introduce entrepreneurial proc-
esses to organizations, to leverage deep tacit knowledge, and to harness the creative
forces in dynamic contexts.
While developing effective business models, identifying, and creating entrepreneurial
opportunities are important, the next section examines means of exploiting opportu-
nities for creating wealth.
Exploiting Opportunities for Wealth Creation
After entrepreneurs identify new business opportunities, they must successfully exploit
them to obtain entrepreneurial rents. Successful entrepreneurs shift from exploration
(a focus on activities and/or investments to reduce technological and market uncer-
tainties surrounding the potential opportunity) to exploitation (activities and/or in-
vestments committed to building efficient business operational systems to generate
profits). Moving an innovation to market quickly can realize benefits earlier while
delaying its introduction may allow further development and cost reductions in pro-
duction. Likewise, Choi, Levesque, and Shepherd, in chapter 7, argue that a similar
trade-off exists for an entrepreneur in deciding when to shift from exploring a new
opportunity to its exploitation. They suggest that, on the one hand, entrepreneurs can
increase profit potential by exploiting the opportunity earlier and capitalizing on first
mover advantages, but, on the other hand, entrepreneurs can reduce a new venture’s
mortality risk by delaying exploitation, further exploring the opportunity, and thereby
reducing its liabilities of newness. The authors construct an analytical optimization
model to identify the optimal time for an entrepreneur to shift from exploration to
8 R. Amit, C. E. Lucier, M. A. Hitt, and R. D. Nixon
exploitation and thus maximize performance (i.e., optimize the trade-off between profit
potential and mortality risk). Their optimization model results in several important
propositions. First, the optimal time to exploit a new opportunity occurs when the
entrepreneur’s uncertainty level reaches a specific threshold that corresponds to the
net expected performance of additional exploration activity, adjusted by the marginal
performance of mortality risk reduction. Second, entrepreneurs should exploit new
opportunities sooner when there is an increase in the unit exploration cost or the
uncertainty gap (lead time). Third, entrepreneurs should exploit new opportunities
later when there is an increase in mortality risk or in irreducible uncertainty. In sum-
mary, the dynamic decision rules presented by Choi et al. should assist entrepreneurs
in deciding when to end exploration or when to begin to exploit opportunities.
During the last decade, information technologies have reshaped most aspects of
business operations, increasing the importance of information-intensive activities. This
transformation is exemplified by the proliferation of electronic entrepreneurial endeavors
(both corporate and individual) and the effect these entrepreneurial ventures have had
on their more traditional competitors. For example, these ventures have forced indus-
try incumbents to modify their operations and structures, many of them creating elec-
tronic counterparts of their own. Electronic diversification through the creation of
Internet-based businesses is the focus of chapter 8 by Garbi, Golden, and Richey.
They examine whether traditional diversification concepts in strategic management
are adequate to understand the world of e-commerce. They argue that the core com-
petence for firms involved in electronic commerce is often the ability to share informa-
tion, rather than a functional expertise in manufacturing or new product technology.
As a consequence, the ability to classify these businesses into different industries, to
define the reach of multiple markets, and to establish the interrelationships among the
Internet-based businesses is increasingly difficult. Garbi et al. argue that in an Internet
environment, differences in firm diversification are not adequately explained by prod-
uct or geographic diversification or strategic groups theory. They propose that e-com-
merce, especially for traditional companies venturing into the electronic world, represents
a different type of diversification, the logic of which is not based on products or mar-
kets but on the channel of communication and distribution. Therefore, the authors
argue that channel diversification should supplement traditional product diversifica-
tion concepts in the field of strategic management.
The role of large corporations as financiers of technology-based new ventures has
increased dramatically in recent years to $18 billion in 2000. Despite this investment
and publicized success stories, the true benefits and limitations for entrepreneurs in
accepting corporate investors as co-owners of their businesses are less clear. In chapter
9, Maula and Murray report the results of an empirical investigation on the influence
of corporate investors on the performance of technology-based start-up companies.
Using a sample of 325 initial public offerings in information and communications
industries during 1998–9, they found that start-up enterprises co-financed by highly
capitalized corporations received higher valuations than comparable firms supported
by venture capitalists alone. They also found that corporate-financed start-ups outper-
formed firms co-financed by venture capitalists. The authors argue the superior per-
formance of co-financed new ventures is explained by three conditions: complementary
certification (i.e., increased legitimacy), the realization of operational synergies, and
Strategies for the Entrepreneurial Millennium 9
better investment selection. They also argue that the superior performance of start-up
enterprises with multiple corporate investors is the result of incremental certification,
validation of emerging dominant designs, and the reduced incidence of potential con-
flicts of interest between the new venture and its investors. Maula and Murray suggest
several implications for corporate investors, portfolio companies, and the traditional
venture capitalist investors. First, corporations are not “second best” investors; they
make successful equity investments into new technology-based firms. Second, tradi-
tional venture capitalists and corporate venture capitalists may be viewed as comple-
mentary, rather than alternative, sources of financial capital. Potential complementary
benefits are derived from the corporate investor’s depth of commercialization experi-
ence and/or technological abilities and the traditional venture capitalist’s wealth of
tacit experience in nurturing and development of the managerial capabilities of nas-
cent, and often highly vulnerable, young firms. They conclude that teaming industry-
leading firms with new ventures can produce superior results, and that corporate
investors are attractive partners for independent venture capitalists as well as new start-
up ventures.
The focus of McNamara and Vaaler’s chapter is on strategic decision-making by ex-
pert organizations in a setting characterized by increasing entrepreneurial competitive-
ness and environmental turbulence. Decision-making in the economic landscape in the
new millennium assumes inherent instability, frequent change, and constant scanning
for threats from rivals. The authors integrate several perspectives to appraise how deci-
sion-making is affected by this environment. These perspectives include upper echelon
theory (assessing decision-making tendencies based on the demographic background of
top managers), a decision-aids perspective (decision-making heuristics used by strategic
actors and the consequent behavior to which they lead), and the dynamic capabilities
viewpoint (the speed of internal decision-making processes linked to the inherent vola-
tility of the business environment in which a firm operates). While all three perspectives
are of increasing relevance in the new economic landscape, McNamara and Vaaler argue
that these perspectives and others suffer from a common shortcoming. They all gener-
ally assume that the decision-making individuals and processes are internal to the firm.
