The Systematic Search for Entrepreneurial Discoveries

The Systematic Search for Entrepreneurial Discoveries

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The Systematic Search for Entrepreneurial Discoveries JAMES O. FIET Foreword by Jay B. Barney

Q

QUORUM BOOKS Westport, Connecticut • London

Library of Congress Cataloging-in-Publication Data Fiet, James O. The systematic search for entrepreneurial discoveries / James O. Fiet ; foreword by Jay B. Barney. p. cm. Includes bibliographical references and index. ISBN 1-56720-255-1 (alk. paper) 1. Entrepreneurship. 2. Learning by discovery. I. Title. HB615.F535 2002 658.4'21—dc21 2001057865 British Library Cataloguing in Publication Data is available. Copyright © 2002 by James O. Fiet All rights reserved. No portion of this book may be reproduced, by any process or technique, without the express written consent of the publisher. Library of Congress Catalog Card Number: 2001057865 ISBN: 1-56720-255-1 First published in 2002 Quorum Books, 88 Post Road West, Westport, CT 06881 An imprint of Greenwood Publishing Group, Inc. www.quorumbooks.com Printed in the United States of America & The paper used in this book complies with the Permanent Paper Standard issued by the National Information Standards Organization (Z39.48-1984). P In order to keep this title in print and available to the academic community, this edition was produced using digital reprint technology in a relatively short print run. This would not have been attainable using traditional methods. Although the cover has been changed from its original appearance, the text remains the same and all materials and methods used still conform to the highest book-making standards.

Copyright Acknowledgments The author and the publisher are grateful to the following for permission to reprint copyrighted material: Chapter 2 is reprinted in substantially the same form from the Journal of Business Venturing 16(1), 2001, J.O. Fiet, The theoretical side of teaching entrepreneurship, 1-24. Copyright 2001, with permission from Elsevier Science. Chapter 3 is reprinted in substantially the same form from Small Business Economics 8(16), 1996, J.O. Fiet, The informational basis of entrepreneurial discovery, 419-430. Reprinted with permission from Kluwer Academic Publishers. Chapter 6 contains contributions from Professor Alexandre Piskounov, which are used with his permission. Dr. Piskounov is an accomplished mathematician who developed the mathematical arguments associated with Bayesian probability theory. He is a professor of infomatics at Jonkoping International Business School, Jonkoping, Sweden. Chapter 9 is reprinted in substantially the same form from the Journal of Business Venturing 16(2), 2001, J.O. Fiet, The pedagogical side of entrepreneurship theory, 101-117. Copyright 2001, with permission from Elsevier Science.

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It has taken 28 years to shape the ideas in this book. The shaping has proceeded onward since the early days of my career, which has been equally divided between entrepreneurship and, most recently, academia. During that time, I have benefited from the unwavering and constant support of my family—Terry, Kyle, Kevin, Jennifer and Katherine. They never wondered what I was doing or where it was taking us. Their abiding confidence was a great source of strength to me, without which this book would not have been possible.

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Contents

Tables and Figures

xi

Foreword by Jay B. Barney

xiii

Preface

xvii

Acknowledgments xix 1.

The Essential Role of Discovery in Entrepreneurship

2.

Toward a Theory of Entrepreneurship

15

3.

The Informational Economics of Discovery

47

4.

The Impact of Competitive Structure on Discovery

73

5.

Entrepreneurial Competence as Knowledge

93

6.

Deciding How Entrepreneurs Can Search for Discoveries

115

7.

Discovery as Either the Result of Accidental Alertness or Systematic Search

137

8.

The Promise of Systematic Search for Aspiring Entrepreneurs

187

9.

The Pedagogy of Entrepreneurship Theory

201

Opportunities for Future Research

221

10. Index

1

231

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Tables and Figures

TABLE 2.1

Assumptions of My Modest Proposal

23

2.2

Rensselaer Retreat Theory-Building Exercise

26

2.3

Theories That Address Similar Questions about Entrepreneurship

30

Assumptions of Selected Theories Utilized in Entrepreneurship Research

34

Important Decision Criteria of Select Theories Utilized in Entrepreneurship Research Summary of Propositions

38 60

Entrepreneurs as Investors in Specific Information

60

The Effects of Competitive Structure on Discovery Propositions

83 109

6.1

Assumptions Made in This Chapter to Model an Optimal Search

121

6.2(a)

Hypothetical Information Channels

123

6.2(b)

Optimal Search Sequence for Hypothetical Information Channels

124

A Multi-Stage Search Plan Using a Truncated Search Sequence

129

True and False Inferences from This Research

132

2.4 2.5 3.1 3.2 4.1 5.1

6.3 6.4

Tables and Figures

Xll

7.1

Effects of Previous Occupational Experience on Wealth Creation

146

7.2

Effects of Specific Knowledge on Wealth Creation

146

7.3

Classification of Discoveries

147

7.4

Significance of Discovery Classification Scheme Using Chi-Square Tests Effectiveness of Treatment for Discovering WealthCreating Ideas

7.5

148 149

FIGURE 3.1

An Information-Based Model of Entrepreneurial Discovery

50

4.1

A Market-Based Logic for Entrepreneurial Discovery

80

5.1

A Consideration Set-Based Model of Entrepreneurial Competence

98

Foreword In Chapter 1 of this important book, Professor Jim Fiet recalls a conversation we had while he was a Ph.D. student at Texas A&M University. Jim recalls that I described entrepreneurship as a "black box" and observes that much of his career has focused on opening up that "black box" for further inspection. I remember the conversation differently. I remember telling Jim that the field of entrepreneurship was a "conceptual black hole" that had "swallowed many a promising career." My rationale behind this statement was simple. In the same way that a black hole's gravity attracts matter and light, the study of entrepreneurial phenomena attracts many young scholars. After all, entrepreneurship is clearly an important economic phenomenon; it clearly is relevant in almost all economic theories, and it is a theoretically underdeveloped area apparently ripe for rigor and analysis. No wonder so many young scholars are attracted to it. However, just as the light and matter attracted to a black hole never escape its gravitational hold, so too are many of the young scholars who commit to the field of entrepreneurship never seen again. Apparently, the efforts of these scholars to bring rigor and theory to this area do not fully materialize and thus do not appear in the most important academic journals. Of course, this characterization of the field was an exaggeration in an effort to test Jim's resolve to pursue entrepreneurial studies. However, while an exaggeration, there remains some truth in these assertions. Despite the early efforts of scholars like Schumpeter and Kirzner, and empirical efforts to describe the attributes of entrepreneurs that took place for over a decade, the field of entrepreneurship is still largely atheoretical. The atheoretical nature of the field of entrepreneurship manifests itself

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Foreword

in several ways. For example, many in the field still believe that it is not possible to do good entrepreneurship research unless you have been an entrepreneur. Is it necessary to have managed a corporation to do good strategy research? Is it necessary to have formed an international joint venture to do good international business research? Is it necessary to have introduced a new product to the market to do good marketing research? Of course, the answer to all these questions is no. Indeed, the whole point of theory is to be able to develop an understanding of a phenomenon, and perhaps even develop prescriptions relative to a phenomenon, without having to rely on personal experience. The field of entrepreneurship will remain underdeveloped until experience is no longer substituted for theory in doing entrepreneurship research. The atheoretical nature of the field is also manifested in the predominance of descriptive studies on what entrepreneurs do. Professor Fiet convincingly argues in this book that while such work may lay the important groundwork necessary for the field to become more theoretically rigorous, an overreliance on this kind of descriptive work can actually slow the development of the field and can lead to misleading prescriptions for aspiring entrepreneurs. Of course, the good news is that this state of affairs in the field of entrepreneurship is beginning to change. Over the last 10 years or so, scholars trained in closely aligned disciplines like strategic management, organization theory and organizational behavior are beginning to apply the theories and methods of these more mature fields to the study of entrepreneurship. The result has been a burgeoning of theoretically rigorous work on entrepreneurship. This book certainly contributes to this theoretically rigorous work. Professor Fiet takes ideas from strategic management and marries them with ideas taken from probabilistic search theory to develop a theory of what individual economic actors can do to search for information about market opportunities. This approach not only characterizes the search process that entrepreneurs can go through to discover market opportunities, but it also describes the educational and some of the prescriptive implications of this theory. To me, this theory is highlighted by three insights. First, this is a theory of what entrepreneurs can do, not a theory of what they actually do. That is, following the lead of game theory and other microeconomic models, Professor Fiet develops a relatively complex model of a search process that generates outcomes that are consistent with search outcomes one actually observes. However, just as most economists do not believe that economic actors actually solve game theoretic equations before they choose a strategy, Professor Fiet does not assert that entrepreneurs necessarily follow his search model in order to find market opportunities. Rather, all he asserts is that entrepreneurs could follow this model, and that the search outcomes

Foreword

xv

it generates are similar to those generated by whatever search process in which entrepreneurs currently engage. Second, by focusing on what entrepreneurs can do instead of what they actually do, Professor Fiet is able to develop a prescriptive theory of entrepreneurial search. His model has a small number of parameters, all of which have intuitive definitions. Based on their previous experiences, would-be entrepreneurs can make subjective estimates of these parameters, apply them to the search model and then calculate an optimal search path. The book presents evidence that this guided search effort is more effective in discovering market opportunities than other kinds of searches. In this sense, entrepreneurship can be taught. Third, Professor Fiet has developed a very interesting connection between the resource-based theory of competitive advantage in strategic management and the theory of entrepreneurship. Resource-based explanations of sustained competitive advantage emphasize, among other things, the important role that decisions made some time in the past play in creating path-dependent resources that are valuable, rare and costly to imitate. This might be called ex post path dependence. However, the idea Professor Fiet interjects into the literature is that entrepreneurial decisions made currently can be the source of path-dependent competitive advantages in the future. In this sense, entrepreneurship can be thought of as ex ante path dependence. The search model developed in this book provides tools that economic actors need in order to create ex ante path dependence. These tools are probabilistic in nature. However, they are not totally random. In this sense, Professor Fiet has made an important contribution to an entrepreneurial theory of competitive advantage, a theory that is closely aligned with resource-based theories of competitive advantage. While Jim and I may remember our conversation from so many years ago differently, our versions of this conversation do converge in one important way. I agree with Jim that until the "black box" of entrepreneurship is opened up, the field will remain a "conceptual black hole." In this sense, this book is a major step in the development and maturation of the field of entrepreneurship. Jay B. Barney Professor and Bank One Chair of Strategic Management, Fisher College of Business, The Ohio State University

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Preface This book is intended for scholars and others who want to delve deeply into the discovery process and its place in the field of entrepreneurship research. Those who are more interested in what entrepreneurs tend to do, and then using that understanding to explain their behavior, may prefer a different approach than the one that I use in this book. I attempt to build and test theory to improve entrepreneurial competence to influence future events. I do not generally favor providing historical or contemporaneous description. I understand that building and testing theory can sometimes be tedious and boring; however, scholars should have a higher tolerance than most readers for abstract concepts and analysis. Those who are more interested in how to teach theory may want to skip directly to Chapter 9, where I review pedagogical applications. Still, a thorough treatment of pedagogy would be incomplete without theoretical content, which is the reason for the rest of the book. I am concerned that some of my assertions about the current state of scholarship in the field of entrepreneurship research will not please everyone. However, my goal is not to be provocative. In fact, my only goal, as one of your colleagues, is to contribute to improving scholarship in the field of entrepreneurship research, especially as it relates to discovery, and thereby serve our constituents better. Because I am confident that you also share a sincere desire to serve our constituents by advancing entrepreneurship research, I have pressed ahead to map out challenges as they relate to the discovery process. After all, discovery is at the heart of entrepreneurship, and entrepreneurial scholarship is the study of how new wealth can be created. I see understanding wealth creation as an implicitly useful goal for our field because of its

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Preface

potential to address many of the world's problems, including poverty and competitive conflict. Unfortunately, I see conflicting trends impeding progress toward the achievement of these goals. The field of entrepreneurship education is entering a critical period as increasing enrollments in university courses collide with a paucity of theory to explain to students how they can be more successful. I have observed during the last several years that there seems to be less interest in teaching theory to entrepreneurship students than I have seen in the past. With atheoretical teaching predominating in classrooms and several professional associations supporting this approach, my concern is that scholars will not be prepared to teach students and that their lack of preparation will hinder student performance and their consequent interest in learning. In my view, this book offers some good news because it reports on a new approach for training students in how to make discoveries. Happily, I can support this new approach both theoretically and experimentally. Scholars can use it to substantially improve the effectiveness of their students in locating their own discoveries, which can be exploited to create new wealth. I would not make this claim unless I had tested the approach and found it to be effective. My challenge to you as a scholar is to consider the discovery process again, but this time from the perspective of informational economics. Test my views for improving the effectiveness of your students in searching for discoveries, which I have derived from informational economics. If they work for your students as well as they have worked for mine, perhaps you will forgive me for seeming to be a bit overzealous about the claims that I make for your students. I want them to succeed, as you do, and I think that the concepts in this book can help them to discover and exploit ideas for creating new wealth.

Acknowledgments I acknowledge the encouragement of numerous mentors and colleagues who have supported me as I have struggled with these ideas. Early mentors were Don Hellriegel, Jay Barney, Raju Varadarajan, Barry Baysinger, Mike Hitt, Robert Hoskisson and Tom Turk. I have also benefited over the years from the friendship and support of wonderful co-authors, particularly Lowell Busenitz and Douglas Moesel. They have become like members of my family. We have worked patiently together as I have learned the craft of entrepreneurship research. In the early days of my career, I was nurtured by a very challenging environment at Texas A&M University and later by colleagues at Clemson University, particularly Jeffrey Harrison and Caron St. John. I also acknowledge the financial support from the Fletcher Jones Chair in Entrepreneurship, which I held while I was at the University of the Pacific. There I benefited from questions from both colleagues and students, as I learned how to frame and understand key issues, as well as to search for the answers to vexing questions, as they related to the discovery process. I made the greatest progress on these ideas during a year in Jonkoping, Sweden, where I worked as a research professor of entrepreneurship at the Jonkoping International Business School (JIBS). JIBS provided me with an ideal working environment that truly motivated me to refine my thinking about the topics in this book. During this period in Sweden, I was supported financially by JIBS's Program in Entrepreneurship and Growth of Small and Medium Sized Businesses. I am particularly indebted to Per Davidson, with whom I had stimulating arguments about informational economics on nearly a daily basis. Per was an exceptional colleague who constantly challenged me to think more deeply and more logically, and to

XX

Acknowledgments

express myself more subtly. While working at JIBS, I was also fortunate to benefit from the association of two Russian co-authors, Alexandre Piskounov and Veronica Gustavsson, both of whom shared my interest in the discovery process. Veronica was an inspiration, having grown up, as she explained it, "in a one company country." Alexandre is a renowned mathematician who taught me how to apply Bayesian probability theory to the search process. Without his assistance, I would not have been able to apply mathematical formalism to the analysis of how to conduct an optimal search for discoveries. In addition, I would be remiss if I did not acknowledge the contributions to my thinking of JIBS's international research affiliates, especially Howard Aldrich, Gaylen Chandler, Alice DeKonig, Benson Honig, Scott Shane and Shaker Zahra, as well as JIBS's talented group of doctoral students. For the last year, I have worked as the Brown-Forman Chair in Entrepreneurship at the University of Louisville. On my arrival here, I found an award-winning entrepreneurship program already operating, which allowed me the freedom to focus my thinking on the topics in this book. I also found colleagues who were eager to join with me in a coordinated, programmatic effort to develop theory that could be transferred into the University of Louisville's entrepreneurship curriculum. Currently, we have approximately 20 faculty members from across the college, and from every discipline, who are working collaboratively on questions within the distinctive domain of entrepreneurship. One of the outcomes of this collaboration has been to establish the University of Louisville's Institute for Entrepreneurial Research to coordinate the extension and testing of the concepts developed in this book. I currently serve as the director of this Institute. I would like to acknowledge the support of my department heads at the University of Louisville—Jeffrey Bracker, who hired me and who has since died; and Arthur Adams and Terry Hancock, each of whom has been responsible for providing me with a supportive working environment. The one constant at the University of Louisville for many years has been our great dean, Robert L. Taylor, who has served for more than 18 years and has just finished a term as the past president of the American Association of Schools of Business. Dean Taylor has been excited about entrepreneurship for years and his excitement pervades the college. I would like to acknowledge the support of my colleagues in the management department, and particularly those who share my interest in entrepreneurship: Karen Bishop, Van Clouse, Bruce Kemelgor, Robert Nixon and Bill Norton. I could not ask for better colleagues, which applies to all my colleagues in the department and the college. I would also like to acknowledge the substantial contributions to this endeavor made by my research assistants: Patrick Migliore, Deepa Balak-

Acknowledgments

xxi

risnan and Kevin Heinselman. Their assistance has contributed in a major way to the success of this effort. Finally, I would like to acknowledge the able administrative support provided by Jackie Jones, Rachael Siller and Judie Handley, who are responsible for the efficient daily operation of the Management Department office at the University of Louisville. Their support was essential.

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Chapter 1

The Essential Role of Discovery in Entrepreneurship

The discovery process is at the heart of what we mean by entrepreneurship. If we remove discovery from most common definitions of entrepreneurship, what remains is small business management, which could be reduced to managerial dictums that can be imitated by competitors. In the long run, imitation would limit the creation of new wealth. It is the neglect of treating discovery in most books on entrepreneurship that leaves them reading very much like books on small business management. Skeptics often argue that entrepreneurial discovery cannot be taught. In so doing, they would certainly question why we would need a book about it. To ask such a question suggests some confusion about the importance of the phenomenon. Entrepreneurs make discoveries. What sets entrepreneurs apart from others is that they make discoveries that may be exploited to create new wealth. Someone else can be hired to perform everything else that entrepreneurs do. Others argue that the discovery of a venture idea is not nearly as important as its exploitation. However, in making this argument they often fail to acknowledge that the exploitation of an idea that is neither valuable nor rare can only lead to the generation of average profits. Thus, the exploitation of the right idea is a prerequisite for wealth creation, which means that exploitation leading to the creation of new wealth must be preceded by a discovery. Although both discovery and exploitation are essential elements in wealth creation, this book emphasizes how to search for discoveries by understanding their informational elements.

2

The Systematic Search for Entrepreneurial Discoveries

PURPOSE OF THIS BOOK The central purpose of this book is to argue that entrepreneurial discovery must be understood from a theoretical perspective if it is to improve the performance of aspiring entrepreneurs. As a pedagogical aid, it develops and tests a theoretical approach for explaining to aspiring entrepreneurs how they can make discoveries. It provides both mathematical and empirical evidence that it does improve search effectiveness and substantially outperform received theory. Clearly, this book challenges readers to consider whether its approach can be used for understanding and teaching how entrepreneurs can search for discoveries. As evidence of the need for a book on discovery, we find that most university-level entrepreneurship courses consist of discussions of how entrepreneurs should perform such responsibilities as marketing, finance and operations, which by themselves are undoubtedly legitimate topics. Unfortunately, these discussions often fail to describe what is distinctive about what entrepreneurs do (Venkatraman, 1997). One result of not expressly treating discovery in textbooks is that the omission elicits criticism from scholars in other disciplines who do not view entrepreneurship as a legitimate area of study. Two common criticisms of entrepreneurship scholarship are that (1) it does not contain anything that is new and (2) it lacks both theoretical and empirical rigor. Unfortunately, independent observers often assume that these criticisms are valid because entrepreneurship scholars rarely, if ever, address them. Responses are strangely absent from the literature despite the fact that those who study the entrepreneurial process generally acknowledge that a discovery begins the entrepreneurial process. DEFINITION OF ENTREPRENEURIAL DISCOVERY Although discoveries can take many forms, what is common among them is that the information that is uncovered was previously unknown. Otherwise, we would expect to see others already creating wealth by using the information. An entrepreneurial discovery (or for brevity, simply, discovery) is an unexpected, yet valuable economic opportunity^ such as the founding of a new firm, the creation of a new product line, the development of an innovative technology, the satisfaction of an ephemeral market need through arbitrage or the like. For the purposes of this analysis, a discovery is valuable if it is one that is monetarily rewarding. It can be monetarily rewarding by either generating new revenues or decreasing costs. Presumably, other aspiring entrepreneurs would judge the same discovery to be valuable but for some reason they do not notice, or at least they do not take advantage of it. Do those who overlook such opportunities fail to see them because they lack entrepreneurial competence? If their failure stems from not having the com-

The Essential Role of Discovery in Entrepreneurship 3

petence, it follows that only those who already possess it or can acquire it should attempt to be entrepreneurs, unless of course they feel very lucky. ENTREPRENEURIAL COMPETENCE Economic agents, such as entrepreneurs, may develop a special competence in interpreting information that signals the existence of opportunities to create new wealth. Signals consist of new information that has the capacity to change our understanding of the future. Entrepreneurial competence may be viewed as agent-specific, prior knowledge containing the decision rules that entrepreneurs use to make rational, if not optimal, informational investments (cf. Pelikan, 1989). Entrepreneurs can be competent to both discover and exploit a venture idea. To be able to invest economically in signals, entrepreneurs must already possess some information in the form of instructions that tells them how to do so. It is this agent-specific, entrepreneurial competence that contains the instructions on how to make optimal informational investments. By extension, entrepreneurial competence has three noteworthy attributes (Pelikan, 1989). First, entrepreneurial competence consists of knowledge that cannot be easily transmitted to another agent. It is tied to a particular agent because it is often tacit knowledge, which has been acquired in response to learning by doing (Polyani, 1962). The tacit aspects of competence may be largely beyond the control of aspiring entrepreneurs, so their pedagogical value is unknown. Nevertheless, I note with interest that whatever entrepreneurs persist in doing becomes easier, not because the nature of the task has changed, but because their capacity to perform it has improved, probably as the result of acquiring greater competence in the form of tacit knowledge. Thus, I assume that an agent's entrepreneurial competence can be improved and that the most effective way to do so is by acting as if one were already an entrepreneur (cf. James, 1955). Second, entrepreneurial competence may be viewed as knowledge-based programming for making decisions about whether to invest in the acquisition of specific signals. The programming may consist either of heuristics for simplifying decision making or of more sophisticated analytical processes. A heuristic is a simplified decision rule (Busenitz & Barney, 1997; Manimala, 1992; Tversky &c Kahneman, 1974). For now, we may consider a signal to be information that changes our views of the value of a particular action. A specific signal is one that pertains to a particular decision and is the only type of information that is valuable for assessing a deal's prospects. As such, the acquisition of specific signals can be risky. Because individual entrepreneurs possess different programming information, they may optimize differently their informational investments.1 Third, entrepreneurial competence is not equally distributed among the population of those who want to be entrepreneurs. However, simply be-

4

The Systematic Search for Entrepreneurial Discoveries

cause only Mark McGuire and Barry Bonds have yet to demonstrate the competence to hit 70 homeruns in a single baseball season, this does not mean that the rest of us cannot improve our batting averages through practice and coaching. Although we know very little about how to augment an entrepreneur's knowledge-based competence, I assume that each of us possesses some degree of competence that can be developed and improved. The fact that you are reading this book is an indication that you are interested in learning how to develop the competence to make discoveries. As suggested earlier, if this book accomplishes its purpose, it will serve as a pedagogical aid in explaining to you how you could learn to make your own discoveries. A by-product of striving to understand how to make discoveries is that the effort itself may tacitly impart greater competence to us. This is a rather strong assumption because it forms the basis for the proposition that the discovery process can be taught and learned. In addition, it focuses our attention on the informational aspects of entrepreneurship. Merely possessing the competence to make optimal informational investment decisions will not result in the creation of new wealth unless someone acts on the competencies. Assuming that we possess individual differences in competence, these differences do not justify the omission of discovery from both curriculum and research. Even students who possess little competence should be able to make discoveries if they study and act on the principles upon which discovery is based. THE OMISSION OF DISCOVERY FROM BOTH CURRICULUM AND RESEARCH There are no known textbook treatments of entrepreneurial discovery, which suggests that we do not profess to know much about it. Textbooks seem to compensate for not treating discovery by including other material on entrepreneurial conduct. These treatments often repeat what is taught in introductory business courses or in courses in small business management. Consequently, there is little that distinguishes these texts from one another. Because textbooks typically omit or sidestep the treatment of entrepreneurial discovery, it is not surprising that it is often neglected in entrepreneurship curricula. One way that we neglect it is by substituting something else for it, such as creativity, perhaps hoping that students will not notice. Yet we realize and students understand that creativity and discovery are not the same. At other times, we present complex models of the entrepreneurial process in which discovery is essentially illustrated as an elusive black box that is beyond our understanding. Comparing it to a black box may actually be little more than a justification of the fact that

The Essential Role of Discovery in Entrepreneurship 5 we do not teach it. We may not teach it because we have little to say about it except that it depends on our intuition or luck, which again cannot be taught. Another justification for not teaching entrepreneurial discovery is that it is part of a larger pattern of entrepreneurial conduct, which is an idiosyncratic process that cannot be codified. It cannot be codified because there are as many types of entrepreneurial conduct as there are millions of aspiring or practicing entrepreneurs. Previous attempts to study it have led scholars in a multitude of different theoretical directions. For example, there are those stressing human capital (Boskin, 1974), motivation (Dubini, 1988), decision models emphasizing psychological or personality traits of the entrepreneur (Brockhaus, 1982), population ecology models that emphasize natural selection processes (Aldrich, McKelvey & Ulrich, 1984; Henderson, 1983), networking and cooperation (Lorenzoni & Ornati, 1988), migration models (Todaro, 1969), occupational choice models (Boskin, 1974; Campbell, 1992), strategic models (Murray, 1984; Sanberg & Hofer, 1987), even illegitimate versus legitimate behavior (Erlich, 1973). 2 It is possible that the presence of so many different interpretations of entrepreneurial conduct has overwhelmed textbook writers to the point that they do not know which theoretical interpretations to include. This book acknowledges that these and other nonpecuniary interpretations of entrepreneurial conduct can add richness to our understanding of the process. Nonetheless, it is doubtful that aspiring entrepreneurs are as interested in gaining an appreciation of these interpretations as are those who study them for a living. Clearly, many aspiring entrepreneurs persist in trying to discover new venture opportunities, even beyond the time when the pursuit becomes very costly. Without any guarantee of success, why do they do it? Whatever their motivations, they must believe that their pursuit is a rational effort to make themselves feel good. For many, the pursuit of profit is likely to be reason enough. For others, money may not play a role. This book does not provide an in-depth evaluation of these nonpecuniary factors. Such an evaluation would only divert us from examining what entrepreneurs can do to increase their odds of making discoveries. THE SUBSTITUTION OF DESCRIPTIONS OF ENTREPRENEURIAL CONDUCT FOR A THEORY OF DISCOVERY Textbooks typically include descriptions of entrepreneurial conduct, much of which has resulted in the failure, or at least the discontinuance of a venture, without attempting to explain it theoretically. The omission of theory has seemingly gone unnoticed by editorial advisory boards of the publishing houses, who may believe that students will be better off if we

6

The Systematic Search for Entrepreneurial Discoveries

teach them practical dictums rather than theory. Reviewers seem to be satisfied so long as textbooks attempt to describe what entrepreneurs do. Most texts also include a discussion of the unfavorable odds of launching a successful business despite the best efforts of entrepreneurs. Being told about these odds must be discouraging for students because it makes the realization of their dreams seem less likely. Next, these texts move on to cases detailing what entrepreneurs do, which in effect sets them up as role models. The value of studying only what most entrepreneurs do is questionable. Why would students want to know about what entrepreneurs do, if ordinarily they discontinue their ventures within five years? A possible reply is that if students study how entrepreneurs fail, this will alert them to pitfalls that they should avoid themselves, which may improve their chances for success. However, profitable discovery depends on more than avoiding mistakes; it depends on taking those actions that lead to discovery (Fiet, 1996). Arguing that studying only the conduct of successful entrepreneurs is beneficial depends on the assumption that in the future students will encounter a similar set of circumstances for which they will be better prepared (Fiet, 1997). Unfortunately, studying the successes of others is likely to focus excessively on the particulars of their action to be generalized for the benefit of students. Clearly, there are motivational benefits resulting from studying successful entrepreneurs. However, the danger of leveraging the motivational benefits of studying them is that this approach may lead to uninformed zeal. Uninformed zeal could actually lead to the destruction of entrepreneurial wealth. At best, studying only entrepreneurial conduct seems like a very indirect and inefficient approach. At worst, it seems misguided. THE IMPORTANCE OF THE DISCOVERY PHENOMENON If there is anything idiosyncratic about entrepreneurship, it is a discovery that can provide both the blueprint and the impetus for a new venture. It is the uncommon nature of discovery that protects it from those who would expose its secrets by writing books about it. If it were possible to write a recipe for how to make a valuable discovery, as soon as the information became commonly available it would lose its value as a possible source of sustained competitive advantage. This would occur because it would become subject to imitation. In fact, any competitive advantage derived from a discovery that is subject to imitation can only be temporary. The more valuable a discovery, the greater is the incentive to imitate it. Eventually, the first entrepreneur's profits would be driven down to the average level earned by other competitors as he or she was forced to share the market with new entrants.

The Essential Role of Discovery in Entrepreneurship 7 Despite the fact that best-selling "how-to" books describing get-richquick schemes cannot be a source of sustainable competitive advantage, they continue to lure readers. It may be that many textbook writers have fallen into this same trap. They fall into this trap by exhaustively describing entrepreneurial conduct, rather than informing students about how they should and can make unique discoveries themselves that can be a source of sustainable competitive advantage. During the 1970s, entrepreneurship students were instructed in a curriculum that consisted largely of listening to very successful entrepreneurs recount how they had launched their ventures. It was enjoyable, motivational and very entertaining. Unfortunately, students rarely encountered later the same circumstances discussed in class and were left wondering what they had actually learned, either to avert failure or to be successful. During the 1980s, the approach for teaching entrepreneurship gradually evolved as scholars attempted to develop descriptive models of the entrepreneurial process. The models were complex attempts to describe or explain the overall entrepreneurial process. However, they only either inferred a role for discovery or omitted it completely. During the 1990s, frustration among teachers and scholars of entrepreneurship increased as they attempted to distill the accumulated descriptive knowledge about entrepreneurial conduct into materials that could be used to teach students. These attempts at distillation failed in part because of the diversity in the entrepreneurial population. As we enter a new millennium, many scholars have complained about the lack of effective case materials, which is only symptomatic of deeper problems. First, it is difficult to generalize about what entrepreneurs actually do. Second, previous attempts to build theory have focused mainly on only describing entrepreneurial conduct. As mentioned earlier, there is very little that distinguishes current textbook treatments from each other because they tend to ignore discovery, which is the essence of what is distinctive about entrepreneurship. Many scholars develop packages of readings that students purchase in bulk. Unfortunately, these compilations also tend to neglect the treatment of discovery, which frustrates students (Fiet, 2001). Models Omitting Discovery Models that omit discovery from their explanation of the entrepreneurial process contain such factors as personal characteristics leading to innovation, personal characteristics leading to some sort of a triggering event, sociological characteristics leading to a triggering event, personal characteristics leading to implementation and personal characteristics leading to later growth of the firm. In addition, these models incorporate environmental factors leading to innovation, environmental factors leading to a

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The Systematic Search for Entrepreneurial Discoveries

triggering event, environmental factors leading to implementation and environmental factors leading to growth of a firm. Nowhere is discovery incorporated in the entrepreneurial process of these models. Models Inferring Discovery Many models of the entrepreneurial process infer the existence of a discovery^ but do not actually include it. Inferential models sometimes use arrows to indicate a discovery. For example, an arrow between a box labeled as an entrepreneur and a box labeled as an opportunity could indicate a discovery. Circles suggesting fits and gaps are sometimes also included, presumably as the two primary types of discoveries. Yet, the acknowledgement of arrowed relationships hardly seems adequate to explore what arguably is the genesis of the entrepreneurial process. PROBLEMS WITH STUDYING DESCRIPTIVE MODELS OF ENTREPRENEURIAL CONDUCT It is quite possible that using these sorts of models to teach students how to be entrepreneurs is another source of frustration for them. Clearly, they are not very interested in only learning about the entrepreneurial process, nor do they care where they fit into a particular model. They are much more interested in learning about how they can succeed themselves. They want to learn what will work for them, not about the process itself; nor are they interested in whether their traits or situations qualify them to succeed. Instead, many of those who study entrepreneurship do so because they want to learn how to start their own businesses and become wildly successful. One of the problems with studying how successful entrepreneurs operate is that aspiring students may view their success as being extraordinary and unachievable. If students view the successes of entrepreneurs as exceptional cases, our efforts to describe their actions may actually discourage some aspirants from trying because they do not fit a particular profile. In addition, the results of large cross-sectional studies have not tended to converge around issues that we can teach with confidence to students. Instead, we continue to develop and teach atheoretical, multidimensional models that convey few clear messages. THE RIGHT QUESTION—HOW CAN ENTREPRENEURS MAKE DISCOVERIES? This book does not concern itself solely with what entrepreneurs do; nor does it use descriptions to explain what we think we see entrepreneurs doing, because this approach would inevitably capture nonessential or pe-

The Essential Role of Discovery in Entrepreneurship 9 ripheral behaviors. This book argues that there is an optimal way to teach entrepreneurial discovery to both aspirants and practitioners. It is not about how entrepreneurs actually make discoveries. It is about how they can make discoveries in order to maximize their economic rate of return and minimize their risk. In addition, it argues that courses and texts should emphasize theory, not historical description, if their purpose is to instruct aspiring entrepreneurs. History is an account of the past. Effective theory enables economic actors to develop assumptions about the future, even if the future appears to be uncertain and unknown. Surely, nothing could have a more significant impact on the success of entrepreneurs than knowing the consequences of their actions before they act. As Kurt Lewin reminded us (1975), there is nothing more practical than a good theory. Peter Drucker inferred that entrepreneurs are rewarded for the future consequences of their actions (Drucker, 1974). Unfortunately, we have lacked valid theory to inform entrepreneurs about the future consequences of their actions. There is also a practical reason for not describing how entrepreneurs have succeeded in the past. Describing what they have done may be detrimental to an aspiring entrepreneur's strategic objectives. As soon as we describe and codify an entrepreneur's successes, others can imitate them, which invites competition. Entrepreneurs can create wealth for themselves by finding ways to compete that are unavailable to others, at least temporarily.

DISCOVERY AS THE THEORETICAL LYNCH PIN In the particular case of entrepreneurship, it may be that the underlying cause of our failure to build theory is that discovery is the theoretical lynch pin that holds most of the process together.3 In other words, numerous aspects of entrepreneurship could be more or less dependent on the common discovery phenomenon which, if left uninterpreted, could prevent us from developing a unified theory of entrepreneurship. One of the implicit objectives of this book is to contribute to the building of a unified theory of entrepreneurship. Previous treatments of entrepreneurial conduct offer very divergent interpretations because they tend to describe what entrepreneurs do, as mentioned previously, and entrepreneurs tend to do different things. The studies of common entrepreneurial traits are the most striking examples of divergent treatments of entrepreneurs. These trait studies never reach a consensus or present conclusive proof of how entrepreneurs are different from anyone else. Although studies of entrepreneurial traits have added to our understanding of the various types of entrepreneurs, it is unlikely that they will ever reach a consensus about who entrepreneurs are or how they sue-

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ceed. They will probably fail in adding to our cumulative knowledge so long as they are limited to describing what entrepreneurs do. DIRECTION FOR THE REST OF THIS BOOK Chapter 2 argues that it would be helpful in understanding entrepreneurial discovery if it could be examined from the perspective of a unified theory of entrepreneurship that incorporated the entire entrepreneurial process. It reviews the causes of theoretical disaggregation, including not providing a theoretical basis for discovery. It also reviews an approach for building theory. Thereafter, the succeeding chapters in the book develop a theory of entrepreneurial discovery. Chapter 3 presents a theory of entrepreneurial discovery in the form of an information-based model. The model explores the economics of specific information in the discovery process. Specific information has little or no value for assessing the risk associated with more than one prospective discovery. Furthermore, specific information, we will see, relates to the special circumstances of time and place of a particular deal. Chapter 3 also explores general information, which is easily conveyed to others, but which cannot inform us about potential discoveries. The chapter concludes by contrasting the uses of specific and general information. Chapter 4 explores the impact of competitive structure on entrepreneurial discovery. Some markets may be more attractive than others for making discoveries because they are less competitive. The chapter will then discuss the relationship between market attractiveness and a market's informational and allocational efficiency. It also explains that a market's earning potential is inversely related to its informational efficiency. Thus, one prerequisite for earning above-normal returns is to compete in inefficient, but attractive markets. In addition, the chapter contrasts private and public markets for information. The chapter concludes by exploring the importance of possessing and acting on private information. Chapter 5 considers entrepreneurial competence as knowledge. It addresses the questions of what entrepreneurs can and cannot competently know about venture ideas, as well as how to search for them. These questions are important because the discovery and exploitation of venture ideas seems to be fundamentally rooted in entrepreneurial competence. To address these questions, it examines the limitations of two different views of identifying discoveries—information search theory and entrepreneurial alertness. The remainder of the chapter proposes a third alternative based on an approach to restricted search that may emulate the search choices made by accomplished entrepreneurs. Chapter 6 uses existing mathematical formalism to demonstrate how entrepreneurs can search deliberately for discoveries. It uses consideration sets to impose constraints on how and where entrepreneurs search. A consid-

The Essential Role of Discovery in Entrepreneurship 11 eration set is a promising set of information channels, which entrepreneurs can select and search based on prior knowledge. To decide how to search the channels in a consideration set, the chapter determines an optimal search sequence. Because there is some probability that a search sequence could continue indefinitely, it determines stopping rules and argues that entrepreneurial search is more feasible within a consideration set than it is in the rest of the world. Chapter 7 describes a controlled experiment pitting the alertness perspective against the consideration set-based approach to searching for venture ideas to create new wealth, which is described in Chapters 5 and 6. The consideration set-based approach uses self-selected sets of information channels to restrict an entrepreneur's search domain, which makes an optimal search possible. The restricted domain conforms to the behavior of accomplished entrepreneurs who do not search the whole world for exploitable venture ideas. Subjects in the treatment group were successful 37.5 percent of the time compared with a 2.9 percent success rate for the control group. Fourteen percent of the control group emulated the treatment group without receiving instructions to do so. Chapter 8 argues that accumulated resources, contacts, good looks, charm and personality or anything else matters less in making a discovery than ongoing informational investments. General information about the state of markets for information is useful for identifying the domain within which a search for information should be commenced. However, specific information is required to assess the prospects for individual opportunities or deals. Concerning the requirement to invest systematically in specific information, nothing counts more than making the investments, which should be within the capacity of most aspirants. Moreover, certain investment behaviors can be emphasized that will increase the probability of making a discovery. These are very encouraging messages for anyone seeking to be an entrepreneur. Chapter 9 presents a theory-based activity approach for teaching entrepreneurial competencies needed to make discoveries. It argues that if our objective is to teach aspiring entrepreneurs how to master such competencies, we ought to do it using theory-based activities. Entrepreneurial educators may want to ask, "What am I going to have my students do today?" rather than "What am I going to teach my students today?" This chapter also argues that it is essential to ground learning activities in a theoretical framework, such as the one presented in this chapter. Chapter 10 discusses methodological problems impeding progress in the field of entrepreneurship research. These problems include description without prescription, a predominance of exploratory research, faulty experimental design and failing the relevancy test. Chapter 10 also discusses research opportunities, including those in entrepreneurial competence, extending a consideration set-based approach for searching, as well as other

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opportunities within the distinctive domain of entrepreneurship. Chapter 10 concludes by offering a final challenge to entrepreneurship researchers. NOTES 1. It is important to emphasize here that I am not suggesting that entrepreneurs search for discoveries in the same way that computers search a database. If in fact they did conduct a computer-like search, we must acknowledge that we know very little if anything about the search algorithms used by them for such a search. Nevertheless, Pelikan's (1989) analogy is a useful way of highlighting the informational elements of competence and how entrepreneurs could search for discoveries if they were aware of the possibility for doing so. 2. These examples only represent a partial list of theories that have been used to explain entrepreneurial conduct. For other examples, the reader may want to consult those that are introduced in Chapter 2. 3. While I was a doctoral student at Texas A&M University, Professor Jay Barney cautioned me that entrepreneurship was a black box. Implicit in his concern was that we did not understand what entrepreneurs do. He was also concerned that I would choose a dissertation topic that could not be effectively studied. His concern about my career would have been justified if I had only attempted to describe entrepreneurial conduct. This book is partially a response to his friendly caution about the futility of the topic. Thanks, Jay. His caution over the years has served as a challenge to try to unwrap the black box. If I have made any progress in this book, it is due in part to his influence. REFERENCES Aldrich, H., McKelvey, B. &; Ulrich, D. 1984. Design strategy from the population ecology perspective. Journal of Management 10(1): 67-86. Boskin, M.J. 1974. A conditional logit model of occupational choice. Journal of Political Economy 82(2): 389-398. Brockhaus, R.H., Sr. 1982. The psychology of the entrepreneur. In C.A. Kent, D.L. Sexton & K.H. Vesper (Eds.), Encyclopedia of entrepreneurship. Englewood Cliffs, NJ: Prentice Hall, pp. 39-57. Busenitz, L.W., 6c Barney, J.B. 1997. Differences between entrepreneurs and managers in large organizations: Biases and heuristics in strategic decisionmaking. Journal of Business Venturing 12(1): 9-30. Campbell, C.A. 1992. A decision theory model for entrepreneurial acts. Entrepreneurship: Theory and Practice 17(1): 21-27. Drucker, P. 1974. Management: Tasks, responsibilities, practices. New York: Harper and Row. Dubini, P. 1988. The influence of motivations and environment on business startups: Some hints for public policies. Journal of Business Venturing 4: 11-26. Ehrlich, I. 1973. Participation in illegitimate activities: A theoretical and empirical investigation. Journal of Political Economy 81(30): 521-565. Fiet, J.O. 1996. The informational basis of entrepreneurial discovery. Small Business Economics 8(6): 419-430.