Many of the key decision-making individuals and decision-making processes may be
external (e.g., outside experts in law, accounting, finance, business, and various techni-
cal fields) and firms seek disinterested, objective advice regarding major strategic deci-
sions such as acquisitions, new product and business expansions, and foreign ventures.
McNamara and Vaaler investigate how the effects of crisis and competition inherent in
an increasingly diverse and volatile environment might skew external expert decision-
making. Using data from credit agency risk assessments of emerging-market sovereign
borrowers, McNamara and Vaaler compare the turbulent 1997–8 period (beginning
with the financial crisis in Thailand in mid-1997) to the more growth/stability-oriented
1987–96 period. Testing six hypotheses, they found that crisis conditions were linked to
negative (and thus costly) deviations from objective risk assessment models used by the
agencies. In addition, they found that the negative deviations were related to competi-
tive factors (e.g., incumbent versus insurgent, and global versus regional specialization).
The authors conclude that their study provides insights and managerial prescriptions
regarding the use of external expert organizations in an entrepreneurial environment
where the stresses of crisis and competition interact.
10 R. Amit, C. E. Lucier, M. A. Hitt, and R. D. Nixon
The strategic decision-making processes of top executives are important in identify-
ing and exploiting entrepreneurial opportunities for gaining competitive advantage in
a turbulent and uncertain environment. Top management teams capable of making
rapid decisions can enable their firms to be the entrepreneurial first movers in their
markets. Eisenhardt (1989) proposed a model of strategic decision-making speed for
firms operating in high-velocity environments. This model has become highly relevant
to firms in the entrepreneurial millennium. In chapter 11, Clark and Collins test this
model in a sample of 66 high technology public and private firms competing in the
information technology, telecommunications, and engineering services industries. Five
“tactics’ can be used to speed up the decision-making process. First, fast decision-
makers use real-time information to continuously update their understanding of the
company’s competitive position. Second, they examine multiple alternatives simulta-
neously rather than in a serial fashion. Third, fast decision-makers screen their deci-
sions and integrate them into an overall pattern or plan. The fourth tactic is a two-tiered
advice process that uses an experienced executive “counselor” to apply speedy heuris-
tics to the decision. The final tactic, termed “consensus with qualification”, allows the
CEO to use fiat if the group does not reach consensus within a specified time. Clark
and Collins’ results indicate that three of the tactics (real-time information, simultane-
ous alternatives, and decision integration) affect decision speed, providing some sup-
port for the validity of the model. They also found that two intervening processes
affect the decision-making speed of top executives in volatile environments, namely,
confidence to act on decisions and an ability to accelerate cognitive processing. They
conclude that top executives who are able to quickly assess the competitive landscape
and make good quality decisions in a timely fashion will provide their organizations
with the best chance of success in the entrepreneurial millennium.
Although the issue of how to manage growth is important to all firms, it is particu-
larly important in entrepreneurial ventures. With growth come challenges as well as
opportunities. Although past research has focused on the internal problems created by
a firm’s growth (e.g., rapid sales growth resulting in the need for capital and trained
employees), chapter 12 by Beekman and Robinson concentrates on the effects of growth
on relationships external to the firm, specifically, supplier relationships. They argue
that high-growth firms increasingly engage in long-term collaborative strategies with
suppliers (ranging from value-chain partnerships to equity joint ventures) to improve
their competitive position. Furthermore, they often retain and expand these long-term
relationships with key suppliers in periods of growth. Beekman and Robinson present
two contrasting theoretical perspectives on why new, high-growth firms remain with
their suppliers. The first is an economic exchange perspective that draws on transac-
tion cost and resource-based theory. This perspective is based primarily on the effec-
tiveness of the supplier relationship. Performance factors, such as reducing costs,
improving product quality, and increasing efficiency, are critical, along with the extent
to which the relationship allows the focal firm to concentrate more on its core busi-
ness. The second perspective is based on social exchange where strong interpersonal
ties create stability and facilitate cooperation between organizations. Additionally, trust
and open communication are emphasized and detailed and timely information is shared.
To test these two perspectives, the authors gathered survey data from high-growth
firms in the pharmaceutical industry between 1994 and 1997. The results suggest that
Strategies for the Entrepreneurial Millennium 11
rapid-growth companies’ partnerships follow a contingency model. A strong relation-
ship between a focal firm and a supply partner is important, but it is likely to explain
the continuation or expansion of business between firms only when the firm’s top
purchasing criteria like price, quality or availability are satisfied. After a supplier meets
the competitive criteria critical to a focal firm, a strong relationship can lead the focal
firm to expand its business with the supplier.
Conclusion
Businesses now operate in a new economic landscape in the entrepreneurial millen-
nium. New ventures and large corporations must be entrepreneurial to survive, much
less produce positive abnormal returns for shareholders. The economic landscape in
the latter half of the 1990s showed the potential but the new millennium was ushered
in with a vision of the challenges faced by firms to survive and succeed in the new
competitive landscape (Hitt, 2000).
Firms must identify and exploit valuable opportunities in existing markets or create
new ones. However, in the entrepreneurial millennium, they must do more. They
must also be strategic. Thus, firms must integrate opportunity-seeking and advantage-
seeking behaviors, what others have referred to as strategic entrepreneurship (Hitt et
al., 2001, 2002). As explained in the chapters in this book, firms must develop and use
new and effective business models. They can employ tools from other business disci-
plines such as real options to evaluate future opportunities. Because of a need for
greater and complementary resources, firms are likely to engage in alliances and strate-
gic networks. Alliances may thus enhance firms’ entrepreneurial capabilities. These
networks even present opportunities for entrepreneurial intermediation. The most
successful firms in the entrepreneurial millennium will effectively manage knowledge
creation, diffusion and application.
To exploit entrepreneurial opportunities, managers/entrepreneurs must balance the
need for exploration and the need for exploitation of opportunities. They must seek
and obtain the most effective forms of venture capital and balance risk and expert
knowledge in making critical strategic decisions. Additionally, decisions must be made
quickly because of the rapidity of change in the dynamic economic landscape. Finally,
because of the importance of alliances for access to resources, firms must effectively
manage external relationships (e.g., relationships with suppliers) (Ireland et al., 2002).
The twenty-first century is an exciting economic time, full of entrepreneurial oppor-
tunities. However, it will face complex and difficult challenges as well. Only the fittest
will survive. This book provides information on how to prepare for and meet these
challenges with effective strategies that will create value in the new millennium.
Note
1 Parts of this chapter draw on the work of Bertrand Shelton of Booz, Allen & Hamilton.
12 R. Amit, C. E. Lucier, M. A. Hitt, and R. D. Nixon
References
Anders, G. 2001: John Chambers, after the deluge. Fast Company, July, 100–11.
Brandenburger, A. M. and Stuart, H. 1996: Value-based business strategy. Journal of Economics
and Management Strategy, 5, 5–25.
Dyer, J. and Singh, H. 1998: The relational view: cooperative strategy and sources of
interorganizational competitive advantage. Academy of Management Review, 23, 660–79.
Eisenhardt, K. 1989: Making fast strategic decisions in high-velocity environments. Academy of
Management Journal, 32, 543–76.
Foster, R. and Kaplan, S. 2001: Creative Destruction. New York: Doubleday.
Hamel, G. 2000: Leading the Revolution. Boston: Harvard Business School Press.
Hitt, M. A. 2000: The new frontier: transformation of management for the new millennium.
Organizational Dynamics, 28, 6-17.
Hitt, M. A. and Ireland, R. D. 2000: The intersection of entrepreneurship and strategic man-
agement research. In D. L. Sexton and H. A. Landstrom (eds), Handbook of Entrepreneur-
ship. Oxford: Blackwell Publishers, 45–63.
Hitt, M. A., Ireland, R. D., Camp, S. M., and Sexton, D. L. 2001: Strategic entrepreneurship:
entrepreneurial strategies for wealth creation. Strategic Management Journal, 22 (special is-
sue), 479–91.
Hitt, M. A., Ireland, R. D., Camp, S. M., and Sexton, D. L. 2002: Strategic entrepreneurship:
integrating entrepreneurial and strategic management perspectives. In M. A. Hitt, R. D. Ire-
land, S. M. Camp and D. L. Sexton (eds), Strategic Entrepreneurship: Creating a New Inte-
grated Mindset, Oxford: Blackwell Publishers, in press.
Hitt, M. A., Keats, B. W., and DeMarie, S. 1998: Navigating in the new competitive landscape:
building strategic flexibility and competitive advantage in the 21st century. Academy of Man-
agement Executive, 12 (4), 22–42.
Ireland. R. D., Hitt, M. A., and Vaidyanath, D. 2002: Managing strategic alliances to achieve a
competitive advantage. Journal of Management, in press.
Lucier, C. E., Moeller, L. H., and Held, R. 1997: 10X value: the engine powering long-term
shareholder returns. Strategy and Business, 8, 21–8.
McGrath, R. G. and MacMillan, I. 2000: The Entrepreneurial Mindset. Boston: Harvard Busi-
ness School Press.
Porter, M. E. 1985: Competitive Advantage: Creating and Sustaining Superior Performance.
New York: Free Press.
Reynolds, P. D., Hay, M., Bygrave, W. D., Camp, S. M., and Autio, E. 2000: Global Entrepre-
neurship Monitor 2000 Executive Report. Kansas City, MO: Kauffman Center for Entrepre-
neurial Leadership.
Shane, S. and Venkataraman, S. 2000: The promise of entrepreneurship as a field of research.
Academy of Management Review, 25, 217–26.
Stuart, T. E. 2000: Interorganizational alliances and the performance of firms: a study of growth
and innovation rates in a high-technology industry. Strategic Management Journal, 21, 791–
811.
Williamson, O. E. 1975: Markets and Hierarchies, Analysis and Antitrust Implications. New
York: Free Press.
doc_898297049.pdf
Detailed description pertaining to strategies for the entrepreneurial millennium1 raphael amit.
Strategies for the Entrepreneurial Millennium 1
Introduction
The most striking features of business life at the turn of the millennium are volatility,
turbulence, and unpredictability. New winners emerge quickly and unexpectedly;
established leaders decline or disappear. Foster and Kaplan (2001), for example, found
that turnover in the S&P 90 increased from about 1.5 percent per year during the
1920s and 1930s to nearly 10 percent in 1998. Economy-wide tsunamis occur like the
six-year “New Economy:” from the IPO of Netscape through John Chamber’s lament
about the “hundred-year flood” that washed out Cisco’s consistent earnings increases
(Anders, 2001). Decisions by courts and regulators redirect the path of industry evo-
lution such as repelling Napster’s attack on the music industry, slowing the application
of biotechnology to agriculture, blocking General Electric’s dominance of the aero-
space industry, and the two-year (unsuccessful) battle by the government to break up
Microsoft. Other examples include disruptive technologies like the Internet that pro-
duce not only hype and uncertainty in the short term but also lasting changes like
dominant new competitors (AOL–Time Warner) and new business models (e.g., auc-
tions and exchanges) and new hybrid organizational structures designed to capture
the benefits of integrating traditional off-line business operations with on-line opera-
tions while leveraging the deep interconnectivity (enabled by the Internet).
Stakeholders demand increasingly higher levels of performance. Shareholders ex-
pect all companies – not only high technology firms – to increase revenues more quickly
than the overall economy and to increase earnings even faster than revenues. George
David, CEO of United Technologies, calls it the “5/15 problem:” how can a com-
pany sustain annual growth in earnings of 15 percent when business units are in indus-
tries growing at only 5 percent? The reality of the 5/15 problem is demonstrated by
table 1.1, which summarizes the performance during the 1990s of each quintile of the
S&P 500 (sorted by total returns to shareholders, including stock price appreciation
and dividends). Among the above-average performers, the median company gener-
CHAPTER ONE
Strategies for the Entrepreneurial
Millennium
1
Raphael Amit, Charles E. Lucier, Michael A. Hitt, and
Robert D. Nixon
2 R. Amit, C. E. Lucier, M. A. Hitt, and R. D. Nixon
ated annual revenue increases of 12.9 percent and average annual earnings increases of
19.3 percent.
The “war for talent” in employees has not only increased compensation for the
highest performers, but also increased the expectation that work will be interesting
and personally fulfilling. When large companies are unable to meet these expectations,
the free agent economy of part-time or self-employed workers is an increasingly avail-
able option, especially in the United States.