The Essential Role of Discovery in Entrepreneurship 13 Fiet, J.O. 1997. Education for entrepreneurial competency: A theory-based activity approach. Paper presented at the Proceedings ofInEnt97, International Conference on Entrepreneurship Education, Monterey, CA. Fiet, J.O. 2001. The theoretical side of teaching entrepreneurship. Journal of Business Venturing 16: 1-24. Henderson, B.D. 1983. The anatomy of competition. Journal of Marketing 47 (Spring): 7-11. James, W. 1955 (reprint). Principles of psychology, vol. 1. New York: Dover Publications. Lewin, K. 1975. Field theory in social science: Selected theoretical papers. New York: Pergamon. Lorenzoni, G., 6c Ornati, O.A. 1988. Constellations of firms and new ventures. Journal of Business Venturing 3: 41-57. Manimala, M.J. 1992. Entrepreneurial heuristics: A comparison between PI (pioneering-innovative) and low PI ventures. Journal of Business Venturing 7(6): 477-504. Murray, J.A. 1984. A concept of entrepreneurial strategy. Strategic Management Journal 5: 1-13. Pelikan, P. 1989. Evolution, economic competence and the market for corporate control. Journal of Economic Behavior and Organization 12: 279-303. Polanyi, M. 1962. Personal knowledge: Towards a post-critical philosophy. London: Routledge & Kegan Paul. Sanberg, W.R., &c Hofer, C.W. 1987. Improving new venture performance: The role of strategy, industry structure, and the entrepreneur. Journal of Business Venturing 2: 5-28. Todaro, M.P. 1969. A model of labor migration and urban unemployment in less developed countries. American Economic Review 59(1): 138-148. Tversky, A., & Kahneman, D. 1974. Judgment under uncertainty: Heuristics and biases. Science 185: 1124-1131. Venkatraman, S. 1997. The distinctive domain of entrepreneurship: An editor's perspective. In J. Katz & R. Brockhaus (Eds.), Advances in entrepreneurship, firm emergence, and growth, vol. 3. New York: JAI Press, pp. 119-138.

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Chapter 2

Toward a Theory of Entrepreneurship In Chapter 1,1 discussed the essential role of discovery in entrepreneurship. Because the discovery phenomenon is central to the whole entrepreneurial process, I argued that the field of entrepreneurship research would benefit from a rigorous theoretical foundation, which it has lacked. This chapter examines the broader context of the theoretical side of entrepreneurship and how it frames our view of discovery. In the process, it examines obstacles that have impeded the formulation of a general theory of entrepreneurship, as well as opportunities that the development of such a theory could offer, especially the benefits that could come to scholars and practitioners by understanding entrepreneurial discovery. THEORETICAL CONCERNS IMPACTING THE FIELD OF ENTREPRENEURSHIP RESEARCH One of the criticisms of recent efforts to develop entrepreneurship theory is that scholars have tended to accumulate separate rather than cumulative theories. They have accumulated theories instead of building on those that relate to each other and discarding those that are invalid or irrelevant (Camerer, 1985; Fiet, Busenitz, Moesel & Barney, 1997). Sometimes, it appears that their research efforts commence from the very beginning each time they start a project, as if it were the first time that a phenomenon were studied, even though it has been studied many times before. In addition, as mentioned in Chapter 1, entrepreneurship research may have focused excessively on describing the entrepreneurial phenomenon rather than on developing theory to enable aspiring entrepreneurs to make predictions. This phenomenological emphasis seems to predominate in textbooks as

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well as research, perhaps to the exclusion of developing theory (Phan, 1998). Furthermore, the majority of published research focuses on issues that are not interesting to aspiring entrepreneurs, which has impeded further the development of a body of entrepreneurship theory. In 1998, these concerns and others were the subject of a three-day retreat of a small group of entrepreneurship scholars, which was sponsored by Rensselaer Polytechnic Institute. 1 I presented a workshop on the topic of what we teach and how we should teach it. This chapter is based on arguments that I presented in the workshop. Four basic points were covered, which are reviewed here. First, I reviewed the results of a survey of the entrepreneurship courses taught by the participants. Second, I offered a modest proposal for resolving the causes of concern raised by the survey. Third, participants engaged in a theory-building exercise, the results of which I will share here. Fourth, I will offer some suggestions concerning how scholars can build cumulative theory and use it in our courses. SURVEY RESULTS Retreat participants were willing to share 18 of their syllabi with me, which I analyzed topically. The analysis found that 18 of them taught 116 different topics in their courses. More striking was the finding that they only overlapped on about one-third of the topics they teach. Although it was difficult to identify clean categories, it was not difficult to see that they taught enough different topics to create six and a half different courses. This finding does not indicate anything about the quality of individual courses. It does suggest that members of the group taught very dissimilar courses, which could be a warning for the field because of its implications for pedagogy and curriculum development. These differences in course content were surprising considering that each of the participants specialized in teaching entrepreneurship. As a group, either they did not agree on a paradigm for teaching entrepreneurship or perhaps they were searching for one. The content of their courses varied so much that it was difficult to detect if they even had a common purpose. Although the causes of these differences were not obvious, the next section explores some possibilities. Academic Autobiography One possible cause of course differences is academic autobiography. This term describes a compulsion to view the world from the perspective of one's own training. It also suggests an unwillingness or inability to view the world through other lenses. My convenience sample of syllabi does not prove conclusively that academic autobiography actually guided course design. However, it was in-

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teresting that many of the teaching choices of participants were highly correlated with their individual training and research streams. To the extent that academic autobiography dictated what they taught, they could subject their students to a rigid, narrow view of the world. One way that scholars can ensure that their views are not biased by academic autobiography is to ask themselves if they are willing to learn and teach paradigms that are outside of their personal training. After all, it is foolish for scholars to exclude automatically a particular set of views from their courses until after they understand them as well as their proponents. I am not arguing that scholars should include every possible paradigm in their courses. My suggestion is not so simple. They should strive to inform themselves as thoroughly as possible before they conclude that the approach that they have been using since their graduate studies is the best or only way to teach a particular concept. Complexity versus Reductionism Another way to interpret the diversity in the participants' different approaches would be to argue that they reflect the complexity of the phenomenon. Proponents of this argument often claim that entrepreneurship is unsuitable for reductionism to develop simplistic, explanatory theory. However, I argued that whether or not entrepreneurship can be advanced through reductionist efforts is probably a question that is much more important to scholars than to their students. Whether scholars resort to reductionism or not, if they do not attempt to make theoretical sense out of entrepreneurship, they could be criticized for not having anything more to teach than intuition. Because they cannot teach intuition, they frequently substitute rules of thumb. However, either way, if all that scholars have to say is that students can be intuitive, why should students attend entrepreneurship school? Scholars would certainly not have anything distinctive to offer them. Based on my own experience, I argued at the retreat that students just want to know what they can do to become wildly successful. Some at the retreat argued that many of their students define success differently. However, regardless of how students define success for themselves, they still look to us as mentors to tell them what they can do. To the extent that they want scholars to tell them what to do, I recommended that we use such moments as opportunities to teach them theory. Leading Topical Coverage Areas Based on my analysis of the syllabi from retreat participants, I reported the six leading topical coverage areas. They are listed below in the order of the frequency that they appeared in their syllabi:

18 1. 2. 3. 4. 5. 6.

The Systematic Search for Entrepreneurial Discoveries Strategy/competitive analysis Managing growth Discovery/idea generation Risk and rationality Financing (mainly business angels) Creativity

With the exception of discovery/idea generation, each of these topics comes from the established literature of other disciplines, which may explain why discovery is frequently avoided in textbooks or else treated as a black box. Strategy/competitive analysis clearly comes from the strategy/ industrial organization literature. Managing growth is not distinctive to entrepreneurship, although it is covered often in courses in small business management. The topic of managing growth is also a common subject in organization theory, as well as many other areas in the management literature. Risk and rationality come from finance and economics. Financing (mainly business angels) is a stepchild of the finance literature. Moreover, creativity comes from the psychology literature. Textbooks or Reading Packets Among textbooks, there were no clear favorites. Eighty-three percent of participants used readings packets, which suggests some dissatisfaction with current texts. However, it was interesting that the participants did not seem to agree on what should be included in a course readings packet. Nearly all of those who used a textbook also supplemented it with a readings packet. However, they could not agree on what sort of supplementary material should be included in a course readings packet. Academic Rigor and Relevance I shared my concern that the diversity in their courses was not solely a reflection of different ways of teaching a topic, which might be expected; nor was it the natural result of pursuing academic freedom. Instead, it might have been an indication that the field of entrepreneurship lacks sufficient rigor to arrive at a consensus on fundamental questions. If lack of rigor is a problem in entrepreneurship courses, the critics may be right that the field is not quite ready to be taken seriously as an academic discipline.2 That is, it still has a few issues to be sorted out before it can be taken seriously.3 Whenever researchers perform similar, related or follow-up tests on variables, whether or not they are from the same sample, they have the opportunity to add to our theoretical understanding of their findings.

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Moreover, if research can be used to inform us about received theory, rather than new theory, the odds are higher that it will have a greater influence on the thinking of those who have already studied a phenomenon. However, not imputing a theoretical interpretation to research findings would be less informative than introducing new theory. This is not an argument against the generation of new theory. It is merely an observation that it takes a field longer to assimilate new theory and to use it to make progress than it does to build on existing theory. However, it is an argument for all entrepreneurship scholars to reconsider the usefulness of atheoretical research. Most journal reviewers appropriately require investigators to answer the "so what" question in their research, which is "why should others care about their findings?" If investigators will interpret their findings within the context of an existing theory, if possible, they will have less difficulty answering the "so what" question. Why cannot entrepreneurship courses be as rigorous as economics or finance courses? If they were, this would be an indication that the field was reaching a consensus on answers to important questions. A lack of theoretical and pedagogical consensus may result in the entrepreneurship field having a reputation for easy, content-light courses. I look forward to the day when there are more rigorous textbooks. A MODEST PROPOSAL I presented a modest proposal 4 for resolving the causes of concern raised by the survey. In contrast to Jonathan Swift's, mine was not as provocative as his call to dine on the poor children of Ireland to solve that country's problem with its permanent underclass. It was merely a concerned appeal to reconsider what scholars teach and how they teach it. The issue of how to teach entrepreneurship will be considered in Chapter 8. My proposal was that scholars in their teaching should not emphasize descriptions of what entrepreneurs do. They should teach students what they can do, which is coded language for theory. This prescription presupposes that scholars should be focusing on developing better theory. In addition, I argued for approaches that are more deductive. In my experience, many scholars who are in favor of descriptive approaches use them for inductive purposes, supposing, as it were, that there is some sort of a cast of mind that they can instill in their students. These descriptive approaches seem to be favored by those who perceive a need to deliver entertaining content. However, I predict that teaching theory that will help them to understand the consequences of their decisions will be more important to them in the future than if they are entertained. In this regard, scholars should teach students how to apply theory deductively to their special circumstances. Why would students want to know about what entrepreneurs do, if or-

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dinarily they fail to survive five years? A possible reply is that if students study how entrepreneurs fail, this may alert them to pitfalls that they can avoid themselves, which may improve their chances for success. However, even the "avoiding pitfalls" argument is a theory that scholars could test. If such a test were to find support, they could then teach the theory of avoiding pitfalls. Assumptions Underlying What Scholars Should Teach My proposal depends on the assumption that there is an ideal process that can be explained theoretically. It must be simple enough to be taught to students. Notice that I did not say that scholars must have the theory now; nor did I say that all scholars must agree on what the theory should be; nor does the theory have to be entirely valid now. In fact, I argued that there is even value in teaching students imperfect theory, if scholars caution them about its possible shortcomings. Students can use imperfect theory to examine necessary assumptions, practice thinking critically, and in fact, improve theory themselves. Finally, I did not assert that scholars must apologize for having imperfect theory if the field is moving forward to improve it. My concern, however, grows when teachers substitute anecdotal accounts, coverage of functional responsibilities and skill development for theory. Studying ideal entrepreneurial behavior can actually be demoralizing to aspiring student-entrepreneurs. For example, one of the presenters at the retreat joked that "90 percent of entrepreneurs are the first-born sons of emigrant parents." The chances are minimal that very many students would actually match such a profile. The risk is that scholars could convince unknowing students that the odds are against them if they do not match a certain ideal profile. Such a problem could never occur in teaching students theory. There is a high failure rate among nascent entrepreneurs, so teaching students to pattern their efforts after this population seems illogical. Although estimates vary, scholars assume that about 20 percent of nascent entrepreneurs fail each year for the first five years of their ventures. After five years, this failure rate means that about 33 percent of those who begin a new venture are still in business. Although this is better than the 20 percent figure that was commonly used for so many years, it is difficult to conclude that a typical nascent entrepreneur has learned enough to generalize his or her experiences to other situations. It is also difficult to conclude that scholars can learn much from studying those who survive because of mediating factors such as luck and survivor bias. This analysis suggests caution in using entrepreneurs as guest speakers if a teacher's purpose is to teach students what they can do to be successful. Guest speakers can work exceedingly well if scholars use them to illustrate

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theory, which means that teachers should thoroughly brief them in advance so that they understand the specific purpose of their participation. Students who are not prepared in advance with theory may be influenced unduly by personal success stories. Such students could unknowingly pattern their career moves after an entrepreneur who is about to fail. The impending failure could be the result of following his own recommendations, which could be uncritically accepted by students. If teachers assume that students must learn theory in order to understand the future consequences of their entrepreneurial decisions, it seems improbable that adjuncts could be used effectively for this purpose. Teaching theory is simply not a strength of adjuncts. However, adjunct or clinical faculty (as they are sometimes called) have proven to be very effective in team teaching with tenure-track faculty who have theoretical training. First, the tenure-track faculty member teaches theory. Second, it is illustrated by the mature adjunct from his or her own entrepreneurial experiences. Third, the tenure-track faculty member summarizes what the students should have learned about theory. Afterward, the tenure-track faculty member should help the students to interpret the adjunct's experiences using the theory introduced in the session. Studying average entrepreneurial profiles, anecdotal recommendations, rules of thumb or listening to "war stories" can only lead to average returns, given semi-strong informational efficiency, which assumes that economic actors respond to historical and public information (Fama, 1980). Although informational efficiency varies across markets (Fiet, 1996a), and the actual level in a particular market is an empirical question, there is support for this level of efficiency in public equity markets. Entrepreneurial profiles, anecdotal recommendations, rules of thumb and i(war stories" consist of general information that is readily available to others because it can be transferred at a very low cost. In the short run, first movers who formulate their strategy using general information will divide any profits that they could make with others who have similar ambitions and information. This would occur because others would enter the market. Entry would continue until everyone was earning the same average returns. Under this scenario, no aspiring entrepreneur would take a risk when all that he or she could earn would be the same as anyone else. It follows that in order to earn above-average profits, entrepreneurs must discover economic opportunities that are unknown to others. Thus, entrepreneurial success is typically an individual accomplishment, which if scholars could fully describe it, would result in average returns. Books that attempt to describe how to get rich quickly by following a particular formula will in the long run only lead to average profits. These conclusions are based on the theory of market efficiency and rational expectations (Copeland & Weston, 1988). Most inductive research cannot detect rare or unique opportunities for

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wealth creation. Moreover, cross-sectional research is limited in its effectiveness if wealth creation is the result of unique, costly-to-imitate discoveries. This is one reason why, when scholars teach the results of such research, students often find it boring and irrelevant. Even case study research may not be valuable because discoveries are often dependent on arbitraging intertemporal differences that may be ephemeral and path dependent. Thus, it seems likely that scholars may have a higher opinion of much of their research than do students. The pedagogical value of research about how entrepreneurs succeed is that it may provide illustrations for teaching theory. There is no apparent reason to study irrational behavior if the purpose is to teach students how to succeed. Even if entrepreneurs do not act rationally when they launch a business, scholars are not going to suggest to students that the way to be successful is to act irrationally. Such observations as, "the only reason that they succeeded is because they did not know what they were getting into when they started, otherwise they never would have done it," concede the argument that scholars do not have much to teach to ameliorate the problem. I would not be surprised to learn that instructors who dwell on the irrational aspects of entrepreneurial behavior do not really believe themselves that they have much to teach students. I am very reluctant to concede that point. Leveraging the motivational benefits of studying successful entrepreneurs may have detrimental, unintended consequences. Clearly, there are motivational benefits to studying them. The danger in leveraging them is that they may beguile students with uninformed zeal. Uninformed zeal could actually lead to the destruction of entrepreneurial wealth. My students have not lacked the motivation to be entrepreneurs. What they have needed is direction^ which is another code word for theory. Table 2.1 summarizes the assumptions of my modest proposal. If you agree with them, you probably sense the urgency of building theory-based courses. If you do not agree with them, you probably think that the real purpose of this chapter is to be provocative. If you fall into the second category, I would ask you to consider how my proposal can address many of the criticisms about entrepreneurship scholarship from those outside of the field. Addressing Criticisms about Entrepreneurship Scholarship A common criticism of entrepreneurship scholarship is that it does not contain anything new. Some critics claim that it borrows everything from other disciplines. Venkatraman (1997) argued that entrepreneurship scholarship does have a distinctive domain, primarily in the arena of where opportunities come from. An underlying purpose of this chapter is to argue that scholars should emphasize topics from this distinctive domain in their courses.

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Table 2.1 Assumptions of My Modest Proposal 1. Studying only the conduct of successful entrepreneurs depends on the assumption that students in the future will encounter a similar set of circumstances for which they will be better prepared. 2. Studying ideal entrepreneurial behavior can actually be demoralizing to aspiring student-entrepreneurs. 3. There is a high failure rate among nascent entrepreneurs, so teaching students to pattern their efforts after this population seems illogical. 4. Studying average entrepreneurial profiles, anecdotal recommendations, rules of thumb or listening to ''war stories" can lead to average returns, given semistrong informational efficiency. 5. Most of our research cannot detect opportunities for wealth creation. 6. There is no apparent reason to study irrational behavior if our purpose is to teach students how to succeed. 7. Leveraging the motivational benefits of studying successful entrepreneurs may have detrimental, unintended consequences.

I argue that what entrepreneurs do that is most distinctive is they make discoveries that may lead to the creation of wealth (Fiet, 1991, 1996b, in press). These discoveries can be process-related or they can reveal opportunities that lead to completely new sources of wealth. How students should make discoveries is a topic that should be included in every course on entrepreneurship. Again, students are more interested in how they should make a discovery than in descriptions of how others have done it. Another criticism of entrepreneurship scholarship is that it lacks both theoretical and empirical rigor. Evidence of this criticism is reflected in entrepreneurship textbooks compared with those of other fields such as finance or economics. With few exceptions entrepreneurship textbooks do not attempt to develop theory. Please consider how scholars can know if what they teach is the best way to convey a lesson to students if it is not based on theory. Once scholars agree on a theoretical perspective, they can debate whether particular circumstances are described appropriately by the theory. Finally, entrepreneurship scholarship has failed to develop a cumulative, unified theory of entrepreneurship, what I shall refer to in these chapters as a general theory of entrepreneurship. This is a valid, but unfair criticism because it could be applied to most fields in the social sciences. One of the purposes of this chapter is to argue that scholars have made more progress in this area than they realize. Scholars would be less sensitive to this sort of criticism if they were teaching rigorous, theory-based courses.

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M a n y of these criticisms stem from w h a t scholars emphasize in their courses, and in their failure to anticipate and respond to them. Unfortunately, in their lack of response, scholars often treat w h a t is distinctive about w h a t entrepreneurs do as a black box that is beyond our understanding and theory. Alternatively, scholars sometimes concede that entrepreneurial conduct depends on intuition or luck, which of course cannot be taught. W h e n scholars m a k e such concessions by default, they allow the field to be criticized unjustifiably. T H E INEFFECTIVENESS OF ATHEORETICAL ARGUMENTS Scholars weaken the effectiveness of their arguments when they try to answer questions that have not been addressed in the literature of a theoretical stream of research. Atheoretical explanation has limited usefulness as a guide for instructing aspiring entrepreneurs a b o u t their prospects for future success. According to Alfred N o r t h Whitehead (1917), The importance, even in practice of the theoretical side of. . . [entrepreneurship] arises from the fact that action must be immediate, and takes place under circumstances that are excessively complicated. If we wait for the necessities of action before we commence to arrange our ideas, in peace, we shall have lost our trade, and in war, we shall have lost the battle. Success in practice depends upon theorists who, led by other motives of exploration, have been there before, and by some good chance have hit upon the relevant ideas. By a theorist, I do not mean a man who is up in the clouds, but a man whose motive for thought is to formulate the rules according to which events occur. A successful theorist should be excessively interested in immediate events, otherwise he is not at all likely to formulate correctly anything about them. (p. 15) (emphases added) The value of entrepreneurship theory is in helping entrepreneurs to understand the consequences of their decisions. Why else should aspirants w a n t to study entrepreneurship? If scholars do not move t o w a r d the development of a general theory of entrepreneurship, their explanations will have little more than motivational value. 5 If aspiring entrepreneurs chose to remain in entrepreneurship school, scholars could encourage them to be lucky, which of course would not be helpful, only because they d o n o t k n o w h o w to teach luck. Again, according to Professor Whitehead (1917), My contention is that this world is a world of ideas, and that its internal relations are relations between abstract concepts and that elucidation of the precise connection between this world and the feelings of actual experience is the fundamental question of scientific philosophy, (p. 16) Like Professor Whitehead, my contention is that explanations should be couched in a world of ideas in which scholars elucidate the relations be-

Toward a Theory of Entrepreneurship

25

tween abstract concepts and how they can help aspirants to succeed. Standing in the way of this goal is the development of better theory. Theory-Building Exercise I divided the participants at the Rensselaer Retreat into five different groups and assigned each group the same four questions to answer. I selected the questions based on how prospective questions would be classified on three different dimensions. I decided that it was necessary that a potential question be evaluated positively on each of these dimensions before it was included. These dimensions were (1) whether or not it fell within the distinctive domain of entrepreneurship, (2) whether or not it was interesting to scholars, and finally, (3) whether or not it was interesting to students. If a question fell outside of the distinctive domain of entrepreneurship, its answer probably would not satisfy critics from outside the field. If a question was not interesting to scholars, its answer would probably fail to contribute anything to advancing entrepreneurship theory. If a question was not interesting to students, its answer would probably fail the "so what" question, which is really a question of relevancy. Based on these criteria, the following four questions were selected and assigned: 1. How should entrepreneurs discover economically lucrative opportunities that others miss? 2. How should entrepreneurs identify the most attractive industries? 3. How should entrepreneurs marshal the resources to launch an entirely new business? 4. How should entrepreneurs create competitive advantage?6 Their assignment was to identify and be prepared to explain at least three theories that help them to answer these four questions. They were also assigned the task to identify two additional questions of their own, as well as three explanatory theories. The results of this theory-building exercise are contained in Table 2.2. A couple of observations stand out from the results in Panel A of Table 2.2, which summarizes the group's suggested theories for addressing the assigned questions. First, just as there was no consensus concerning what to include in their syllabi, there was no consensus on the much narrower issues raised by this exercise. Second, it is not enough to specify the research questions, if their purpose is to make progress toward building a general theory of entrepreneurship. Panel B of Table 2.2 contains the questions that the retreat participants thought were important. Notice that there was no consensus concerning which questions were important. However, from my point of view, most

Table 2.2 Rensselaer Retreat Theory-Building Exercise PANEL A: Assigned Questions and Responses 1.

How can entrepreneurs discover economically lucrative opportunities that others miss?

Alertness Divergent thinking Garbage can model Information

Search and discovery Options theory General equilibrium theory (straw man) Persistence (hardly a theory, more of a philosophy) Luck Path dependence Network theory Corridor principle

Communication theory Arbitrage Cognition Biases and heuristics 2.

How can entrepreneurs identify the most attractive industries?

Dynamism 5 forces model (2 votes) Commitment theory (economic, psychological, social) Industry structure (S-C-P) [Industry structure => firm conduct => firm performance] (2 votes) Product life cycle (wrong level of analysis) Resource & suppliers sophistication Industry life cycle Resource-based 3.

Recency bias Punctuated equilibrium Stakeholder theory Information asymmetry Public choice IO economics Fun-ness: Preference theory

How should entrepreneurs marshal the resources to launch an entirely new business?

Networking 4 Fs: friends, family, finance companies & fools Resource-based theory Capital markets Social capital/networking Institutional theory Social skills Social exchange theory

Alliance building Agency theory Network theory and social capital Require fewer resources Knowledge Liability of newness Network theory Self-efficacy enactment (Weickian)

26

4.

How do entrepreneurs create a competitive advantage?

Product leadership

Barriers to entry

Industry standard

Resource-based theory (2 votes)

HRM theories

Five forces model

Network externalities/standards

Learning

Knowledge (new)

New combinations

Hustle is strategy

Tacit knowledge (specialized resources)

Resource-based

10

Continuous innovation PANEL B: Group-Volunteered Questions and Responses • Why do some people engage and persevere in entrepreneurship pursuits? Heuristics, biases

Cognitive psychology

Financial theories •

How do we get out of an entrepreneurial venture and when do we get out?

Financial theories

Escalation of commitment

Succession •

What functions are inside the entrepreneurial firm?

Agency theory

Social network theory

Personality, traits and attitudes •

How do entrepreneurs recover from failure?

Transaction cost economics

Learning

Change theory •

How do we turn current failures into future success?

Learn

Adapt

Decisiveness •

What is the process of entrepreneurial emergence?

Behavioral theory

Person-fit

Four Ps of Marketing •

Why do some choose to become entrepreneurs whereas others do not?

Birth order

Career theory

Need for achievement

Locus of control

Self-action

27

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The Systematic Search for Entrepreneurial Discoveries

of these questions failed to pass the "so what" test of being interesting to students. If the answers to the suggested questions were included in an entrepreneurship course, I would argue that they would probably not be very interesting for students. If the answers to the suggested questions were not included in an entrepreneurship course, have scholars not lost a major audience for the dissemination of their research results? Clearly, the lack of consensus regarding course content is a possible cause of the accumulation of separate research findings. The next section of this chapter considers other possible causes. After considering possible causes of separate, noncumulative research findings, this chapter identifies opportunities for the aggregation of related findings into a more general theory. Next, it outlines an approach for building theory so that it can be more easily taught in courses, and will argue that there can be both appropriate 7 and inappropriate theoretical syntheses8 from the incautious application of such a process, which can lead to conflicting and fallacious conclusions, as well as additional confusion about course content. Finally, it argues that it is important for researchers not only to conduct theory-based research, but also to emphasize its importance in both teaching and research. POSSIBLE CAUSES FOR THE ACCUMULATION OF SEPARATE THEORIES The accumulation of separate theories may be the result of performing tests of statistical significance on the influence of variables that are theoretically uninteresting. In contrast, variables are especially interesting when they provide concomitant support for competing theoretical perspectives. Research that pits perspectives against each other is useful for evaluating the underlying assumptions of each perspective, which eventually may lead to more valid and reliable theory. In addition, pitting theories against each other may be useful for identifying the domains within which each of them provides predictive power. Another possible cause of the accumulation of unrelated results is that they are generated by the persistent appearance of descriptive research, which often makes no effort to contribute to an understanding of the variance in dependent variables. This persistence is understandable because it is much easier to describe observations than it is to predict outcomes using theory. One way that scholars have justified the prevalence of descriptive research is to label their research efforts on a particular project as "exploratory." Perhaps they are hoping that if they can convince reviewers that their work is "exploratory," it will somehow receive a less critical review. The underlying justification for exploratory research is that scholars do not know enough to formulate testable hypotheses. If they substitute the

Toward a Theory of Entrepreneurship

29

word "hunch" for "hypothesis," it is not unreasonable to argue that there are very few instances when they do not have a hunch about the results of even the most exploratory research. Often hunches are based on an understanding of theories that have generated satisfactory research outcomes in the past. If no theory known to them can assist to develop some insight on their hunches, scholars are free to propose a new one. Proposing a new theory when scholars cannot interpret a research question with an existing theory is better than conducting atheoretical research. All that scholars do when they propound a new theory is tell a story. Theory building is no more than storytelling (Daft, 1987). OPPORTUNITIES FOR THE AGGREGATION OF RELATED THEORIES All theories in the social sciences, including those that examine entrepreneurs, are in some ways inaccurate, contradictory or incomplete. Consequently, it is not surprising that many of these separate theories do not easily cumulate, especially in view of the fact that most of them do not have their origin in entrepreneurship research. Nevertheless, they provide penetrating insights on many aspects of entrepreneurial conduct and wealth creation. The purpose of this section is to identify groups of theories9 that address the questions raised in the Rensselaer theory-building exercise.10 Ideally, it would have been possible to demonstrate how most of the Rensselaer submissions could be incorporated into a general theory of entrepreneurship that could be easily taught to students. However, such a task is probably impossible, if not simply beyond the scope of this chapter. Table 2.3 summarizes potential representative theoretical groupings. The discussion that follows will illustrate how divergent perspectives provide insights into different aspects of each question. Question One: How Can Entrepreneurs Discover Economically Lucrative Opportunities That Others Miss? Accomplished entrepreneurs seem to have a special knack for repeatedly discovering hidden value. Are they simply luckier than the rest of us? If their discoveries depend on luck, it follows that the rest of us should resist the urge to be entrepreneurial, unless of course, we feel especially lucky. Two perspectives provide insights into this conundrum. Informational economics. It is the study of how entrepreneurial discoveries can be made, not necessarily how they are made. It assumes that not all information is equal in value when it comes to making entrepreneurial discoveries. Information that is related to the time, place or special circumstances of a potential deal is more valuable in making an entrepreneurial

Table 2.3 Theories That Address Similar Questions about Entrepreneurship 1 Research Question

Theories Addressing Research Question

| Representative Researchers

How can entrepreneurs discover economically lucrative opportunities that others miss?

Informational Economics Decision Making Theory

Hayek; Arrow; Fiet Busenitz & Barney

How can entrepreneurs identify the most attractive industries?

Industrial Organization Economics Austrian Economics Game Theory

Porter Jacobson Nielson

How should entrepreneurs marshal the resources to launch an entirely new business?

Agency Theory Procedural Justice Social Embeddedness Transaction Cost Economics

Fama & Jensen Greenberg Granovetter Williamson

How do entrepreneurs create a competitive advantage?

Resource-Based Theory Hypercompetition

Barney D'Aveni

Toward a Theory of Entrepreneurship

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discovery than general information (Fiet, 1996b; Gifford, 1992, in press; Hayek, 1945). It suggests that information, like any other commodity, can be purchased at a price, however, ex ante, its acquisition is partially a gamble on its unknown value. Nevertheless, entrepreneurial discovery is viewed as a rational investment process that can be understood and mastered. Decision-making theory. Busenitz and Barney (1997) argue that entrepreneurs often substitute biases and heuristics for well-reasoned analysis and investments in specific, risk-reducing information about a deal. They do this to economize on decision-making effort in the face of the many choices that they encounter when launching a new business (cf. Kahneman &C Tversky, 1984; Tversky & Kahneman, 1981). Scholars would know much more about how to discover lucrative opportunities if the insights from informational economics and decisionmaking theory could be combined. For example, when is it optimal to invest systematically in the acquisition of risk-reducing information and when is it acceptable to circumvent this rational process by using short cuts, such as biases and heuristics? Question Two: How Can Entrepreneurs Identify the Most Attractive Industries? The pharmaceutical, medical devices and semiconductor industries have historically been much more profitable than intercity buses, steel and corn farming. If scholars knew the causes for these differences in industry attractiveness, they could coach entrepreneurs to avoid competing in certain industries or alternatively, to attempt to restructure them through cooperative strategies, regulation and government lobbying. This section examines three approaches for understanding industry attractiveness. Industrial organization economics. Michael Porter summarized 40 years of research on the structure of industries (1980). He argued that the critical competitive factors were buyers, suppliers, substitutes, potential entrants and rivals. The important dimension connecting these factors is interdependence, which prevents one competitor from earning above-normal returns without it lowering the profits of other firms in the industry. The greater the competitive interdependence among firms, the less attractive are the prospects of the average entrepreneur to earn above-normal profits (Copeland &c Weston, 1988). The way to prosper in Porter's five forces world is "[colluding] behind strategically erected entry barriers" (Jacobson, 1992, p. 783; cf. Rumelt, 1987). The problem for entrepreneurs is that without erecting barriers to entry, there is no incentive to incur the risk of possible losses associated with discovery and innovation. Austrian economics. It assumes that entrepreneurs possess heterogeneous resources from which they can earn Ricardian rents (Rumelt, 1987). In

32

The Systematic Search for Entrepreneurial Discoveries

addition, they can earn quasi-rents through capitalizing on innovation and then utilizing isolating mechanisms to forestall competitive imitation (Rumelt, 1987). Entrepreneurs also have a high level of uncertainty because of incomplete or inaccurate information. Finally, entrepreneurs may not know how to duplicate each others' strategies without being at a cost disadvantage. The assumptions of Austrian economics are actually the opposite of the equilibrium assumptions of such neoclassical economists as Walras (in 1874) and Marshall (in 1890). Industrial organizational economics is actually derived later from the least stringent assumptions of neoclassical economics (cf. Kirchhoff, 1997). Game theory. This theory identifies different games that are played by competitors. These games are zero-sum, positive-sum/growth, negativesum/decline and change to positive-sum/growth, among others (Nielsen, 1988). The rules of a game specify the ways in which competitors are allowed to compete in a given industry. Competitors have little power to change the rules of a game in which they compete. Positive-sum/growth games enable competitors to increase their sales while merely maintaining market share, whereas for a negative-sum/decline game, competitors must increase their market share to hold on to their existing sales. The most promising way for rivals to improve the outcomes from their game is to cooperate with each other to stimulate primary demand. Unless competitors cooperate to change the rules of their game, they may be consigned to a competitive equilibrium in which none of them will really prosper. Deciding which of these industry descriptions (theories) is the most appropriate indicator of industry attractiveness is an empirical question. It seems apparent that Austrian economics describes most industries. However, the other two are also plausible, as are others that are not reviewed here. Ideally, each of these could be combined in one theory. Question Three: How Can Entrepreneurs Marshal the Resources to Launch an Entirely New Business? Aspiring entrepreneurs and public policy makers have lamented the capital gap that purportedly exists, which may prevent those with deserving ideas from being funded. Several theories contribute to understanding how this capital gap can be overcome. Agency theory. It assumes that capital providers and entrepreneurs may have divergent self-interests (cf. Fama & Jensen, 1983; Jensen, 1994; Jensen 8c Meckling, 1976). In addition, it contributes greatly to understanding of incentive alignment problems, such as those associated with venture funding. It suggests that entrepreneurs can substitute monitoring for bonding, if they lack necessary capital, and vice versa, if they do not wish to be monitored (Barney, Fiet, Busenitz &c Moesel, 1996). Procedural justice theory. It suggests that preserving an effective ongoing

Toward a Theory of Entrepreneurship

33

relationship between the entrepreneur and venture capitalists requires that the parties be able to maintain the perception that their exchange partner is acting fairly in compensating them for contributed work (Fiet, Busenitz, Moesel &c Barney, 1997; Greenberg, 1987, 1990; Sapienza & Korsgaard, 1994). Whereas agency theory emphasizes possibly different interests, procedural justice suggests how these differences may be overcome. Transaction cost economics. It also contributes to understanding of the availability of financing for new businesses. Although agency theory relies on the assumption of market efficiency, transaction cost economics presupposes that firms actually come into existence when markets fail to be informationally or allocationally efficient. Williamson (1975, 1985) notes that many factors may contribute to market inefficiency, particularly those mentioned in Table 2.4 under human and environmental assumptions. Transaction cost economics shares with agency theory the observation that one way to overcome any opportunistic tendencies of providers and users of capital is to monitor the capital user. Social embeddedness theory. It suggests that exchange relationships, such as those through which venture capital is exchanged, may socialize the exchangers so that they become more trustworthy (Fiet, 1995b; Granovetter, 1985). The network of exchange relationships serves as an implicit monitoring device to forestall opportunism. Granovetter (1985) would argue that opportunism is unlikely when exchange relations become socially embedded because repeated, reciprocal exchanges supplant opportunism with trust. Clearly, improving understanding of market efficiency, incentive alignment and trust, as suggested by these approaches, would greatly add to understanding how to advise aspiring entrepreneurs to launch their ventures. Question Four: How Can Entrepreneurs Create a Competitive Advantage? Michael Porter heightened awareness of the desirability of a competitive advantage in his second book (1985). He suggested that firms that possessed a competitive advantage would be positioned to earn higher profits. The following theories address this issue of competitive advantage. Resource-based theory. This approach attends to a firm's heterogeneous collection of resources, which are housed internally (Barney, 1986, 1997; Penrose, 1959; Wernerfelt, 1984). These resource bundles (or capabilities) enable a firm to generate quasi-rents, which are an attribute of the resources themselves. Jay Barney (1997) suggests that there are four major criteria that these resources must satisfy to serve as potential sources of sustainable competitive advantage. They are (1) valuable, (2) rare, (3) imperfectly imitable, which includes both nonduplicatability and nonsubstitutability and

Table 2.4 Assumptions of Selected Theories Utilized in Entrepreneurship Research 1 Theory

1 Primary Domain

Key Idea

Unit of Analysis

Agency

Relationships in which principal and agency may have i partially differing goals and risk preferences

Principal-agent relations should reflect efficient organization of information and risk-bearing costs

Contract between principal and agent

Usually individual but relationships can criss-cross the entire economy

Self-interest Bounded rationality Risk aversion

1 Level of Analysis

Human and/or Environmental 1 Constraints

Procedural Justice

The reward process in exchange relationships

Rewards will be meted out on the basis of the perceived fairness of the exchange

Wide variety of exchange relationships

Usually individual, but like agency theory, relationships can criss-cross the entire economy

Humans want to be treated fairly Self-interest Bounded rationality

Transaction Cost

Markets, hierarchies and vertical integration

Promotes efficient transactions as a basis of organizing

Transactions, both inside and outside the firm

Functional, business or corporate

Bounded rationality Opportunism Information impactedness Asset specificity Uncertainty/ complexity Small numbers

1 Power

Resource-Based

1 Social Embeddedness

The sources of power

Focuses on the efficiencies that can be achieved based on power that can be exercised.

Sources of power

Can occur at personal, functional, business and corporate.

Self-interest Opportunism

Firms

Firms are composed of heterogeneous resources, which in proper combination, if exploited, could be a source of sustainable competitive advantage

The resource or capability

Resources are at the functional level and capabilities are at the business level

Some of each person's knowledge about his/her resources remains private, which could serve as a basis for a sustainable competitive advantage

Exchange relationships

Repeated exchanges socializing the exchangers into being trustworthy

Repetition in exchange relationships

Usually individual, but like agency theory and procedural justice, relationships can criss-cross the entire economy

Humans can be trusted Well-founded trust is economical

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The Systematic Search for Entrepreneurial Discoveries

(4) the degree to which an organization is organized to exploit a resource. The implication of this approach is that entrepreneurs can chose strategies, which are consistent with their resources, to gain a sustainable competitive advantage for their firms. Hyper competition. This reframing of Austrian economics by Richard D'Aveni (1994) argues that all competitive advantages are temporary because of increased and increasing competitive rivalry. Therefore, rather than attempting to protect their competitive advantage, entrepreneurs should continually strive to obsolete them before they are used by a competitor as a platform for creating the next innovation. Alternatively, a competitor could attempt to destroy a competitor's advantage, which would also serve to protect the distance between competitive products or services. The correct approach, according to D'Aveni, depends on the perceived stage of competitive rivalry. Resource-based theory and the theory of hypercompetition use differing assumptions about the viability of a strategy intended to generate a sustainable competitive advantage. In fact, they do not even agree that the generation of such an advantage is possible or even advantageous. Should a firm continually innovate to obsolete its own advantages and those of its competitors or should it invest in protecting what it already possesses? These are the primary questions posed by these two theories of sustainability. All of the theories summarized in Table 2.1 provide plausible premises that instructors can use to teach entrepreneurship theory.11 Students of entrepreneurship can also utilize them in certain circumstances if they are careful to follow the recommendations in the next section. Problems develop when students assume that these theories can be applied generally without taking into account various contingencies. Moreover, these are only some of the theoretical platforms that scholars can use. A CONTINGENCY APPROACH FOR TEACHING ENTREPRENEURSHIP THEORY Until scholars develop a general theory of entrepreneurship, as mentioned earlier, all current theories of how entrepreneurs succeed are in some ways inaccurate, contradictory or incomplete. This contention should be noteworthy to both instructors and aspiring entrepreneurs. However, as indicated by the preceding review of attempts to address questions about entrepreneurs, scholars have made impressive progress in their too frequently separate, but parallel research efforts.12 Several of the theories in the preceding review address the same research questions, although they do so using different assumptions or contingencies. The purpose of this section is to suggest a contingency approach for examining the differing assumptions of theories that address similar entrepreneurial questions. This approach, consisting of three questions, should

Toward a Theory of Entrepreneurship

37

assist entrepreneurs to better understand the consequences of their decisions. These are the three questions: (1) On what assumption(s) does this conclusion depend? (2) What evidence is there for this assumption? (3) What alternative assumption(s) could explain this conclusion? Each of these will now be reviewed. 1. On what assumption(s) does this conclusion depend? This question recognizes that in order for theories to be distinct, they must rely on different assumptions. If they did not rely on different assumptions, they would not be internally consistent because they reach different conclusions. Table 2.4 summarizes five different categories of theoretical assumptions. These assumptions are (1) primary domain, (2) key idea, (3) unit of analysis, (4) level of analysis and (5) human and/or environmental constraints. Table 2.4 also provides illustrations of each of these assumptions for six theories that have been recently applied in entrepreneurship research.13 The theories in Table 2.4 indicate that some approaches turn on their degree of presumed market efficiency, notably transaction cost economics and agency theory, whereas power theory assumes that those who possess power can decide for others. Transaction cost economics also assumes that humans may act opportunistically, whereas the social embeddedness view predicts that embedded social relations will prevent it from occurring. A long-term view of the negative consequences in the relationship among exchangers can also prevent opportunism, as is explained by the procedural justice perspective. It is important not to attempt to cumulate theories by combining ones with different underlying assumptions unless these assumptions are modified to make them compatible. For example, trying to combine agency theory with transaction cost economics is not appropriate without modifying some of the basic assumptions of each. Because one approach assumes market efficiency and the other market failure, although their human and environmental constraints appear very similar, these subtle efficiency differences generate markedly different predictions. According to transaction cost economics, firms are launched when markets fail. In contrast, agency theory suggests that firms are launched in part to resolve the problem of shirking during team production (Alchian & Demsetz, 1972). Because some markets are inefficient and do fail in real life,14 agency theorists have occupied most of the last 20 years identifying conditions that explained this observed market inefficiency. It may be appropriate to use separate theories together when their varying assumptions are complementary. For example, Fiet et al. (1997) found that agency theory and procedural justice theory could be used jointly to understand venture capitalist-initiated dismissals of members of a new venture team because their separate insights were complementary. They found that clearly signaling the consequences of an undesirable behavior could reduce the incidence of dismissals, which is according to agency theory.

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The Systematic Search for Entrepreneurial Discoveries

Table 2.5 Important Decision Criteria of Select Theories Utilized in Entrepreneurship Research 1 Theory

Key Decision Criteria

Agency

Agents have separate and possibly divergent interests from those of the principals. Monitoring may be utilized to detect agent behavior that is harmful to principals. It may be further reduced through incentive alignment, being careful to not shift excessive risk for loss of compensation for work performed to the agent. Risk of loss is more efficiently borne by principals who can diversify their risk of loss.

Procedural Justice

Because a fair distribution of rewards cannot always be determined, it may be possible to substitute the installment of a fair reward system and then to ensure that the procedures themselves are scrupulously followed. In this way, the procedures become a proxy for fair distribution.

Transaction Cost

Firms exist when the cost of doing business, including transaction costs, is less within the hierarchical structure of a firm than it would be in a market. The process of shifting transaction within the boundaries of a firm is referred to as vertical integration.

Power

Dependency, financial resources, centrality, nonsubstitutability, and the ability to cope with uncertainty are potential sources of power. Resource-Based If a resource (or capability) is valuable, rare, imperfectly imitable (including nonduplicable and nonsubstitutable) and if a firm is organized to exploit it, it may generate a sustainable competitive advantage and above-normal returns. Social Embeddedness

An exchange relationship becomes embedded in a larger network of exchange relationships after repeated, and preferably frequent, exchanges. The result is that participants become socialized to a network's norms of reciprocity and fair play. Once socialization takes place, the embedded relationship serves as a governance mechanism to ensure against opportunistic, end-game power plays.

Procedural justice entails more than signaling the negative consequences of an undesirable behavior. To act in a way that is perceived as procedurally just, exchangers must be concerned about the capacity of survivors to be productive. Procedural justice does not foreclose negative incentives, as long as they are perceived as being meted out fairly. Table 2.5 compares the decision-making criteria used by entrepreneurs, given the assumptions of the six different theories in Table 2.4. If an entrepreneur is interested in evaluating the sustainability of a competitive advantage that could be generated by developing a strategy based on

Toward a Theory of Entrepreneurship 39

proprietary resources or capabilities, he or she should consider the resourcebased theory of the firm. If an entrepreneur is interested in understanding those factors that will affect the birth and survivability of his or her firm, transaction cost economics should be consulted. If an entrepreneur is interested in knowing whether he or she should be concerned about possible opportunistic behavior, he or she should consider the assumptions of both transaction cost economics and the social embeddedness view. The question of which of these approaches should be used to determine the probability of opportunistic behavior depends on the next question. 2. What evidence is there for this assumption? This question asks us to consider the validity of a theory's assumptions. It is impossible to evaluate the comparative validity of two internally consistent theories without considering the supportive evidence for the assumptions of each one. Fiet (1995b) pitted transaction cost economics against the social embeddedness view to predict the degree to which business angels and venture capital firm investors rely on information from informants, information that could be slanted to favor the informant. He found that when exchanges of information among informants were frequent, as in the case among venture capital firm investors, trust was high. In fact, trust among venture capital firm investors was higher than among business angels, who complained about inadequate requests for funding as well as less frequent contacts with informants, which could have developed greater trust. Fiet's (1995b) results suggest that each theory is valid, depending on the number and frequency of exchanges that occur among the informants. A more recent study by Fiet, Busenitz, Moesel and Barney (1997) compared the validity of predictions made about the dismissal of new venture team members (NVT) by venture capitalists. It compared predictions made by agency theory, procedural justice and power theory. They report the following results: Poor performance is associated with NVT dismissals, as predicted by agency theory. However, the actual occurrence of dismissals seems to be moderated by the power of the board of directors (i.e., the smaller the size of the board and the greater the number of VC-controlled seats) and the necessity to act in a procedurally just manner so NVT survivors will not feel threatened, (p. 363)

This study found that each of these theories provided an incomplete explanation of NVT dismissal. However, when their interpretive insights were combined, it found them to be complementary and in fact synergistic. These studies by Fiet and his colleagues provide some evidence to suggest that each of the competing theories tested by them is at least partially valid.15 However, their individual validity was contingent on the circumstances of the encounter. Given the partial and contingent nature of only these conclusions, it is important to be willing to accept other explanations

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The Systematic Search for Entrepreneurial Discoveries

for phenomenon. If scholars are willing to be open to other explanations, they will probably be surprised and delighted by unexpected outcomes. Until they arrive at a unified theory of entrepreneurship, entrepreneurs may obtain valuable insights from considering the predictions of multiple theories, which will be useful for ensuring that they are asking pertinent questions about the future effects of their decisions. 3. What alternative assumption(s) could explain this conclusion? Considering possible alternative assumptions underlying conclusions is important for several reasons. First, it is important to consider that judgments about the consequences of decisions can often be influenced by the views of others, as in the case of groupthink (Janis, 1982). It is safe to argue that when everyone agrees with the correctness of a particular argument, there is some aspect of the argument that is being overlooked. These are complex matters and reasonable researchers ought to disagree until they understand a phenomenon very well. Second, a psychological process that sometimes obscures judgment is escalation of commitment (Staw, 1981). Students of this process have observed that personal commitment to the correctness of former judgments may increase with the passage of time and investment. Again, if everyone agrees that we are correct, that may be the time to step back and question whether we have subconsciously accepted assumptions that we consciously would have resisted. Third, Fiet et al. (1997) describe an impatient discussion about the relative value of organizational economics and traditional management theory between Lex Donaldson (1990a, 1990b) and Jay Barney (1990) in which the latter cited Clay Alderfer: Professor Alderfer argued that many of the conflicts between academic disciplines [read, entrepreneurship theory] could be analyzed using models of "intergroup conflict" (Barney, 1990, p. 389, 390). According to Barney (1990), these debates often devolve into turf battles with the combatants erecting intellectual barriers to entry presumably by influencing gatekeepers who guard the most influential publication outlets. These turf wars, Barney (1990) argued, inhibit intellectual inquiry and stifle debate, which ultimately eviscerates the most potentially interesting and productive inquiry. (Fiet et al., 1997, p. 363) Two requirements for building a general theory are that its assumptions be both internally consistent and valid. It would be quite rare that a theory could survive the peer review process and yet still have internal inconsistencies in its assumptions. Thus, if scholars wish to understand theoretically generated predictions, the primary concern should be to check for contradictory evidence that could invalidate a theory. For researchers, contradictory evidence means that we must ask ourselves the following question: "Can this theory's assumptions be modified to correct for contradictory

Toward a Theory of Entrepreneurship

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evidence?" In addition, entrepreneurs can modify a theory's assumptions to correct for biased and inaccurate predictions. The process is similar for both groups because in reality, all that entrepreneurs are trying to do is construct a theory about the consequences of their decisions. Can scholars teach aspiring entrepreneurs to predict the future using research-generated theory? Probably not yet, but they can at least teach them to be systematic as they go through the same assumption-checking process as researchers. In addition, if they attempt to do it without the assistance of theoreticians who have already done most of the pioneering work, it will be much more difficult and time-consuming. Can researchers conduct atheoretical research? Yes, but they still ought ensure that their work does not contradict received assumptions so that it contributes to the eventual development of a general theory of entrepreneurship. Scholars have the responsibility to teach aspiring entrepreneurs the value of theory. They also have a larger institutional responsibility to the field to move it toward a general theory of entrepreneurship. Meanwhile, they can teach aspiring entrepreneurs to use what is known on a contingent basis. They do not have to promise more than their theory-building efforts can presently deliver. They should be able to admit theoretical limitations without becoming apologists that current entrepreneurship theory represents unfinished business. In this sense, they have a great deal in common with entrepreneurs. The business of their separate endeavors is to construct a more accurate, general theory about the future.

NOTES 1. Rensselaer Polytechnic Institute hosted the retreat under the leadership of Professor S. Venkatraman. I am indebted to Professor Venkatraman and the other retreat participants for their contributions to the ideas presented in this chapter. 2. In defense of the retreat participants, they cannot be criticized for lacking rigor in their courses. Their courses were rigorous. Their problem, in my view, is that they did not agree on what to teach, which casts some collective doubt on any claim that our field may espouse one best way to teach people how to be entrepreneurial. 3. Please understand that none of the concerns that I have about our field are directed at individual scholars; nor am I suggesting that entrepreneurship scholars do not do rigorous work. The purpose of these remarks is to initiate a conversation about these important issues. 4. My apologies to Jonathan Swift, who was the first one to coin the title of this section. 5. However, like trade schools, universities could claim that they were training students in skill development, such as incorporating a new business, patenting a product or running an ad in the newspaper. If universities opt for that argument to support what they teach, their students will not be able to utilize what scholars

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teach them to earn above normal returns because it is easily codifiable and can be transferred to anyone who wants it. Thus, students with trade school-like knowledge can only earn average returns by using it, unless of course they are lucky. 6. Since the retreat, I have further refined and extended this list of questions. The new list contains the following items: 1. 2. 3. 4. 5.

How can entrepreneurs discover lucrative opportunities that others miss? How can entrepreneurs identify the most attractive industries? How can entrepreneurs marshal the resources to launch entirely new businesses? What strategies can entrepreneurs pursue so that their ventures survive and prosper? What is the nature of entrepreneurial competence and how does it relate to the discovery and exploitation of wealth-generating venture ideas? 6. How and what should scholars teach to students so that they acquire entrepreneurial competence?

7. Agency theory and procedural justice will be set forth as highly complementary in their approaches and as candidates for theoretical synthesis. 8. Agency theory and transaction cost economics will be discussed as similar but less appropriate as candidates for theoretical synthesis. 9. Space limitations prevent providing an extensive analysis and comparison of each of the theories reviewed in this section. Those wishing more information about particular theories than is provided in this section or in Table 2.1 should consult the references in this chapter. 10. Some minor changes were made in the actual questions to make them editorially consistent in this chapter. 11. There is some disagreement about whether each of these "theories" is in fact a theory. Because they originate from different disciplines, it is quite difficult to arrive at a consensus about what constitutes a theory. Some may feel more comfortable referring to them as "perspectives." For this chapter, I am more interested in synthesis than definitional precision. 12. All that is needed to substantiate this contention is to compare how entrepreneurship was taught 20 years ago with how it is taught today. Twenty years ago, entrepreneurship education consisted of drills in the fundamentals of running a business, anecdotes, successful entrepreneur guest speakers and war stories. Today, there are several publication outlets for theory-based research, forums where scholars can debate what and how to teach and entrepreneurship textbooks that review entrepreneurship theories as a part of outlining opportunities to practice skills. 13. The selection of these illustrations is not intended to elevate particular theories above others that were omitted, or to suggest that those that were omitted offer less insight. They are provided for illustrative purposes only. 14. The informal market for venture capital is an example of one that fails because its business angel investors constantly complain about not having enough deals to review. Interestingly, angels are part of this problem because they have a desire for privacy and wish to preserve their anonymity (Fiet, 1991). 15. Busenitz, Moesel and Fiet (1998) studied the effects of strategic intervention by venture capital firms on the performance of their investee firms. In their longitudinal study, they contrasted the predictions of learning assistance theory, agency

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theory and procedural justice theory. Learning assistance theory was not supported, agency theory predictions were actually found to be negatively related to actual performance, and procedural justice theory was supported. This study is important because it not only pits three theories against each other, but it does so using six years of longitudinal data.

REFERENCES Alchian, A.A., dc Demsetz, H. 1972. Production, information costs, and economic organization. American Economic Review 62: 777-795. Barker, J.A. 1992. Future edge: Discovering the new paradigms of success. New York: William Morrow. Barney, J.B. 1986. Strategic factor markets: Expectations, luck and business strategy. Management Science 32(10): 1231-1241. Barney, J.B. 1990. The debate between traditional management theory and organizational economics: Substantive differences or intergroup conflict? Academy of Management Review 15(3): 382-393. Barney, J.B. 1991. Firm resources and sustained competitive advantage. Journal of Management 17: 99-120. Barney, J.B. 1997. Gaining and sustaining competitive advantage. New York: Addison-Wesley, ch. 5. Barney, J.B., Fiet, J.O., Busenitz, L.W. 6c Moesel, D. 1996. The substitution of bonding for monitoring in venture capitalist relations with high technology enterprises. Journal of High Technology Management Research 7(1): 9 1 105. Busenitz, L.W., 8c Barney, J.B. 1997. Biases and heuristics in strategic decision making: Differences between entrepreneurs and managers in large organizations. Journal of Business Venturing (12): 9-30. Busenitz, L.W., Moesel, D.D. & Fiet, J.O. 1998. Strategic intervention and longterm performance: Venture capitalist involvement with new venture teams. Working paper, University of Houston. Camerer, C. 1985. Redirecting research in business policy and strategy. Strategic Management Journal (6): 1-15. Copeland, T.E., &c Weston, J.F. 1988. Financial theory and corporate policy, 3rd ed. New York: Addison-Wesley. Daft, R.L. 1987. Personal conversation. D'Aveni, R.A. 1994. Hyper competition. New York: The Free Press. Donaldson, L. 1990a. The ethereal hand: Organizational economics and management theory. Academy of Management Review 15(3): 394-401. Donaldson, L. 1990b. A rational basis for criticisms of organizational economics: A reply to Barney. Academy of Management Review 15(3): 394-401. Eisenhardt, K. 1989. Agency theory: An assessment and review. Academy of Management Review 14(4): 57-74. Fama, E.F. 1980. Agency problems and the theory of the firm. Journal of Political Economy 88: 288-307. Fama, E.F., &c Jensen, M.C. 1983. Separation of ownership and control. Journal of Law and Economics 26: 301-325.

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Fiet, J.O. 1991. Managing investments in specific information: A comparison of business angels and venture capital firms. Unpublished dissertation, Texas A&M University. Fiet, J.O. 1995a. Risk avoidance strategies in venture capital markets. Journal of Management Studies 32(4): 551-574. Fiet, J.O. 1995b. Reliance upon informants in the venture capital industry. Journal of Business Venturing 10(3): 195-223. Fiet, J.O. 1996a. Fragmentation in the market for venture capital. Entrepreneurship Theory and Practice 21(2): 5-20. Fiet, J.O. 1996b. The informational basis of entrepreneurial discovery. Small Business Economics 8(6): 419-430. Fiet, J.O., Busenitz, L.W., Moesel, D.D. & Barney, J.B. 1997. Complementary theoretical perspectives on the dismissal of new venture team members. Journal of Business Venturing 11: 347-366. Gifford, S. 1992. Innovation, firm size and growth in a centralized organization. RAND Journal of Economics 23(2): 284-298. Gifford, S. In press. Limited entrepreneurial attention. Small Business Economics. Granovetter, M.S. 1985. Economic action, social structure, and embeddedness. American Journal of Sociology 91(3): 481-510. Greenberg, J. 1987. A taxonomy of organizational justice theories. Academy of Management Review 12: 9-22. Greenberg, J. 1990. Organizational justice: Yesterday, today, and tomorrow. Journal of Management 16(2): 399-432. Hayek, F.A. 1945. The use of knowledge in society. American Economic Review 35: 519-530. Jacobson, R. 1992. The "Austrian" school of strategy. Academy of Management Review 17: 782-807. Janis, I.L. 1982. Groupthink, 2nd ed. Boston: Houghton Mifflin. Jensen, M.C. 1994. Self-interest, altruism, and agency theory. Journal of Applied Corporate Finance 7(2): 40-45. Jensen, M.C., & Meckling, W.H. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics 3: 305-360. Kahneman, D., &c Tversky, A. 1984. Choices, values, and frames. American Psychologist 39(4): 341-350. Kirchhoff, B.A. 1997. Entrepreneurship economics. In W.D. Bygrave (Ed.), The portable MBA in entrepreneurship, 2nd ed. New York: John Wiley &; Sons, pp. 444-474. Korsgaard, M.A., Schweiger, D. & Sapienza, H. 1995. Building commitment, attachment, and trust in strategic decision-making teams: The role of procedural justice. Academy of Management Journal 38: 60-84. Nielsen, R.P. 1988. Cooperative strategy. Strategic Management Journal 9: 4 7 5 492. Penrose, E. 1959. The theory of growth of the firm. New York: John Wiley & Sons. Phan, P.H. 1998. Learning and knowledge creation as the bases for a paradigmatic approach to entrepreneurship. Working paper series 98-11, National University of Singapore.

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Porter, M.E. 1980. Competitive strategy. New York: The Free Press. Porter, M.E. 1985. Competitive advantage. New York: The Free Press. Rumelt, R. 1987. Theory, strategy and entrepreneurship. In D.J. Teece (Ed.), The competitive challenge: Strategies for industrial innovation and renewal. Cambridge, MA: Ballinger, pp. 137-158. Sapienza, H., Sc Korsgaard, M.A. 1994. Managing investor relations: The impact of procedural justice in establishing and sustaining investor support. Presentation at Entrepreneurship Research Conference, Babson College. Staw, B.M. 1981. Escalation of commitment to a course of action. Academy of Management Review (October): 577-587. Tversky, A., & Kahneman, D. 1981. The framing decision and the psychology of choice. Science 211: 453-458. Venkatraman, S. 1997. The distinctive domain of entrepreneurship: An editor's perspective. In J. Katz &t R. Brockhaus (Eds.), Advances in entrepreneurship, firm emergence^ and growth, vol. 3. New York: JAI Press, pp. 119-138. Wernerfelt, B. 1984. A resource-based view of the firm. Strategic Management Journal 5: 171-180. Whitehead, A.N. 1917. The organisation of thought, educational and scientific. London: Williams and Norgate. Williamson, O.E. 1975. Markets and hierarchies. New York: The Free Press. Williamson, O.E. 1985. The economic institutions of capitalism. New York: The Free Press.

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Chapter 3

The Informational Economics of Discovery

Scholars generally study what entrepreneurs do after discovering a venture opportunity. Taking this approach, the risk of a venture failing is associated with the uncertain outcome of implementing either an intentional or emergent strategy. However, risk also attends the choice of the type of information and means of acquiring it to discover a venture idea that can be exploited to create new wealth. Information can be acquired for a price like any other commodity, but the acquisition expense can become a sunk cost if a venture idea turns out to be unpromising. Purchasing the wrong information also takes time, which adds to the cost of making discoveries. The objective of acquiring information to launch a new venture can be to acquire the most informative signals in the least expensive way possible, which is an issue for those who study economics. This chapter focuses on the ex ante process of acquiring information through discovery, rather than on the ex post process of exploiting a venture idea. DISCOVERY IN THE ECONOMICS LITERATURE An exploration of the economics literature for references to entrepreneurial discovery leads one into the midst of an intradisciplinary conflict that generally pits Austrian economists, who assume entrepreneurs have an important role to play in discovery, against neoclassical economists, who do not make allowances for such a role (Kirchhoff, 1991). Since Adam Smith (1965), economists have attempted to understand how entrepreneurs discover economic opportunities and distribute wealth. Toward the end of the nineteenth century, neoclassical economists diminished the role of economic

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actors in discovery. Their chief spokesman was Marshall, who emphasized market forces being in equilibrium. The Neoclassical View Essential to neoclassical economics is the notion that economic actors are rational and operate independently in markets that are in equilibrium. At equilibrium, rational suppliers and rational buyers co-determine prices and everyone earns the same level of profits, which is just sufficient to maintain capital investment. It is an elegant view that is mathematically powerful, but it provides no incentive for entrepreneurs to bear the risk of creating new products and processes (Jacobson, 1992). Entrepreneurship researchers have criticized the neoclassical view for assuming away the possibility of human tendencies that may be irrational. However, its critics may have missed the central contribution of this perspective—although entrepreneurs may not typically act rationally, they could chose to do so. Neoclassical economics assumed that economic actors acted rationally on average, which meant that it could be used effectively to make predictions about the behavior of a population. Unfortunately, critics have taken to debate the question of whether entrepreneurs actually act rationally on average, which misses the central contribution of the neoclassical perspective—whether they do act rationally or whether they do not act rationally is an uninteresting empirical question. A much more interesting issue to sort out is whether scholars can develop theory to inform aspiring entrepreneurs how to act rationally, and if so, whether they can use it for training. If scholars could develop theory to use for training, the neoclassical perspective foreshadows how an average entrepreneur would act. In addition to the reasons already cited for considering the neoclassical perspective, I use its general equilibrium theory as a foil to demonstrate the need to provide incentives to entrepreneurs in exchange for bearing risk. The Austrian View According to Austrian economics, markets are in disequilibrium and profits are a disequilibrium phenomenon (Jacobson, 1992), which is the obverse of the neoclassical perspective. Disequilibrium enables entrepreneurs to discover market imbalances that offer ways to earn above-average returns. If they can protect their discoveries from imitation by others, they can preserve a competitive advantage that will ensure their economic survival (Barney, 1986). The most often cited explanation of entrepreneurial discovery from Austrian economics is the carrying out of new combinations (Schumpeter, 1971). The individuals who carry out the combinations are entrepreneurs.

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However, the carrying out of new combinations is only part of the story. Although it is an indicator of the intentions of an entrepreneur (Bird, 1992), it does not provide us with any insight into the discovery process. In the Schumpeterian view, discovery is still treated as a black box. Neither the neoclassical view nor the Austrian view offers aspiring entrepreneurs an avenue for improving their odds of making a discovery. However, both of them focus attention on efficiency as a choice criterion. Unfortunately, the first perspective does not allow an entrepreneurial role, whereas the second infers that it depends on entrepreneurs being lucky. Based on informational economics, the next section introduces an information-based model that entrepreneurs can use to make discoveries. THE INFORMATIONAL BASIS OF ENTREPRENEURIAL DISCOVERY Figure 3.1 contains an information-based model of entrepreneurial discovery. A central premise of this model is that entrepreneurs can chose to be profit maximizers who purchase information about prospective ventures that they can use to improve their risk-adjusted return on investment. Some readers may prefer to think of them as utility maximizers, or individuals who maximize their personal psychic well-being, rather than their profit. One difficulty with conceptualizing them as utility maximizers, however, is in selecting a metric to measure the dependent variable, entrepreneurial discovery. The utility maximization alternative also would introduce a variety of unknown, and probably unknowable, personal preferences as moderating effects, which would shroud any relationships that could be found in unnecessary complexity. An information-based approach can be used as a basis for building on the work of previous researchers, particularly those from the Austrian school (cf. Camerer, 1985). It also permits the examination of actions by an entrepreneur that can lead either to the discovery or rejection of a prospective venture idea. Focusing only on those deals that are carried out may cause scholars to overlook a large number of venture possibilities that were seriously considered by an entrepreneur, but that were eventually abandoned. Finally, to demonstrate its relevance, the model must identify propositions that have actionable implications for entrepreneurs or future research. An unreasonable expectation for the model would be to require that it generate propositions that have implications that are as rich as the experiences of actual entrepreneurs. The behavior of actual entrepreneurs is exceedingly complex and sometimes unpredictable. All theory depicts a view that is a simplification of real experience and the view presented in this chapter is no exception. I do not consider this simplified perspective to be a limitation of the

Figure 3.1 An Information-Based Model of Entrepreneurial Discovery

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model because its purpose is not to describe entrepreneurial conduct. Rather, its purpose is to suggest what an aspiring entrepreneur can do to make discoveries. An advantage of this approach is that I will use it in Chapter 6 to model mathematically how entrepreneurs can decide to search for valuable venture ideas. Although entrepreneurs would probably never use such a sophisticated approach to decide whether to pursue a venture idea, demonstrating that optimal search is possible is an important step in developing an approach that can show aspiring entrepreneurs how to deliberately search for entrepreneurial discoveries, as I do in Chapter 7. The purpose of this chapter is to provide an overview of this informationbased approach. The remainder of the book will explore in more detail those aspects of the model that have prescriptive implications for aspiring entrepreneurs. A major thrust of this chapter is to use the model to illustrate how different ways of optimizing investments in specific information lead to different ways that discoveries can be made. Public and Private Markets for Information Received theory assumes that markets are accessible by the general public and are both informationally and allocationally efficient. Markets are informationally efficient when all buyers and sellers have the same information. Markets are allocationally efficient when prices are set so that they equate "the marginal rates of return (adjusted for risk) for all [buyers and sellers]. In an allocationally efficient market, scarce savings are optimally allocated to productive investments in a way that benefits everyone" (Copeland & Weston, 1988, p. 330; cf. Fiet, 1993, pp. 4-6). When markets are informationally and allocationally efficient, a state of perfect competition exists so that all economic actors earn the same average level of profit. Entrepreneurs are unwilling to bear the required above-normal levels of risk in return for average levels of profit. Above-normal risk is a level of risk that exceeds that which allows entrepreneurs to earn enough to keep their dedicated assets productively employed in their ventures. Thus, given perfect competition, all discoveries would cease. There would be no incentive for entrepreneurs to bear above-normal levels of risk in return for average levels of profit. Incentives for entrepreneurs to take risks can only exist in imperfectly competitive industries. Imperfect competition permits differences in informational and allocational efficiency to exist simultaneously in the same market so that it is possible for some entrepreneurs to earn above-average profits. When scholars see entrepreneurs "betting the store," it is unlikely that it is because these entrepreneurs expect to divide their future earnings equally with competitors. This reasoning yields the first proposition for aspiring entrepreneurs, which suggests that they should access the level of informational and allocational efficiency in their chosen market.

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Proposition 1: Entrepreneurial discovery can only occur where imperfect competition exists. Entrepreneurs take on risk because they believe that they can manage it using private information, or information with very limited distribution, which may give them a competitive advantage (Fiet & Hellriegel, 1993). Their hubris contrasts with the findings of Fama's (1970) study of equity markets. Fama (1970) reported that public equity markets are informationally efficient in a semi-strong sense. By this, he meant that no investor could earn above-normal returns by trading on publicly available information. If information regarding ventures that could generate above-average returns were publicly available, potential competitors would have an incentive to expropriate any returns that were in excess of average. Subsequent investigations of the informational efficiency of public equity markets have provided substantial empirical support for Fama's findings (cf. Copeland & Weston, 1988). These subsequent investigations, however, were not intended to uncover how entrepreneurs use private information known only to them. Private information markets are those that disseminate information that is not available to the general public. This kind of information is important to entrepreneurs because a discovery may not generate a sustainable competitive advantage unless its circumstances are private (cf. Barney, 1986). Many entrepreneurs use personal contacts to acquire private information (cf. Granovetter, 1978; Lorenzoni & Ornati, 1988). Although using personal contacts is more time-consuming than consulting public information sources, entrepreneurs have few alternatives if they wish to access private information. Private markets are less well organized than public markets, primarily as a result of their lack of intermediaries who, like stockbrokers, can guarantee the value of information exchange (Poindexter, 1976). Although the rationale for the existence of these markets is compelling (cf. Casson, 1990), scholars know comparatively little about them because of their overriding interest in the neoclassical paradigm. Not only is private information distributed less widely than public information, it is normally unavailable to the public. Private information is less accessible because it requires an investment of resources to uncover and normally is more costly to transfer. Public information is information that is normally accessible through the print media. It is a public good, meaning that no one can take custody of it and limit its distribution. Examples of this information are corporate annual reports, investment advisory newsletters or stock quote data. It is information that is available to anyone who seeks it. In summary, entrepreneurial discovery can only occur when individuals have access to private information about the circumstances of a venture. If the information about a venture were public, potential imitators would

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copy the discovery until they depleted any capacity to earn above-average returns. Because this private information is not available through published sources, entrepreneurial discovery can only occur in private information markets. Refer to private information markets in Figure 3.1. The above arguments generate the following proposition. Proposition 2: Entrepreneurial discovery can only occur in private markets for information. The Role of Signaling When entrepreneurs position themselves so that they have access to information about potential new venture opportunities, they may be using an information channel.1 An information channel is a frequent, low-cost source of signals. A signal is new information that changes our ideas about a future state. Specifically, a signal can inform us about how a discovery will affect an entrepreneur's future profit. One of the most useful types of signals is one that reduces an entrepreneur's risk, thereby increasing his or her profit. Signals can be used to generate more wealth when they are unique or at least rare. When they are unique or rare they may be combined with previously acquired specific information to provide an aspiring entrepreneur with a competitive advantage in moving forward with a discovery. Entrepreneurs are often pictured as achieving mastery over their fate by being independent, rugged, dynamic, innovational and making their way, largely by their own efforts. Closer inspection of their enterprises leads us to a somewhat different conclusion. They thrive not by bucking the odds, but by selecting an environment that they view as having an appropriate set of security arrangements, which probably includes being in close proximity to an information channel. Security arrangements are circumstances that limit the risk of entrepreneurial discovery. Easterbrook (1949) suggests that the presence of security arrangements may be a historical accident as much as anything. Nevertheless, entrepreneurs who survive are more than lucky. They are aware of the types of signals that have been informative in the past and they remain vigilant to any need for a course correction. Because they have previously invested in signals they may also enjoy ongoing economies of scope in the acquisition of new protective signals. Figure 3.1 illustrates how risk evaluation in the discovery process depends on receiving signals, often from information channels. This section's arguments give rise to the following proposition. Proposition 3: Entrepreneurs can protect their ventures from the risks associated with discovery by tapping into an information channel that provides them risk-reducing signals.

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Positioning aspiring entrepreneurs in close proximity to an information channel reduces their access cost.2 Nevertheless, acquiring signals to reduce risk is still not costless; nor are there any guarantees that their purchase will have the expected risk-reducing value. Thus, aspiring entrepreneurs may view the acquisition of risk-reducing signals as an investment with an uncertain return. The Role of Risk Evaluation in Entrepreneurial Discovery Entrepreneurs choose the types of signals in which they invest. Acquiring the wrong signals poses a risk because their cost cannot be recovered if it does not provide more accurate information about the prospects for a discovery. Whereas the acquisition of a signal can be expensive and must be purchased in the present, its true value cannot be determined until the outcome of the discovery is known in the future. The intertemporal nature of investing in signals poses a risk for aspiring entrepreneurs. Risk assumes the probability distribution of future events is known. Recently, it has come to be increasingly a concept referring not to the probability of outcomes but to their costs (Fischoff, Watson &c Hope, 1984; March & Shapira, 1987). The main focus has been on "defining tradeoffs between specific 'risk' and other costs" (March & Shapira, 1987, pp. 1411, 1412). This means that entrepreneurs might be willing to select an alternative with a very high probability of a loss as long as the loss was small. However, they would prefer to avoid any choice through which a loss could be devastating, even if its probability were low. Fiet (1991a) suggested that there are two types of risk confronting entrepreneurs, market risk and agency risk. Market risk is due to unforeseen competitive conditions. It depends on the size, growth and accessibility of a market and on the existence of a market need. Agency risk refers to an entrepreneur's risk that those on whom he or she depends for resources will pursue their own interests. Projects that have an unknown future are uncertain. Uncertainty assumes the probability distribution of future events is unknown (Knight, 1933). Arrow (1989) argues, There is a state of the world, which, if we only knew it, would tell us what the consequences of every action are. But since we don't know it we can speak of uncertainty as being an uncertainty about the state of the world. Whereas what will actually happen will depend on the action we take but also depend on factors which we don't know. (p. 41) Entrepreneurs would be interested in a prospective venture if their evaluation of it suggested that it would be profitable. However, they could be expected to reject it if they could not assess its risk.

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Some researchers have suggested that entrepreneurs may be moderate risk-takers (Brockhaus, 1980; Mancuso, 1975; McClelland, 1961); however, their studies used recent small business founders as proxies for entrepreneurs, regardless of whether or not they (1) had innovated to enter an existing market, or (2) had grown by creating new demand or (3) had taken customers away from existing competitors (cf. Carland, Hoy, Boulton & Carland, 1984, p. 357). If they would have required these more riskladen criteria from their subjects, it is very possible that they would have found that characterizing them as moderate risk-takers is an oversimplification. As noted earlier, there is evidence to suggest that they believe that the normally expected probabilities of failure do not apply to them. Characterizing their risk-taking propensity as moderate presupposes that entrepreneurs consider risk to be an exogenous factor over which they have no control. Their confidence in their ability to manage risk may come from a belief that they can reduce it by comparing relevant risk-reducing signals with what they believe are a discovery's prospects. (Even the most aggressive entrepreneurs do not attempt some discoveries because their prospects are uncertain.) There is little doubt that certain cultures are less risk averse. For example, the popular business press reported that a couple of failures on one's resume were once considered to be a badge of honor in Silicon Valley (Sager, 1997). Alternatively, as others have suggested, it might have been no more than hubris for Silicon Valley entrepreneurs to have thought that they could continually beat adverse odds. The essence of this confidence is captured in the following statement from an observer of Silicon Valley. The founder of one of the largest Silicon Valley venture capital firms, who wholeheartedly endorsed it, shared it with me: The future is not a result of choices among alternative paths offered by the present, but a place that is created—created first in the mind and will—created next in activity. The future is not some place we are going to, but one we are creating. The paths are not to be found but made, and the activity of making them changes both the maker and the destination. (Anonymous)

Chapter 7 delineates an approach that provides some theoretical justification for the confidence expressed by this statement. The approach is based on knowing how to access low-cost signals through information channels. Indeed, as the statement suggests, it is a very powerful, liberating set of concepts. One way to reduce the cost of risk evaluation is to specialize in the acquisition of information about particular types of risk, such as market or agency risk, as suggested by Fiet (1991b). Specialization allows entrepreneurs to put to use their previous investments in specific information.

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To save on the assessment of market risk, an entrepreneur might focus his or her activities on a particular industry; whereas to reduce the cost of assessing agency risk, an entrepreneur might choose to limit his or her dealings to a selected group of suppliers and distributors with whom he or she has had personal experience. Proposition 4 suggests how entrepreneurs evaluate the factors affecting a prospective discovery's market risk and agency risk to determine the returns that can be expected from it. Figure 3.1 illustrates the role of risk evaluation in the discovery process. Proposition 4: Entrepreneurs can improve their chances of generating rewards from discoveries by evaluating limiting factors, such as those related to market risk and agency risk. Investments in Specific Information Figure 3.1 indicates that risk-reducing signals consist of specific information. Specific information has little or no value for assessing the risk associated with more than one prospective discovery. It may even be limited to certain aspects of a deal, such as its market risk or agency risk (Casson, 1990; Fiet, 1991b; Klein, Crawford & Alchian, 1978). For example, it is not possible to invest in background investigations of, or spend personal time with, providers of critical resources to assess their character and intentions and to use this same information to assess unforeseen competitive conditions (market risk). To assess competitive conditions, it would be necessary to invest in different specific information, such as conducting market research concerning customer or competitor reactions, and evaluating competitor cost structures. Hayek (1945) observed that the most valuable information to entrepreneurs is that which relates to the special circumstances of the time and place of a particular deal. In addition, he identified "knowledge of people, of local conditions, and special circumstances" (p. 319) (emphasis added) as having particular practical value. To his list, I suggest adding relationships with people because they require extended investments of personal energy to develop, which limits their availability. I also suggest adding specialized technical knowledge that is not widely available. By a deal, he meant a decision with monetary consequences related to a prospective new venture. He noted that practically every individual possesses specific information that endows its possessor with some advantage over all others. This advantage consists of the possession of "unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or made with his active cooperation" (p. 328). This specific knowledge of special circumstances is very important but it is unscientific information because it does not need to consist of general rules. Because it is likely to be unscientific, it may be viewed with

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some contempt by those who see it as less sophisticated when in fact it is often the key to wealth creation. The model in Figure 3.1 suggests that it is the type of information that entrepreneurs use for discovery. Because a risk-reducing signal is specific information, and in this sense is not a public good, one entrepreneur can acquire control of it and keep it secret. Because specific information is ephemeral, it may only be valuable to the entrepreneur who discovers it. Others may not be as well positioned to take advantage of it concerning the time, location or special circumstances of a deal. Thus, specific information, as long as it can be kept private, can be a source of temporary competitive advantage. The crucial role of specific information in the discovery process is delineated in the next proposition. Proposition 5: An entrepreneur's most essential type of information for making a discovery is specific information about the circumstances of a prospective deal. A corollary to proposition 5 is that the acquisition of general information can only lead to the generation of average economic returns. Thus, entrepreneurs should learn to recognize when they are acquiring each type of information and how much each type of information costs to acquire. Some entrepreneurs are better suited by their previous experience to recognize the criticality of a signal. Previous experience consisting of specific information is not the same as having a reservoir of general information, such as a diploma from a graduate school. General information from previous experience is not costly to transfer and in fact may be studied and acquired in school. Unfortunately, because it is easily transferred to others, as mentioned previously, it cannot be the source of a competitive advantage for long. Presumably, many aspiring entrepreneurs are similarly qualified. In contrast, previous investments in specific information are very costly to transfer and thus exist in pockets within private markets for information. An additional advantage of acquiring specific information is that its acquisition may bestow on the acquirer economies of scope in the acquisition of new specific information. Thus, the cost of specializing in specific information decreases with its acquisition, and concomitantly, so does the risk of acquiring it. These arguments lead to the next two propositions. Proposition 6: Entrepreneurs can reduce their risk of discovery through the assessment of specific, risk-reducing signals. Proposition 7: Some entrepreneurs are better suited to assess the criticality of signals because of having previously acquired relevant, specific information.