The expectations of citizens and governments are even higher than for others. For
example, rising standards for safety (both legal standards and public expectations) are
apparent in the mad cow disease and genetically-modified organism regulations and
reaction in Europe, in the asbestos litigation-related bankruptcies at Fortune 500 com-
panies like Owens-Corning, Johns Manville, Eagle Picher, Armstrong, and USG, in
the tobacco industry reshaping settlements in the United States, and in the termina-
tion of the long-standing relationship between Ford and Bridgestone/Firestone over
responsibility for accidents of Ford Explorers caused by tread separation. Of course,
the public’s expectations are high in many areas other than safety, including: environ-
mental responsibility, accessibility for the economically or physically disadvantaged,
privacy, and loss of control because of globalization.
While this new landscape is highly turbulent and uncertain (Hitt et al., 1998; Hitt,
2000), it also presents entrepreneurial opportunities (McGrath and MacMillan, 2000;
Shane and Venkataraman, 2000). For example, there are opportunities to take market
share from less innovative competitors by offering new and better goods and services
to the market. Entrepreneurial firms may capture existing markets with innovative
goods and services but also may create new markets (Hamel, 2000).
Entrepreneurs who seize the opportunity in volatile environments to create success-
ful new businesses or to revitalize existing businesses are the central figures in the new
economic landscape. In fact, the number of new business start-ups reached record
levels in the USA in 1998–9, especially in the high technology sector. Also, the number
of companies funded and the amounts provided by venture capital firms reached un-
precedented levels ($15.59 billion in 1997, $27.73 billion in 1998 and $46.1 billion
in 1999). Those firms that accessed public markets for capital (growing from
119 companies in 1997 to 246 in 1999) represent only the tip of the entrepreneurial
iceberg. A better indication of the pervasive impact of entrepreneurs is the study of
Table 1.1 Performance of S&P 500, 1990–9
Quintile of Annual returns to Annual growth in Annual growth in
performance for shareholders earnings revenue
shareholders (%) (%) (%)
Top 34.0 29.3 20.6
Above average 21.8 14.6 8.3
Average 14.7 9.8 5.2
Below average 10.0 4.7 4.9
Bottom 3.2 1.1 5.2
Strategies for the Entrepreneurial Millennium 3
1,335 large companies publicly traded in the United States from 1965 to 1995 by
Lucier et al. (1997). They found that more than 90 percent of the companies that
provided long-term returns ranked in the top decile for shareholders had pioneered
the successful application of a disruptive technology or a fundamentally new business
model in an industry – the hallmarks of the most successful entrepreneurs.
The Entrepreneurial Millennium
The bursting of the Internet bubble and the decline of the IPO market in 2000 and
2001 do not mean that the importance of entrepreneurs is decreasing. In fact, we
argue that the impact and ubiquity of entrepreneurs will increase, driven by the posi-
tive feedback cycle of today’s entrepreneurial success, thereby creating even more op-
portunities for future entrepreneurs. In turn, this will attract more entrepreneurs and
serve as a catalyst for a greater amount of entrepreneurial activity.
Successful entrepreneurs represent the new winners who change the economic land-
scape and cause much of the turbulence. They create new-to-the-world industries,
shift the boundaries of existing industries, and cause industries to converge. They
challenge legislators and regulators to address new questions (e.g., is cloning legal for
humans, other animals, or plants?) and to redefine “intellectual property” in new set-
tings. Their successful commercialization of disruptive technologies (e.g., microproc-
essors) accelerates the development of additional technologies (e.g., genomics) that,
in turn, disrupt additional industries. The new business models they develop in one
industry stimulate the development of analogous business models in other industries,
such as the propagation of power retailing format created by Toys “R” Us across
16 other retailing industries. Thus, opportunities for entrepreneurs continue to in-
crease exponentially.
Past success and current opportunities are expanding the supply of potential entre-
preneurs. Well-publicized extraordinary rewards for successful entrepreneurs like Bill
Gates, Richard Branson, and Larry Ellison attract additional entrepreneurs. Increas-
ingly effective support infrastructures – incubators, angel investors, venture capitalists,
and networks of experienced entrepreneurs – are evolving not only in Silicon Valley
but globally (Reynolds et al., 2000). Established companies are trying to enhance
entrepreneurship as well, for example, through corporate venturing groups (some-
times in partnership with venture capitalists) or new business pilot ventures.
This spiral of entrepreneurial success, greater opportunities, and increasing numbers
of entrepreneurs shapes the new millennium. Large companies are likely to become
more entrepreneurial but with the turbulent landscape and increasing entrepreneurial
activity, we can also expect greater turnover among Fortune 500 companies.
Strategy for the Millennium
Twenty years ago, strategists shared a paradigm: a consistent set of concepts, processes
and tools grounded in Marshallian microeconomics and industrial organization
economics. However, the traditional paradigm is not effective in explaining behavior
R
4 R. Amit, C. E. Lucier, M. A. Hitt, and R. D. Nixon
in a volatile, discontinuous environment where increasing stakeholder expectations
demand innovation more than optimization. Although an effective and widely ac-
cepted strategy paradigm for the entrepreneurial millennium has not yet emerged,
some new concepts, processes, and tools are available.
One example is the concept of strategic entrepreneurship explained in a recent spe-
cial issue of the Strategic Management Journal (Hitt et al., 2001) and a forthcoming
book (Hitt et al., 2002). Essentially, this concept suggests entrepreneurial actions be
taken using a strategic framework. In other words, entrepreneurial ventures develop
and implement new business models within which entrepreneurial opportunities are
identified and exploited through the application of strategic discipline to create wealth
(Hitt et al., 2001). Thus, opportunity-seeking and advantage-seeking behaviors are
integrated (Hitt et al., 2002).
In the emerging world of continuous structural change, competitive advantage may
be defined by the extent and duration of abnormal profits during disequilbrium condi-
tions as compared to a defensible position in equilibrium. Linear industry value chains
are disappearing, replaced by webs of complex relationships where a firm can simulta-
neously serve as an alliance partner, competitor, customer, and supplier. A company’s
competitive cost position is determined less by structural factors like scale than by its
business model. Furthermore, competition is based on knowledge and capabilities
derived from a firm’s resources.