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The Role of Previous Experience The signaling capacity of an entrepreneur's previous experience depends on its specificity; however, not all specific information is a signal capable of changing our view of future events. Signals consist of new information, whereas specific information, such as some forms of previous experience, is not restricted to the present period. Relevant, previous experience can be expected to be specific information—information that can bias an entrepreneur's perception of a discovery's prospects. Entrepreneurs are presumed to make deposits of specific information into their memories for future recall, and which, as just mentioned, can be the source of economies of scope. Previous experience is useful for setting the context within which entrepreneurs can decide whether to invest in specific, risk-reducing signals. It can be conceptualized as a cue that alerts entrepreneurs to a promising opportunity to invest in specific information (refer to Figure 3.1). Because other aspirants are likely to have had similar previous experience, entrepreneurs cannot expect to earn above-normal profits from it. Aboveaverage profits can only result if an entrepreneur invests in, and then acts on private, specific information. It is possible that an entrepreneur's previous experience could by itself act as an effective signal. However, if a signal were not valuable, rare, imperfectly imitable by others and acted on by an entrepreneur, he or she could not expect to maintain a sustainable competitive advantage (Barney, 1986). The above arguments lead to the eighth proposition. Proposition 8: Previous experience can serve as a cue to inform entrepreneurs about when to invest in signals related to a prospective discovery. Psychic Weil-Being Some entrepreneurs may not be lured by profit (Campbell, 1992). To the extent that their discoveries are motivated by a desire to maximize some other utility function, it may be impossible to model why or how they act. Scholars would have to examine the individual values of an entrepreneur to predict how a particular venture opportunity would affect his or her psychic well-being. For example, an entrepreneur might be interested in how a venture would impact the public good, the less fortunate among us, his or her reputation or whether or not it is a business operated ethically, among many other factors too numerous to explore here. Therefore, this model makes provision for such motivations by attributing them to a desire to positively influence an entrepreneur's psychic well-being. The arguments in this section lead to the ninth proposition.

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Proposition 9: Some entrepreneurs are motivated to make discoveries by a desire to positively influence their psychic well-being, rather than to make as much money as possible. What does proposition 9 mean for entrepreneurs and interested observers? The clear implication for aspiring entrepreneurs is that they can decide what type of an investment they are willing to make and how they hope to be rewarded for making it. The type of investment does not necessarily need to depend on financial rewards. However, the model does not incorporate nonpecuniary rewards and motivations. Regarding interested observers, some of them are likely to be disappointed that the model in Figure 3.1 cannot account for the behavior of all aspiring entrepreneurs. This latter group should keep in mind that comprehensiveness is not its function, nor is it necessary that it be comprehensive to be useful. Its primary function is to generate propositions that aspiring entrepreneurs can profitably incorporate into their thinking. The following section demonstrates that entrepreneurs play different informational roles in discovery. Historically, the discussion of these different roles has been quite confused because scholars have generally not differentiated among them. The model in Figure 3.1 incorporates these different roles. Proposition 10 explicitly distinguishes among them. The implication of this proposition is that there are at least four different ways to make discoveries. Aspirants may choose the role best suited to improve their chances of success. Proposition 10: Entrepreneurs evaluate signals in different ways, which can lead them to play different roles in the discovery process. Table 3.1 summarizes the propositions generated by the information-based model of entrepreneurial discovery. The next section explores four different ways that aspiring entrepreneurs can make discoveries. The purpose of this section is to suggest ways that entrepreneurs may choose to proceed. The reader will note that detailed descriptions of how others have made discoveries are missing. ENTREPRENEURIAL ROLES IN DISCOVERY In a comprehensive review of Austrian theories, Hebert and Link (1982) moved from the identification of four basic entrepreneurial roles in discovery—(1) pure uncertainty, 3 (2) pure innovation, (3) uncertainty and innovation and (4) adjustment to uncertainty—to the observation that all past theories have centered on uncertainty, innovation or some combination of the two (p. 111). Uncertainty appears to be the result of change whereas innovation is primarily its cause. Table 3.2 summarizes the views of the

Table 3.1 Summary of Propositions 1. Entrepreneurial discovery can only occur where imperfect competition exists. 2. Entrepreneurial discovery can only occur in private markets for information. 3. Entrepreneurs can protect their ventures from the risks associated with discovery by tapping into an information channel that provides them risk-reducing signals. 4. Entrepreneurs can improve their chances of generating rewards from their discoveries by evaluating limiting factors, such as those related to market risk and agency risk. 5. An entrepreneur's most essential type of information for making a discovery is specific information about the circumstances of a prospective deal. 6. Entrepreneurs can reduce their risk of discovery through the assessment of specific, risk-reducing signals. 7. Some entrepreneurs are better suited to assess the criticality of signals as a result of having previously acquired relevant, specific information. 8. Previous experience can serve as a cue to inform entrepreneurs about when to invest in signals related to a prospective discovery. 9. Some entrepreneurs are motivated to make discoveries by a desire to positively influence their psychic well-being, rather than to make as much money as possible. 10. Entrepreneurs evaluate signals in different ways, which can lead them to play different roles in the discovery process.

Table 3.2 Entrepreneurs as Investors in Specific Information Investment Role of Entrepreneur

Chief Proponent of Role

Significance of Specific Information to the Role

Risk bearer

Cantillon

Uses it to reduce risk while uncertainty is irreducible

Innovator

Schumpeter

Uses it to creatively combine factors of production

Risk bearer and innovator

Baudeau

Its uses are similar whether for competitive circumstances or for innovation

Risk arbitrageur

Kirzner

Uses it to identify opportunities for risk arbitrage

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chief proponents of each of Hebert and Link's (1982) four entrepreneurial roles (also, refer to Figure 3.1). Their views of these roles will be elaborated in this section. Risk Bearer Cantillon (1931) emphasized an entrepreneur's role as a bearer of risk. He coined the term "entrepreneur," and was the first of a school of scholars (including himself; Cole, 1946, 1949, 1959; Hawley, 1893; Knight, 1933; Mangoldt, 1907; Mill, 1942, 1965; Mises, 1939; Shackle, 1955, 1966; &c Thunen, 1960) who viewed an entrepreneur as a person who assumes the risk associated with the uncertainty of earning above-normal returns. Many modern scholars have attempted to separate the risk-bearing function from an entrepreneur and assign it to a capitalist. The argument for not requiring entrepreneurs to bear risk became more prevalent with the advent of limited liability corporations. However, scholars cannot argue persuasively that all of an entrepreneur's risk is assignable to venture capitalists unless they also assume that he or she would be able to escape opportunity costs associated with the loss of present and future income, which seems like an unreasonable assumption. In this sense, Cantillon's view was more comprehensive than those of modern scholars in acknowledging the risk-bearing function of entrepreneurs (Spengler, 1954). Thus, one way for an entrepreneur to make a discovery would be to underwrite the costs associated with making it by paying someone else to represent him or her. To the extent that the risk of discovery can be assigned to someone else, the assignee becomes the entrepreneur. An example of the risk-bearing entrepreneur would be someone who is willing to cosign a loan in exchange for a percentage of a business. Innovator Schumpeter (1936,1939,1947, 1961, 1971) became the chief proponent of an entrepreneur's role as an innovator. He argued [on behalf of himself and earlier scholars like Schmoller (1838-1917), Sombart (1863-1941) and Weber (1930)] that an entrepreneur was the prime mover behind a process called creative destruction, in which technological innovation obsoletes older ways of doing business. Innovation disrupts established routines by necessitating new combinations of production factors. These may be creative responses to knowledge that is not currently in use. The result is that innovation creates new products, changes how they are manufactured and creates new customer demand. Moreover, the changes caused by innovation are frequently not gradual. He observed that they seem to come in revolutionary waves that alter the rules by which competitors compete. Revolutionary changes make the future state of the world unpredictable.

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Schumpeter's (1961) entrepreneurs were not required to bear risk because they could control risk by ceasing to innovate. This approach assumes that almost all uncertainty results from technological innovation, and it certainly is true that much of the uncertainty in a business environment can be traced to this source. However, he largely ignored the part played by other competitive action. He also ignored the part played by macroenvironmental factors that are beyond an entrepreneur's control, such as the weather or governmental regulation. Nevertheless, uncertainty was viewed as an opportunity for visionary entrepreneurs. Without it, they could not earn above-normal profits (Jacobson, 1992). For example, it was reported that by the time Microsoft introduced Windows 95, it had already invested $85 million in the development of Windows 98. Windows 98 and its predecessor were clearly sources of creative destruction resulting from innovating discovery. Risk Bearer and Innovator Baudeau (1910) epitomized Hebert and Link's (1982) third entrepreneurial type, which was a combination of risk bearing and innovation. He, as well as Bentham (1952, 1962), Thunen (1960), Mangoldt (1907) and Cole (1946, 1949, 1959), pictured entrepreneurs who use their knowledge and intelligence to pursue profit. For them, an entrepreneur was more than Cantillon's risk bearer and Schumpeter's innovator. The purpose of entrepreneurial innovation was to reduce costs and increase profits. Baudeau's (1910) theory implicitly recognized the role of macroenvironmental factors that are beyond an entrepreneur's control. He concluded that to the extent that entrepreneurs confront events that are controllable [risky], their success would depend on knowledge and intelligence—in Schumpeter's parlance, innovation. To the extent that they confront macroenvironmental factors that are beyond their control [uncertain], their success will depend on whether they are lucky. In some ways, Silicon Valley entrepreneurs who invest their own capital to commercialize new technologies typify Baudeau's risk-bearing innovator. It is impressive to realize that Baudeau's insights about discovery would presage events in Silicon Valley more than 200 years in the future. It is even more impressive to realize that the type of discovery that he envisioned would be the creator of the greatest new source of wealth that the world has ever seen. Risk Arbitrageur Hebert and Link's (1982) fourth entrepreneurial type is one who adjusts to risk. Its chief proponent is Kirzner (1973, 1979a, 1979b, 1985), who has views that are similar to those of Clark (1892,1899,1907) and Schultz (1975, 1980), when he insists that the primary function of an entrepreneur

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is to be an arbitrageur. Entrepreneurs can avoid bearing risk by contracting for factors at one price and simultaneously selling them to another party. His entrepreneurs do not bear financial risk because they require no capital. Kirzner's entrepreneurs succeed by being alert to market forces in disequilibrium. They do not have to create opportunities for profits, as is the case with Schumpeter's entrepreneur. They merely have to be alert to changes in a market as they occur. Thus, whereas Schumpeter's entrepreneur causes disequilibrium, Kirzner's entrepreneur is an equilabrator. Examples of a risk-arbitraging entrepreneur can be found pursuing short-term opportunities in the stock market. Each of these four entrepreneurial types plays a unique investor role in pursuing differing but viable paths to discovery. They are the products of the discovery process in Figure 3.1 in which entrepreneurs emphasize different ways of optimizing their investment in specific information. Table 3.2 summarizes these investor roles and how entrepreneurs acting in each of them could use specific information to uncover venture ideas. The next section explores in detail how each of Hebert and Link's (1982) four entrepreneurial types can be interpreted as a different approach to optimizing an investment in specific information. ENTREPRENEURS CAN INVEST IN SPECIFIC SIGNALS A major implication of the model in Figure 3.1 is that entrepreneurs can be viewed as investors in specific information. By extension, an entrepreneur can be viewed as a person who optimizes the trade-off between investing too much or too little in specific, risk-reducing signals. I am not arguing that all entrepreneurs take such a rational approach. My only argument is that they could take such a rational approach, which would be conducive to being taught and learned. This is a nontrivial implication because it implies that the acquisition of information can be viewed as an investment, over which entrepreneurs can exert some control. Because they can exert control, Chapters 5, 6 and 7 are able to develop and test a model of how entrepreneurs can most efficiently invest in the acquisition of signals to uncover valuable venture ideas. Without the capacity of entrepreneurs to evaluate the trade-offs in investing in specific information, the arguments in these three chapters would not be possible. Alternatively, scholars might be influenced to concede that entrepreneurs can only behave irrationally and depend solely on being lucky for their success. However, scholars do not profess to understand how to teach students who are irrational to succeed as entrepreneurs. In contrast, scholars could work with students who may tend to act irrationally, as many entrepreneurs may do, and counsel them to acquire specific signals. Specific signals can reduce risk, but they are costly. Otherwise, scholars

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would expect to find entrepreneurs acquiring unlimited amounts of them. Because they are not costless, entrepreneurs evaluate and take responsibility for their cost. This approach suggests that when entrepreneurs discover new venture ideas, it is not because they have unusual perceptive ability. It is because they are able to react to similarities between current signals and specific information garnered from previous experience. Continued investments in information can increasingly become sunk costs. However, making investments in information may also result in reducing risk through the amalgamation of signals that narrow the expected range of probabilities of future events. Predicting the future more accurately can become a competitive advantage when it is utilized to deploy more efficiently specific production factors. Both the expected returns and risks from investing in specific information depend on the quantity and specificity of the acquired information. There is an optimal combination of the level of investment in information with the degree of information specificity. That is, investing in information that is too specific could be excessively costly or, alternatively, it would not be sufficiently specific to be relevant to future discoveries. At the same time, investing in less specific information generates a suboptimal reduction in risk, whereas investing in more specific information could be excessively costly. This view of entrepreneurs as investors in specific, risk-reducing signals will probably not satisfy scholars who think that describing entrepreneurial conduct should be paramount. However, the objective of this book, as it was outlined in Chapter 1, is to develop an approach that can provide guidance concerning what entrepreneurs can do to make discoveries, not to describe what they actually do. The reader may recall that this approach was selected based on the assumption that this is what aspiring entrepreneurs would want to know. The efficacy of the model can be judged based on how well it minimizes entrepreneurial effort. Another standard against which this approach could be assessed is how effectively it incorporates the thinking of prior theorists to build cumulative theory. According to Cantillon (1931), at least one of the functions of entrepreneurs in the discovery process is to be a risk bearer. However, he did not differentiate between risk and uncertainty (refer to Table 3.2). When the probabilities of future events are known, the cost of an insurance contract can be included in a deal as a cost of business. To narrow the range of Cantillon's probability of future events, entrepreneurs can invest in specific, risk-reducing information. When a probability cannot be calculated, it is more accurate to say that they bear uncertainty by avoiding it. Thus, investments in specific information enable an entrepreneur to differentiate between profitable opportunities with known risk factors and those whose probabilities are unknown, and thus unmanageable. However, even if a venture had a known risk with a positive net present value, it might still

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be rejected because a potential loss could be devastating. Moreover, as suggested by the model, some entrepreneurs who might not be profit maximizers would reject it for nonpecuniary reasons. One way to reduce the risk of discovery is to follow Schumpeter's (1961) dictum to be an innovator. His innovator may be no more than an information specialist who has made inferences from previous experience about how to creatively combine factors of production (refer to Table 3.2). An innovator's information comes through devising alternative hypotheses, constructing a crucial experiment, carrying it out so as to obtain a clean result and recycling the whole mental process (Platt, 1964). Initially, specialized knowledge can be acquired either by obtaining a professional education or occupational experience. The more specialized the information, the more useful it may be in viewing new possibilities for combining factors of production. What seems to be important for innovation is to systematically gather and interpret information. However, entrepreneurial discovery is often not intentionally directed innovation. Some of it occurs as a result of exogenous factors, such as, the weather, 4 governmental action 5 or competitive initiatives that are outside the control of an entrepreneur. 6 When discovery occurs as a result of exogenous factors acting on an entrepreneur, instead of the converse, scholars may argue that an entrepreneur is not innovative, but lucky. In the case of lucky discoveries, entrepreneurs succeed, as Kirzner (1973, 1979a, 1979b, 1985) noted, by being alert to opportunities and quickly acting on them. Baudeau's (1910) entrepreneurs invest in information to reduce risk and uncertainty. They also invest in technical information related to how they can reduce costs or increase profits. Nevertheless, the processes are very similar. Although avoiding uncertainty and managing risk may involve acquiring information about the circumstances of the time and place of a deal, investing in technical information is the same process in a different area (refer to Table 3.2). In both circumstances, specific information is acquired and interpreted one detail at a time. From an informational perspective, an entrepreneur's size or wealth does not necessarily translate into an advantage for Baudeau's entrepreneurs as they attempt to reduce costs and increase profits. Specific, risk-reducing information is not likely to be generalizable from prior experience. It must be gathered sequentially, often through one information channel, one detail at a time. Recognizing the sequential nature of information acquisition should allay the fears of those such as Schumpeter (1942), who foresaw the day when large firms would be the only ones who could afford to be entrepreneurial. Kirzner's (1973) views on arbitraging cost differentials in the present period could be misinterpreted as unusual perceptive ability, or as Kirzner himself describes it, as staying alert. Unfortunately, the admonition to stay alert has little pedagogical value because it provides no guidelines about

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what should attract the attention of our alertness. In contrast, the approach that I suggest here focuses the attention of entrepreneurs not on some general conceptual horizon, but on issues related to what they already have experienced in investing in specific information. For each entrepreneur these issues are unique and provide a potential competitive advantage. Readers who are interested in the research implications of an information-based model of entrepreneurial discovery may want to refer to Appendix 3.1.

CONCLUSION I have suggested in this chapter that the focus of any consideration of entrepreneurial discovery can be on information that is related specifically to a deal. I then use this informational perspective to reconsider the actions of aspirants as they have been viewed in economic history, and build on this perspective by looking at the acquisition of information as an investment decision that is motivated at least in part by pecuniary self-interest seeking. This chapter has proposed a view of entrepreneurial discovery wherein entrepreneurs can most efficiently identify discoveries by optimizing their investment in specific, risk-reducing signals. This implies that signals can be purchased at price. If an entrepreneur cannot see a market opportunity, this does not necessarily mean that no opportunity exists. It may be that he or she has not invested sufficiently to recognize it. Nor does lack of entrepreneurial insight suggest that one lacks what it takes—namely, some as yet undescribed talent. It certainly does not suggest that one is not smart enough. Where no investments in specific signals have been made, there are no insights to be discovered. It may mean that one has not been sufficiently diligent. Diligence can be expected to vary depending on what attracts an entrepreneur's gaze; and once again, that can depend on his or her previous specific investments in signals. The primary implication of this approach is that discovery depends on actions by those who aspire to be entrepreneurs, many of which are within their control. Unlike the approach taken by neoclassical economists, the present model recognizes the preeminent role of an entrepreneur in the discovery process. Moreover, it goes beyond the position of Austrian economists by identifying a micro-level mechanism for making discoveries, namely, the optimization of investments in specific information. The advantage of this approach is that it makes explicit provision for the efficacy of initiative by individual actors. Their success depends on proactively combining new signals with specific information from previous experience. This should be a hopeful message for aspiring entrepreneurs.

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APPENDIX 3 . 1 . RESEARCH IMPLICATIONS In order to derive and test hypotheses from these 10 propositions, two natural limitations of information must be addressed. These were identified by Arrow (1989), who noted that (1) it does not have obvious units and (2) it may not be cumulative. That is, doubling the amount of it does not necessarily double its signaling capacity. Because the present analysis postulates that entrepreneurs utilize investments in specific information to identify new venture opportunities, hypotheses derived from these propositions cannot be tested unless these limitations can be controlled in the analysis. Unfortunately, information does not come to us in neatly packaged units that can be added together. One way to begin to address Arrow's limitations is to consider information along narrowly defined dimensions, such as market risk and agency risk. In order to cumulate information about risk dimensions, we must determine how to measure them. An effective way to address the measurement problem is to collect data on potential indicators. We could measure agency risk by collecting information about incidents of dishonesty or not performing agreedto responsibilities. Scholars could measure market risk by collecting information about the number of current competitors, the number of buyers or the degree of technical obsolescence. These indicators could then be used to measure each of these constructs in a confirmatory factor analysis application of structural equation modeling (cf. Bollen, 1989; Loehlin, 1987). The advantage of this approach is that it could simultaneously be utilized to isolate measurement error and to compare the relationships among the constructs. One way to solve the difficulty of measuring information is to relate a venture idea to particular aspects of an entrepreneur's prior experience. An example would be if an entrepreneur were to develop a new type of heart monitor and the entrepreneur had previous experience as a cardiologist, scholars could conclude reasonably that a venture idea was based on specific knowledge from the entrepreneur's prior experience. An important area for future inquiry will be to measure and compare the informational investments of entrepreneurs who commit resources to develop a discovery with those of entrepreneurs who judge that a venture opportunity will not be sufficiently profitable. Such a comparison could be useful for insights into the discovery process, for effective teaching and future study. Finally, the speed with which investments must be made and how their rapidity affects the eventual performance and the type of investor role in discovery could be investigated by future researchers. As these investigations proceed, they will enable us to eliminate some of the misspecification that probably exists in the model.

NOTES 1. There is an extensive literature describing how entrepreneurs utilize networks. The use of networks may be viewed as a way of tapping into an information channel to obtain risk-reducing signals about a venture opportunity. 2. One of the reasons that positioning is critical is that humans can only process a limited amount of information at one time. Thus, they make choices about how

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they will do it. Al Ries and Jack Trout have reversed this positioning principle and applied it to their marketing practice. They have also written a popular book entitled Positioning: The Battle for Your Mind, in which they demonstrate how advertisers can use positioning to their advantage. 3. Although Hebert and Link (1982) refer to bearing uncertainty, in the context of the present analysis, entrepreneurs would not voluntarily chose to bear unknown future consequences. Thus, it follows that entrepreneurs would only embark on a new venture if they believed they could anticipate a favorable future outcome as a result of their self-believed capacity to manage the present. It is possible, as suggested by March and Shapira (1987), that entrepreneurs believe that the normally expected probabilities of success do not apply to them. Entrepreneurs would be willing to bear some degree of risk, but would have very little tolerance for bearing uncertainty. 4. A pivotal weather example is the anecdotal account of Newton's discovery of gravity when the apple fell off the tree striking him on the head. 5. Examples of government surprises are changes in the tax code, environmental regulations or industrial policy. 6. Examples of exogenous competitive initiatives are actions to link databases to the Internet or the creation of a system of airline hubs that leaves openings for competitors that provide direct connection between smaller cities.

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Mill, J.S. 1965 [originally 1806-1873]. Principles of political economy (Sir W.J. Ashley, Ed.). New York: A.M. Kelley Bookseller. Mises, L.V. 1939. Human action: A treatise on economics. New Haven, CT: Yale University Press. Murray, J.A. 1984. A concept of entrepreneurial strategy. Strategic Management Journal 5: 1-13. Neilsen, R.P. 1988. Cooperative strategy. Strategic Management Journal 9: 4 7 5 492. Nelson, R.R., & Winter, S.G. 1982. An evolutionary theory of economic change. Cambridge, MA: Harvard University Press. Platt, J.R. 1964. Strong inference. Science 146: 347-353. Poindexter, J.B. 1976. The efficiency of financial markets: The venture capital case. Unpublished doctoral dissertation, New York University. Ries, A., & Trout, J. Positioning: The battle for your mind. 1st ed., rev. New York: McGraw-Hill. Ronstadt, R.C. 1985. Entrepreneurship. Dover, MA: Lord Publishing Co. Sager, I. 1997. Cloning the best of the Valley. Business Week, August 25. Sandberg, W.R., & Hofer, C.W. 1987. Improving new venture performance: The role of strategy, industry structure, and the entrepreneur. Journal of Business Venturing 2: 5-28. Schmoller, G.V. 1967 [originally 1838-1917]. The mercantile system and its historical significance. New York: A.M. Kelley Bookseller. Schultz, T.W. 1975. The value of the ability to deal with disequilibria. Journal of Economic Literature 13(3): 827-846. Schultz, T.W. 1980. Investment in entrepreneurial ability. The Scandinavian Journal of Economics 82(4): 437-448. Schumpeter, J.A. 1936. The theory of economic development: An inquiry into profits, capital, credit, interest, and the business cycle. Cambridge, MA: Harvard University Press. Schumpeter, J.A. 1939. Business cycles. New York: McGraw-Hill. Schumpeter, J.A. 1942. Capitalism, socialism, and democracy. New York: Harper and Row. Schumpeter, J.A. 1947. The creative response in economic history. Journal of Economic History 7: 149-159. Schumpeter, J.A. 1961. The theory of economic development. New York: Oxford University Press. Schumpeter, J.A. 1971. The fundamental phenomenon of economic development. In P. Kilby (Ed.), Entrepreneurship and economic development. New York: The Free Press, pp. 43-70. Shackle, G.L.S. 1955. Uncertainty in economics. Cambridge: Cambridge University Press. Shackle, G.L.S. 1966. The nature of economic thought. Cambridge: Cambridge University Press. Smith, A. 1965 [originally 1776]. The wealth of nations. New York: Random House/Modern Library Edition. Sombart, W. 1967 [originally 1867-1941]. The quintessence of capitalism: A study of the history and psychology of the modern business man (M. Epstein, Ed. 6c Trans.). New York: H. Fertig.

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Spengler, J.J. 1954. Richard Cantillon: First of the moderns. Journal of Political Economy 62: 281-295. Thunen, J.H.V. 1960. The isolated state in relation to agriculture and political economy, vol. 2 (B.W. Dempsey, Ed. 8c" Trans.). Chicago: Loyola University Press, pp. 187-368. Todaro, M.P. 1969. A model of labor migration and urban unemployment in less developed countries. American Economic Review 59(1): 138-148. Weber, M. 1930. The Protestant ethic and the spirit of capitalism (T. Parsons, Trans.). New York: Scribners.

Chapter 4

The Impact of Competitive Structure on Discovery

This chapter examines the competitive structure within which discoveries can occur. It argues that it is possible for entrepreneurs to make discoveries in most industries, regardless of their structures, provided they follow the strategies discussed here. In addition, this chapter develops a basic logic that can be taught to aspiring entrepreneurs. Like most of the other chapters in this book, it is not a description of how entrepreneurs actually make discoveries. Its sole purpose is to highlight major, actionable contingencies that can improve an entrepreneur's odds. The basic logic for these arguments is that industry structure constrains the set of advisable entrepreneurial strategies, which constrains the set of possible discovery options. It begins with the assumption that entrepreneurs can learn how to identify four different types of industry structures, which are (1) perfect competition, (2) Schumpeterian competition, (3) imperfect competition and (4) unobserved competition. Possible entrepreneurial strategies are (1) risk bearer, (2) innovator, (3) risk bearer and innovator, (4) risk arbitrageur, (5) tacit and (6) exit. Possible types of discovery include (1) discovering a new market, (2) discovering a new process for serving an existing market and (3) discovering a new technology. The proposed discovery logic consists of general information that can be easily conveyed in a classroom setting. This general information contrasts with the specific information that aspirants will have to uncover by themselves to earn a temporary competitive advantage and above-normal returns. The next section introduces the competitive context of discovery.

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THE COMPETITIVE CONTEXT OF DISCOVERY Competition may reduce the odds of individual entrepreneurs making discoveries as more competitors search for scarce, inimitable venture ideas. However, not much is known about how competition influences the making of particular types of discoveries. Typically, competitors vie with each other to create a competitive advantage because they offer products or services that are close substitutes. 1 In such a world, developing an advantage is the rare strategy that can ensure survival. If scholars understood better the actual relationship between competition and discovery, particularly those structural, industry attributes that tend to be enduring (Barney, 2002), they might be able to help entrepreneurs to survive longer (Kirzner, 1973; Shane, 2000). I adapt insights from industry organization economics to develop a market-based logic for entrepreneurial discovery. These ideas do not describe how entrepreneurs actually make discoveries. Instead, they represent a conceptual blueprint for how entrepreneurs could make them if they were aware of their potential effectiveness. The development of these ideas depends on understanding the role of information, the allocational efficiency of markets for information and resources, as well as an entrepreneur's capacity to identify industry structures and formulate and implement strategies that depend on idiosyncratic resources and capabilities. I conclude by illustrating that really there are no unattractive industries, if the full range of discovery options is understood as potentially successful outcomes of entrepreneurial strategies. A major contribution of this approach is to describe the potential fit between various industry structures and possible discoveries. The term market is sometimes used to describe a place where buyers and sellers meet to sell goods and services. It is derived from the literatures of marketing, finance and economics. Markets establish the clearing prices for goods and services. They also set prices for the acquisition of specific information about transactions of interest (Fiet, 1996a). In marketing, the term refers to the set of all actual and potential buyers of a product (Kotler, 1997). It may be a physical market place or an invisible one that reacts instantaneously to signals from buyers and sellers. For example, a gas war among service stations acts invisibly and automatically to fix the price of a gallon of unleaded gasoline. In finance and economics, scholars use the term market to refer to an economic situation in which supply and demand interact through the activity of buyers and sellers, which they refer to as market forces. Examples of different types of markets from the finance and economics literature are markets for corporate control, stock markets, the market for inside information, the sports gambling market, the options market, the futures market and the formal and informal markets for ven-

The Impact of Competitive Structure on Discovery 75 ture capital, and so on. Each of these markets differs in its informational and allocational efficiency. The roots of the term industry may be traced to the literature of industrial organization economics (Bain, 1968; Mason, 1939). This literature, which has been popularized by Michael Porter (1980, 1985), has tended to emphasize how a firm may create a sustainable competitive advantage through the manipulation of an industry's barriers to entry (Salop, 1979). Others have pointed out that the erection of barriers to entry will only generate above-normal returns if incumbents coordinate their competitive actions, which is anathema to public policy makers (Jacobson, 1992; Rumelt, 1988). The prescriptions of industrial organization economics are based on the structural characteristics of industries that persist over time, namely, buyers, sellers, substitutes, potential entrants and rivals. From its beginnings, it was most interested in how to prevent entry into an industry by outsiders, which decreases the average profitability of incumbent firms (Mason, 1939). The terms market and industry can each be used to understand different aspects of how competition affects the allocation of resources and information, which impacts the incidence of entrepreneurial discovery. Their particular usage in this chapter will be determined by the literature to which they allude. The way that a market allocates resources and information affects the probability that a discovery can be made. In general, the prospects for making a discovery are inversely related to market efficiency.

MARKETS FOR INFORMATION This section elaborates on markets for information that were introduced in the previous chapter. The purpose of this elaboration is to introduce a framework to assist entrepreneurs to know what kinds of discoveries to pursue, based on industry structure. Market forces set prices that determine the allocation of products and information. In other words, there are two parallel markets for every product. There is the actual market in which goods and services are traded and there is a corresponding informational market, which informs buyers and sellers about their value. According to Hirschleifer (1970), "In a world of . . . [risk], information becomes a useful commodity—acquisition of information to eliminate . . . [risk] should then be considered as an alternative to productive investment subject to . . . [risk]" 2 (p. 311). The decision regarding whether to invest in the acquisition of risk-reducing information or whether to engage directly in an activity subject to its associated risks is central to what entrepreneurs do (Casson, 1990; Hayek, 1945; Knight, 1933; Shane &c Venkatraman, 2000). This decision can be influenced in a

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major way by the structure of an entrepreneur's prospective product market, which influences its market for information. Markets for information may be divided into two types: (1) public markets for information and (2) private markets for information. Because each of these has its own structural attributes, it is important for aspiring entrepreneurs to determine from which of them they are receiving signals (Spence, 1974; Stigler, 1961). Their differing structural attributes offer entrepreneurs distinct strategic options (Fiet, 1996a, 1996b), which will be introduced in the next two sections. Public Markets for Information Public markets for information contain published information. Technological advances have expanded the domain of published information to include electronic media (i.e., CDs, records, databases, etc.), the Internet, wireless personal data assistants and related forms of information transmission such as television, radio and the like. Some forms of published information are costly. To the extent that the cost of a publication restricts its distribution, it becomes less-public information. 3 Public markets for information efficiently allocate historical and public information (Fama, 1970), but not private information (cf. Hayek, 1945). Information in this market is a public good whose value can be appropriated by anyone who wishes. Appropriability refers to a condition in which an economic actor can extract the value of information without actually owning it. In addition, its value is alienable (cf. Jensen & Meckling, 1992), which means that it can be inexpensively conveyed to others. The properties of appropriability and alienability relegate the level of earnings to normal economic returns that can be earned by trading on information in public markets for information. Examples of public markets for information include classified ads, television news programs and ticker tape information about stocks. Some investors may appear to earn above-normal returns by trading on publicly available information. As a rule, the objective of the game is to locate inefficient markets and act on private information that is not available to others. 4 To the extent that information is a public good, by definition, it can only generate normal economic returns. Thus, those investors who appear to be earning above-normal returns based on trading with publicly available information must actually be profiting in response to privately held information or some unknown market inefficiency. Private Markets for Information Private markets contain unpublished information, which is not available to the general public. This kind of information is important to entrepre-

The Impact of Competitive Structure on Discovery 77 neurs because a discovery cannot generate sustainable above-normal returns unless it is costly to imitate (Barney, 2002) or its circumstances are private (cf. Barney, 1986a, 1986b; Fiet, 1996a). If its circumstances were not private, competitors might have already entered the market until everyone was earning normal returns. Of course, one reason that they might not have entered a profitable market would be if its cost of entry were greater than the expected returns from entering. Many entrepreneurs use personal contacts to acquire private information (cf. Granovetter, 1978; Lorenzoni & Ornati, 1988). Although using personal contacts is more time-consuming than consulting public information sources, entrepreneurs have few alternatives because private markets are less well organized than public markets. There is little published information about them, partly because of previous scholarly preoccupation with markets that are more efficient, and partly because they lack market intermediaries, such as stockbrokers, to publicize and guarantee transactions. As this chapter has already noted, the discovery of information leading to sustained above-normal returns can only occur when individuals have access to private information about the potential circumstances of a venture. Because scholars know comparatively little about private markets, it is quite possible that they could overlap in some limited way with public markets. Thus, although public markets for information are highly competitive, it could be possible to access the same information by using a private market. It also may be possible to access private information while accessing a public market if entrepreneurs were searching in an area where both markets overlapped. On average, entrepreneurs can create more wealth for themselves when a market is inefficient, because of less-informed competitors, which would occur most often in private markets for information. However, an important inference from the arguments made in this chapter is that aspirants may have viable strategic alternatives even when they are competing in relatively efficient markets. This suggests that there are really no unattractive markets provided that entrepreneurs realize which types of discoveries are the most likely to succeed based on their corresponding markets for information. Industry Structure, Venture Strategy and Performance In the 1930s, several economists began to develop a model to understand the relationships among a firm's industry, its strategies and its performance (Bain, 1968; Mason, 1939). It was known as the S-C-P model, which stands for structure-conduct-performance. The term structure refers to the enduring attributes of an industry that tend to persist over time (Bain, 1956). These were delineated later in Porter's model of competitive threats (Barney, 2002; Porter, 1980). The term conduct refers to those strategies that

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a firm may elect to pursue. These may consist of corporate, business or functional-level actions, including marketing, pricing, research and development and production decisions (cf. Sandburg & Hofer, 1987). For our purposes, performance refers to venture performance. According to Fama (1970), there are three categories of performance, which can be applied to new ventures (Copeland & Weston, 1988). First, normal economic performance is equivalent to a venture's future earnings having a net present value of zero. It is also that level of performance that is just sufficient to keep all of a venture's productive assets employed. Second, above-normal economic performance is equivalent to a venture's earnings representing a positive net present value. It also provides a level of earnings that provides a surplus after maintaining all of a venture's productive assets. Third, below-normal economic performance means that a venture's future earnings represent a negative net present value. It also means that a venture does not earn enough to fully employ all of its productive assets. The S-C-P model generates a set of powerful insights, which can be used to understand an entrepreneur's prospects for discovering information that will lead to above-normal returns. First, industry structure is treated as an exogenous factor over which entrepreneurs can exert little influence (Shane &c Venkatraman, 2000). Until recently, this has been a rather safe assumption. However, emerging insights from Austrian economics suggest that entrepreneurs may influence structure through innovation (Jacobson, 1992). Second, structure constrains the range of viable strategies (conduct) that are available to an entrepreneur. Strategies that are outside this range should not be attempted (Kirzner, 1973; Shane, 2000). Third, the performance of a venture is a function of its available strategies (Shane, 2000). Some strategies may lead to a higher level of performance. However, not all of those that may lead to higher levels of profit are a good fit with an industry's structure. Thus, the impact of venture conduct on the relationship between industry structure and performance is more than a moderating influence. S constrains C, which constrains P. During the 1980s interest in the S-C-P model focused on using it to identify environmental threats (Sandburg &: Hofer, 1987). Porter (1980) suggested that these threats originate from five sources: suppliers, potential industry entrants, rivals (incumbents), buyers and product substitutes. Taken together, these individual threats can be used to indicate the overall level of threat within an industry (Bain, 1956). These threats can increase a firm's costs and decrease its revenue. Individual threats also increase the level of competition within an industry (Barney, 2002). Competition is a process that determines the number and qualities of competitors. Competition tends to maximize value at a given cost and minimize the costs of accomplishing results (McGee, 1988). Competition is good for consumers, but nearly always costly for competitors.

The Impact of Competitive Structure on Discovery 79 A MARKET-BASED LOGIC FOR ENTREPRENEURIAL DISCOVERY If scholars make two clarifying assumptions about the S-C-P model, they could use it to evoke insights about the relationship between the level of competition and entrepreneurial discovery. First, assume that the intensity of industry competition is an effective proxy for its structure. Second, assume that in order for a venture to generate above-normal returns, it must discover how to do it—in other words, make a discovery, which can only occur in a private market for information. Given these two assumptions, scholars could recast the S-C-P model. Figure 4.1 depicts a market-based logic for entrepreneurial discovery. A venture's industry structure constrains its available strategies. There are four primary types of industry structures: (1) perfect competition, (2) Schumpeterian competition, (3) imperfect competition and (4) unobserved competition. In addition, there are six strategies that an entrepreneur can implement in making a discovery, which are (1) risk bearer, (2) innovator, (3) risk bearer and innovator, (4) risk arbitrageur, (5) tacit and (6) exit (cf. Fiet, 1996a; Hebert &: Link, 1982). A venture's strategies constrain its available discoveries. There are three primary types of discovery, which are: (1) discovery of a new market, (2) discovery of a new process for serving an existing market and (3) discovery of a new technology. Each industry structure has its own peculiar set of attributes, and consequently, generates a different level of competitive rivalry. After examining each of these structures, I explore corresponding entrepreneurial strategies and discoveries. Many factors influence competitive rivalry (Barney, 2002; D'Aveni, 1994; McGee, 1988; Oster, 1990; Scherer, 1980). The relationships among these factors create a competitive structure that is relatively stable and beyond the effective control of individual entrepreneurs (Barney, 2002). The level of competition is critical because it affects a market's informational and allocational efficiency (Rothchild &c Stiglitz, 1976; Scherer, 1980). The lower the levels of competition, the greater an individual entrepreneur's prospects are for making a discovery and maintaining secrecy about it. If entrepreneurs can make a discovery and keep it secret from potential competitors, they will have a longer lead time during which they will be able to enjoy monopoly profits. The higher the level of competition, the shorter will be the lead time during which an entrepreneur can earn monopoly profits (Hirschleifer &c Riley, 1979; Oster, 1990). To develop discovery logic, I assume that each industry structure exists in the real world, even though actual conditions are likely to vary somewhat from the simplified ideals presented in the industry models. One way for entrepreneurs to make discoveries more effectively is to match these ideal types as closely as possible with their perceptions of actual market

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Figure 4.1 A Market-Based Logic for Entrepreneurial Discovery

conditions. Just as some modification of industry types may be necessary to accommodate actual differences, the proposed entrepreneurial strategies may be modified to facilitate strategy implementation. The value in this matching exercise for entrepreneurs is that each industry structure has certain predictable attributes, which can serve as cues about which type of discovery to undertake. I begin by analyzing entrepreneurial strategies un-

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der perfect competition. Perfect competition is the most developed economic model (McGee, 1988), which facilitates strategic analysis. Entrepreneurial Strategies under Perfect Competition The concept of perfect competition comes from neoclassical economics (Marshall, 1961; Robinson, 1933; Rothchild & Stiglitz, 1976). Competitive forces exist in static equilibrium, which does not allow for surprises. Public markets allocate information as though they were perfectly competitive (Stigler, 1961). Perfect competition assumes that each of many identical firms sells a homogeneous product while possessing similar resources and pursuing similar strategies (Kirchhoff, 1991). None of these firms can have a major impact on the prosperity of others in this atomistic world. They are quite dispersed, which may be caused by the presence of a large number of small firms, each of which seeks its own competitive space to reduce rivalry (Caves & Porter, 1977). In addition, each competitor assumes that the others are indifferent about what it does, including changing its output, which has no perceptible effect on market prices. Each seller is called a price-taker—it takes the market price as a given. In this perfectly competitive world of price-takers, each of them maximizes its profit by producing at a rate for which marginal costs and prices are equal. In contrast, a price-searcher has some power to choose price and searches for one that generates the greatest profit (McGee, 1988). Price-searchers do no exist under perfect competition. There is no incentive to search because all actors possess complete information about current prices, costs and so on (D'Aveni, 1994). They possess the same information about competitive conditions, which means that none of them earns greater than normal economic returns (Jacobson, 1992). At the same time, none of them fails to survive because of an unexpected change in competitive conditions. Scholars have identified a class of markets that perform as though they were perfectly competitive (Baumol, Panzar &c Willig, 1982). They refer to these markets as contestable. Contestable markets may be imperfect in many respects, but they have very low barriers to entry. The effect of having very low barriers to entry is that potential entrants can lurk outside the market without incurring the costs of actually competing. When they discover information about how to earn above-normal returns, they can enter quickly, at very little cost, and drive down average profits to normal levels—the same as they would be if the industry were perfectly competitive. Under perfect competition, there are two entrepreneurial strategies for discovering a way to earn above-normal returns. One way is to act as an innovator to create new technology that obsoletes existing competitive dynamics (D'Aveni, 1994). The other way is to exit the market (Bain, 1956; Mason, 1939). If entrepreneurs remain in a perfectly competitive industry

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and fail to discover a way to innovate, the best that they can hope to achieve is to survive and earn normal economic returns. If entrepreneurs do not implement a strategy as well as their competitors, it is quite possible that they could earn below-normal returns while average competitors earn normal economic returns (Barney, 1986a). Unfortunately, after paying expenses, there is nothing left for venture owners. The advantage of earning normal economic returns is that it means a venture is surviving. However, it also means that the net present value of future income from a venture is zero—hardly attractive to an entrepreneur who has risked time and resources with the expectation of future wealth creation. The other way to increase the returns from a venture is to exit the market with the expectation that it will be possible to find an alternative, positive net present value investment in a new market. Thus, exit from a perfectly competitive industry to discover information about how to create new wealth should be considered when innovation fails and when an industry is perfectly competitive. As with the innovation option, the exit option does not guarantee that a successful discovery will be made outside of the current market. In fact, such a discovery probably becomes less certain because of a new set of market forces that will confront the entrepreneur. Table 4.1 summarizes the implications of this logic for entrepreneurs and how they relate to perfect competition. Entrepreneurs should either innovate or exit a perfectly competitive industry if they hope to succeed in discovering how to create new wealth. Entrepreneurial Strategies under Schumpeterian Competition The concept of Schumpeterian competition comes from the Austrian school of economics. Joseph Schumpeter, its namesake, argued that most markets were in disequilibrium and that profits were a disequilibrium phenomenon (Jacobson, 1992). According to Schumpeter's scheme, entrepreneurs were the primary source of disequilibrium. Entrepreneurs create disequilibrium through the introduction of innovative technologies that obsolete older ways of creating value (Schumpeter, 1936, 1939, 1947, 1971). Schumpeter referred to the process of introducing technology to create disequilibrium as creative destruction. Firms and entrepreneurs do not necessarily start out the same. They can be moderately heterogeneous in the resources that they possess. However, entrepreneurs can succeed even if they possess few resources by leveraging what they have. Before the introduction of an innovation, there is a low level of uncertainty under Schumpeterian competition. Uncertainty is low because an entrepreneur contemplating the introduction of an innovation has inside information regarding his or her own intentions. After the introduction, he or she has inside information about the innovation's technology. Industries with few available competitive niches are good candidates for

Table 4.1 The Effects of Competitive Structure on Discovery Unobserved Competition Heterogeneous resourcespossessing different resources j and pursuing different strategies

Imperfect Competition

Moderately heterogeneous Heterogeneous resourcesresources— possessing different resources and pursuing different strategies i among competitors

1 High certainty[ High uncertaintymanagers control markets using managers make decisions with their power, which may be incomplete, inaccurate, or too legally or monopoly-based much information High concentration— One firm controls the entire market. Results— Above-normal returns based on market power. Entrepreneurial Strategy(ies)— Tacit strategy Discovery with highest probability to create wealth— New process for serving existing market with same technology

Schumpeterian Competition (ex post)

Perfect Competition Homogeneous firmspossessing similar resources and pursuing similar strategies

Low uncertainty— because it is introduced by entrepreneur

No uncertainty— firms possess perfect information about past, present and future

High concentration— a small number of large firms leaving many niches underserved Results— Above-normal returns if firms exploit imperfect competition

Low concentrationLeaving very few niches underserved

Firm dispersionLarge numbers of small firms

ResultsAbove- or below-normal returns are possible

ResultsNormal returns

Entrepreneurial Strategy(ies)— Risk bearer Risk arbitrageur

Entrepreneurial Strategy(ies)— Innovator Risk bearer and innovator

Entrepreneurial Strategy(ies)— Innovator

Discovery with highest probability to create wealthNew market or new process for serving existing market with same technology Financial discovery

Discovery with highest probability to create wealth— New technology

Discovery with highest probability to create wealthNew technology New market

Exit j

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the introduction of innovations that change the balance of power among market forces. Thus, Schumpeterian competition is likely to occur when there are many small firms that occupy most market niches. To compete successfully, firms must use innovation to find new ways to serve customers. Economic returns under Schumpeterian competition can be either above or below normal. The reason for this bimodal distribution of outcomes is that many innovations are radical departures from past patterns and can either succeed or fail. Bimodality results because it is impossible to predict with certainty which innovations will succeed. Another strategy for discovering value in a world of Schumpeterian competition is to act as a risk bearer and innovator (Baudeau, 1910; Bentham, 1952; Cole, 1946; Mangoldt, 1907). This combination strategy's purpose is to use innovation to reduce costs and increase profits. It may be effective because it can discover more efficient processes so that those used by competitors are more costly. The discovery that is most likely to lead to wealth creation, given Schumpeterian competition, is the invention of a new technology. The possession of financial wealth may not be correlated with invention. Invention can easily take place in a garage or basement. Recognizing their lack of monopoly over invention and risk bearing, some firms do not invest in R&D. Instead, they specialize in buying smaller firms that have developed a new technology. An example of such a firm is Symatec, which would often acquire smaller firms with proven but innovative technologies. Table 4.1 summarizes the implications of this logic for entrepreneurs and how they relate to Schumpeterian competition. Entrepreneurs should probably innovate to discover a new technology. They may be innovative by either being a risk bearer and/or by allowing others to bear risk. Entrepreneurial Strategies under Imperfect Competition Imperfect competition is the opposite of perfect competition. Imperfectly competitive industries harbor firms that possess different resources and pursue different strategies (Wernerfeldt, 1984). Strategy can make a difference in imperfectly competitive industries, whereas under perfect competition, all entrepreneurs possess the same information and resources and pursue the same strategy as other competitors. These differences enable them to implement strategies to avoid competition (D'Aveni, 1994). Because entrepreneurs in imperfectly competitive industries can avoid competition, evidence from a study of firm formations from 1976 to 1990 by the Small Business Administration indicates the level of competition has no effect on survival rates (Kirchhoff, 1991). If an entrepreneur can avoid competing with other firms under imperfect competition, such conditions are the next best thing to having no competitors (Robinson, 1933). The level of competition in an imperfectly competitive industry depends

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on many factors that I assume are within the control of entrepreneurs to influence (Rothchild &c Stiglitz, 1976). The prescription for reducing competition is to erect barriers to entry to restrict new industry competitors from entering a market so that incumbents can collude (Rumelt, 1988). There are five barriers to entry to diminish the threat of competition: (1) economies of scale, (2) product differentiation, (3) cost advantages independent of scale, (4) contrived deterrence and (5) government regulation of entry (Barney, 2002). Their purpose is to create a competitive advantage by either reducing the cost of products for buyers or by increasing revenue for entrepreneurs. Competition among firms is also affected by the strategies selected by firms within an industry. Under imperfect competition, entrepreneurs pursue different strategies using different resources. The most important resources for entrepreneurs are those that are valuable, costly-to-imitate, rare and exploited by entrepreneurs (Barney, 1986, 1991). Resources with these attributes are the most important because they can serve as the basis for implementing a strategy that can generate a sustainable competitive advantage (Barney, 2002). Collusion among competitors in an imperfectly competitive industry may lead to a small number of large firms (Hill & Jones, 1995). Their concentration makes it costly to serve all market niches, so they leave many niches underserved. Within these underserved niches, competition is minimal. If an entrepreneur can discover a market niche where there is very little competition, he or she can enjoy temporary monopoly profits until new entrants begin to bid away market share. The distinguishing feature of imperfect competition is that there are knowledge differences among economic actors within a given market (Leland &; Pyle, 1977). These knowledge differences create two primary types of risk for entrepreneurs. The first is market risk, which is due to unforeseen competitive conditions and investment complexity (Moesel, Busenitz, Fiet &C Barney, 1999; Porter, 1985; Williamson, 1975). The second is agency risk, which is caused by the separate and possibly divergent interests of resource providers. The presence of these risks means that some discoveries, when acted upon, create losses for entrepreneurs. There are two strategies to profit from the presence of these risks. The first way is to act as a risk bearer in return for the expectation of a commensurate reward (Cantillon, 1931). That is, another strategy for making a discovery is to be a deliberate, intentional risk bearer, rather than a risk avoider. Entrepreneurs who take on the role of a risk bearer accept potential losses as a normal cost of doing business. They may look for ways to have others pay them for doing it. Alternatively, they may view risk as an ally because it deters others from entering a market and thereby reduces competitive threats. Risk-bearing entrepreneurs are reportedly more concerned

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with large, low probability losses than with small, high probability losses (cf. March & Shapira, 1987). For example, they may be willing to bet one dollar in a lottery with very long odds. However, according to the same logic, they would be unwilling to risk millions of dollars even if a risk were very small. The second way to profit under imperfect competition is to be a risk arbitrageur (Kirzner, 1973, 1979a, 1979b, 1985). A risk arbitrageur is an entrepreneur who avoids risk by contracting for factors at one price and simultaneously selling them to another party at a higher price, and as a result, makes a financial discovery. Rather than bearing risk, the arbitrageur profits from intertemporal differences in price. The key to discovering information about how to arbitrage successfully the price of factors is to stay alert to changes (Kirzner, 1979a), which Demsetz (1983) derisively characterized as being lucky. Table 4.1 summarizes the implications of imperfect competition for entrepreneurs. There are two primary ways for them to discover information about how to create new wealth. First, entrepreneurs can arbitrage price differentials. Second, they can agree to assume the risk of someone else who has an idea that could lead to a discovery. Entrepreneurial Strategies under Unobserved Competition Unobserved competition permits the existence of other competitors in the same industry. However, the competitive actions of these firms do not influence the profitability of other firms in the same industry. When such a relationship exists, the firms are not interdependent (Bain, 1968). Interdependence means that the competitive actions of one firm influence the profitability of others within the same industry. Interdependence is an important concept because it is inappropriate to use Porter's model of competitive threats when no competitors can be observed. By definition, unobserved competition fails the interdependence test. A market in which there is no observed competition is the most attractive of all markets because a solitary incumbent can enjoy monopoly profits, which often lead to sustainable above-normal returns, with very little risk (Chamberlin, 1933). In this sort of a market, a competitor is either a monopolist with no competitors or a quasi-monopolist who can act as if there were no competitors. Because buyers have no way to purchase competitive products or services, an incumbent really is under no pressure to reduce its prices or to be more efficient. Such an incumbent may exercise monopoly power. The only way that a buyer can counteract monopoly power is to decline purchasing. One reason that a monopolist has tremendous discretion in exercising its power is that it possesses heterogeneous resources, which it uses to pursue a distinctive, if not unique, strategy. In addition, incumbents have nearly

The Impact of Competitive Structure on Discovery 87 complete power to set prices and determine product quality. Because one firm effectively controls the market, it can expect to generate sustainable above-normal returns for as long as the monopoly lasts. Under such favorable competitive conditions, the most likely entrepreneurial strategy is a tacit strategy that entails learning by continuing to do what has already led to success. The most likely discovery would occur as a by-product of learning by doing, which would enable an entrepreneur to serve an existing market with the same technology. Although an entrepreneur would not be opposed to improving the firm's efficiency, there are no apparent reasons for him or her to risk any losses. Table 4.1 summarizes the implications of unobserved competition for entrepreneurs searching for discoveries. The least expensive way for a monopolist to make a discovery in this sort of market would be a tacit strategy that did not require the dedication of idiosyncratic resources for implementing a new, risky strategy. IMPLICATIONS The logic in this chapter represents a series of propositions because it rests on indirect evidence and requires systematic testing. I have attempted to explain the contingent relationships among industry structure, entrepreneurial strategy and entrepreneurial discovery. I do not claim to incorporate every possible effect that could influence discovery outcomes. Nevertheless, I argue that there may not be any unattractive industries, only entrepreneurs who have not learned how to evaluate industry structures and strategize to select potential types of discovery with the highest probabilities of success. The next three chapters develop an approach for searching for the various types of discoveries discussed in this chapter. A major limitation of the logic in this chapter is that it assumes greater homogeneity among entrepreneurs than exists in the real world. Entrepreneurs actually possess idiosyncratic combinations of entrepreneurial competence, which depend on their prior knowledge (Fiet, 1999; Kirzner, 1979a; Shane, 2000). In fact, one way to view discovery is as a fit between entrepreneurial competence and environmental conditions, over which entrepreneurs possess limited control. Thus, all entrepreneurs are not equally equipped to make the discoveries described in this chapter, regardless of their industries. The appropriate fit between an entrepreneur's competence and the discovery of a venture idea may most often occur because of luck (Kirzner, 1985). In the same way that there may be no generic entrepreneurial competencies because of differences in prior knowledge, there probably are no typical venture ideas to be discovered and exploited. Nevertheless, these fit restrictions do not limit an entrepreneur's capacity to search for discoveries

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within a more limited consideration set of possible venture ideas whose search costs may be less due to economies of scope. This chapter is important for aspiring entrepreneurs because it provides them with a logic for selecting both a consideration set of search possibilities and a framework for analyzing industry structure and its effects on venture strategizing. Those aspirants w h o have the conceptual skills to perform such an analysis may develop a competitive advantage over those w h o lack them. The results of this analysis are important to scholars because they demonstrate that it is possible to integrate concepts from different literatures on competition, strategy and discovery to develop logic that can be taught to aspiring entrepreneurs. The integration of these literatures also suggests a new set of opportunities for interesting and pragmatic research. NOTES 1. I will use the term product to indicate either a good or a service, which is consistent with the marketing literature (Kotler, 1997). 2. Hirschleifer (1970) actually uses the term uncertainty instead of risk. I will use risk to refer to when we assume that we know the probability distribution of future events, whereas under uncertainty we do not assume that we know the future. In addition, I will assume that investing in specific, related information may reduce risk. However, technically, uncertainty is irreducible, regardless of informational investments. 3. A common misunderstanding is that the cost or availability of capital can serve as a barrier to entry (Barney, 2002). However, investors should be interested in all positive net present value investments. Because the ex ante value of information cannot be known with certainty, it may deter entry. In contrast, the ex post value of information would not serve as a barrier to entry because its true value could be correctly evaluated. 4. Some types of private information are covered by insider trading laws, which prohibit officers and directors of a firm from using that information to profit personally. One could argue that the whole purpose of having markets is to discover information that no one else possesses in order to create a competitive advantage. If you accept this argument, we should eliminate these laws and allow the markets to set prices and allocate products and information. To suggest that some types of information should be disallowed seems to run counter to the purpose of having markets, subject to the fiduciary responsibilities that actors owe to others. A fiduciary responsibility is an obligation to represent the interests of a principal in exchange for some type of legal consideration.

REFERENCES Bain, J.S. 1956. Barriers to new competition. Cambridge, MA: Harvard University Press. Bain, J.S. 1968. Industrial organization. New York: Wiley.

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Barney, J.B. 1986a. Strategic factor markets: Expectations, luck and business strategy. Management Science 32(10): 1231-1241. Barney, J.B. 1986b. Organizational culture: Can it be a source of sustained competitive advantage? Academy of Management Review 32(11): 656-665. Barney, J.B. 2002. Gaining and sustaining competitive advantage. Upper Saddle River, NJ: Prentice Hall. Baudeau, N. 1910 [Originally 1767]. Premier introduction a la philosophic economique. (A. Dubois, Ed.). Paris. Baumol, W.J., Panzar, J.C. &c Willig, R.P. 1982. Contestable markets and the theory of industry structure. New York: Harcourt, Brace, Jovanovich. Bentham, J. 1952. Jeremy Bentham s economic writings (W. Stark, Ed.). London: Allen &c Unwin. Cantillon, R. 1931 [originally c. 1755]. Essai sur la nature du commerce en general (H. Higgs, Ed. &C Trans.). London: Macmillan. Casson, M. 1990. The market for information. In Entrepreneurship. Brookfield, VT: Edward Elgar. Caves, R.E., &C Porter, M.E. 1977. From entry barriers to mobility barriers: Conjectural decisions and contrived deterrence to new competition. Quarterly Journal of Economics 91: 241-262. Chamberlin, E.H. 1933. The theory of monopolistic competition. Cambridge, MA: Harvard University Press. Cole, A.H. 1946. An approach to the study of entrepreneurship: A tribute to Edwin F. Gay. Journal of Economic History 6: 1-15. Copeland, T., & Weston, J.F. 1988. Financial theory and corporate policy, 3rd ed. Reading, MA: Addison-Wesley. D'Aveni, R.A. 1994. Hypercompetition. New York: The Free Press. Demsetz, H. 1983. The neglect of the entrepreneur. In Joshua Ronen (Ed.), Entrepreneurship. Lexington, MA: Lexington Books, pp. 17-33. Fama, E.F. 1970. Efficient capital markets: A review of theory and empirical work. Journal of Finance 25: 383-417. Fiet, J.O. 1999. Entrepreneurial competence as knowledge. Working paper, Jonkoping International Business School. Fiet, J.O. 1996a. The informational basis of entrepreneurial discovery. Small Business Economics 8: 419-430. Fiet, J.O. 1996b. Fragmentation in the market for venture capital. Entrepreneurship: Theory and Practice 21(2): 5-20. Granovetter, M.S. 1978. The strength of weak ties. American Journal of Sociology 78(6): 1360-1380. Hayek, F.A. 1945. The use of knowledge in society. American Economic Review 35: 519-530. Hebert, R.F., 6c Link, A.N. 1982. The entrepreneur: Mainstream views and radical critiques. New York: Praeger. Hill, C.W.L., &£ Jones, G.R. 1995. Strategic management: An integrated approach. 3rd ed. New York: Houghton Mifflin. Hirschleifer, J. 1970. Investments, interest, and capital. Englewood Cliffs, NJ: Prentice Hall. Jacobson, R. 1992. The "Austrian" school of strategy. Academy of Management Review 17(4): 782-807.

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Jensen, M.C., 8c Meckling, W.H. 1992. Specific and general knowledge, and organizational structure. In L. Werin and H. Wijkander (Eds.), Contract economics. Cambridge, MA: Blackwell, pp. 109-133. Kirchoff, B.A. 1991. Entrepreneurship's contribution to economics. Entrepreneurship: Theory and Practice (Winter): 93-112. Kirzner, I.M. 1973. Competition and entrepreneurship. Chicago: University of Chicago Press. Kirzner, I.M. 1979a. Perception, opportunity, and profit: Studies in the theory of entrepreneurship. Chicago: University of Chicago Press. Kirzner, I.M. 1979b. Comment: X-efficiency, error, and the scope of entrepreneurship. In M.J. Rizzo (Ed.), Time, uncertainty and disequilibrium. Lexington, MA: Lexington Books. Kirzner, I.M. 1985. Discovery and the capitalist process. Chicago: University of Chicago Press. Knight, F.H. 1933. Risk, uncertainty and profit. London School of Economics and Political Science, Reprint No. 16. Kotler, P. 1997. Marketing management: Analysis, planning, implementation and control. Upper Saddle River, NJ: Prentice Hall. Leland, H.E., 8c Pyle, D.H. 1977. Informational asymmetries, financial structure, and financial intermediation. Journal of Finance 31(2): 371-384. Lorenzoni, G., 5c Ornati, O.A. 1988. Constellations of firms and new ventures. Journal of Business Venturing 3: 41-57. Mangoldt, H. von. 1907 [Originally 1855]. The precise function of the entrepreneur and the true nature of entrepreneur's profit. In F.M. Taylor (Ed.), Some readings in economics. Ann Arbor, MI: George, pp. 33-49. March, J.G., &c Shapira, Z. 1987. Managerial perspectives on risk and risk taking. Management Science 33: 1404-1418. Marshall, A. 1961. Principles of economics. London: Macmillan. Mason, E.S. 1939. Price and production policies of large-scale enterprises. American Economic Review 29: 61-74. McGee, J.S. 1988. Industrial organization. Englewood Cliffs, NJ: Prentice Hall. Moesel, D.D., Busenitz, L.W., Fiet, J.O. &C Barney, J.B. 1999. A reassessment of the risks confronting venture capitalists and new venture teams. Working paper, University of Missouri-Columbia. Oster, S.M. 1990. Modern competitive analysis. New York: Oxford University Press. Porter, M.E. 1980. Competitive strategy. New York: The Free Press. Porter, M.E. 1985. Competitive advantage. New York: The Free Press. Robinson, J. 1933. Economics of imperfect competition. London: Macmillan. Robinson, J. 1934. What is perfect competition? Quarterly Journal of Economics 49: 104-120. Rothchild, M., &C Stiglitz, J.E. 1976. An essay in the economics of imperfect information. Quarterly Journal of Economics 90: 629-650. Rumelt, R.P. 1988. Theory, Strategy and Entrepreneurship. In D.J. Teece (Ed.), The competitive challenge: Strategies for industrial innovation and renewal. Cambridge, MA: Ballinger, pp. 137-158. Salop, S.C. 1979. Strategic entry deterrence. American Economic Review 69: 3 3 5 338.

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Sandberg, W.R., &C Hofer, C.W. 1987. Improving new venture performance: The role of strategy, industry structure, and the entrepreneur. Journal of Business Venturing 2: 5-28. Scherer, F.M. 1980. Industrial market structure and economic performance, 2nd ed. New York: Houghton Mifflin. Schumpeter, J.A. 1936. The theory of economic development: An inquiry into profits, capital, credit, interest, and the business cycle. Cambridge, MA: Harvard University Press. Schumpeter, J.A. 1939. Business cycles. New York: McGraw-Hill. Schumpeter, J.A. 1947. The creative response in economic history. Journal of Economic History 7: 149-159. Schumpeter, J.A. 1971. The fundamental phenomenon of economic development. In P. Kilby (Ed.), Entrepreneurship and economic development. New York: The Free Press, pp. 43-70. Shane, S. 2000. Prior knowledge and the discovery of entrepreneurial opportunity. Organization Science 11: 448-469. Shane, S., &c Venkatraman, S. 2000. The promise of entrepreneurship as a field of research. Academy of Management Review 25: 217-226. Spence, A.M. 1974. Competitive and optimal responses to signals: An analysis of efficiency and distribution. Journal of Economic Theory 7: 296-315. Stigler, G.J. 1961. Economics of information. Journal of Political Economy 69(3): 213-225. Wernerfeldt, B. 1984. A resource-based view of the firm. Strategic Management Journal 5: 171-180. Williamson, O.E. 1975. Markets and hierarchies. New York: The Free Press.

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Chapter 5

Entrepreneurial Competence as Knowledge

The most important contention of the previous chapters is that knowledge of information that is not available to others can provide entrepreneurs with a competitive advantage. Possessing the competence to discover and exploit information that is not generally accessible may hold the key to creating new wealth. Chapter 3 discussed the informational basis of entrepreneurial discovery, whereas Chapter 4 focused on the structural attributes of industries that should be known and understood by entrepreneurs if they are to be able to conduct informed, systematic searches for venture ideas. Not only do industries differ, but so also do venture ideas. Ideas do not have equal potential for wealth creation and understanding those factors that affect this potential can be studied and understood by entrepreneurs. Chapters 1 and 2 laid the foundation so that these informational issues could be developed and appreciated. The present chapter examines the informational elements of entrepreneurial competence, which influences what can and cannot be known about venture ideas and the factors that affect their potential value. I will show that their prior knowledge determines their competence to make a specific discovery and circumscribes how and where they can search. The model developed in this chapter will be tested in Chapter 6 and used in Chapter 7 as a basis for training aspiring entrepreneurs. Chapter 7 will also discuss the significant improvement in search effectiveness that was achieved by subjects who attempted to make discoveries using it. IDEAS CAN MAKE A DIFFERENCE Consider the careers of two aspiring entrepreneurs. One of them repeatedly profits from novel ideas, thereby creating new wealth. The other earns

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subsistence wages trying to imitate what others have done. The difference in their financial success may be due in part to the ideas that each of them chooses to exploit. As a result, many researchers have focused their attention on the origin of venture ideas (Bailey, 1986; Christensen &C Peterson, 1990; De Konig, 1999; Gaglio, 1997; Hills, 1995; Kirzner, 1985, 1997; Koller, 1988). We know that information can play a role in the discovery and exploitation of venture ideas by providing a platform for more successfully launching a new venture (Fiet, 1996; Kaish &c Gilad, 1991; Shane, 2000). Thus, I address the questions of what entrepreneurs can and cannot competently know about venture ideas, as well as how to search for them. These questions are important because the discovery and exploitation of venture ideas seems to be fundamentally rooted in entrepreneurial competence (cf. Pelikan, 1989). After defining some of the basic concepts, I proceed by discussing the limitations of two different views of identifying discoveries—information search theory and entrepreneurial alertness. I address their limitations and propose a third alternative—a consideration set-based model of entrepreneurial competence, which portrays how entrepreneurs can discover and exploit venture ideas, not necessarily how they commonly do so. The informational basis of the model is operationalized by signals and signal processing, which will be treated next. Importantly, the next section treats the relationship between entrepreneurial competence and wealth creation. Each of these topics includes propositions for future research. I discuss why a consideration set-based approach is a superior way to view discovery and exploitation to either information search theory or entrepreneurial alertness. I conclude by discussing the implications of consideration sets for entrepreneurs and future research. In this chapter, I reintroduce the term discovery to mean a venture idea that leads to the creation of new wealth and typically consists of information about a potential innovation, such as the founding of a firm, the creation of a new product line, the development of a new technology, the satisfaction of an ephemeral market need through arbitrage or the like. According to this definition, only valuable venture ideas are discoveries, which means that most venture ideas are not discoveries. Exploitation refers to the commercialization of a venture idea. Information is any element in a system that provides understanding of an observed relationship, in this case, how to make or exploit a discovery (cf. Dreyfus &c Dreyfus, 1986; Macintosh, 1985). Competence is knowledge used in problem solving (Johnston &c Dark, 1986; Newell &c Simon, 1978). It relates to how to choose strategies, plans and goals (Simon, 1979, 1981). I view the central entrepreneurial problem as the discovery and exploitation of information that is useful for creating new wealth (Kirzner, 1985; Schumpeter, 1934). Those who solve it best

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are the most competent. It follows that entrepreneurial competence consists of the knowledge to discover and exploit particular ways to create new wealth. As individuals, we may be competent to discover and exploit some discoveries, but incompetent for others until we augment what we know with relevant information. Individual competence depends on prior knowledge (Shane, 2000), Knowledge is information that can be stored and recalled (Dreyfus &c Dreyfus, 1986; Palich &c Bagby, 1995). Knowledge often consists of understandings and beliefs that clarify the value of information. As entrepreneurs become more competent, they become more knowledgeable about how to profit from specific discoveries. It is important to note that each of the above definitions takes its meaning from a substantial stream of research, which means that together they represent more than a simple classification scheme. I endeavor to ensure in this chapter that I do not adopt new usages for these terms because to do so would violate the assumptions of the research stream from which they come. Doing so would also frustrate the development of a general theory of how to make discoveries. As has been common in entrepreneurship research, scholars would continue to find research results accumulating separately rather than cumulating into a body of knowledge (cf. Camerer, 1985). TWO VIEWS OF IDENTIFYING ENTREPRENEURIAL DISCOVERIES Some entrepreneurs make discoveries by searching (Bailey, 1986; Koller, 1988); others discover them accidentally (Baumol, 1993). There have been two alternative views of how entrepreneurs can identify discoveries. The first, information search theory, minimizes the cost of search by equating the marginal cost of future searching with the marginal value of acquiring additional information (Arrow, 1974; Hirschleifer &c Riley, 1979; Stigler, 1961), although it is noticeably silent on how to accomplish this objective. Because a search could continue indefinitely, search theory also notes the importance of calculating a stopping rule for truncating a search. The second, entrepreneurial alertness, suggests that true discoveries leading to the creation of new wealth cannot be anticipated and therefore must occur accidentally (Baumol, 1993; Kirzner, 1997). Advocates of the alertness perspective argue that entrepreneurs make discoveries while they are otherwise engaged by being alert to possible opportunities (Baumol, 1993; Kaish &c Gilad, 1991; Kirzner, 1997; Shane &c Venkatraman, 2000; Venkatraman, 1997), which implies that deliberate search is impossible. Information search theory depicts few if any real markets because it requires that they approximate equilibrium in the way that they allocate information and resources (Grossman &c Stiglitz, 1976). In addition, detractors question whether it is actually possible to optimize the value of

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information search or to compute a stopping rule when the object of the search is unknown. The alertness perspective's primary limitation is that although it may describe how many entrepreneurs commonly make discoveries, it offers practically no guidance to aspiring entrepreneurs other than to advise them to stay alert. Demsetz (1983) argues that "if [alertness] is the essence of [entrepreneurial competence], there is a more familiar name for it—luck" (1983, p. 277), which we do not know how to teach (Fiet, 1997, 2001). Alertness advocates criticize search theorists for defending a supposedly linear optimization process that arbitrarily constrains thinking (De Bono, 1978; Kirzner, 1997). Search advocates criticize alertness theory for having few practical implications (Baumol, 1993). Both approaches have negative implications for wealth creation. Pure search theory rules out incentives for entrepreneurs to take risks to discover and exploit venture ideas (Marshall, 1891), whereas entrepreneurial alertness can only provide for the "discovery" of ways of diverting resources from one person to another while setting up an economic system that tends to run down because it does not create any new wealth (Ricketts, 1993). Most troubling is that both approaches seem to neglect a growing body of knowledge about how accomplished entrepreneurs actually search. These findings indicate that they tend to follow a two-step pattern—they first scan the environment widely for information cues, but then consciously narrow their search to preferred environmental sectors (Bailey, 1986; BarHillel &c Faulk, 1982; Baumol, 1993; Drucker, 1985; Gaglio, 1997; Gilad, Kaish Sc Ronen, 1988; Hughes, 1978; Kaish &c Gilad, 1991; Keren, 1984; Koller, 1988; Newell &c Simon, 1978). They also tend to use decision rules and unique cognitive categorization processes (Bailey, 1986; Bird, 1995; Busenitz, 1995; Busenitz &c Barney, 1997; Christensen &c Peterson, 1990; Kaish &c Gilad, 1991; Koller, 1988; Palich &c Bagby, 1995; Ronstadt, 1988). In summary, neither search theory nor alertness theory accounts for these findings. A CONSIDERATION SET-BASED ALTERNATIVE In this chapter, I attempt to resolve criticisms of both approaches by proposing a third alternative—a consideration set-based model of entrepreneurial competence. It accommodates concerns of alertness advocates by replacing the search for unknown venture ideas with the search of known information channels (cf. Kirzner, 1997; Shane &c Venkatraman, 2000). It accommodates the concerns of search theorists by proposing actionable pedagogical guidelines. In addition, it extends both approaches by including the role played by exploitation in wealth creation. It is based on the observation that cognitive barriers such as prior knowledge and bounded rationality constrain effective search (Fiet, 1996; Simon, 1961; Woo, Folta &c Cooper, 1992). However, these same constraints suggest a

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theory of what can and cannot be competently known and how to search for it. A consideration set is a grouping of information channels that emit signals that may indicate a potential discovery. Entrepreneurs can select channels in their consideration set using prior knowledge (Fiet, 1996; Hirshleifer &C Riley, 1979; Johnston &c Dark, 1986; Keren, 1984; Lopes, 1994). They can also update the composition of their consideration sets as their searching continues and as they scan the environment (cf. Cooper, 1981). Figure 5.1 contains a model of how entrepreneurs can select information channels both to search for and exploit venture ideas. The dashed-line box indicates the central importance of a consideration set in the model.1 An information channel is a comparatively low-cost source of frequent signals, some of which is noise and of little value (Marshak, 1971). An example of an information channel for a real estate developer could be a realty office that represents sellers of diverse properties. The noise factor could relate to a few uninformed, self-interested agents in the office whose primary interest was earning a commission. From information channels, entrepreneurs actually access a set of signals with some probability distribution, not just a particular signal (cf. Lilien, Kotler &c Moorthy, 1992). A signal is new information that changes our ideas about the value of a future state (Spence, 1974). For example, a signal could be a sale sign or a listing on a property indicating its availability for development. The basic rationale for this approach is that entrepreneurial discovery depends on a fit between an entrepreneur's 2 idiosyncratic prior knowledge and a particular venture idea (Shane, 2000; Venkatraman, 1997), which may be discovered through systematic search (Fiet, Piskounov &c Gustavsson, 2000). If in the realty example a developer did not have the knowledge to understand that a property was attractively priced, it would not be a discovery for him or her. This competence or prior knowledge is moderated by an entrepreneur's specific knowledge of people, places, timing, special circumstances and technology (Fiet &c Samuelsson, forthcoming; Hayek, 1945). It would not be prudent for entrepreneurs to search outside their consideration sets where they presuppose that venture ideas complementing their competencies can be found. Moreover, a consideration set can and should be a dynamic, ongoing reflection of an entrepreneur's prior knowledge and newly received signals. If an entrepreneur were to encounter an outside venture idea, it is highly unlikely that he or she would possess the requisite competencies to discover or exploit its value, which suggests that individual entrepreneurs possess different types of competence (Venkatraman, 1997). In addition, ideas are not valuable until they are exploited and exploitation itself depends on an entrepreneur acquiring the requisite knowledge-based competencies and resources, which may lead to the creation of new wealth (Hills, 1995). Finally, regardless of how entrepreneurs

Figure 5.1 A Consideration Set-Based Model of Entrepreneurial Competence

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actually search for discoveries, they can learn to apply a consideration setbased approach. Proposition 1: Aspiring entrepreneurs can learn to use consideration sets to search for entrepreneurial discoveries. SIGNALS AND SIGNAL PROCESSING Entrepreneurs can become more competent by processing signals into knowledge. Figure 5.1 explores why, together with prior knowledge, signals and signal processing are pertinent to entrepreneurial competence. The Role of Signals If discovery depends on information, the actual packets that carry that information are signals. Signals emanate from information sources (Marshak, 1971; Stigler, 1961) and are the triggers that activate the relationships in Figure 5.1. The arrows in Figure 5.1 represent the direction of the effects that signals can cause. One key to acting entrepreneurially is to respond quickly to changes in the environment. In fact, entrepreneurs are themselves frequent instigators of change (Schumpeter, 1947) or may be the ones who quickly act to equilibrate such changes in the market (Kirzner, 1997). They perform their equilibrating function by arbitraging the cost and value of goods and services, which become known to them as they receive and process signals. Signals as venture-specific information. A signal containing venturespecific information is the most exploitable type of information because a single entrepreneur can take possession of it and appropriate its value (Hayek, 1945; Rumelt, 1988). Venture-specific information deals with particular people, places, timing, special circumstances and technology (Hayek, 1945). For a real estate developer, a sale sign could signal the discovery that the asking price for a property was twice its feasible price for development. In this case, the sign is a venture-specific signal because it relates to a particular place, time and seller. Any effort expended in obtaining information about the property's asking price would have little or no value because the property cannot be developed economically and the signal contains very little information for developing another property. However, when a signal fits an entrepreneur's competence, it can provide him or her with a protected space within which, for a time, to exercise monopoly power (Fiet, 1996). A signal must be more specific than scientific knowledge, which consists of general rules. Assuming some degree of market efficiency, general rules would be available to others who could bid up the cost of acquiring venture signals until the returns from them were reduced to average levels (Jensen &c Meckling, 1992).

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Venture-specific information has no practical value for assessing more than one idea, except to the extent that it may augment an entrepreneur's knowledge-based competence. Its incapacity to assess other venture ideas is not precluded by its nature. Rather, it cannot be used widely because others would already have used it to reallocate resources so that they are better positioned to compete. Proposition 2: Signals consisting of venture-specific information have greater potential to create new wealth than those consisting of general information. Signals as cues for resource allocation. Signals can both impede and facilitate resource allocation. The impediment for entrepreneurs is that the information needed to make informed allocations of resources does not exist, according to Hayek, in a concentrated or integrated form, but solely as dispersed bits of incomplete and frequently contradictory knowledge. . . . The economic problem . . . is [one] of the utilization of knowledge not given to anyone in its totality. (1945, pp. 316, 317) This dispersion of signals prevents entrepreneurs from taking advantage of all the possibilities that exist at a given moment. Thus, entrepreneurs tend to pursue self-interests differently in response to their unique information about the world. The opportunity for entrepreneurs is that they access different signals, which may isolate individual entrepreneurs from competition. Meanwhile, it may serve as a first-mover advantage to enable them to marshal needed resources. Proposition 3: The dispersion of signals in the real world can provide a first-mover advantage for proactive entrepreneurs who wish to marshal the resources to launch a new venture. Accessing signals. Entrepreneurs can access signals in a variety of ways, which include (1) scanning the environment, (2) being lucky or (3) conducting a more targeted search of promising information channels. These approaches differ in both their potential effectiveness for wealth creation and in their acquisition costs. Scanning the environment, which by definition is unconstrained, is the most costly, least effective way of making discoveries. Entrepreneurs incur immediate, ongoing costs in return for a very low probability of making a discovery. It is costly because entrepreneurs who employ it must always be on duty. Scanning is the approach espoused by those who advocate entrepreneurial alertness (cf. Baumol, 1993; Kaish & Gilad, 1991; Kirzner,

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1997; Shane &c Venkatraman, 2000). In fact, its effectiveness is questionable (no different from luck) because it is impossible to conduct an optimal search if a search domain is unknown. It is the basis for their criticism of search theory, as articulated by Kirzner, An opportunity for pure profit cannot, by its nature, be the subject of systematic search. Systematic search can be undertaken for a piece of missing information but only because the searcher is aware of what he does not know. . . . What distinguishes discovery . . . from successful search . . . is that the former involves . . . surprise. (1997, pp. 71-72)

Assuming that a search domain is unconstrained, as Kirzner (1997) does, it is mathematically impossible to perform an optimal, systematic search (Fiet et al., 2000). The alternative to performing a systematic search is to stay alert, which Demsetz (1983) has equated with luck. The advantage of relying solely on luck is that it requires the lowest investment for signal acquisition. Because its low initial investment may be spread across ongoing activities, it may actually be superior to scanning, which has the same probability of success as luck. The deliberate, systematic search of a consideration set begins with the imposition of constraints consistent with the expectation that entrepreneurs would update their ongoing search patterns as they process signals. In fact, as mentioned earlier, many studies indicate that accomplished entrepreneurs narrow their search to preferred information channels in anticipation of making discoveries. It is important to recognize that as they do this, they are not searching for a particular idea. They are searching among known channels (ones with a familiar and favorable probability distribution) for a signal that could provide a clue about how to launch a new venture. Any discovery may actually include some element of surprise, as noted by Kirzner (1997). The key difference between entrepreneurial alertness and searching information channels is that the cost of a targeted search based on prior knowledge is probably less than the cost of luck-based alertness, which presumably has a much lower probability of leading to wealth creation. Proposition 4: Targeted systematic search will be more successful than entrepreneurial alertness.