An integrated entrepreneurial and strategic process balances commitment to a stra-
tegic intent with the ability to sense and seize opportunities as they arise: neither an
inflexible plan nor pure opportunism. Coherence and coordination across the enter-
prise are provided less by formal strategic plans than by sharing the vision, priorities,
and assumptions about the competitive landscape and environment and information.
Adaptation and innovation are stimulated by an organization’s culture and the provi-
sion of ba (loosely translated as “space”). The result is a true learning organization
involving scanning, adapting, learning, and launching new businesses.
Applied game theory and dynamic modeling tools such as complex adaptive systems
are in transition from research tools to use in the strategic management and operations
of a business. Options are a powerful metaphor for the future potential of current
business positions and possible moves. Options may prove to be a more powerful tool
than net present value in evaluating decisions.
A strategy paradigm for the new millennium (integrating these concepts, processes,
and tools) should logically center on entrepreneurs. Such a paradigm should help new
entrepreneurs emulate other successful entrepreneurs. However, it should also be
for entrepreneurs, thereby enhancing their success. Entrepreneurs have made little
use of the traditional strategy paradigm, utilizing neither the concepts, the strategic
planning process, nor the strategic management analytical tools. A powerful paradigm
that increases the success of entrepreneurs can accelerate the dynamic environment
and economic development by creating more opportunities, expanding the supply of
entrepreneurs, intensifying volatility, and increasing the performance of the businesses
for shareholders, employees, and society.
Strategies for the Entrepreneurial Millennium 5
Wealth-Creating Business Models and Identifying Opportunities
Several scholars, including Hitt and Ireland (2000) and McGrath and MacMillan (2000),
have argued that e-commerce presents an opportunity to integrate entrepreneurship
and strategic management research streams. However, academic research on e-com-
merce is sparse, with little articulation regarding the central issues related to this new
phenomenon or with insufficiently developed theory that captures the unique features
of virtual markets. In particular, there has been little research on the new business
models needed to create wealth in the new economic landscape. Chapter 2 by Amit
and Zott begins to address this need. First, they derive a relatively new business-model
construct by building on the value chain framework (Porter, 1985), strategic network
theory (Dyer and Singh, 1998), and the transaction cost perspective (Williamson, 1975).
A business model refers to the structure, content, and governance of transactions that
are enabled by a network of firms, suppliers, complementors, and customers. Amit and
Zott argue that this new construct, the business model, provides a deeper understand-
ing of value creation than is possible with other units of analysis (e.g., firm or industry)
and is especially useful in analyzing interactive, rapid growth electronic markets. Sec-
ond, the authors develop a model to describe the value drivers (i.e., factors that en-
hance the total value created by a business model) of e-commerce business models.
They argue that the total value created is the sum of all the values that can be appropri-
ated by the participants in a business model – the firm, its partners, and its customers
(Brandenburger and Stuart, 1996). Amit and Zott examined the business models of
59 European and American e-firms and found the major value drivers of novelty, lock-
in, complementarities, and efficiency to be critical for value creation in an e-commerce
environment.
Chapter 3 by Peng and Wang introduces an intermediation-based view of entrepre-
neurship to explain why entrepreneurs act to take advantage of market opportunities,
and why some entrepreneurs outperform others. Integrating transaction cost theory
and resource-based theory, they argue that many entrepreneurial activities can be ap-
propriately conceptualized as intermediations which are, in essence, market makers by
connecting complicated sets of suppliers and customers. The authors present examples
of entrepreneurial activities in financial, labor, distribution, and technology markets
showing that the information asymmetries (and thus high transaction costs) between
transaction parties create opportunities for entrepreneurial intermediation. Those en-
trepreneurs who can reduce transaction costs for both sides can carve out new market
niches. Thus, the large amounts of intermediation needs in the new economy create
entrepreneurial opportunities. From a resource-based perspective, Peng and Wang
suggest that entrepreneurs who possess and bundle resources to help buyers/sellers
reduce search, negotiation, and monitoring costs provide an important service to the
markets and have a high probability of creating wealth.
As noted earlier, a strategic options approach can be useful to entrepreneurs when
assessing future opportunities and the value of potential entrepreneurial actions. Chapter
4 by Reuer presents a real options-based perspective that allows entrepreneurs to gain
access to upside opportunities in the future while at the same time limiting downside
risk in entrepreneurial activities such as investing in a new technology or exploring
6 R. Amit, C. E. Lucier, M. A. Hitt, and R. D. Nixon
new markets. Reuer examines the application of real options in international joint
ventures. He suggests that through discretionary investments, corporate entrepreneurs
can enhance value by embracing, rather than avoiding, uncertainties; that multina-
tional networks are distinctive in enabling shifts in multinational firms’ value-chain
activities across borders in response to changes in product, factor, and currency mar-
kets; and that using a real options logic allows entrepreneurship to overcome an anti-
failure bias. In addition, Reuer argues that joint ventures can be helpful in entrepreneurial
undertakings intended to test new products, technologies, or foreign markets as part
of a sequential investment approach. While firms also use joint ventures to leverage
existing assets, from a corporate entrepreneurship perspective, joint ventures can be
useful in implementing exploratory initiatives by taking on partners with different and
needed resources. With data from 121 international joint ventures, Reuer explores the
likelihood that a call opportunity (to buy out a partner) is present and how cultural
differences, relevance to the firm’s core business, and the host environment affect that
likelihood. Therefore, Reuer’s chapter provides a useful introduction to the applica-
tion of real options thinking to entrepreneurial opportunities.
Along with the creation of new ventures and the emergence of new industries, new
organizational forms (intentional and unintentional) have appeared. One of these is
the strategic network that involves the development of strategic alliances. Chapter 5
by Rothaermel and Deeds focuses on three types of strategic alliances in the biotech-
nology industry: (1) vertical-upstream alliances with universities, research institutions,
government labs, hospitals, and industry associations; (2) horizontal alliances with other
biotechnology firms; and (3) vertical-downstream alliances with pharmaceutical and
chemical firms. The authors argue that previously hybrid forms of organization such as
alliances were generally limited to non-critical projects with relatively low levels of
complexity and uncertainty. Projects that were critically important or had high levels
of uncertainty and complexity were internalized because of fear that partner firms
would be opportunistic. However, while many new high technology ventures have the
knowledge resources and creativity to create valuable new products, they often lack
other important resources to fully develop and commercialize them. As such, the young
technology ventures have turned to strategic alliances for access to the complementary
resources necessary for complex, uncertain, and costly research and development
projects. However, this argument is not unique to the literature. Other research has
suggested and found a relationship between strategic alliances and innovative activity
(e.g., Stuart, 2000). Alternatively, all firms have limited managerial and financial re-
sources and, eventually, the costs of simultaneously managing a large number of alli-
ances exceed the gains obtained from the alliances. Rothaermel and Deeds hypothesize
that the number of strategic alliances into which a firm enters and its new product
development will be related in a curvilinear (inverted-U) manner; that the type of
alliance will affect the inflection point of the relationship, and that the firm’s experi-
ence will influence the number of alliances it can manage. Rothaermel and Deeds use
data from 2,226 strategic alliances entered between 1975 and 1997 by 325 new bio-
technology firms. Finding general support for their hypotheses, they conclude that
there are limits to a firm’s ability to manage alliances. Past a certain point, one more
vertical-upstream, horizontal or vertical-downstream alliance may reduce new product
development. In addition, they argue that different types of alliances pose different
Strategies for the Entrepreneurial Millennium 7
types and amounts of challenges to managers and, for different types of alliances, de-
clining returns occur at different levels of alliance intensity. Rothaermel and Deeds
also conclude that there exists an experience curve in alliance management; more ex-
perienced firms can successfully manage a larger number of alliances than less experi-
enced firms.
In their chapter on knowledge creation and utilization, Nonaka and Reinmoeller
suggest that creative renewal in industries, organizations, and teams is critical for effec-
tive strategic actions in the entrepreneurial millennium. Routines of creative renewal
involve the processes that create and exploit knowledge within large organizations.
When new ventures and start-ups threaten incumbents, the management of knowl-
edge, its creation and use, increase in importance. They argue, however, that explicit
knowledge and best practices often diffuse quickly and personal knowledge of employ-
ees can be lost with unplanned turnover, if this is not embedded in patterns of interac-
tion. To embed such knowledge, Nonaka and Reinmoeller develop the concept of
creative routines that emphasize dialogue and improvising. Creative routines make
complex idiosyncratic relationships in dynamic business systems visible, trigger prag-
matic action and contribute to competitive advantage because they drive knowledge
conversions, even of authentic, hidden and difficult-to-imitate tacit knowledge. Using
three case studies, the authors illustrate how dynamic business systems and creative
routines affect information technology, organizational systems, and procedural sys-
tems through dialogue, improvising, and distributed leadership. They conclude that
the concept of creative routines is a pragmatic way to introduce entrepreneurial proc-
esses to organizations, to leverage deep tacit knowledge, and to harness the creative
forces in dynamic contexts.
While developing effective business models, identifying, and creating entrepreneurial
opportunities are important, the next section examines means of exploiting opportu-
nities for creating wealth.
Exploiting Opportunities for Wealth Creation
After entrepreneurs identify new business opportunities, they must successfully exploit
them to obtain entrepreneurial rents. Successful entrepreneurs shift from exploration
(a focus on activities and/or investments to reduce technological and market uncer-
tainties surrounding the potential opportunity) to exploitation (activities and/or in-
vestments committed to building efficient business operational systems to generate
profits). Moving an innovation to market quickly can realize benefits earlier while
delaying its introduction may allow further development and cost reductions in pro-
duction. Likewise, Choi, Levesque, and Shepherd, in chapter 7, argue that a similar
trade-off exists for an entrepreneur in deciding when to shift from exploring a new
opportunity to its exploitation. They suggest that, on the one hand, entrepreneurs can
increase profit potential by exploiting the opportunity earlier and capitalizing on first
mover advantages, but, on the other hand, entrepreneurs can reduce a new venture’s
mortality risk by delaying exploitation, further exploring the opportunity, and thereby
reducing its liabilities of newness. The authors construct an analytical optimization
model to identify the optimal time for an entrepreneur to shift from exploration to
8 R. Amit, C. E. Lucier, M. A. Hitt, and R. D. Nixon
exploitation and thus maximize performance (i.e., optimize the trade-off between profit
potential and mortality risk). Their optimization model results in several important
propositions. First, the optimal time to exploit a new opportunity occurs when the
entrepreneur’s uncertainty level reaches a specific threshold that corresponds to the
net expected performance of additional exploration activity, adjusted by the marginal
performance of mortality risk reduction. Second, entrepreneurs should exploit new
opportunities sooner when there is an increase in the unit exploration cost or the
uncertainty gap (lead time). Third, entrepreneurs should exploit new opportunities
later when there is an increase in mortality risk or in irreducible uncertainty. In sum-
mary, the dynamic decision rules presented by Choi et al. should assist entrepreneurs
in deciding when to end exploration or when to begin to exploit opportunities.
During the last decade, information technologies have reshaped most aspects of
business operations, increasing the importance of information-intensive activities. This
transformation is exemplified by the proliferation of electronic entrepreneurial endeavors
(both corporate and individual) and the effect these entrepreneurial ventures have had
on their more traditional competitors. For example, these ventures have forced indus-
try incumbents to modify their operations and structures, many of them creating elec-
tronic counterparts of their own. Electronic diversification through the creation of
Internet-based businesses is the focus of chapter 8 by Garbi, Golden, and Richey.
They examine whether traditional diversification concepts in strategic management
are adequate to understand the world of e-commerce. They argue that the core com-
petence for firms involved in electronic commerce is often the ability to share informa-
tion, rather than a functional expertise in manufacturing or new product technology.
As a consequence, the ability to classify these businesses into different industries, to
define the reach of multiple markets, and to establish the interrelationships among the
Internet-based businesses is increasingly difficult. Garbi et al. argue that in an Internet
environment, differences in firm diversification are not adequately explained by prod-
uct or geographic diversification or strategic groups theory. They propose that e-com-
merce, especially for traditional companies venturing into the electronic world, represents
a different type of diversification, the logic of which is not based on products or mar-
kets but on the channel of communication and distribution. Therefore, the authors
argue that channel diversification should supplement traditional product diversifica-
tion concepts in the field of strategic management.