The Processing of Signals Using Consideration Sets Entrepreneurial competence consists of idiosyncratic knowledge about how to invest in the acquisition of signals. It may process inputs in a similar way as the operating system of a computer (cf. Pelikan, 1989), although scholars know very little about any algorithms used for such processing.

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Venkatraman (1997) observes that the most useful idiosyncratic knowledge (about how to process signals) consists of information about one's occupation, on-the-job routines, social relations and daily life, such as hobbies. Fiet &c Samuelsson (forthcoming) suggest that it may also consist of jobrelated technology and specialized education. As indicated by Figure 5.1, each of these forms of idiosyncratic knowledge comes from prior experience. Their acquisition becomes an investment decision because they may turn out to have little or no value. Figure 5.1 also indicates key relationships that constrain how entrepreneurs could search for discoveries, not how they commonly search. It illustrates the relationship between idiosyncratic knowledge from prior experience and selecting information channels to be part of a consideration set. The composition of a consideration set can be updated continuously as entrepreneurs scan the environment for new signals. Once an entrepreneur selects a consideration set, the key questions are: (1) Can we determine an optimal search sequence for the channels within the set? and (2) can we determine a stopping rule? The answer to the first question is "yes." It was derived from a straightforward mathematical analysis (Bikhchandandi & Sharma, 1996; Fiet et al., 2000; Talmain, 1992). Answering the second question is useful because a search can never completely eliminate all uncertainty, which leaves an entrepreneur to manage the trade-off between continuing to invest in information to reduce what is unknown and the cost of doing so (Fiet, 1996). Fiet et al. (2000) demonstrated that optimal search is possible, assuming that the search domain is bounded and that entrepreneurs can accurately assess the costs and risks for each round of search, which they assumed could be estimated on the basis of prior knowledge. Proposition 5: Aspiring entrepreneurs may be able to improve their searching by conforming to the mathematical constraints necessary to show that optimal search is possible. Entrepreneurial competence has three noteworthy attributes that can be used by aspiring entrepreneurs to make discoveries. These attributes are derived from prior experience, as detailed in Figure 5.1 and discussed earlier. First, entrepreneurial competence may consist of declarative knowledge about venture ideas within a consideration set. This declarative component is the part of competence that provides for baseline comparisons. Declarative knowledge consists of decision rules that may only be used to evaluate one type of venture. By itself, declarative knowledge is typically insufficient to evaluate a particular venture idea, but it may trigger additional searching within an entrepreneur's consideration set. Second, entrepreneurial competence may be viewed as procedural knowl-

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edge about how to invest in the acquisition of specific signals and later how to launch a venture. This component may consist of fuzzy logic, algorithmic solutions and/or heuristics for simplifying decision making. Fuzzy logic notes that there may be a range of specific solutions that merit testing (Anderson, 1994; Hoffman, 1994). An algorithmic solution is a set of rules for solving a problem in a finite number of steps (Christensen & Peterson, 1990). A heuristic is a simplified decision rule (Busenitz & Barney, 1997; Tversky & Kahneman, 1974). Because individual entrepreneurs possess different stocks of knowledge, there are differences in the expected value of their discoveries, partly because the value of a signal depends on its fit with an individual's stock of prior knowledge. Without such a fit, an entrepreneur would not have the competence to exploit a discovery. Third, entrepreneurial competence is not equally distributed among the population of those who aspire to be entrepreneurs, nor will it necessarily be effective for the discovery and exploitation of multiple venture ideas. Instead, based on idiosyncratic knowledge, individual entrepreneurs will be most fit to discover and exploit particular ventures (cf. Shane &: Venkatraman, 2000). A by-product of individual striving to acquire venture-specific information is that the effort itself may tacitly impart greater competence. Proposition 6: Meaningful differences exist among entrepreneurs in their procedural and declarative competence to discover and exploit valuable venture ideas. ENTREPRENEURIAL COMPETENCE AND WEALTH CREATION This section describes those elements of entrepreneurial competence over which entrepreneurs may exercise the most effective control. They include (1) choices posed by acquiring signals, (2) exploitation as an element of entrepreneurial competence, (3) discovery as entrepreneurial fitness and (4) the role of quickness. Choices Posed by Acquiring Signals If entrepreneurs have not already discovered a potentially valuable signal, or if they have detected such a signal but do not possess the requisite resources and competencies to exploit it, they have a choice—continue to search their consideration sets for signals to learn more. Alternatively, they may stop searching and begin to exploit a particular signal, even though they lack some information. If they decide to exploit an idea but lack the necessary competencies and resources, they can stop searching and attempt to marshal the needed resources. Of course, there are trade-offs between

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discovering venture ideas and the costs and risks of acquiring more information and resources. In general, it is nearly impossible to evaluate a venture idea without committing oneself to its corresponding level of informational investment. Therefore, it does not matter very much what others think about a venture idea if they have not already invested in the acquisition of the relevant specific information. They are simply too uninformed to render a meaningful judgment. This reasoning presents entrepreneurs (and skeptics) with a choice about how to proceed. It is important to note that discovery can be an ongoing process closely connected with exploitation. Exploitation provides immediate feedback about a venture idea. As indicated in Figure 5.1, there must be a feedback loop to evaluate the viability of exploited ideas, which can affect the composition of a consideration set. The model in Figure 5.1 indicates that entrepreneurs can have choices if they have positioned themselves in time and space to take advantage of the signals coming from their consideration sets.3 This positioning represents a commitment for which there are costs and benefits. If they do not make such a commitment, they probably will not have access to the same venturespecific information. Moreover, for at least one brief moment, they may have a monopoly over a particular venture idea. The choice as to what to do about it is theirs alone. As this section has reasoned, they can continue to invest in information to attempt to reduce remaining uncertainty or they can accept this uncertainty, presumably at a low level, and act to exploit the idea. Proposition 7: Aspiring entrepreneurs can either act to exploit a particular venture idea or they can invest in specific information to discover more about it. Exploitation as an Essential Element of Competence Several field studies have found that accomplished entrepreneurs think that the exploitation of an idea is more important than its discovery (Birley, 1986; Hills, 1995; Ostgaard & Peterson, 1988). Nevertheless, exploiting a common idea can only lead to average returns, so the model in Figure 5.1 incorporates both discovery and exploitation as components of entrepreneurial competence. Exploitation requires the marshalling and organization of needed resources and competencies, many of which are no doubt obtained through networks of personal contacts. Family, friends and business associates can provide advice, access to resources and contacts for additional information. They can also compensate for missing competencies. If resources and competencies are valuable, rare, costly-to-imitate and exploited by an entrepre-

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neurial team to capitalize on these characteristics, it is possible that a venture will generate a sustainable competitive advantage (cf. Barney, 2002). The challenge for entrepreneurs, however, is that most resources and competencies can be quickly imitated, and today, imitated at Internet speed, which is faster than ever before. Thus, nearly all competitive advantages are temporary. In such an environment, speed is critical, which would seem to argue against the use of vertical integration. It may be faster, less risky and more profitable to contract with others for resources and competencies than to hire them more permanently. Nevertheless, the optimal level of vertical integration is another class of information problem whose solution depends on investing in venture-specific information. The complexities of vertical integration highlight the importance of only exploiting venture ideas about which an entrepreneurial team already has some prior knowledge. It would be simpler if scholars could view the entire exploitation process as an information problem. However, exploitation involves humans with idiosyncratic prior knowledge, different values, peculiar relationships with others, odd motivations and behavioral differences, all of which may seem irrational. These not-too-subtle variations are too complex to model here. Nevertheless, their modeling is not my purpose because the model in Figure 5.1 does not describe how accomplished entrepreneurs behave most of the time. Its purpose is to develop theory about how they can act to maximize their effectiveness. Thus, I offer the following proposition: Proposition 8: The actions of accomplished entrepreneurs will be more similar to the prescriptions of the model in Figure 5.1 than will the actions of those exploiting their first venture idea. Discovery as Entrepreneurial Fitness Entrepreneurs can acquire competence in two stages: (1) through an existing stock of prior knowledge and (2) through newly evaluated signals that have been converted into knowledge, as in the real estate example when the developer became more knowledgeable about property values in the neighborhood. Because the exploitation of a venture idea depends on specific knowledge, as detailed in Figure 5.1, that portion of competence that consists of newly evaluated specific information will be costly or impossible to transfer. There are several ways that newly evaluated signals can be costly or impossible to transfer. First, signals about a discovery that are based on unique historical conditions cannot be effectively transferred to someone else and exploited by them. Their exploitation depends on their unique place in time and space, which cannot be recreated for someone else (cf.

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Arthur, 1989). Thus, signals of historically based discoveries are of little value to someone else, regardless of their clarity. Second, signals of pathdependent discoveries cannot be transferred to someone else and exploited by them because their value depends on the significant effects of earlier events (cf. Barney, 2002). Entrepreneurs who are not positioned to benefit from the same path-dependent events will find their signals to be of little value. Third, the utility of causally ambiguous signals cannot be transferred to another entrepreneur. Causally ambiguous signals do not offer a clear picture of their value to their recipients, thus leaving potential imitators uncertain about what to transfer. Fourth, the utility of signals, which are based on social complexity, cannot be transferred to another entrepreneur because of not knowing what to transfer (cf. Hambrick, 1987). The most important implication of the above discussion is that it is possible for entrepreneurs to search their consideration set for an appropriate fit between their individual entrepreneurial competencies and a potentially valuable signal about a venture idea. Once discovered, such a signal may inform an entrepreneur about how to allocate resources and develop tactics that can provide at least a temporarily sustainable competitive advantage. Discoveries are not equally valuable for all entrepreneurs because of differences in competence. However, simply because someone's particular competence does not equip him or her to profit from a particular discovery does not imply that the missing competence cannot be acquired. Unfortunately, by the time a competence has been acquired, the related discovery may have already lost its value. The time-sensitive nature of discovery requires aspiring entrepreneurs to ask—competency for what? This is not an easy question to answer because the "what" often takes place in the future and depends on entrepreneurs accurately foreseeing it. Nevertheless, entrepreneurs can develop tactics within a consideration set in anticipation of future events. Proposition 9: Discoveries are not equally valuable for all entrepreneurs because of differences in competence. Proposition 10: Entrepreneurs may acquire requisite knowledge-based competencies in anticipation of exploiting a particular venture idea. The Role of Quickness The ephemeral, random nature of the fit between an entrepreneur's idiosyncratic competencies/resources and environmental opportunities affects wealth creation. This means that it is impossible to rule out the role of quickness as signals being converted into knowledge are affected by unique historical conditions, path dependence, causal ambiguity and social com-

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plexity, as described in the previous section. Apparently, being in the right place at the right time matters because someone else cannot instantaneously conform to these constraints, which means that being where we are may give us a competitive advantage. Thus, quickly exploiting suddenly obvious conditions may extend an entrepreneur's temporary competitive advantage while others struggle to catch up with a competitive move. The important empirical question is, can entrepreneurs influence their luck by acting quickly? Anecdotally, the answer is yes, as asserted by the following edited quotation from an anonymous author, which I quoted earlier, and which indicates that not only do we create our own luck, but our own future as well: The future is not a result of choices among alternative paths offered by the present, but a place that is created—created first in the mind and will [by visualizing the intended discovery]—created next in activity [by searching a consideration set and then quickly exploiting a discovery to create new wealth]. The future is not some place we are going to, but one we are creating [by discovering what no one else knows about it by acquiring specific information]. The paths are not to be found but made, and the activity of making them changes both the maker [by enriching his or her stock of knowledge] and the destination [by providing private insights into the discovery]. (Anonymous) It is useful to consider those conditions that may allow entrepreneurs to create their own future as they make entrepreneurial discoveries. First, they could create their own future if they were to search for signals in a domain where they were very knowledgeable, based on prior experience. Second, it would be helpful if they understood their domain very well so that they could quickly make logical, strong inferences, as suggested by Platt (1964), in the same way that a technologist plans the next application of basic knowledge. Third, they could create the future if they understood and quickly exploited the costs and probabilities associated with their actions in the same way that Fiet et al. (2000) demonstrated that optimal search is possible. There is randomness to the environment that affects an entrepreneur's ability to manage the start-up of a new venture and the creation of wealth. Nevertheless, accomplished entrepreneurs have a track record for being luckier than most. This research has argued that their two-step process of first scanning widely and then focusing on a search domain where they are knowledgeable not only gives them valuable, private insights, but also better equips them to exploit quickly any discoveries. Proposition 11: Accomplished entrepreneurs build their luck in discovering venture ideas on prior knowledge, which they can quickly extend by systematically acquiring relevant signals.

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DISCUSSION In this chapter, I have analyzed the informational elements of entrepreneurial competence, particularly the role of signals and prior knowledge. The analysis consisted in part of a process model, which was based on a new construct—the consideration set, which may be conceptualized first by entrepreneurs and then used by them to discover and exploit venture ideas.4 The analysis also developed propositions regarding entrepreneurial competence that are summarized in Table 5.1. Ideas Not Addressed I did not examine socio-cognitive factors, such as motivation, goal setting, expectations, personal relations, individual differences, decisionmaking style or personality (cf. De Konig, 1999). Neither do I attempt to analyze the algorithms used by entrepreneurs to process signals. Although they may be related to discovering new wealth, as far as we know, they are complex phenomena that are partially beyond the control of individual entrepreneurs. In contrast, entrepreneurs can probably learn to trade off the cost of acquiring specific information within their consideration sets against its expected value, which may offer some guidance. A New Approach to Discovery and Exploitation I suggested that there have been two approaches to entrepreneurial discovery—alertness-based scanning and search that is based on efficiency considerations. An alertness approach may be more descriptive of how many entrepreneurs search; unfortunately, its effectiveness, which is determined by luck, is difficult to predict and its use does not seem to be preferred by accomplished entrepreneurs. As we have seen, searching as prescribed in information theory requires constraints that are unavailable in the real world or that searchers often do not apply. To resolve concerns about both approaches, I proposed a third alternative based on the use of consideration sets. I argued that effective search requires that an entrepreneur take steps to intelligently limit with consideration sets the scope of his or her search domain. In addition, for the first time, I have incorporated exploitation into a model of entrepreneurial competence and treated it as an information problem. The adoption of a consideration set-based approach leads to the propositions in Table 5.1. Implications Understanding the distinctions and relations between discovery and exploitation provides a basis for analyzing how to create new wealth. Their

Entrepreneurial Competence as Knowledge 109 Table 5.1 Propositions 1. Aspiring entrepreneurs can learn to use consideration sets to search for entrepreneurial discoveries. 2. Signals consisting of venture-specific information have greater potential to create new wealth than those consisting of general information. 3. The dispersion of signals in the real world can provide a first-mover advantage for proactive entrepreneurs who wish to marshal the resources to launch a new venture. 4. Targeted systematic search will be more successful than entrepreneurial alertness. 5. Aspiring entrepreneurs may be able to improve their searching by conforming to the mathematical constraints necessary to show that optimal search is possible. 6. Meaningful differences exist among entrepreneurs in their procedural and declarative competence to discover and exploit valuable venture ideas. 7. Aspiring entrepreneurs either can act to exploit a particular venture idea or they can invest in specific information to discover more about it. 8. The actions of accomplished entrepreneurs will be more similar to the prescriptions of the model in Figure 5.1 than will the actions of those exploiting their first venture idea. 9. Discoveries are not equally valuable for all entrepreneurs because of differences in competence. 10. Entrepreneurs may acquire requisite knowledge-based competencies in anticipation of exploiting a particular venture idea. 11. Accomplished entrepreneurs build their luck in discovering venture ideas on prior knowledge, which they can quickly extend by systematically acquiring relevant signals.

shared informational basis highlights the possibility that conceptualization prior to action may reduce the uncertainty of an entrepreneur's actually succeeding. Mastering how to use a consideration set to increase the effectiveness of entrepreneurial search could reduce the failure rate of startups by providing them with a more profitable basis for investing. As mentioned in the beginning, the difference in the financial success of two aspiring entrepreneurs may be due in part to the ideas that each of them chooses to exploit. Thus, this research has addressed the questions of what entrepreneurs can and cannot competently know about venture ideas, as well as how to search for them. The answer to what they can competently know partially depends on how much of a role they are willing to play in investing in the acquisition of venture-specific information.

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Entrepreneurs should care a b o u t the ideas in this chapter because it presents them with an option to choose to invest more efficiently in the acquisition of signals to m a k e discoveries, even if they currently lack the resources to exploit them. Discoveries may be used to attract needed resources, which makes entrepreneurship a viable career option for more aspirants. The ideas in this chapter could attract interest from a wide range of scholars w h o bring different skill sets themselves, as well as different intellectual preparation. Future research could empirically test the propositions developed here. It is possible that they could develop a new body of knowledge based on emerging concepts in informational economics, which could provide the pedagogical foundations for teaching the next generation of entrepreneurs. NOTES 1. The advantage of searching within a consideration set, as depicted by Figure 5.1, is that entrepreneurs can enjoy an informational advantage in discovering ideas that may lead to wealth creation. This chapter does not discuss the characteristics that these ideas must possess in order to lead to the creation of new wealth. The interested reader should refer to this discussion in Chapter 7. 2. When referring to an entrepreneur in this research, I intend to also include any members of an entrepreneurial team. 3. The term consideration has been used before in the advertising literature as a way of determining what types of messages would need to be sent to prospective buyers, based on their stage of considering a new purchase. However, my work is the first to use the term in the entrepreneurship literature. In the advertising context, purchasers are grouped according to their disposition to purchase, whereas in my usage here, aspiring entrepreneurs can organize information channels into consideration sets in order to conduct a deliberate search. 4. See note 1. REFERENCES Anderson, G. 1994. Fuzzy logic: What it is. What it does. What it can do. Production (October): 38-42. Arrow, K.J. 1974. Limited knowledge and economic analysis. American Economic Review 64: 1-10. Arthur, W.B. 1989. Competing technologies, increasing returns, and lock-in by historical events. Economic Journal 99: 116-131. Bailey, J. 1986. Learning styles of successful entrepreneurs. In R. Ronstadt et al. (Eds.), Frontiers of entrepreneurship research. Wellesley, MA: Babson College, pp. 193-210. Bar-Hillel, M., & Faulk, R. 1982. Some teasers concerning conditional probabilities. Cognition 11: 109-122. Barney, J.B. 2002. Gaining and sustaining competitive advantage. Englewood Cliffs, NJ: Prentice Hall.

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Baumol, W.J. 1993. Formal entrepreneurship theory in economics: Existence and bounds. Journal of Business Venturing 8: 197-210. Bikhchandani, S., & Sharma, S. 1996. Optimal search with learning. Journal of Economic Dynamics and Control 20: 333-359. Bird, B. 1995. Toward a theory of entrepreneurial competency. In J. Katz (Ed.), Advances in entrepreneurship, firm emergence, and growth, vol. 2. New York: JAI Press, pp. 51-72. Birley, S. 1986. The role of new firms: Births, deaths and job generation. Strategic Management Journal 7: 361-376. Busenitz, L. 1995. Research on entrepreneurial alertness: Sampling, measurement and theoretical issues. Journal of Small Business Management 34: 35-44. Busenitz, L.W., & Barney, J.B. 1997. Differences between entrepreneurs and managers in large organizations: Biases and heuristics in strategic decisionmaking. Journal of Business Venturing 12: 930. Camerer, C. 1985. Redirecting research in business policy and strategy. Strategic Management Journal 6: 1-15. Christensen, P., St Peterson, R. 1990. Opportunity identification: Mapping the sources of new venture ideas. In N.C. Churchill et al. (Eds.), Frontiers of entrepreneurship research. Wellesley, MA: Babson College, pp. 567-581. Cooper, A.C. 1981. Strategic management: New ventures and small business. Long Range Planning 14(5): 39-45. De Bono, E. 1978. Opportunities. New York: Penguin Books. De Konig, A. 1999. Conceptualizing opportunity formation as a socio-cognitive process. Unpublished doctoral dissertation, INSEAD. Demsetz, H. 1983. The neglect of the entrepreneur. In J. Ronen (Ed.), Entrepreneurship. Lexington, MA: Lexington Books, pp. 173-185. Dreyfus, H.L., 8t Dreyfus, S.E. 1986. Mind over machine. Oxford: Basil Blackwell. Drucker, P.F. 1985. Innovation and entrepreneurship. New York: Harper and Row. Fiet, J.O. 1996. The informational basis for entrepreneurial discovery. Small Business Economics 8: 419-430. Fiet, J.O. 1997. Education for entrepreneurial competency: A theory-based activity approach. Paper presented at the Proceedings of lntEnt97, International Conference on Entrepreneurship Education, Monterey, CA. Fiet, J.O. 2001. The theoretical side of teaching entrepreneurship. Journal of Business Venturing 16: 1-24. Fiet, J.O., Piskounov, A. &C Gustavsson, V. 2000. How to decide how to search for entrepreneurial discoveries. Paper presented at the Babson/Kaufman Research Conference, Wellesley, MA. Fiet, J.O., 8c" Samuelsson, M. Forthcoming. Knowledge-based competencies as a platform for firm formation. In Frontiers of entrepreneurship research. Wellesley, MA: Babson College. Gaglio, C M . 1997. Opportunity identification: Review, critique and suggested research directions. In J. Katz &; R. Brockhaus (Eds.), Advances in entrepreneurship, firm emergence, and growth, vol. 3. New York: JAI Press, pp. 139202. Gilad, B., Kaish, S. & Ronen, J. 1988. The entrepreneurial way with information. In S. Maital (Ed.), Applied behavioral economics, vol. II. Brighton, England: Wheatsheaf Books, pp. 480-503.

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Grossman, S.J., 6c Stiglitz, J.E. 1976. Information and competitive price systems. American Economic Review 66(2): 246-252. Hambrick, D. 1987. Top management teams: Key to strategic success. California Management Review 30: 88-108. Hayek, F.A. 1945. The use of knowledge in society. American Economic Review 35: 519-530. Hills, G.E. 1995. Opportunity recognition by successful entrepreneurs: A pilot study. In W.D. Bygrave et al. (Eds.), Frontiers of entrepreneurship research. Wellesley, MA: Babson College, pp. 421-439. Hirschleifer, J., 6c Riley, J.G. 1979. The analytics of uncertainty and information— An expository survey. Journal of Economic Literature 17: 1375-1421. Hoffman, M.E. 1994. Extending probability to fuzzy probability. Al Expert (December): 38-41. Hughes, T.P. 1978. Inventors: The problems they choose, the ideas they have, and the inventions they make. In D. Kelley 6c S. Kranzberg (Eds.), Technological innovations: A critical review of current knowledge. San Francisco: San Francisco Press, pp. 166-182. Jensen, M.C., 8c Meckling, W.H. 1992. Specific and general knowledge and organizational structure. In L. Werin 6c H. Wijkander (Eds.), Contract economics. Cambridge, MA: Blackwell. Johnston, W.A., 6c Dark, V.J. 1986. Selective attention. Annual of Psychology 37: 75. Kaish, S., 6c Gilad, B. 1991. Characteristics of opportunities search of entrepreneurs versus executives: Sources, interests, general alertness. Journal of Business Venturing 6: 45-61. Keren, G. 1984. On the importance of identifying the correct problem space. Cognition 16: 121-128. Kirzner, I. 1985. Discovery and the capitalist process. Chicago: University of Chicago Press. Kirzner, I. 1997. Entrepreneurial discovery and the competitive market process: An Austrian approach. Journal of Economic Literature 35: 60-85. Koller, R.H. 1988. On the source of entrepreneurial ideas. In B.A. Kirchhoff et al. (Eds.), Frontiers of entrepreneurship research. Wellesley, MA: Babson College, pp. 317-325. Lilien, G.L., Kotler, P. 6c Moorthy, K.S. 1992. Marketing models. Englewood Cliffs, NJ: Prentice Hall. Lopes, L.L. 1994. Psychology and economics: Perspectives on risk, cooperation, and the marketplace. Annual Review of Psychology 45: 197-227. Macintosh, N.B. 1985. The social software of accounting and information systems. New York: John Wiley 6c Sons. Marschak, J. 1971. Economics of information systems. In M.D. Intriligator (Ed.), Frontiers of quantitative research. New York: North-Holland, pp. 32-107. Marshall, A. 1891. Principles of economics. Philadelphia: Porcupine Press. Newell, A., 6c Simon, H. 1978. Human problem solving. Englewood Cliffs, NJ: Prentice Hall. Ostgaard, T.A., 6c Birley, S. 1996. New venture growth and personal networks. Journal of Business Research 36: 37-50. Palich, L., 6c Bagby, R. 1995. Using cognitive theory to explain entrepreneurial

Entrepreneurial Competence as Knowledge 113 risk taking: Challenging conventional wisdom. Journal of Business Venturing 10: 425-438. Pelikan, P. 1989. Evolution, economic competence, and the market for corporate control. Journal of Economic Behavior and Organization 12: 279-303. Peterson, R.T. 1988. An analysis of new product ideas in small business. Journal of Small Business Management 26: 25-31. Platt, J.R. 1964. Strong inference. Science 146: 347-353. Ricketts, M. 1993. Kirzner's theory of entrepreneurship—A critique. In B.J. Caldwell 6c S. Boehm (Eds.), Austrian economics: Tensions and new directions. Boston: Kluwer Academic Press, pp. 67-84. Ronstadt, R. 1988. The corridor principle. Journal of Business Venturing 3: 3 1 40. Rumelt, R.P. 1988. Theory, strategy and entrepreneurship. In D.J. Teece (Ed.), The competitive challenge: Strategies for industrial innovation and renewal. Cambridge, MA: Ballinger, pp. 137-158. Schumpeter, J. 1934. Theory of economic development. Cambridge, MA: Harvard University Press. Schumpeter, J. 1947. Capitalism, socialism, and democracy. New York: Harper and Brothers. Shane, S. 2000. Prior knowledge and the discovery of entrepreneurial opportunity. Organization Science 11: 448-469. Shane, S., 6c Venkatraman, S. 2000. The promise of entrepreneurship as a field of research. Academy of Management Review 25: 217-226. Simon, H.A. 1961. Administrative behavior, 2nd ed. New York: Macmillan. Simon, H.A. 1979. Models of thoughts. New Haven, CT: Yale University Press. Simon, H.A. 1981. Studying human intelligence by creating artificial intelligence. American Science (May-June): 308. Spence, A.M. 1974. Competitive and optimal responses to signals: An analysis of efficiency and distribution. Journal of Economic Theory 7: 296-315. Stigler, G.J. 1961. The economics of information. Journal of Political Economy 69: 213-225. Talmain, G. 1992. Search from an unknown distribution: An explicit solution. Journal of Economic Theory 57: 141-157. Tversky, A., 6c Kahneman, D. 1974. Judgment under uncertainty: Heuristics and biases. Science 185: 1124-1131. Venkatraman, S. 1997. The distinctive domain of entrepreneurship: An editor's perspective. In J. Katz 8c R. Brockhaus (Eds.), Advances in entrepreneurship, firm emergence, and growth, vol. 3. New York: JAI Press, pp. 119-138. Woo, C , Folta, T. 6c Cooper, A.C. 1992. Entrepreneurial search: Alternative theories of behavior. In N.C. Churchill et al. (Eds.), Frontiers of entrepreneurship research. Wellesley, MA: Babson College, pp. 417-438.

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Chapter 6

Deciding How Entrepreneurs Can Search for Discoveries Over half a century ago, Joseph Schumpeter contemplated the day when innovation might be reduced to a routine that could be taught instead of being envisioned as something that appeared as an inexplicable flash of genius (1947, p. 132). In this chapter, I use existing mathematical formalism to examine how Schumpeter's vision can be realized now as it relates to those innovations discovered by entrepreneurs. Figure 5.1 provides an overview of the logic for this examination. Ultimately, my examination provides evidence of how entrepreneurs can deliberately conduct a systematic, optimal search for discoveries by imposing informed constraints. Entrepreneurs must first determine an optimal sequence for searching, as well as effective termination criteria. Entrepreneurs can conduct an optimal search by restricting their inquiry to known domains. The domains of interest are information channels, which are frequent, low-cost sources of signals about venture ideas. Entrepreneurs can narrow their search by systematically exploring a set of known channels, which I refer to as a consideration set, and which I have described previously. To decide how to search the channels in a consideration set, I determine an optimal search sequence, which is the one with the lowest cost. Because there is some probability that a search sequence could continue indefinitely, I determine stopping rules. I argue that entrepreneurial search is more feasible within a consideration set than it is in the rest of the world. I will now proceed by examining the informational basis of search and discovery.

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THE INFORMATIONAL BASIS OF SEARCH AND DISCOVERY Information is required to discover and exploit venture ideas (Fiet, 1996; Kaish & Gilad, 1991; Shane, 2000). It consists of any element in a system, usually from an entrepreneur's prior experience, which provides meaningful ideas about an observed relationship. Because information can be rare and costly to acquire, I address how to decide how to search for venture ideas that entrepreneurs can exploit to create new wealth. The object of such a search would be to identify a discovery, which again is a valuable economic opportunity, such as the founding of a new firm, the creation of a new product line, the development of an innovative technology, the satisfaction of an ephemeral market need through arbitrage or the like (Fiet, 1996). Informational economics suggests that there should be an optimal combination of the quantity and specificity of information on which the discovery and exploitation of venture ideas depends (Fiet, 1996; Marschak, 1971; Stigler, 1961). However, many theorists have noted that it is impossible to conduct an optimal search if scholars assume that a search domain is the whole world, which effectively makes it unconstrained (Baumol, 1993; Kaish & Gilad, 1991; Kirzner, 1997; Shane, 2000; Shane and Venkatraman, 2000). In addition, Kirzner (1997) argues that it is impossible to conduct an optimal search when the object of a search is unknown, which leads him to conclude that we are only left with one search option— to remain alert. This chapter examines the possibility that entrepreneurs may be able to search more effectively by restricting their inquiry to known domains. The problems of calculating an optimal solution for both unconstrained search and searching for what is unknown occur if scholars do not specify how and where entrepreneurs search for exploitable venture ideas. An exploitable venture idea for creating new wealth is one that an entrepreneur is qualified to commercialize because he or she possesses the requisite prior knowledge. I assume that resources necessary to commercialize an exploitable idea will accrue to an entrepreneur because it would represent a positive net present value investment.

RESTRICTING AND OPTIMIZING SEARCH As entrepreneurs gain experience, they become more knowledgeable about venture ideas and their sources. In the same way that scholars would not expect all information to be equally valuable to aspiring entrepreneurs, they would not expect all sources of information to be equally informative or relevant.

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Information Channels To the extent that certain sources, or information channels, provide access to exploitable venture ideas, they may also represent an entrepreneur's best chance of conducting an optimal search, despite the possibility that they may also propagate noise that is of little value (Marschak, 1971). Examples of possible information channels are an entrepreneur's inner circle of friends and confidants, business associates, the U.S. Patent Office, weekly trade publications, trade shows, golfing buddies at the country club and the like. Information channels provide entrepreneurs with an option to acquire not a particular message, but a set of messages with some probability distribution (cf. Lilien, Kotler 6c Moorthy, 1992; Marschak 6c Miyasaw, 1968; McGrath &c MacMillan, 2000). An advantage of analyzing how entrepreneurs could search information channels, rather than studying how entrepreneurs may be alert to particular venture ideas, is that it becomes mathematically possible to optimize the search of a finite number of channels. Thus, I resolve concerns about optimization by replacing the scanning for unknown venture ideas (i.e., being alert for them) with the search of known information channels. The selection of information channels presupposes where future discoveries will lie. It does not precisely specify what they will be. However, I do assume that a particular entrepreneur who is searching for them within a consideration will be successful, due to previously acquired knowledge, which has guided the search. Another advantage of restricting entrepreneurial search to information channels is that it is consistent with the expectation that entrepreneurs would update their ongoing search patterns as they interpret environmental signals. In fact, many studies indicate that accomplished entrepreneurs actually narrow their search efforts to particular areas of interests in anticipation of making discoveries (Bar-Hillel 6c Falk, 1982; Baumol, 1993; Gaglio, 1997; Gilad, Kaish 6c Ronen, 1988; Hughes, 1978; Kaish 6c Gilad, 1991; Keren, 1984). The empirical contradiction with received theory that is posed by these studies suggests that it is important to clarify the conditions that would allow search to be optimized—conditions to which accomplished entrepreneurs may be able to adapt. Otherwise, we are left with the alternative hypothesis that conducting an optimal search is impossible and largely dependent on luck (Demsetz, 1983). Entrepreneurs can select information channels to search based on their prior knowledge. In this regard, Shane (2000) examined the commercialization of a single, patented idea by different entrepreneurs. He found that they unanimously attributed their good fortune to being alert to the application of knowledge that they already possessed. Venkatraman (1997) suggested that potentially useful categories of prior knowledge that could

118

The Systematic Search for Entrepreneurial Discoveries

trigger knowledge-based discoveries are occupation, on-the-job routines and social relations. In addition, job-related technology, specialized education and hobbies have the potential to offer aspirants specific knowledge that could be a source of competitive advantage (Fiet, 1996, 2000). Consideration Sets A new feature of the research reported in this chapter and mentioned earlier is the suggestion that entrepreneurs can optimize their searching of information channels by grouping them into consideration sets. A consideration set is a promising group of information channels, which entrepreneurs can select and search based on their prior knowledge (Fiet, 1996; Hirschleifer 8c Riley, 1979; Johnston 6c Dark, 1986; Keren, 1984; Lopes, 1994). Not only could the selected channels be sources of discoveries, but they could also be sources of information for updating the selection of the channels themselves within a consideration set. An entrepreneur's consideration set would probably be unique based on idiosyncratic, prior knowledge and ongoing feedback signals from previously selected channels. Someone could protest that limiting entrepreneurial search to known channels is too high a price to pay in missed discoveries that could lie outside a consideration set. Such criticism assumes that entrepreneurs are equally qualified to exploit all venture ideas when we know that they vary in their competence, depending on their experience-based prior knowledge (Shane, 2000). Entrepreneurs do not forego discoveries that are not a reflection of their prior knowledge because they are not qualified to exploit them, nor can rapid preparation substitute very often for prior knowledge due to the ephemeral value of many venture ideas, which is what creates windows of opportunity during which exploitable venture ideas are most discoverable. The primary benefit to aspiring entrepreneurs of a consideration setbased approach is that it offers them a choice—they can either exploit a venture idea with their current knowledge or they can continue searching for more related, informative signals (Fiet, 1996; Hayek, 1945; Hirschleifer, 1970). Because searching for information within a consideration set surely would be less costly (due to economies of scope) and risky than actually launching a venture, this recognition offers them a chance to leverage their resources even if they are minimal. Using this approach, entrepreneurs with fewer resources may be able to compete with those who are more richly endowed. The optimization of entrepreneurial search depends on several interrelated criteria, which I explore in this chapter. Together, they constitute an informal model of entrepreneurial search. First, to optimize the search for information, I determine the optimal search sequence, which is the one with the minimum expected search costs. Because even an optimal search se-

Deciding How Entrepreneurs Can Search for Discoveries 119 quence could continue indefinitely, it is essential that I develop criteria for terminating a search. No known research has investigated criteria for terminating entrepreneurial search, so I propose some that are not only testable, but that have normative implications. I base the proposed criteria on establishing a confidence level for making a discovery, inventorying available resources and calculating expected search costs. I demonstrate this approach with an extended example. Next, I discuss the implications of this optimal search process for students, aspiring entrepreneurs and scholars. Finally, I suggest how to test empirically a theory of how entrepreneurs can search most efficiently for exploitable venture ideas. MODELING HOW T O SEARCH Understanding how entrepreneurs could search most efficiently depends on several assumptions. Given that entrepreneurs can develop expectations about the value of a discovery, based on their prior knowledge, I assume that they can search information channels according to their perception of the chances of a venture idea being in a particular channel. In my view, they would not search where they did not expect to find a discovery. I assume that they can assign a probability to an exploitable venture idea actually being in a particular information channel. While searching, I assume that they consider the cost-effectiveness of each of their search decisions at each stage of the process. The higher the probability of making a discovery and the lower the cost of acquiring information, the more efficient a search would be in its utilization of time and resources. It is an empirical question as to whether or not entrepreneurs can accurately estimate probabilities and costs for searching. However, identifying these constraints is a necessary precursor to conducting empirical tests. The modeling of a search depends on the following additional assumptions: First, the prospects for making a discovery in a particular channel can vary. Second, entrepreneurs can adjust the regularity with which they search channels based on their expectations for making a discovery. Third, even within a consideration set, entrepreneurs face some uncertainty about whether they will find a venture idea that they are competent to exploit. Fourth, entrepreneurs can only search one information channel at a time. Fifth, I assume that a valuable venture idea actually exists in one of the channels of an entrepreneur's consideration set. Even if a venture idea can be found, and is likely to be found, in a particular information channel there is some remaining uncertainty that an entrepreneur will be lucky enough to discover it. I assume that the probability of overlooking a venture idea would depend on its channel, and would be the same for all searches of that channel, indicating that search outcomes are independent. The probability of discovering an actual venture idea could be influenced by an entrepreneur's cognitive limitations, edu-

120

The Systematic Search for Entrepreneurial Discoveries

cational background, psychological characteristics or prior knowledge. If there are no venture ideas in a particular channel, an entrepreneur would not find one there, regardless of how much he or she searches. I summarize these assumptions in Table 6.1. A Formal Model for Determining an Optimal Search Sequence In this section, I determine an optimal sequence for entrepreneurial search. I base this research on stochastic models developed by Matula (1964), Kadane (1968) and Chew (1967) and summarized by DeGroot (1970). An advantage of using a mathematical approach is that it introduces formalism into the analysis, which can provide a basis for experimentally testing the assumptions of the informal search model. The Matula-Kadane-Chew-DeGroot (MKCD) approach employs very simple semantics: a person searches n boxes for an object. I substitute n information channels for n boxes in order to simulate searching within a consideration set. By making this substitution, I demonstrate how a consideration set-based search can pay off, versus unconstrained, stochastic search, by limiting inquiry to select information channels. To proceed with this demonstration, I reproduce parts of the analysis presented by DeGroot (1970). I also describe DeGroot's optimal search algorithm because some of its intermediate results can be reasonably interpreted as entrepreneurial search, which provides evidence for the adequacy of the model. pi >>00(i(i= = . , p1 r), +p1p2++ p2 pr the = 1prior be the prior probability Let pi 1,.1,. . . ,. r), . . .++ .pr. =. + 1 be probability (the probability before a search begins) that a discovery is in the /th of r information channels. Equating the expression to one means that a valuable venture idea actually exists in one of r channels of a consideration set. Entrepreneurs can assign probabilities based on prior knowledge. Entrepreneurs do not have to specify the probability of finding an unknown idea from all sources, only the probabilities for familiar, known channels. Nor do they have to specify an exact idea, merely the probability of an idea from a familiar class of ideas being in one of r information channels within their consideration set. Let a, (0 < a, < 1) represent the probability that an entrepreneur will not discover a venture idea if it is in an information channel i (i = 1 , . . . , r). Let Ci > 0 represent the cost of searching channel i, i = 1,. . ., r. My criterion for determining an optimal search sequence for r information channels is to minimize an entrepreneur's expected total search costs. Because the probability of finding a discovery in a particular channel influences search costs, I will now examine these probabilities. Even if entrepreneurs were to search a channel, /, and fail to make a discovery, despite the failure they would have acquired information that changes the future probability of a discovery being in one of the channels.

Table 6.1 Assumptions Made in This Chapter to Model an Optimal Search 1. Aspiring entrepreneurs are most competent to discover exploitable venture ideas that are related to their prior knowledge. 2. The selection of information channels that constitute a consideration set depends crucially on an entrepreneur understanding his or her prior knowledge. 3. Entrepreneurs can search information channels according to their perception of the chances of a venture idea being in a particular channel. 4. Entrepreneurs would not search where they did not expect to find a discovery. 5. Entrepreneurs can assign a probability of an exploitable venture idea actually being in a particular information channel. 6. Entrepreneurs consider the cost-effectiveness of each of their search decisions at each stage of the process. 7. The prospects for making a discovery in a particular channel can vary. 8. Entrepreneurs can adjust the regularity with which they search channels based on their expectations for making a discovery. 9. Entrepreneurs face some uncertainty about whether they will find a venture idea that they are competent to exploit. 10. Entrepreneurs face uncertainty about how to actually maximize their search investments because they do not possess perfect information about possible outcomes. 11. Because entrepreneurs will encounter some search failures, it would not be prudent for them to spend more than they have budgeted for searching. 12. Entrepreneurs can only search one information channel at a time. 13. A value venture idea actually exists in one of the channels of an entrepreneur's consideration set. 14. There is some remaining uncertainty that an entrepreneur will be lucky enough to discover a valuable venture idea. 15. The probability of overlooking a venture idea would depend on its channel and would be the same for all searches of that channel, indicating that search outcomes were independent. 16. The probability of discovering an actual venture idea could be influenced by an entrepreneur's cognitive limitations, educational background, psychological characteristics or prior knowledge. 17. If there are no venture ideas in a particular channel, an entrepreneur would not fine one there, regardless of how much he or she searches.