The role of large corporations as financiers of technology-based new ventures has
increased dramatically in recent years to $18 billion in 2000. Despite this investment
and publicized success stories, the true benefits and limitations for entrepreneurs in
accepting corporate investors as co-owners of their businesses are less clear. In chapter
9, Maula and Murray report the results of an empirical investigation on the influence
of corporate investors on the performance of technology-based start-up companies.
Using a sample of 325 initial public offerings in information and communications
industries during 1998–9, they found that start-up enterprises co-financed by highly
capitalized corporations received higher valuations than comparable firms supported
by venture capitalists alone. They also found that corporate-financed start-ups outper-
formed firms co-financed by venture capitalists. The authors argue the superior per-
formance of co-financed new ventures is explained by three conditions: complementary
certification (i.e., increased legitimacy), the realization of operational synergies, and
Strategies for the Entrepreneurial Millennium 9
better investment selection. They also argue that the superior performance of start-up
enterprises with multiple corporate investors is the result of incremental certification,
validation of emerging dominant designs, and the reduced incidence of potential con-
flicts of interest between the new venture and its investors. Maula and Murray suggest
several implications for corporate investors, portfolio companies, and the traditional
venture capitalist investors. First, corporations are not “second best” investors; they
make successful equity investments into new technology-based firms. Second, tradi-
tional venture capitalists and corporate venture capitalists may be viewed as comple-
mentary, rather than alternative, sources of financial capital. Potential complementary
benefits are derived from the corporate investor’s depth of commercialization experi-
ence and/or technological abilities and the traditional venture capitalist’s wealth of
tacit experience in nurturing and development of the managerial capabilities of nas-
cent, and often highly vulnerable, young firms. They conclude that teaming industry-
leading firms with new ventures can produce superior results, and that corporate
investors are attractive partners for independent venture capitalists as well as new start-
up ventures.
The focus of McNamara and Vaaler’s chapter is on strategic decision-making by ex-
pert organizations in a setting characterized by increasing entrepreneurial competitive-
ness and environmental turbulence. Decision-making in the economic landscape in the
new millennium assumes inherent instability, frequent change, and constant scanning
for threats from rivals. The authors integrate several perspectives to appraise how deci-
sion-making is affected by this environment. These perspectives include upper echelon
theory (assessing decision-making tendencies based on the demographic background of
top managers), a decision-aids perspective (decision-making heuristics used by strategic
actors and the consequent behavior to which they lead), and the dynamic capabilities
viewpoint (the speed of internal decision-making processes linked to the inherent vola-
tility of the business environment in which a firm operates). While all three perspectives
are of increasing relevance in the new economic landscape, McNamara and Vaaler argue
that these perspectives and others suffer from a common shortcoming. They all gener-
ally assume that the decision-making individuals and processes are internal to the firm.
Many of the key decision-making individuals and decision-making processes may be
external (e.g., outside experts in law, accounting, finance, business, and various techni-
cal fields) and firms seek disinterested, objective advice regarding major strategic deci-
sions such as acquisitions, new product and business expansions, and foreign ventures.
McNamara and Vaaler investigate how the effects of crisis and competition inherent in
an increasingly diverse and volatile environment might skew external expert decision-
making. Using data from credit agency risk assessments of emerging-market sovereign
borrowers, McNamara and Vaaler compare the turbulent 1997–8 period (beginning
with the financial crisis in Thailand in mid-1997) to the more growth/stability-oriented
1987–96 period. Testing six hypotheses, they found that crisis conditions were linked to
negative (and thus costly) deviations from objective risk assessment models used by the
agencies. In addition, they found that the negative deviations were related to competi-
tive factors (e.g., incumbent versus insurgent, and global versus regional specialization).
The authors conclude that their study provides insights and managerial prescriptions
regarding the use of external expert organizations in an entrepreneurial environment
where the stresses of crisis and competition interact.
10 R. Amit, C. E. Lucier, M. A. Hitt, and R. D. Nixon
The strategic decision-making processes of top executives are important in identify-
ing and exploiting entrepreneurial opportunities for gaining competitive advantage in
a turbulent and uncertain environment. Top management teams capable of making
rapid decisions can enable their firms to be the entrepreneurial first movers in their
markets. Eisenhardt (1989) proposed a model of strategic decision-making speed for
firms operating in high-velocity environments. This model has become highly relevant
to firms in the entrepreneurial millennium. In chapter 11, Clark and Collins test this
model in a sample of 66 high technology public and private firms competing in the
information technology, telecommunications, and engineering services industries. Five
“tactics’ can be used to speed up the decision-making process. First, fast decision-
makers use real-time information to continuously update their understanding of the
company’s competitive position. Second, they examine multiple alternatives simulta-
neously rather than in a serial fashion. Third, fast decision-makers screen their deci-
sions and integrate them into an overall pattern or plan. The fourth tactic is a two-tiered
advice process that uses an experienced executive “counselor” to apply speedy heuris-
tics to the decision. The final tactic, termed “consensus with qualification”, allows the
CEO to use fiat if the group does not reach consensus within a specified time. Clark
and Collins’ results indicate that three of the tactics (real-time information, simultane-
ous alternatives, and decision integration) affect decision speed, providing some sup-
port for the validity of the model. They also found that two intervening processes
affect the decision-making speed of top executives in volatile environments, namely,
confidence to act on decisions and an ability to accelerate cognitive processing. They
conclude that top executives who are able to quickly assess the competitive landscape
and make good quality decisions in a timely fashion will provide their organizations
with the best chance of success in the entrepreneurial millennium.
Although the issue of how to manage growth is important to all firms, it is particu-
larly important in entrepreneurial ventures. With growth come challenges as well as
opportunities. Although past research has focused on the internal problems created by
a firm’s growth (e.g., rapid sales growth resulting in the need for capital and trained
employees), chapter 12 by Beekman and Robinson concentrates on the effects of growth
on relationships external to the firm, specifically, supplier relationships. They argue
that high-growth firms increasingly engage in long-term collaborative strategies with
suppliers (ranging from value-chain partnerships to equity joint ventures) to improve
their competitive position. Furthermore, they often retain and expand these long-term
relationships with key suppliers in periods of growth. Beekman and Robinson present
two contrasting theoretical perspectives on why new, high-growth firms remain with
their suppliers. The first is an economic exchange perspective that draws on transac-
tion cost and resource-based theory. This perspective is based primarily on the effec-
tiveness of the supplier relationship. Performance factors, such as reducing costs,
improving product quality, and increasing efficiency, are critical, along with the extent
to which the relationship allows the focal firm to concentrate more on its core busi-
ness. The second perspective is based on social exchange where strong interpersonal
ties create stability and facilitate cooperation between organizations. Additionally, trust
and open communication are emphasized and detailed and timely information is shared.