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The Systematic Search for Entrepreneurial

Discoveries

Based on Bayes theorem, they can select the next channel to be searched using a revised set of probabilities—the posterior probability of a venture idea being in one of the information channels. The posterior probability of a valuable venture idea being in a channel is: (1)

Let the expected total cost of searching be L(p p2,. . .,. .,pr), pr), when when /?, /?, isisthe u up2,. the probability that the discovery is in channel i (i = 1 , . . . , r). It consists of the cost of searching one of the channels c; and the expected cost L(p*u P*2> • • • 5 P*r) f°r tne remainder of a search, assuming that an entrepreneur follows an optimal search routine. That is, the expected total cost of an optimal search routine must satisfy the following recurrence relation (DeGroot, 1970):

DeGroot's (1970) work demonstrated that arranging the following terms in descending order of magnitude provides the sequence that minimizes the total cost of searching within a consideration set:

This result corresponds to the /th search of the /th channel. Furthermore, if a particular ratio n /; /c, is the wth largest value in an ordering of information channels, an entrepreneur can minimize his or her search costs by conducting the /th search of channel i at the wth stage. If, at any stage, two or more values of the ratio n i; /c, are equal, an entrepreneur would be indifferent about their order. Equation (3) can be considered as the costeffectiveness of the /th search of channel /. In summary, to determine the optimal sequence of channels to search within a consideration set, let p * l 5 . . . , p*r be the current posterior probability that a discovery may still be in each of r possible channels, which an entrepreneur can reevaluate after each search, according to Bayes theorem. The most cost-effective or optimal channel to search of those in a consideration set will be the one for which the value of /?*,• (1 - oc,-)/c,- is the greatest.

Deciding How Entrepreneurs Can Search for Discoveries 123 Table 6.2(a) Hypothetical Information Channels Information Channels

Pi

on

Ci

1

Inner circle of friends and confidants

0.05

0.2

5

2

Business associates

0.1

0.4

8

3

U.S. Patent Office

0.35

0.7

10

4

Weekly trade publications

0.05

0.1

2

5

Trade shows

0.25

0.6

6

6

Golfing buddies at the country club

0.2

0.8

15

P/= the prior probability that entrepreneurs will discover a valuable venture idea in a given information channel. oc/=the probability that entrepreneurs will overlook a valuable idea in a given information channel within their consideration set. Q= the cost for a one-time search of an information channel within a given information channel.

An Example to Illustrate an Optimal Search Sequence As an example of how entrepreneurs could apply these algorithms, consider the following six hypothetical channels: (1) inner circles of friends and confidants, (2) business associates, (3) the U.S patent office, (4) weekly trade publications, (5) trade shows and (6) golfing buddies at the country club. For each of these channels, Table 6.2(a) contains hypothetical values for ph ot„ and ct. An underlying assumption of this approach is that entrepreneurs are qualified to estimate values for these variables because of their prior knowledge of the information channels within their consideration set. Table 6.2(b) contains values in each cell that represent the costeffectiveness of a search of the hypothetical information channels. The shaded cells identify an optimal search sequence, given the data listed in Table 6.2(a). I computed the values for each of the first six stages of the search by using equations (1) and (3). The search actually continues past these six stages; however, I deemed six stages to be sufficient to illustrate how to apply these equations. Options for Terminating a Search At the beginning of any search, entrepreneurs would do well to acknowledge that they might never terminate a search by making a discovery. This could occur for two reasons. First, even in the case that I just considered in which the channels to be searched actually contain exploitable venture

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The Systematic Search for Entrepreneurial Discoveries

Table 6.2(b) Optimal Search Sequence for Hypothetical Information Channels

#

Information Channels

Search Stages 1

2

3

4

5

6

1

inner circle of friends and confidants

0.0080

0.0084

0.0094

0.0107

f |'f:f;#!i : 0.0025

2

Business associates

0.0075

0.0079

0.0088

0.0100

0.0109

com

3

U.S. Patent Office

0.0105

0.0110

0.0123

0.0098

0.0107

0.0113

4

Weekly trade publications

:. ". -

0.0024

0.0026

0.0030

0.0033

0.0035

5

Trade shows

0.0167

- 0.0175 -

0.0117

0.0133

0.0087

0.0092

6

Golfing buddies at the country club

0.0027

0.0028

0.0031

0.0036

0.0039

0.0041

ideas {px + p2 + . . . + pr = 1), there is always a small probability that a discovery will not be made in one of the channels. The probability of not finding a discovery can only asymptotically approach zero and will never completely disappear. A second reason is that entrepreneurs cannot know whether a valuable venture idea of the type they seek really exists within a particular consideration set. Thus, the sum of the probabilities of finding a discovery in one of the channels in their consideration set may be less than one: p1 + p2 + . . . + pr < 1. In this case, even an entrepreneur who is willing to invest any amount of resources in searching may never discover an exploitable venture idea. Entrepreneurs are free to assume that a discovery is in one of r + 1 channels. However, this is not helpful to them because channel (r + 1) represents the rest of the world. Under conditions of limited resources, they can only search among the first r channels. I do not see their search budgets as being a serious limitation for them because they have a higher probability of discovering an exploitable venture idea in a known information channel than they do of discovering one in the rest of the world. If a search algorithm minimizing the expected cost of searching would indicate that the next channel to be searched would be (r + 1), which is unavailable to them, then the channel with the second largest value of p*t(l — oe,)/^ should be searched next. The fact that a discovery may be in a channel that cannot be searched increases the probability that a particular search will never terminate.

Deciding How Entrepreneurs Can Search for Discoveries 125 In either of these two cases, a search to find a discovery would have a positive probability of never terminating, making it necessary to determine criteria for stopping. Most stopping problem formulations assume that searchers have two choices: (1) they can stop searching and pay an exit fee or (2) they can continue to pay the cost of further searching (e.g., Chew, 1967). I propose replacing an exit fee as the terminating constraint with a search budget. A search budget consists of an entrepreneur's available resources, such as money, time and effort. Entrepreneurs cannot search indefinitely. Sooner or later they will exhaust their resources for searching, even within the more limited domain of a consideration set. How and when should an entrepreneur decide to stop searching? Without search theory, possibly derived using a mathematical model, entrepreneurs would have to decide intuitively when to terminate a search. They would stop searching when they reached a predetermined budget constraint or when in their view their chances of discovering an exploitable venture idea were very small. The idea of using a budget to terminate a search seems to contradict the neoclassical ideal of the profit-maximizing entrepreneur who pursues any positive net present value opportunities. The difference in my formulation is that I assume that entrepreneurs face uncertainty about how to actually maximize their search investments. Instead of possessing perfect information about possible outcomes, I expect that the entrepreneurs will encounter some search failures and that it would not be prudent to spend more than they have budgeted, even if they were to be successful searching. MODELING HOW TO STOP SEARCHING Modeling when to stop searching requires that entrepreneurs estimate the probability of a discovery being in a particular information channel and the cost of searching for it. The Probability of Making a Discovery Entrepreneurs can divide their searching into stages. A stage represents the one-time search of a single channel within a consideration set. After each stage, an entrepreneur can reevaluate the probabilities of discoveries being in each channel as indicated by equation (1). Thus, I can conceive of entrepreneurial search as a multistage process, when at each stage k, there are corresponding probabilities of making discoveries [pkj\, j = 1 , . . . , r; k = 1, 2, . . . . If pk) is a probability of a discovery being in a channel / searched at stage k, the probability of not making a discovery is pkpLj + 1 - pkj. Entrepreneurs may continue searching if they fail to make a discovery at a particular stage. Eventually they reach a stage, m, if they have failed

126

The Systematic Search for Entrepreneurial Discoveries

previously, yet continued to search. The probability of not making a discovery until the current stage m is a product of all the probabilities of not making discoveries at previous stages. At the same time this probability can be considered as the probability that an entrepreneur would continue a search if he or she has not already given up without making a discovery. Thus, the probability qm of continuing to search at stage m is:

where S is a sequence of channels searched. Search Costs Because there is no way of reducing equation (2) to a closed form, instead of using the expected cost, I will use the cumulative expected cost or buildup function of the expected cost of searching, which takes the following form:

(5) I will use equation (5) as an aid in deciding when to terminate a search. Such a decision could occur in three different situations. Unlimited resources with no budget constraints. Given unlimited resources and no budget constraints, only the probability of making a discovery matters, which means that a level of confidence Q (the level of probable success that an entrepreneur is willing to accept) can be used as a criterion for stopping. In this case he or she should continue searching until reaching stage mq which is the smallest value of m for which the following inequality holds:

where S is a sequence of search channels and mq corresponds to the first stage when the probability of making a discovery exceeds Q, which can be determined in advance. Limited resources with a budget constraint. An entrepreneur can determine using a budget B how many search stages mb he or she can afford, where mh is the largest integer m satisfying the following inequality:

Deciding How Entrepreneurs Can Search for Discoveries

127

After mb stages, the search budget B has been spent and the search must be terminated. The probability of making a discovery within mb searches is

and can be used to justify whether a search budget could provide sufficient chances for making a discovery. According to DeGroot (1970), the expected total cost of an optimal search L(pu p2,. . . , pr) satisfies the following inequality:

This inequality provides a rough upper bound for expected search costs and can also be used while determining a search budget. Both a budget and probability constraint. When entrepreneurs commence a search, they are presumably interested in more than just having an adventure. Their objective is to make a discovery. Nevertheless, they must acknowledge the stochastic nature of search, even within a consideration set. They can preselect a level of confidence Q that reflects their desired probability of making a discovery. This is a probability that must be less than 1; otherwise a search could continue indefinitely. However, to locate a discovery while searching a particular channel with confidence level Q, an entrepreneur must still possess all of the resources specified in his or her search budget. In addition, the confidence level Q of making a discovery limits the number of stages mq that an entrepreneur can afford tnq

to search. To conduct mq stages of search requires Cmq = ?Cj resources, where S is a sequence of searched channels. If a search budget B were set at this value, it would indicate that an entrepreneur was pessimistic about dismissing the adverse role of luck. He or she would demonstrate more optimism by budgeting a smaller amount, such as C*mq = mq = ?q,c,representing the expected cost of searching the first mq stages of an optimal sequence. With these resources, an entrepreneur can conduct m*q stages of search with probability Qm
128

The Systematic Search for Entrepreneurial Discoveries

search budget B, entrepreneurs may still fail in their search for an exploitable venture idea. When both budget and probability constraints matter, an entrepreneur specifies both Q and B. The confidence of making a discovery, Q, limits the number of searched stages mq according to equation (6). A search budget B must be sufficient to provide for at least mq searches. That is, the corresponding B should be such that mb > mq. In this case I would apply a different constraint for terminating a search. It would require that each time an entrepreneur begins to search a new channel, say m + 1, that he or she evaluate the cost of searching, which includes the cost of the first m stages (Cm) of failed searches, together with the expected cost of further search (Lw + 1):

Let ns be the largest value of n such that

If ns > mq, an entrepreneur may continue searching because when cumulative expected search costs exceed the budget, the respective probability would be larger than the confidence level Q. If ns < mq, an entrepreneur would stop searching because the budgeted resources would be spent even though the confidence level Q had not been reached. Note that the value of ns can be determined in advance using the model. An Example to Illustrate Criteria for Terminating a Search Let us consider in more detail the search problem presented previously in Table 6.2(a). I will demonstrate how a consideration set-based search could be analyzed and the decision support that a formal model could provide while searching. By decision support I am referring to the fact that it would not actually be necessary to conduct a search in order to determine an optimal search sequence. Table 6.3 illustrates a truncated search sequence, which contains a complete 18-stage search. The row labeled search channel lists the same channels by numbers that are detailed in Table 6.2(a). Recall that these were the same channels indicated for searching by the optimal search sequence procedures that we derived earlier. The first six stages in Table 6.3 correspond to the stages in Table 6.2(b).

Deciding How Entrepreneurs Can Search for Discoveries 129 Table 6.3 A Multi-Stage Search Plan Using a Truncated Search Sequence Stage of Search 1

2

3

4

5

6

7

8

9

Search channel

4

5

3

5

1

2

3

5

3

Search costs ($ in hundreds)

2

6

10

6

5

8

10

6

10

Probability of not making discovery at previous stages, %

95.5 85.5

75

69

65

59

51.6 48

Expected total costs at stage 1 ($ in hundreds)

7.73

16.3 20.8 24.2 29.4 35.3 38.4 43.2 47.5

Cumulative expected cost estimated at stage 10 ($ in hund.)

2

8

18

42.9

24

29

37

47

53

63

Stage of Search 10

11

12

13

14

15

16

17

18

Search channel

3

5

2

6

3

4

5

6

3

Search costs (hundreds of $)

10

6

8

15

10

2

6

15

10

Probability of not making discovery at previous stages, %

39.3 37.1 34.7 30.7 28.2 27.8 26.5 23.3 21.5

Cumulative expected cost estimated at stage 1 ($ in hund.)

49.9 52.9 58.1 61.1 61.7 62.4 67.3 69.7 72.9

Cumulative expected cost estimated at stage 10 ($ in hund.)

75.4 78.3 83.5 86.6 87.2 88.8 92.8 95.1 98.4

In Table 6.3, the row labeled probability of not making a discovery contains the probabilities qm of not making a discovery until the current stage m, which are also the probabilities of continuing the search. For example, after 18 stages, there is a probability of 21.5 percent that the plan would not have detected a valuable venture idea. As a review, I have considered three different constraints that impact stopping a search: (1) unlimited resources, (2) budget constraints, (3) specified budget and confidence levels. I will review each of these cases in the same order. First, suppose that an entrepreneur with unlimited resources wants to make a discovery with a confidence level of 0.75. According to inequality (6) and the example in Table 6.2(a), it may require as many as mq= 17 stages to reach Q. If an entrepreneur were to search 17 stages without making a discovery, he or she would have to decide whether to search further. It might be safer to terminate the focal search because it is

130

The Systematic Search for Entrepreneurial Discoveries

possible that the assigned probabilities could be inadequate to preclude a discovery being found in the rest of the world. Second, if only a budget were to matter to an entrepreneur, then he or she could specify an amount and then use inequality (7). If B were = $9,000, then according to inequality (7), it would only allow mb = 12 search stages. Table 6.3 could be helpful in establishing a budget. It contains the cumulative, expected cost (the last two rows), estimated at the first stage (m = 1) for different N = 1 , . . . , 36. Using the data in table 6.3, entrepreneurs can budget $9,000, knowing that this level of investment would guarantee them a discovery with a probability larger than 65 percent. Third, when both a budget and a confidence level matter, consider the case of an entrepreneur desiring to make a discovery with a 75 percent probability of success. This would correspond to mq = 17 search stages. Refer to inequality (6) or the third row of Table 6.3, which contains the probability of not making a discovery before each stage. The probability of making a discovery within 17 stages is 76.5 percent. Using inequality (11), I deduce that m = 9 is the first stage for which ns < mq = 17. This result means that after nine unsuccessful search stages and spending $6,300, an entrepreneur would understand that the expected cost of searching until Q = 0.75 (or until mq = 17) is greater than the remaining resources still budgeted for searching. In this case an entrepreneur should stop searching because his or her search budget would be exceeded after 16 stages and would correspond to a probability of making a discovery that is less than 75 percent (see the last row of the Table 6.3). Therefore, if an entrepreneur's desired level of confidence in making a discovery were 75 percent, he or she would stop searching after failing at the first nine stages. DISCUSSION I have demonstrated that entrepreneurs may determine an optimal search sequence for discoveries, as well as an effective termination criterion. If I am correct, I have effectively explained how to help entrepreneurs to decide how to search for discoveries. My demonstration was based on searching within a consideration set of known information channels, which increases the odds of entrepreneurs effectively assigning probabilities and costs for optimal searching. I have argued that the assignment of these probabilities and costs is more feasible within a consideration set because of their prior knowledge of the information channels than it is in the rest of the world. I have not demonstrated that entrepreneurs actually can conduct such a search because it is an empirical question as to how effectively they can estimate prior probabilities and costs. I address this empirical question in Chapter 7. I have noted that accomplished entrepreneurs tend to narrow

Deciding How Entrepreneurs Can Search for Discoveries 131 their search domains. I do not know if their restricted search domains are to areas in which they have the most prior knowledge. I based this research on an informal search model, which I tested using existing mathematical formalism. I draw several inferences from these results, which are important to students, aspiring entrepreneurs and scholars. First, entrepreneurs can replace the search for unknown discoveries with the search of known information channels, which removes the suspected obstacles from conducting an optimal search. Second, entrepreneurs can systematically search the channels in their consideration set, which may lead to an optimal solution. Third, signals leading to the discovery of exploitable venture ideas are not equally valuable, nor widely available. Fourth, differences in signals create both acquisition risks and opportunities. Fifth, an entrepreneur's primary task while searching is to optimize his or her investment in the acquisition of specific signals. Sixth, one way to minimize the risk of signal acquisition is to search known information channels, which I have grouped into a consideration set. Seventh, signals must be exploited in order to be valuable. Eighth, aspiring entrepreneurs can use consideration sets to estimate a search budget with a given level of confidence of discovering an exploitable venture idea. Ninth, assuming that entrepreneurs can reliably estimate a search budget, this would provide them with an effective tool for evaluating their options—either (1) exploiting immediately a known venture idea or (2) searching more to refine it or discover another. I summarize these inferences in Table 6.4. Demonstrating the potential effectiveness of searching for discoveries within a consideration set is important because it suggests that the following statements about entrepreneurial search are false: First, optimal search models are useless. Although it is an empirical question as to how well entrepreneurs can actually employ them to search, using existing mathematical formalism, I have shown conclusively that they are useful theoretically. Because it may be possible to conduct an optimal search, I can use this possibility to motivate the development of more informative theoretical explanations of how this could occur. Second, all discoveries are accidental. Although I have not addressed this point directly, it seems reasonable to assume that the theoretical existence of an optimal search sequence and criteria for terminating a search could account for some entrepreneurs intuitively understanding how narrowing their search to the most promising domains could improve their search effectiveness. Third, having argued that optimal search is possible, I am not arguing that all searches by entrepreneurs are rational calculations. In fact, it is probably just the obverse—most searches that lead to exploitable venture ideas are probably accidental. However, because most entrepreneurs discontinue their ventures within five years, I can assume that they do not discover venture ideas optimally. The fact that so many entrepreneurs dis-

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The Systematic Search for Entrepreneurial Discoveries

Table 6.4 True and False Inferences from This Research True Inferences 1. Entrepreneurs can replace the search for unknown discoveries with the search of known information channels, which effectively removes the suspected obstacles from conducting an optimal search. 2. Entrepreneurs can systematically search the channels in their consideration set, which may lead to an optimal solution. 3. Signals leading to the discovery of exploitable venture ideas are not equally valuable, nor widely available. 4. Differences in signals create both acquisition risks and opportunities. 5. An entrepreneur's primary task while searching is to optimize his or her investment in the acquisition of specific signals. 6. One way to minimize the risk of signal acquisition is to search known information channels, which can be grouped into a consideration 7. Signals must be exploited in order to be valuable. 8. Aspiring entrepreneurs can use consideration sets to estimate a search budget with a given level of confidence of discovering an exploitable venture idea. 9. Assuming that entrepreneurs can reliably estimate a search budget, this would provide them with an effective tool for evaluating their options—either (a) exploiting immediately a known venture idea or (b) searching more to refine it or discover another. False Inferences 1. Optimal search models are useless. 2. All discoveries are accidental. 3. All searches by entrepreneurs are rational calculations. 4. Studying how entrepreneurs scan the environment is the only way to study how they can make discoveries.

continue their ventures suggests that their pursuit of launching new ventures may be based on irrational calculations. Fourth, studying how entrepreneurs scan the environment is the only way to study how they can make discoveries. Based on the number of scholars who attempt to describe what entrepreneurs do, one would think that it was axiomatic that I should conduct descriptive research. However, I have shown that considering what entrepreneurs could do if they were more knowledgeable, instead of their actual behavior, is an alternative approach for developing and testing theory to improve entrepreneurial search. I summarize both true and false inferences that can be drawn from this research in Table 6.4.

Deciding How Entrepreneurs Can Search for Discoveries 133 Empirical Testing As I suggested earlier, it is an empirical question as to whether aspiring entrepreneurs can estimate prior probabilities and search costs. Thus, the next step would be to conduct a test by comparing the performance of randomly selected groups—one that was trained in the use consideration sets, based on a careful assessment of their prior knowledge, and the other, a control group that would attempt to be alert to potential discoveries. I report on such a controlled experiment in Chapter 7. A precursor to controlled tests is to develop assessment techniques to assist aspiring entrepreneurs to understand their prior knowledge as expressed in the form of idiosyncratic competencies. An underlying premise of this research is that aspiring entrepreneurs are most competent to discover exploitable venture ideas that are related to their prior knowledge. In fact, the selection of information channels that constitute a consideration set depends crucially on an entrepreneur understanding his or her own prior knowledge. It is not enough to say that searching consideration sets leads to the discovery of exploitable venture ideas; it is important to show that it leads to more discoveries than a "luck-based" alertness approach (Demsetz, 1983) because many discoveries may result from being lucky. One of the obvious difficulties with conducting a comparative test is convincing a control group that it is really the treatment group. Consider how difficult it would be to tell subjects to go forth and be lucky and then report back the results of how many discoveries they made. If it were possible to teach subjects to be lucky, it would not be viewed as such a rare commodity. Thus, one necessary step in testing a consideration set-based approach is to develop a convincing cover story to be used while training subjects. Implications This research has implications for students and aspiring entrepreneurs. Here are a few of these implications. First, the chances for entrepreneurs of making discoveries are greater within a consideration set than in the rest of the world. Second, entrepreneurs would have different consideration sets based on their prior knowledge. Third, entrepreneurs are not equally equipped to discover or exploit venture ideas. Fourth, if entrepreneurs can evaluate their prior experience, they can use it to select their own, probably unique consideration sets, which could endow them with a competitive advantage. Fifth, entrepreneurs can update their consideration sets as they process information. Sixth, searching using consideration sets may make it affordable for more people to make their own discoveries, which suggests that more people could be entrepreneurs. This research is important for scholars because it offers evidence that an

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optimal search is possible, given the constraints that I have placed on the search problem. As Schumpeter expressed it, "[as] innovation itself is being reduced to routine . . . so m a n y more things can be strictly calculated that had of old to be visualized in a flash of genius" (1947, p. 132). O n e way to view the use of consideration sets is as the routinization of the discovery process, which does not diminish their idiosyncratic nature nor potential for discovering ideas for wealth creation (Baumol, 1993). Although making discoveries will never be routine, I look forward to the greater routinization of the discovery process that Schumpeter anticipated.

NOTE I am particularly indebted to Alexandre Piskounov, with whom I have worked on the research presented in this chapter, and without whose contribution the writing of this chapter would not have been possible. Dr. Piskounov is an accomplished mathematician who led me through the intricacies of Bayesian probability theory to ensure that the calculations presented here are not only correct but also concise. He is a professor of infomatics at Jonkoping International Business School, Jonkoping, Sweden.

REFERENCES Bailey, J. 1986. Learning styles of successful entrepreneurs. In R. Ronstadt, J.A. Hornaday, R. Peterson 6c K.H. Vesper (Eds.), Frontiers of entrepreneurship research. Wellesley, MA: Babson College, pp. 199-210. Bar-Hillel, M., 6c Faulk, R. 1982. Some teasers concerning conditional probabilities. Cognition 11: 109-122. Baumol, W.J. 1993. Formal entrepreneurship theory in economics: Existence and bounds. Journal of Business Venturing 8: 197-210. Chew, M. Jr. 1967. A sequential search procedure. Annals of Mathematical Statistics 38: 494-502. DeGroot, M. 1970. Optimal statistical decisions. New York: McGraw-Hill. Demsetz, H. 1983. The neglect of the entrepreneur. In Joshua Ronen (Ed.), Entrepreneurship. Lexington, MA: Lexington Books, pp. 17-33. Drucker, P.F. 1985. Innovation and entrepreneurship. New York: Harper and Row. Fiet, J.O. 1996. The informational basis of entrepreneurial discovery. Small Business Economics 8: 419-430. Fiet, J.O. 2000. Entrepreneurial competence as knowledge. Paper presented at the annual meeting of the Academy of Management, Toronto, Canada. Fiet, J.O., 6c Samuelsson, M. Forthcoming. Knowledge based competencies as a platform for firm formation. In Frontiers of entrepreneurship research. Wellesley, MA: Babson College. Gaglio, C M . 1997. Opportunity identification: Review, critique and suggested research directions. In J. Katz 6c R. Brockhaus (Eds.), Advances in entrepreneurship, firm emergence, and growth, vol. 3. New York: JAI Press, pp. 139202.

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Gilad, B., Kaish, S. 6c Ronen, J. 1988. The entrepreneurial way with information. In Sholomo Maital (Ed.), Applied behavioral economics, vol. II. Brighton, England: Wheatsheaf Books, pp. 480-503. Hayek, F.A. 1945. The use of knowledge in society. American Economic Review 35: 519-530. Hirschleifer, J. 1970. Investment, interest, and capital. Englewood Cliffs, NJ: Prentice Hall. Hirschleifer, J., 6c Riley, J.G. 1979. The analytics of uncertainty and information— An expository survey. Journal of Economic Literature 17: 1375-1421. Hughes, T.P. 1978. Inventors: The problems they choose, the ideas they have, and the inventions they make. In D. Kelley 6c S. Kranzberg (Eds.), Technological innovations: A critical review of current knowledge. San Francisco: San Francisco Press, pp. 166-182. Johnston, W.A., 6c Dark, V.J. 1986. Selective attention. Annual of Psychology 37: 43-75. Kadane, J. 1968. Discrete search and the Neyman-Pearson Lemma. Journal of Mathematical Analysis and Applications 22: 156-171. Kaish, S., & Gilad, B. 1991. Characteristics of opportunities search of entrepreneurs versus executives: Sources, interests, general alertness. Journal of Business Venturing 6: 45-61. Keren G. 1984. On the importance of identifying the correct problem space. Cognition 16: 121-128. Kirzner, I. 1997. Entrepreneurial discovery and the competitive market process: An Austrian approach. Journal of Economic Literature 35 (March): 60-85. Lilien, G.L., Kotler, P. 6c Moorthy, K.S. 1992. Marketing models. Englewood Cliffs, NJ: Prentice Hall. Lopes, L.L. 1994. Psychology and economics: Perspectives on risk, cooperation, and the marketplace. Annual Review of Psychology 45: 197-227. Macintosh, N.B. 1985. The social software of accounting and information systems. New York: John Wiley 6c Sons. Marschak, J. 1971. Economics of information systems. In M.D. Intriligator (Ed.), Frontiers of quantitative research. New York: North-Holland, pp. 32-107. Marschak, J., 6c Miyasaw, K. 1968. Economic comparability of information systems. International Economic Review 9 (June): 137-175. Matula, D. 1964. A periodic optimal search. American Mathematical Monthly 71: 15-21. McGrath, R., 6c MacMillan, I. 2000. The entrepreneurial mindset: Strategies for continuously creating opportunity in an age of uncertainty. Boston: Harvard Business School Press. Newell, A., 6c Simon, H.A. 1978. Human problem solving. Englewood Cliffs, NJ: Prentice Hall. Palich, L., 6c Bagby, R. 1995. Using cognitive theory to explain entrepreneurial risk taking: Challenging conventional wisdom. Journal of Business Venturing 10: 425-438. Schumpeter, J. 1947. Capitalism, socialism and democracy. New York: Harper and Brothers. Shane, S. 2000. Prior knowledge and the discovery of entrepreneurial opportunities. Organization Science 11(4): 448-469.

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Shane, S., 6c Venkatraman, S. 2000. The promise of entrepreneurship as a field of research. Academy of Management Review 25: 217-226. Stigler, G.J. 1961. The economics of information. Journal of Political Economy 69: 213-225. Venkatraman, S. 1997. The distinctive domain of entrepreneurship: An editor's perspective. In J. Katz 6c R. Brockhaus (Eds.), Advances in entrepreneurship, firm emergence, and growth, vol. 3. New York: JAI Press, pp. 119-138.

Chapter 7

Discovery as Either the Result of Accidental Alertness or Systematic Search

It may be that the key difference between entrepreneurs and managers of small businesses is that the former are able to discover and exploit valuable venture ideas that are not widely available to potential competitors. Entrepreneurs could use this informational advantage to create a competitive advantage and to develop new wealth.1 With so much at stake in understanding how entrepreneurs make discoveries, it is not surprising that opportunity recognition has been a popular research topic for many years. This literature has attempted to explain how successful entrepreneurs identify opportunities. The success of the recognition literature has been limited in part because most entrepreneurs discontinue their businesses after fewer than five years, which means that drawing inferences from their actions may be misleading. Clearly, most entrepreneurs have a great deal to learn about how to discover and exploit venture ideas. Otherwise, more of them would continue with their ventures and create new wealth. A variant of the recognition literature argues that entrepreneurs make discoveries by being alert, which may mean that discoveries depend on being lucky because, as discussed in Chapter 6, it is impossible to search systematically for them. The alertness argument purports that it is impossible to search systematically for something that is unknown, which if true, would mean that scholars would have very little to teach about how to make discoveries, except to admonish their students to be lucky. In addition, because they could not teach them to make discoveries, and because making discoveries is at the heart of entrepreneurship, they could not teach them very much about being entrepreneurial. This chapter reports on an experiment that I conducted using 52 grad-

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uate students in entrepreneurship to pit the alertness perspective against my new approach to searching for venture ideas to create new wealth. My new approach uses self-selected consideration sets to restrict an entrepreneur's search domain, which makes an optimal search possible. The restricted domain conforms to the behavior of accomplished entrepreneurs who do not search the whole world for venture ideas. Subjects in the treatment group were successful 37.5 percent of the time compared with a 2.9 percent success rate for the control group. Fourteen percent of the control group emulated the treatment group without receiving instructions to do so and still the results were statistically significant. In addition, this chapter presents clear evidence that an entrepreneur's prior experience as it relates to his or her occupation may not contribute as much to discovery as the specificity of one's prior knowledge. It appears that training graduate students in how to use consideration sets can significantly enhance the potential of the ideas that they discover. Subjects in the treatment group discovered more ideas that were valuable, rare, costly-to-imitate and that fit their particular entrepreneurial competence. These four criteria determine whether an idea can be exploited to provide an entrepreneur with a sustainable competitive advantage, as well as an opportunity to create new wealth. In addition, the treatment group tended to consider ideas that were an extension of an existing product or service, whereas the control group found more low-potential ideas based on personal problems. This chapter provides some encouragement that scholars may be able to teach a consideration set-based approach as one way to show students how to search more systematically for discoveries. The next section reviews the feasibility of systematic search. THE FEASIBILITY OF SYSTEMATIC SEARCH The new mathematical approaches in Chapter 6 for examining the feasibility of systematic search have demonstrated that it may be possible for entrepreneurs to conduct an optimal search for venture ideas (cf. Fiet, Piskounov 6c Gustavsson, 2000). An optimal search is one that has the lowest expected cost and the highest probability of identifying a discovery. Ultimately, an optimal, systematic search may increase the number of discoveries actually identified, which increases the odds that entrepreneurs will be able to exploit them to create new wealth. The remaining questions about systematic search concern whether aspirants in a treatment group can actually outperform others who attempt only to remain alert for discoveries, as suggested by received theory. It is not sufficient simply to improve search effectiveness by whatever means possible, which could occur due to luck (cf., Demsetz, 1983); it is necessary to outperform the most commonly accepted alternative approach. The pur-

Discovery as Accidental Alertness or Systematic Search 139 pose of this research is to evaluate the training effects of the mathematically validated model in Chapters 5 and 6 on the success rate of entrepreneurs searching for discoveries (Fiet et al., 2000). Identifying an optimal way to search for discoveries, as suggested by Fiet and colleagues (2000), is notable for two reasons. First, many studies of opportunity recognition have concluded that it is impossible to search systematically for unknown discoveries, which leaves alertness as the only alternative for aspiring entrepreneurs (cf. Kaish &c Gilad, 1991; Kirzner, 1997; Shane, 2000; Shane & Venkatraman, 2000, among others). Scholars who argue against the feasibility of systematic search are correct if they assume that a search domain is unknown, which effectively makes it unbounded. No optimal solution exists for searching an unbounded domain. Second, the research of Fiet and colleagues (2000) was notable because it provided an explanation for the observation that novice entrepreneurs scan widely while trying to make a discovery, whereas accomplished entrepreneurs narrow their search efforts to known domains (Bar-Hillel & Falk, 1982; Baumol, 1993; Gaglio, 1997; Gilad, Kaish & Ronen, 1988). Received theory offers no explanation for their switch in search tactics. Scholars can resolve questions concerning systematic search, as well as questions about why accomplished entrepreneurs can narrow their search as they gain experience by replacing the scanning for unknown venture ideas (i.e., being alert to them) with the search of known information channels. An information channel is a low-cost source of frequent venture ideas. Examples of possible information channels are an entrepreneur's inner circle of friends and confidants, business associates, a patent office, trade publications, trade shows, golfing buddies or the like. Information channels provide entrepreneurs with an option to acquire not a particular message, but a set of messages with some probability distribution. BASIC RATIONALE AND HYPOTHESES Entrepreneurs may be able to optimize their searching of information channels by grouping them into consideration sets. As noted in earlier chapters, a consideration set is a promising set of information channels, which entrepreneurs can select and search based on their prior knowledge (Fiet, 1996; Hirschleifer & Riley, 1979). Not only could selected channels be sources of discoveries, but they could also be sources of information for updating the composition of information channels within a consideration set. Moreover, an entrepreneur's consideration set would probably be unique based on idiosyncratic, prior knowledge and ongoing feedback signals from previously selected channels. Someone could protest that limiting entrepreneurial search to known channels is too high a price to pay in missed discoveries that could lie outside a consideration set. Such criticism assumes that entrepreneurs are

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equally qualified to exploit all venture ideas that they encounter when scholars know that entrepreneurs vary in their competence, depending on their experience-based prior knowledge (cf. Chapter 5, this volume; Fiet & Samuelsson, forthcoming; Shane, 2000). Entrepreneurs do not forego discoveries that are not a reflection of their prior knowledge because they are not qualified to exploit them; nor can rapid cramming with new information substitute very often for prior knowledge due to the ephemeral nature of venture ideas, which is what may create windows of opportunity during which exploitable venture ideas are most discoverable. The primary benefit to aspiring entrepreneurs of a consideration setbased approach is that it offers them a choice—they can either exploit a venture idea with their knowledge from previous experience or they can continue searching for more related, informative signals (Fiet, 1996; Hayek, 1945; Hirschleifer, 1970). Because searching for information within a consideration set surely would be less costly (due to economies of scope) and risky than actually launching a venture, this recognition offers them a chance to leverage their resources even if they are minimal. Using this approach, entrepreneurs with fewer resources may be able to compete with those who are more richly endowed. Occupational Experience Discovery depends on a fit between an entrepreneur's prior knowledge and a particular venture idea. The most commonly researched form of prior knowledge is occupational experience (Shane, 2000; Venkatraman, 1997). Knowledge is information that can be stored and recalled (Dreyfus & Dreyfus, 1986; Palich & Bagby, 1995). Search can pay off with a discovery because not all knowledge is equally valuable or accessible. Whether prior knowledge can lead to discoveries is a testable hypothesis. I focus specifically on their use of prior knowledge obtained through occupational experience. I would expect a more random scanning process from the alertness group, which could occur, as suggested by Kirzner (1997), while they were engaged in something other than a systematic search. In contrast, I would expect that the treatment group could use its occupational experience to guide its searching. Hypothesis 1: The consideration set-based group will focus more on situations identified through the use of occupational experience than will the alertness group. Specific Knowledge and Information The most valuable knowledge for making a discovery consists of specific information 2 that is not readily available to potential competitors. As en-

Discovery as Accidental Alertness or Systematic Search 141 trepreneurs become more competent, they become more knowledgeable about how to profit from particular discoveries. Specific information consists of information about people, places, timing, special circumstances, relationships and technology (Chapters 3 and 5, this volume; Hayek, 1945). When entrepreneurs acquire specific information, its specificity increases its cost and risk of acquisition because it has little or no value for unintended purposes. In contrast, general information, which is more widely available, can be codified into rules and procedures that have little value for creating new wealth (Jensen & Meckling, 1992). Because general information is widely available and has many applications, its acquisition is less costly and risky than specific information. Typical sources of general information are the Internet, textbooks and newspapers. Subjects trained in the use of consideration sets should search more using the higher-cost, but more informative, specific knowledge than would subjects in the alertness group. Subjects in the alertness-based control group should tend to discover ideas based more on lower-cost, general knowledge than specific knowledge. Thus, I expected that subjects in the control group would identify more ideas than the treatment group because they would not distinguish between their informative content. Without making such a distinction, cost would lead the control group to search for more ideas, regardless of their lower value. Subjects in the treatment group would concern themselves with both the cost and value of discoveries, which would make them more discriminating and would lead to the discovery of fewer, higher-value ideas than subjects in the control group. Hypothesis 2: The consideration set-based group will utilize specific knowledge more in making discoveries than will the alertness group. Hypothesis 3: The alertness group will submit more venture ideas than will the discovery group.

Wealth-Creating Ideas Consider again the wealth created by two entrepreneurs. Even if each of them faces similar environmental opportunities and threats, one of them is still likely to create more wealth than the other. In this research, I assume that the ideas exploited by entrepreneurs play an important role in determining their differential success. Two of the most important attributes of a venture idea are whether it can be efficiently imitated by others or conveyed to them. Both of these attributes refer to its inalienability (Jensen & Meckling, 1992). These attributes largely determine whether competitors can appropriate the value of an idea without having to invest in the cost of its discovery. To protect themselves against competitive appropriation,

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entrepreneurs who succeed in creating new wealth probably base their strategies on ideas with inalienable attributes. In addition, creating substantial wealth depends on a venture enjoying a sustainable competitive advantage. Wealth creation also depends on an entrepreneur's competencies being suitable to exploit an idea's potential. I draw on the resource-based literature (cf. Barney, 2001, chap. 5), as well as literature on entrepreneurial competence (Chapter 5, this volume; Fiet, 2001), to elaborate on some of the special attributes of venture ideas that could lead to the sustainability of a competitive advantage. There are four attributes to consider that collectively determine the potential of venture ideas to be exploited for competitive advantage and wealth creation. The first is the value of an idea. If appropriately exploited, does it have the potential to create or increase a venture's revenues or decrease its costs? The second is rareness. Are there so many current or potential competitors threatening the market for an idea that there is little chance that it could be exploited for an economic profit? The third attribute is costliness-to-imitate. Would potential competitors be at a cost disadvantage if they attempted to use it to pursue a similar strategy? The fourth attribute, and perhaps the most critical to consider, is entrepreneurial fitness. Does an entrepreneur (or an entrepreneurial team) already possess the requisite prior knowledge to discover and exploit an idea? Because founders vary in their knowledge-based competencies, they are not equally competent to discover and exploit all ideas, which may be the implicit reason that venture capitalists pay so much attention to the experience of an entrepreneurial team when evaluating a business plan. An idea that can score well on each of these attributes has the potential to be used for the creation of a sustainable competitive advantage, leading to the creation of substantial new wealth, particularly if the potential market is quite large. It would be quite unlikely that an entrepreneur could stumble very often across an idea that possessed these four attributes. Very few ideas would possess these attributes, and if they did, someone else might have already exploited them. Yet, it is unlikely that an entrepreneur will be able to exploit any idea to create substantial new wealth that does not possess these four attributes. Based on the informational arguments underlying a consideration setbased approach, I expected that aspiring entrepreneurs could discover more ideas that qualified as wealth-creators using a consideration set-based approach than when using an alertness approach. Hypothesis 4: The group using consideration sets will identify more venture ideas that can lead to the creation of new wealth and a sustainable competitive advantage than will the alertness group.