To test these two perspectives, the authors gathered survey data from high-growth
firms in the pharmaceutical industry between 1994 and 1997. The results suggest that
Strategies for the Entrepreneurial Millennium 11
rapid-growth companies’ partnerships follow a contingency model. A strong relation-
ship between a focal firm and a supply partner is important, but it is likely to explain
the continuation or expansion of business between firms only when the firm’s top
purchasing criteria like price, quality or availability are satisfied. After a supplier meets
the competitive criteria critical to a focal firm, a strong relationship can lead the focal
firm to expand its business with the supplier.
Conclusion
Businesses now operate in a new economic landscape in the entrepreneurial millen-
nium. New ventures and large corporations must be entrepreneurial to survive, much
less produce positive abnormal returns for shareholders. The economic landscape in
the latter half of the 1990s showed the potential but the new millennium was ushered
in with a vision of the challenges faced by firms to survive and succeed in the new
competitive landscape (Hitt, 2000).
Firms must identify and exploit valuable opportunities in existing markets or create
new ones. However, in the entrepreneurial millennium, they must do more. They
must also be strategic. Thus, firms must integrate opportunity-seeking and advantage-
seeking behaviors, what others have referred to as strategic entrepreneurship (Hitt et
al., 2001, 2002). As explained in the chapters in this book, firms must develop and use
new and effective business models. They can employ tools from other business disci-
plines such as real options to evaluate future opportunities. Because of a need for
greater and complementary resources, firms are likely to engage in alliances and strate-
gic networks. Alliances may thus enhance firms’ entrepreneurial capabilities. These
networks even present opportunities for entrepreneurial intermediation. The most
successful firms in the entrepreneurial millennium will effectively manage knowledge
creation, diffusion and application.
To exploit entrepreneurial opportunities, managers/entrepreneurs must balance the
need for exploration and the need for exploitation of opportunities. They must seek
and obtain the most effective forms of venture capital and balance risk and expert
knowledge in making critical strategic decisions. Additionally, decisions must be made
quickly because of the rapidity of change in the dynamic economic landscape. Finally,
because of the importance of alliances for access to resources, firms must effectively
manage external relationships (e.g., relationships with suppliers) (Ireland et al., 2002).
The twenty-first century is an exciting economic time, full of entrepreneurial oppor-
tunities. However, it will face complex and difficult challenges as well. Only the fittest
will survive. This book provides information on how to prepare for and meet these
challenges with effective strategies that will create value in the new millennium.
Note
1 Parts of this chapter draw on the work of Bertrand Shelton of Booz, Allen & Hamilton.
12 R. Amit, C. E. Lucier, M. A. Hitt, and R. D. Nixon
References
Anders, G. 2001: John Chambers, after the deluge. Fast Company, July, 100–11.
Brandenburger, A. M. and Stuart, H. 1996: Value-based business strategy. Journal of Economics
and Management Strategy, 5, 5–25.
Dyer, J. and Singh, H. 1998: The relational view: cooperative strategy and sources of
interorganizational competitive advantage. Academy of Management Review, 23, 660–79.
Eisenhardt, K. 1989: Making fast strategic decisions in high-velocity environments. Academy of
Management Journal, 32, 543–76.
Foster, R. and Kaplan, S. 2001: Creative Destruction. New York: Doubleday.
Hamel, G. 2000: Leading the Revolution. Boston: Harvard Business School Press.
Hitt, M. A. 2000: The new frontier: transformation of management for the new millennium.
Organizational Dynamics, 28, 6-17.
Hitt, M. A. and Ireland, R. D. 2000: The intersection of entrepreneurship and strategic man-
agement research. In D. L. Sexton and H. A. Landstrom (eds), Handbook of Entrepreneur-
ship. Oxford: Blackwell Publishers, 45–63.
Hitt, M. A., Ireland, R. D., Camp, S. M., and Sexton, D. L. 2001: Strategic entrepreneurship:
entrepreneurial strategies for wealth creation. Strategic Management Journal, 22 (special is-
sue), 479–91.
Hitt, M. A., Ireland, R. D., Camp, S. M., and Sexton, D. L. 2002: Strategic entrepreneurship:
integrating entrepreneurial and strategic management perspectives. In M. A. Hitt, R. D. Ire-
land, S. M. Camp and D. L. Sexton (eds), Strategic Entrepreneurship: Creating a New Inte-
grated Mindset, Oxford: Blackwell Publishers, in press.
Hitt, M. A., Keats, B. W., and DeMarie, S. 1998: Navigating in the new competitive landscape:
building strategic flexibility and competitive advantage in the 21st century. Academy of Man-
agement Executive, 12 (4), 22–42.
Ireland. R. D., Hitt, M. A., and Vaidyanath, D. 2002: Managing strategic alliances to achieve a
competitive advantage. Journal of Management, in press.
Lucier, C. E., Moeller, L. H., and Held, R. 1997: 10X value: the engine powering long-term
shareholder returns. Strategy and Business, 8, 21–8.
McGrath, R. G. and MacMillan, I. 2000: The Entrepreneurial Mindset. Boston: Harvard Busi-
ness School Press.
Porter, M. E. 1985: Competitive Advantage: Creating and Sustaining Superior Performance.
New York: Free Press.
Reynolds, P. D., Hay, M., Bygrave, W. D., Camp, S. M., and Autio, E. 2000: Global Entrepre-
neurship Monitor 2000 Executive Report. Kansas City, MO: Kauffman Center for Entrepre-
neurial Leadership.
Shane, S. and Venkataraman, S. 2000: The promise of entrepreneurship as a field of research.
Academy of Management Review, 25, 217–26.
Stuart, T. E. 2000: Interorganizational alliances and the performance of firms: a study of growth
and innovation rates in a high-technology industry. Strategic Management Journal, 21, 791–
811.
Williamson, O. E. 1975: Markets and Hierarchies, Analysis and Antitrust Implications. New
York: Free Press.
doc_898297049.pdf