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143

METHODOLOGY I randomly assigned 52 graduate students in entrepreneurship to two treatment groups, one intended to instruct subjects to search systematically using consideration sets, the other intended to acquaint subjects with the literature on entrepreneurial alertness. A trainer met weekly for eight weeks with each of the separate teams to ensure that they understood their task, which was to discover venture ideas that they could exploit to create new wealth. For each session, there was a treatment regimen for each group, which reinforced particular aspects of the underlying theory for the treatment and control groups. One of the challenges of the treatment regimens was to ensure that they accurately reflected both the most recent findings and the overall sense of the literature from each approach. I list below some of the excerpts from the literature that I discussed separately with each treatment group. Excerpts in Support of Entrepreneurial Alertness It must be remembered that the theory of entrepreneurial alertness does not operate by having the entrepreneur ponder the comparative merits of a list of alternative future scenarios. Instead the theory posits that, based on the entrepreneur's "alertness," his sense of the future, his attention will tend to be grasped by the relevant profit future scenario. Our point is that all relevant future alternative realities have equal potential for grasping entrepreneurial attention. The greater the degree of his alertness, the greater the likelihood that the "future reality" which will in fact grab his attention will be that which will in fact turn out to be the case. (Kirzner, 1992, p. 228) An opportunity for pure profit cannot, by its nature, be the subject of systematic search. Systematic search can be undertaken for a piece of missing information but only because the searcher is aware of what he does not know. . . What distinguishes discovery . . . from successful search . . . is that the former involves . . . surprise. (Kirzner, 1997, pp. 71, 72) The truth surely is that, of the mass of knowledge, beliefs, opinions, expectations, and guesses that one holds at a given moment and that inspire and shape action, only a fraction can be described as being the result of deliberate search or learning activity. Surely a great volume of one's awareness of one's environment, and of one's expectations concerning the future, is the result of learning experiences that occurred entirely without having been planned. The knowledge one obtains from the advertising message thrust before one's eyes was, more likely than not, not deliberately searched for; the knowledge one obtains when one is addressed by one's neighbor, or importuned by a beggar, is simply acquired, not at all deliberately. Simply being alive as a human being subjects one to all sorts of sense impressions that continually alter one's awareness of the world. (Kirzner, 1979, pp. 142-143)

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Making the "right" decision, therefore calls for far more than the correct mathematical calculation; it calls for a shrewd and wise assessment of the realities (both present and future) within the context of which the decision must be taken. (Kirzner, 1985, p. 17) Excerpts in Support of Searching with Consideration Sets There is a state of the world, which if we only knew it, would tell us what the consequences of every action are. But since we don't know it we speak of uncertainty as being an uncertainty about the state of the world. Whereas what will actually happen will depend not only on the action we take but also on factors, which we don't know. (Arrow, 1989, p. 41) Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others in that he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and special circumstances. (Hayek, 1945, pp. 321,322) The information needed to make informed allocations of resources [discoveries] does not e x i s t . . . in a concentrated or integrated form, but solely as dispersed bits of incomplete and frequently contradictory knowledge. The economic problem . . . is [one] of utilization of knowledge not given to anyone in its totality. (Hayek, 1945, p. 320) In addition, the treatment group was exposed to the rationale that entrepreneurs are only fit to discover and exploit venture ideas for which they possess specifically relevant prior knowledge. T h u s , ideas not encountered within a person's consideration set could probably not be either discovered or exploited, which I explained to them was an implicit proposition of the research that I intended to test. The purpose of the weekly treatment sessions was to ensure that each subject understood how to use a consideration set-based approach to improve his or her chances of making a discovery to create new wealth. 3 After six training sessions, each of the subjects could use the model to select information channels that fit his or her competencies. They also knew how to update and search their consideration sets.

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145

Instructions for the Treatment Group Using Consideration Sets The instructions for the treatment group on how to use consideration sets to search consisted of the following elements: First, they were to identify and categorize their prior knowledge. I used a series of activities over a three-week period to uncover knowledge areas. 4 Second, the treatment group subjects were to select information channels to search based on their prior knowledge. Third, they were to determine an order for searching their channels, which depended on their search costs and prospects for discovering an idea in each of them. Fourth, they were to update the composition of their consideration set in response to learning while searching. Fifth and finally, they were to record journal entries to explain their search experiences. Instructions for the Control Group Using Entrepreneurial Alertness The control group received a comparable amount of training in staying alert over the same eight-week period. The alertness perspective argues that it is impossible to conduct an optimal search because the object of search would be unknown. Accordingly, there is little, if anything, that an entrepreneur can do to increase his or her odds of success. This raised concerns that the subjects would begin to realize that they were in the control group, which might have lessened their motivation to stay alert.5 Therefore, I developed a cover story. The cover story acknowledged that most discoveries are accidental. I supported this acknowledgment by sharing the findings from previous research that supported this view. Nevertheless, I argued that the accidental alertness perspective, if left unchallenged, could undermine an important premise of entrepreneurship education because it would mean that it was unlikely that scholars could teach the discovery process. To prove that alertness could be taught, the control group subjects had to collect a realtime sample of alertness-based discoveries from which a theory could be induced that had more promising pedagogical implications. The students in the control group enthusiastically engaged in the experiment because they believed that discovery could be taught, probably because they were mostly graduate students studying entrepreneurship. Their task was to provide a sample of discoveries while they recorded their efforts several times a week in a journal, which they turned in at the end of the experiment. In addition, I exposed the control group subjects to the assertions of those who argue that scholars cannot teach entrepreneurs either to be lucky or to search systematically. Still, one of entrepreneurship education's basic premises is that scholars can improve student performance, and if they

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The Systematic Search for Entrepreneurial Discoveries

Table 7.1 Effects of Previous Occupational Experience on Wealth Creation Source

Type III Sum of Squares

Mean Square

Degrees of Freedom

F

Significance

Corrected Model:

51.575

6

8.596

1.150

.347

Intercept:

210.952

1

210952

28.224

.000

Occupational Experience:

51.575

6

8.596

1.150

.347

Error:

388.6

52

7.474

Total:

837.000

59

Corrected Total:

440.237

58

Table 7.2 Effects of Specific Knowledge on Wealth Creation Source

Type III Sum of Squares

Degrees of Freedom

Mean Square

F

Significance

Corrected Model:

78.861

1

78.861

12.439

.001

Intercept:

424.353

1

424.353

66.933

.000

Specific Knowledge:

78.861

1

78.861

12.439

.001

Error:

361.376

57

6.340

Total:

837.000

59

Corrected Total:

440.237

58

cannot actually do it, the intellectual basis of what they espouse to be able to teach suddenly becomes more questionable. During the course of the eight-week experiment, all subjects recorded their efforts in journals. Their journals contained information about their successes, their frustrations, as well as descriptions of their venture ideas. Three raters independently classified venture ideas, together with journal entries, survey responses and explanations of accomplishments as indicators of prior knowledge. 6 There were no disagreements among raters. I used crosstabs and univariate analysis of variance to analyze the results (refer to Tables 7.1 to 7.5).

Discovery as Accidental Alertness or Systematic Search 147 Table 7.3 Classification of Discoveries Criteria for Wealth Creation

Search with Consideration Sets:

No Value

Valuable Valuable Valuable, &Rare Rare, CostlytoImitate

Valuable, Total Rare, Cases Costly-toImitate & Fitness

6

5

2

2

9

24

Entrepreneurial Alertness:

10

3

15

6

1

35

Total

16

8

17

8

10

59

RESULTS I analyzed journal entries and concluded that there were 59 useable venture ideas, which were generated by 31 subjects who completed the experiment. There were no statistically significant differences between groups on average in their age (31 years), gender (two-thirds of whom were male), income ($41,216), or the income of their immediate family ($64,730); nor were there any differences between groups in their educational or occupational backgrounds. Most of the randomly assigned subjects (93%) had no previous start-up experience; however, 14 percent of the subjects in the control group did have previous start-up experience compared with 3 percent of the subjects in the treatment group, which could have assisted the control group. Again, these differences in previous start-up experience were generated by random assignment of subjects. Subjects were employed and/ or educated in finance/accounting (15.3%), marketing/sales (18.6%), business-other (28.8%), engineering (22.0%), student only (6.8%), medicine (3.4%) and information technology (5.1%). I also plotted each of the measurement errors used for hypothesis testing and concluded that they were normally distributed, which facilitated the use of parametric statistical techniques. I evaluated these ideas using the four criteria discussed earlier, namely, (1) value, (2) rareness, (3) costliness-to-imitate and (4) entrepreneurial fitness. Hypothesis 1 was not supported. There was no significant difference between the groups in their reliance on occupational experience to find discoveries. Hypothesis 2 was supported (p < .001). The treatment group used specific knowledge significantly more than did the control group. For hypothesis 3, as predicted, the control group discovered more ideas than did the treatment group (p < .001). However, importantly for hypothesis 4,

Table 7.4 Significance of Discovery Classification Scheme Using Chi-Square Tests Source

Value

Degrees of Freedom

Asymptotic Significance (2-sided)

Exact Significance (2-sided)

Pearson ChiSquare:

18.727

5

.002

.001

Likelihood Ratio:

2081.7

5

.001

.001

Fisher's Exact Test:

18.742

Linear-by-Linear Association:

6.628

Number of Valid Cases

59

Exact Significance (1-sided)

Point Probability

.006

.001

.001 1

.010

.010

Discovery as Accidental Alertness or Systematic Search 149 Table 7.5 Effectiveness of Treatment for Discovering Wealth-Creating Ideas Source

Type Ill-Sum of Squares

Degrees Mean Square of Freedom

F

Significance

Corrected Model

50.308

1

50.308

7.354

.009

Intercept

436.477

1

436.477

63.804

.000

Search better than Alertness

50.308

1

50.308

7.354

.009

Error

389.930

57

6.841

Total

837.000

59

Corrected Total

440.237

58

the treatment group identified significantly more ideas that could lead to the creation of new wealth than did the control group (p < .009), which suggests that the treatment was effective for training aspiring entrepreneurs to search for discoveries. DISCUSSION This chapter reports on a rare attempt to test a new theory about how aspiring entrepreneurs may improve their performance. It does not describe the choices or behavior of everyday entrepreneurs, most of whom unexpectedly discontinue their efforts within five years. To its advantage, this study's findings are not subject to many of the limitations of studies that attempt description, such as being (1) cross-sectional; (2) conducted among convenience samples that do not distinguish between entrepreneurs who create new wealth from their ideas and those who unexpectedly discontinue their efforts; (3) retrospective in that they tend to examine ventures after stochastic effects have already predetermined outcomes and (4) uninterested in the role of luck. On this last point, it is important to realize that scholars cannot learn much about how to teach aspiring entrepreneurs from studying past successes if they cannot control for the role of luck, which few scholars attempt to do. The most important finding of this research is that training graduate students in how to use consideration sets can significantly enhance the potential of the ideas that they discover; that is, they discover more ideas that are valuable, rare, costly-to-imitate and that fit their particular entrepreneurial competence. As noted earlier, these four criteria determine whether an idea could be exploited to provide an entrepreneur with a sustainable

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competitive advantage, as well as an opportunity to create new wealth. Thirty-seven and a half percent of the ideas from the treatment group met these criteria compared with the control group that only found qualifying ideas 2.9 percent of the time. One interesting difference that I discovered by comparing the journal entries of the treatment and control groups is that the former tended to recognize a problem that existed in the market as a first step in making a discovery. In addition, the treatment group tended to consider ideas that were an extension of an existing product or service. The latter group tended to recognize a problem that they personally encountered as a first step in finding an idea. Although the control group found more ideas based on personal problems, they tended not to be market-driven. Perhaps the reason that the control group found more ideas is that its subjects did not need to be as discriminating. In addition, the control group subjects were motivated by problems in their personal experience. Another important finding is that knowledge specificity is an important correlate of the potential of ideas, whereas previous occupational experience was not a statistically insignificant source of high-potential venture ideas. This is important because received theory suggests that a person's occupation is an important source of prior knowledge. Clearly, though, a person's occupation was not the determining factor in whether he or she discovered a high-potential idea. Instead, it appears to have been the specificity of prior knowledge. Ninety-two percent of the treatment group used specific knowledge to make a discovery compared with 8 percent of the control group. The study's most interesting finding is that 14 percent of the control group narrowed its search to specific domains in accordance with instructions given to the treatment group, although control group members never received instructions about narrowing their search domain. This narrowing occurred spontaneously and without any encouragement. As expected, none of the subjects in the treatment group resorted to random scanning. Pedagogical Implications Entrepreneurs may be heroes in the eyes of many scholars and the popular business press; however, most entrepreneurs discontinue their ventures within five years, which suggests that they have quite a bit to learn about how to search for and exploit venture ideas. With these facts in mind, scholars may want to adopt a cautious approach to suggesting that aspiring entrepreneurs emulate the practices of those who have succeeded because their success might have been due to luck. Part of the task of scholars is to ensure that students are more successful than they would be otherwise without sitting in our classrooms. Because entrepreneurs often do not achieve their objectives, it may be problematic

Discovery as Accidental Alertness or Systematic Search 151 to hold them up as exemplars or to educate aspiring entrepreneurs entirely by exposing them to what entrepreneurs actually do. Although research attempting to describe entrepreneurial behavior has certainly been informative, it may be time to consider other research designs that can control for past limitations. This study provides some encouragement that scholars may able to begin to teach a consideration set-based approach to entrepreneurial discovery as one way to show students how to search more systematically for discoveries. Subjects in the treatment group were 12.9 times as likely to discover an exploitable venture idea as those in the control group, which mirrors received theory. Implications for Future Research Future researchers may want to address some of the following limitations of current research about discovering venture ideas: (1) cross-sectional designs that do not address causality nor control for spurious effects, (2) conducting research among convenience samples that do not distinguish between entrepreneurs who create new wealth from their ideas and those who unexpectedly discontinue their efforts, (3) retrospective studies that tend to examine ventures after stochastic forces may have already determined their outcomes and (4) studies that ignore the role of luck. On this last point, it is important to realize that scholars cannot learn much about how to teach aspiring entrepreneurs from studying past successes if they cannot control for the role of luck, which few scholars attempt to do. Randomized experimental designs that control for the above problems offer great promise for adding to our understanding of entrepreneurial discovery. One of their advantages is that they can enable investigators to study discoveries as they occur, which can provide opportunities for subjects to document not only what they do as they search, but what they are thinking. This additional source of data can control for biased findings due to common method variance. A misunderstanding about randomized designs is that they suffer from lack of realism. Although this initial study chose students as a sample, there is no reason that I had to choose them. I chose students as subjects because I was particularly interested in the pedagogical implications of this research. I reasoned that if it worked among subjects who were students, it might work later with subjects who were not students. Of course, there is an opportunity for other researchers to replicate this research design among other populations. An area of tremendous promise for future research is the influence of specific information on the systematic search for discoveries. Studying the role of specific information has both public policy and pedagogical implications. For example, can different social groups draw on private sources

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of information for making discoveries, which have not been recognized to date? Do economically disadvantaged groups have an unknown informational advantage that they could exploit to create a sustainable competitive advantage? It is not likely that education that provides exposure to general information will make disadvantaged groups extraordinarily successful as entrepreneurs. However, teaching them how to exploit the specific and perhaps private information that they already possess may have a surprisingly beneficial impact. Research designs that compare the discoveries of different populations are the best way to control for spurious effects, including luck. Studying each of the following populations promises to add to the theory underlying what scholars teach students. First, habitual entrepreneurs may already recognize the advantages of searching domains that are an extension of their prior knowledge, in the same way that 14 percent of the control group narrowed its search. Second, I would expect that technologically trained employees who have already advanced their own fields through their work would be especially effective in discovering ideas that they could readily exploit. Third, economically disadvantaged groups may be able to substitute their possession of deal-specific knowledge for their presumed lack of formal education, which could enable them to create new wealth. Fourth, it would be important to compare aspiring entrepreneurs with 10 years or more of business experience to determine the differential effect of consideration sets on their performance. Fifth, and finally, scholars need to do additional research with students who aspire to become entrepreneurs because they are part of our professional mandate. Scholars simply must learn how to teach them more effectively by improving the theory underlying how entrepreneurs can search for high-potential venture ideas and exploit them more effectively.

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APPENDIX 7.1. SESSION 1 FOR ALL SUBJECTS: THE "HUMAN SUBJECTS REVIEW" CORRESPONDENCE AND CONSENT LETTER How to Decide How to Search for Valuable Venture Ideas Dear participant: You are being invited to participate in a research study of how entrepreneurs can search most effectively for valuable venture ideas. It is generally recognized that what distinguishes entrepreneurs from managers is that the former are able to search for and identify valuable venture ideas that they succeed in exploiting. Using these ideas, entrepreneurs are able to create new wealth. The purpose of this research is to develop and test theory that entrepreneurs can use to increase their odds of discovering valuable venture ideas. If you decide to participate in this voluntary study, it is important that you comply with the following guidelines. 1. Complete the study, which will last about six weeks. There will be weekly group meetings, which will last between 30 and 45 minutes, most likely at 8:30 P.M., on Tuesdays. During these weekly group meetings, subjects will discuss information that may influence their thinking about how to conduct their individual searches. 2. Keep a journal in which you record brief daily notes that reflect your thinking and activities with regard to identifying valuable venture ideas. 3. Do not communicate with any other participants about this research until it has been completed and all participants have been debriefed. The debriefing will summarize our findings. That way all participants will have equal access to the findings. Other than being prohibited from speaking with other participants about the study, you are free to do whatever you would like to do, especially if an activity relates to your objective of discovering valuable venture ideas. The experimental procedures used in this study involve randomization to assign participants into groups. Randomization is like flipping a coin. The information that you provide will be used to develop and test theory to assist aspiring entrepreneurs. There are no penalties or known risks for your participation. However, there is a substantial potential for benefits (discovering venture ideas), which you will own. You may also be invited to participate in a follow-up research project, but your participation in any other research is also completely voluntary and not required to participate in the current study. All information that you supply will be stored in room 301, which is my office. Individuals from the Department of Management and the University Human Studies Committee may inspect these records. In all other respects, however, the data will be held in confidence to the extent permitted by law. Should the data be published, your identity will not be disclosed. Please remember that your participation in this study is voluntary. By completing and returning the attached questionnaire, you are voluntarily agreeing to participate

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in the entire six-week study. You are also indicating that all your present questions have been answered in language that you can understand. All future information that you will be asked to supply about your participation in this research will be treated in the same manner. You may refuse to participate or discontinue your participation at any time without being subject to any penalty or losing any benefits to which you are otherwise entitled, even if your decision adversely affects this research. If you have any questions about this study, please feel free to call Dr. Jim Fiet at If you have any questions about your rights as a research subject, you may call the University Human Studies Committee office ( ) and will be given an opportunity to discuss any questions in confidence, with a member of the committee. This is an independent committee composed of faculty and staff of the University of Louisville and its affiliated hospitals, as well as lay members of the community not connected with these institutions. The committee has reviewed this study. By signing below, you indicate your willingness to participate in the study and that you have received a copy of this agreement. Subject signature

Date Signed

Please print subject's signature Investigator Signature

Date signed

Consent date: January 8, 2001 Questionnaire on Personal Background Please answer the following personal questions, which will be used only for the purposes of this research. Although you are free to decline to answer any particular question, such a response may disqualify you from further participation in this research. Name: E-mail address: Telephone number (during day): Home address:

Why do you want to participate in this research project?

Discovery as Accidental Alertness or Systematic Search

Age:

Race:

155

Gender:

Personal annual income from all sources: Income of immediate family from all sources: Annual profit from businesses you have started in the past (list each business):

Number of businesses that you have started that have created significant new wealth: If none, that is fine—simply say "0." Answer each of the following: Number of years of formal education If you attended college, what did you study and how long did you study it?

If you attended another type of training program, what was it and how long did you study?

What do you like to do in your spare time?

List any family members or close friends who have started businesses, which were based on ideas that were not widely known by others. Please mention both the relationship with this person and the type of business that each started.

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What are your proclivities—those things that you enjoy doing and feel that you do well?

Please detach the following instructions and complete them before the next weekly meeting. Information about Personal Accomplishments For the purposes of this assignment, please complete the following: 1. List 10 to 15 of your most significant accomplishments. Think about an accomplishment as something that you personally did. Furthermore, it should be something that meets the following criteria: a. Something that you are proud to have accomplished. b. Something that you enjoyed doing. c. Something that you think that you did very well. 2. No one else needs to share your views of the significance of these accomplishments. 3. I am primarily interested in accomplishments that are related to your work or education. However, as long as each of them satisfies the three criteria listed under point number 1, you may list anything—even hobbies or sports. 4. Please provide enough information to indicate your approximate age at the time of the accomplishment, as well as enough information to provide a picture of what it was you accomplished and why it was important to you. If you were to type the accomplishments in a double-spaced format, you could probably fit three or four on a page. 5. After you have listed the accomplishments, please prioritize them from one to fifteen, depending on their significance to you, numbering the most significant one as number one. 6. If you have any questions about this exercise, please contact Dr. Fiet by telephone or e-mail. It is most important that you try to complete this exercise before our next scheduled meeting.

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APPENDIX 7.2. SESSION 1: CONFIDENTIALITY AGREEMENT For the purpose of sharing information and providing assistance during and outside of the experiment to study entrepreneurial discovery, this letter of agreement confirms that information disclosed or provided to the undersigned is proprietary and confidential and constitutes a valuable asset of each individual participating in the experiment. This agreement is made by and among the participants in the experiment and Dr. Fiet ("participants"). In consideration of the joint disclosure of information, the undersigned acknowledges and agrees (when the information being disclosed is confidential to a fellow subject in the experiment), that: 1. All disclosures, discussions, demonstrations and exchanges of information at any session of the experiment shall be confidential. Also, all subsequent disclosures, discussions, demonstrations and exchanges of said information taking place either during a session or between sessions (including but not limited to telephone and e-mail discussions, written memoranda, etc.) shall be confidential. Said information may be proprietary or confidential to a fellow subject in the experiment and any information so designated which is proprietary or confidential to them shall not be used, duplicated nor disclosed by the participants except on prior written consent of the disclosing participant(s). 2. Upon request by the disclosing participant(s), any evaluation material, computer-generated data, documents, memoranda, notes, any other writings and any reproductions in whole or in part thereof, prepared by either the disclosing or receiving participant, shall be returned to the disclosing participant. The participant requesting return of aforesaid information, if any, shall pay costs of this process. Notwithstanding the foregoing, the receiving participant shall be permitted to retain one copy of said confidential information in its files, which copy shall be used only by the receiving participant and its legal advisors solely in connection with ensuring compliance with its obligations hereunder. 3. The provisions of this agreement shall remain in effect for a period lasting three (3) years from the effective date of this agreement, subject to the exceptions listed under Section 4 below. 4. The provisions of this agreement shall not apply to any material: a. which is in the public domain at the time of its disclosure; b. which, after its disclosure, becomes part of the public domain through no act, omission or fault of the receiving participant(s) or employees, agents or representatives, of same; c. which, prior to its disclosure, was already in the possession of the participant as evidenced by written records kept in the ordinary course of their business or by proof of actual use by the participant(s); d. which is explicitly approved for release by written authorization of the disclosing party; e. which is independently developed by employees or agents of the receiving

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The Systematic Search for Entrepreneurial Discoveries participant who had no knowledge of or access to the confidential information as evidenced by the receiving participant's records; or

f. which is required by law or court order to be disclosed. 5. This agreement shall be governed by the laws of the Commonwealth of Kentucky and shall be binding upon and inure to the benefit of the parties and their affiliates, including but not limited to their respective successors and assigns. This agreement has been executed by me on this the (date) day of (month) (year), and constitutes our legal, valid and binding agreement. (participant signature) (participant's printed name)

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APPENDIX 7.3. SESSION 2: DISCOVERY GROUP (CHART T O ANALYZE PERSONAL ACCOMPLISHMENTS [TO ASSESS PRIOR KNOWLEDGE]) Instructions on How to Analyze Your Chart of Accomplishments This exercise can help you to better understand factors that possibly contributed to your success with previous accomplishments. Having this understanding may help you to formulate strategies in the future or to make discoveries of valuable venture ideas. Instructions: 1. In the row headings on the left of the matrix, please write a brief description or label to remind you about a particular accomplishment. Please write something for each accomplishment starting from the upper-left heading. 2. For each accomplishment, ask yourself, "What was it about myself that contributed to my success with this particular accomplishment?" Write the answer to this question in a separate column heading for each talent or type of prior knowledge that applies. Examples of possible answers to this question are the following: • Intelligence • Perseverance • Creativity • People skills • Problem-solving ability • Conceptual skills • Physical prowess • Good looks and charm • Technical knowledge • Education • Networking skills 3. You may add to the above list if it does not capture the factors that contributed to your success. 4. Now, for each accomplishment, place a check mark in each box indicating that a particular type of talent or type of prior knowledge that individually contributed to the success of each accomplishment. After you examine and indicate with a check mark for each type of talent or type prior knowledge that contributed to a particular accomplishment, you will have created a checkered matrix with some boxes checked off and others left empty. 5. For each accomplishment, ask yourself, "Of those factors that I have indicated with a check mark, which of them most greatly influenced my success with this

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particular accomplishment?" When you have completed this step, you will have one circled check mark for each accomplishment. Interpretation: The circled check marks indicate those factors that you have relied on in the past and may wish to rely on in the future as you strive to accomplish your objectives.

N. Poor Knowledge or Talent

Accomplishments X .

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APPENDIX 7.4. SESSION 2: T R E A T M E N T FOR TRAINING IN ENTREPRENEURIAL DISCOVERY If you are reading this paragraph, you have been invited to participate as a subject in an experiment to test a theory of how to discover valuable venture ideas. You have been randomly assigned to one of two groups that will each apply discovery principles. Directions Please read and think about the following information about discovery. You are then encouraged to use it to make your own discoveries. You are requested to record brief, daily notes about your experiences, which will become your journal history of your experiences during this experiment. In your notes, you should describe what you have done and why. Finally, please be careful not to discuss your experiences with this experiment with anyone else who is not in this treatment group. Our concern is that any sharing of information outside of this group could bias our findings. Remember that at the experiment's conclusion, you will be fully debriefed about everything that we have learned. The task of this session is to understand the role that information plays in making discoveries and to introduce you to a new way to use it. In fact, our purpose is to apply this new approach with the objective that it will enable us to outperform all other ways of making discoveries. Building on the work of others, I developed this approach to improve the way that scholars train aspiring entrepreneurs. Please try to understand the concepts below. You will discuss and apply them as a group. "There is a state of the world, which if we only knew it, would tell us what the consequences of every action are. But since we don't know it we speak of uncertainty as being an uncertainty about the state of the world. Whereas what will actually happen will depend on the action we take but also depend on factors, which we don't know" (Arrow, 1989). "Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others in that he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and special circumstances" (Hayek, 1945). "The information needed to make informed allocations of resources [discoveries] does not e x i s t . . . in a concentrated or integrated form, but solely as dispersed bits of incomplete and frequently contradictory knowledge. . . . The economic problem

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. . . is [one] of utilization of knowledge not given to anyone in its totality" (Hayek, 1945, p. 320). "Two individuals walk through the same city block teeming with hundreds of people in a variety of garbs, with shops of different kinds, advertising signs for many goods, buildings of different architectural styles. Each of these individuals will notice a different set of items out of these countless impressions impinging on his senses. What is noticed by one is not what is noticed by [another]. The difference will not merely be one of chance. It is a difference that can be ascribed, in part, to the interests of the two individuals. Each tends to notice what is of interest to him" (Kirzner, 1985). According to the approach that you will use in your sessions (not with the other group), the reason that entrepreneurs notice different things is that each of them brings to every situation a unique understanding of the world, based on their prior knowledge. Thus, discovery depends on a fit between an entrepreneur's idiosyncratic prior knowledge and a particular venture idea, which may be discovered based on systematic search. Information can come to entrepreneurs in the form of signals. A signal is information that changes our understanding about a future state. Due to market inefficiencies, some sources of information may be less costly to access, as well as more frequent. Thus, an information channel is a comparatively low-cost source of frequent signals, some of which is noise and of little value. An example of an information channel for a real estate developer could be a realty office that represents sellers of diverse properties. The noise factor could relate to a few, uninformed, self-interested agents in the office whose primary interest was earning a commission. From information channels, entrepreneurs actually access a set of signals with some probability distribution, not just a particular signal. This approach is based on the use of consideration sets. A consideration set is a grouping of information channels that emit signals that may indicate a potential discovery. Entrepreneurs can select channels in their consideration set using prior knowledge. They can also update the composition of their consideration set as their searching continues and as they scan the environment. [Subjects were then referred to Figure 5.1, which is a Consideration Set-Based Model of Entrepreneurial Discovery. Please refer to this Figure in Chapter 5.] It would not be prudent for entrepreneurs to search outside their consideration sets where they presuppose that venture ideas complementing their competencies can be found. Moreover, a consideration set is a dynamic, ongoing reflection of an entrepreneur's prior knowledge and newly received signals. If an entrepreneur were to discover an outside venture idea, it is highly unlikely that he or she would possess the requisite competencies to discover or exploit its value, which suggests that individual entrepreneurs possess different types of competencies. In addition, ideas are not valuable until they are exploited and exploitation itself depends on an entrepreneur acquiring the requisite knowledge-based competencies and resources, which may lead to the creation of new wealth. A. To test the effectiveness of a consideration set-based approach, you must do several things:

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1. Develop a way to categorize and act on our prior knowledge. There are three ways that you can do this: a. You can identify your own categories of experience that you think provide you with a very informed view of a particular activity or activities. You would try to identify about six categories. b. Use your answer of last week to the question about your proclivities. c. Use the question of last week asking you to list your achievements as indicators of where you think these provide you with a unique understanding of a particular activity or activities. You can further analyze these activities individually. If you would like to work with me individually, please sign up for an appointment. 2. Select information channels to search, based on your prior knowledge. 3. Determine an order for searching these channels, which depends on their search costs and prospects for discovering an idea in each of them. 4. Update the composition of your consideration set in response to what you learn while searching. 5. Make brief, daily written comments on your search activities, which will collectively become a journal record of what you have accomplished. B. Please list six categories of prior knowledge where you consider yourself an expert. 1. 2. 3. 4. 5. 6. C. For each of the categories of prior knowledge listed on the previous page, please state your choice of the best sources of information about future signals about venture ideas related to that category. These six choices become your information channels. Collectively, they become your first consideration set for searching. 1. 2. 3. 4. 5. 6. D. Now, prioritize the order that you will use to search each of them this week. Please do not check information sources outside your consideration set. E. Finally, make brief daily notes of your search activities and bring them with you next week.

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APPENDIX 7.5. SESSION 2: T R E A T M E N T FOR TRAINING IN E N T R E P R E N E U R I A L ALERTNESS Treatment for Training in Entrepreneurial Alertness If you are reading this paragraph, you have been invited to participate as a subject in an experiment to test a theory of how to discover valuable venture ideas. You have been randomly assigned to one of two groups that will each apply discovery principles. It is very important that you complete all stages of the experiment, which will take about six weeks. The six weekly sessions will last about one hour each. However, in preparation for each session, there will occasionally be some reading. The major part of the work between sessions will consist in applying concepts that could facilitate discovery. During the training, you will answer questions about your discovery-related activities during the week. At the conclusion of the training, and after analysis of the results, you will be completely debriefed on what has been learned from the experiment. You will not be identified as a participant in this research unless you provide written permission. Directions: Please read and think about the following information about discovery. You are then encouraged to use it to make your own discoveries. There is no expectation that you will use it in any particular way. However, you will be asked later to describe what you have done with it and why. "Two individuals walk through the same city block teeming with hundreds of people in a variety of garbs, with shops of different kinds, advertising signs for many goods, buildings of different architectural styles. Each of these individuals will notice a different set of items out of these countless impressions impinging on his senses. What is noticed by one is not what is noticed by [another]. The difference will not merely be one of chance. It is a difference that can be ascribed, in part, to the interests of the two individuals. Each tends to notice what is of interest to him" (Kirzner, 1985, p. 28). "The information needed to make informed allocations of resources [discoveries] does not e x i s t . . . in a concentrated or integrated form, but solely as dispersed bits of incomplete and frequently contradictory knowledge. . . . The economic problem . . . is [one] of utilization of knowledge not given to anyone in its totality" (Hayek, 1945, pp. 316, 317). "An opportunity for pure profit cannot, by its nature, be the subject of systematic search. Systematic search can be undertaken for a piece of missing information but only because the searcher is aware of what he does not know. . . . What distinguishes discovery . . . from successful search . . . is that the former involves . . . surprise" (Kirzner, 1997, pp. 71, 72). "The truth surely is that, of the mass of knowledge, beliefs, opinions, expectations, and guesses that one holds at a given moment and that inspire and shape action, only a fraction can be described as being the result of deliberate search or learning activity. Surely a great volume of one's awareness of one's environment, and of one's expectations concerning the future, is the result of learning experiences that occurred entirely without having been planned. The knowledge one obtains from the advertising message thrust before one's eyes was, more likely than not,

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not deliberately searched for; the knowledge one obtains when one is addressed by one's neighbor, or importuned by a beggar, is simply acquired, not at all deliberately. Simply being alive as a human being subjects one to all sorts of sense impressions that continually alter one's awareness of the world" (Kirzner, 1979, pp. 142-143). "Ignorance of knowledge or information that might be known through deliberate search or learning can be explained and accounted for. Such ignorance is in fact to be defended as justified by the high cost of search or learning. Such ignorance has, then, been deliberately accepted; in a sense it is optimal. To know more would mean to sacrifice something more important than the knowledge to be gained" (Kirzner, 1979, pp. 144-145). "Making the 'right' decision, therefore calls for far more than the correct mathematical calculation; it calls for a shrewd and wise assessment of the realities (both present and future) within the context of which the decision must be taken" (Kirzner, 1985, p. 17). "But closely as the element of knowledge is tied to the possibility of winning pure profits, the elusive notion of entrepreneurship is, as we have seen, not encapsulated in the mere possession of greater knowledge of market opportunities. The aspect of knowledge which is crucially relevant to entrepreneurship is not so much the substantive knowledge of market data as alertness, the 'knowledge' of where to find market data. . . . Ultimately, then, the kind of 'knowledge' required for entrepreneurship is 'knowing where to look for knowledge' rather than knowledge of substantive market information. The word which captures most closely this kind of 'knowledge' seems to be alertness. It is true that 'alertness,' too, may be hired; but one who hires an employee alert to possibilities of discovering knowledge has himself displayed alertness of a still higher order. Entrepreneurial knowledge may be described as the 'highest order of knowledge,' the ultimate knowledge needed to harness available information already possessed (or capable of being discovered) (Kirzner, 1973, pp. 67, 68). "I speak of the essentially entrepreneurial element in human action in terms of alertness to information, rather than of its possession. The entrepreneur is the person who hires the services of factors of production. Among these factors may be persons with superior knowledge of market information, but the very fact that these hired possessors of information have not themselves exploited it shows that, in perhaps the truest sense, their knowledge is possessed not by them but by the one who is hiring them. It is the latter who 'knows' whom to hire, who 'knows' where to find those with market information needed to locate profit opportunities. Without himself possessing the facts known to those he hires, the hiring entrepreneur does nonetheless 'know' these facts, in the sense that his alertness—his propensity to know where to look for information—dominates the course of events. . . . The entrepreneurial alertness refers to an attitude of receptiveness to the available (but hitherto overlooked) opportunities. The entrepreneurial character of human action refers not simply to the circumstance that action is taken in an open-ended, uncertain world, but also to the circumstance that the human agent is at all times spontaneously on the lookout for hitherto unnoticed features of the environment (present or future), which might inspire new activity on his part. Without knowing what to look for, without deploying any deliberate search technique, the entrepreneur is at all times scanning the horizon, as it were, ready to make discoveries.

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Each such discovery will be accompanied by a sense of surprise (at one's earlier unaccountable ignorance)" (Kirzner, 1997, p. 72). "If [alertness] is the essence of [entrepreneurial competence], there is a more familiar name for it—luck" (Demsetz, 1983, p. 277). These views of entrepreneurial alertness may be summarized as follows: 1. Discovery is an information problem. 2. Entrepreneurs cannot systematically search for discovery-related information. 3. Entrepreneurs make discoveries by constantly scanning the environment. 4. Because the object of search is unknown, there is no preferred source of such information. 5. Finding valuable venture ideas depends on being lucky. Your challenge is to be receptive to your environment in order to identify as many venture ideas as possible. In particular, we want to know if you have made any decisions that increased your odds of being lucky, as you have scanned. At the end of six weeks, we may use a panel of experts to assess your efforts for their potential value and plausibility. If the panel views a particular idea that you have discovered as having considerable commercial value, no one connected with this experiment will assert any claim to it. The idea will be yours alone to commercialize. Nonetheless, participants may tap the considerable research of the College of Business and Public Administration to make their ideas commercially successful. Time and Location of Next Meeting:

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APPENDIX 7.6. SESSION 3: DISCOVERY GROUP I.

Distribute agenda.

II.

Distribute attendance sheet.

III.

Confidentiality agreement.

IV.

Answer questions about theory: a. The role of specific information. b. The role of market efficiency. c. The role of information channels. d. The advantage of searching a consideration set over searching the rest of the world. e. Revising the composition of a consideration set.

V.

Fill out chart for area of specific prior knowledge and corresponding information channels.

VI.

Answer questions about how to search channels.

VII. Reminder to record brief journal entries. VIII. Overview.

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APPENDIX 7.7. SESSION 3: DISCOVERY GROUP (INSTRUCTIONS FOR UPDATING THE COMPOSITION OF CHANNELS OF A CONSIDERATION SET) This exercise may assist you to inventory areas of prior knowledge where you may have a comparative advantage over most other people. In addition, you have listed three information channels for each area of knowledge that may provide cues about discoveries in each area. Think about a discovery as information about an idea for creating new wealth that would place potential competitors at a cost disadvantage if they were to attempt to imitate it. Steps: 1. You have listed six areas. Now, prioritize these areas according to your view of their potential value if you could make a discovery in each area. You can do this by renumbering the areas on the other side of this sheet of paper. 2. Based on your considered view of the potential of each area to be a promising source of ideas about discoveries, select three to six information channels that you want to intensively search this week. • Your selection of information channels may be limited to a single area of knowledge or it may be a combination of channels representing multiple areas. • Develop a sequence for searching these channels for this week. 3. Make brief notes on your experiences while searching the channels. 4. Record a brief description of any discoveries. We are interested in both the quantity of discoveries and the potential of your discoveries to create new wealth. • We will use industry experts, if you wish, to evaluate the potential of your ideas. • Everyone who views your idea will have signed a confidentiality agreement first.

Areas of Prior Knowledge 1.

2.

3.

4.

5.

6.

Related Information Channels

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APPENDIX 7.8. SESSION 3: ALERTNESS GROUP I.

Distribute agenda.

II.

Distribute attendance sheet.

III. Confidentiality agreement. IV. Recap session 2: a. You were given excerpts from the work of Israel Kirzner, the most prolific author on the subject of entrepreneurial discovery, in order to familiarize you with the current state of alertness theory. b. We explained that one of the purposes of this experiment is to determine the extent to which "alertness" can be taught. c. You were instructed to begin a journal in which you are to record observations you make during the time between sessions. V.

Introduce session 3: a. The objectives for this experiment are twofold: i.

To apply a training technique designed to increase your alertness.

ii. To discover and record the cognitive process by which aspiring entrepreneurs make discoveries. b. Our contention is this: Alertness Level + Cognitive Process = p(discovery) VI. Alertness Level: a. Triggering devices—something that continually reminds you to stay alert. b. Recording observations (no matter how small) in a journal, being sure to include: i. The date. ii. What you were thinking at the time of the observation. iii. What you were doing at the time of the observation. iv. How you made the observation (e.g., reading the newspaper, watching TV, performing your job). v. Anything else that seems relevant. c. Confirmation—sharing your journal entries with the group so that each of you witnesses how (and how effectively) the others are using the techniques. VII. Cognitive process: a. To date, no one has recorded the cognitive processes that aspiring entrepreneurs like you go through at the time the discovery is made. b. Other researchers have interviewed entrepreneurs after the fact (see appendix to last week's handout). c. One of the objectives of this experiment is to determine the cognitive pro-

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The Systematic Search for Entrepreneurial Discoveries cess (or mental model) that entrepreneurs use in the weeks, days and moments leading up to a discovery.*

T h a t is why it is critical that you record your thought processes in your journal (e.g., what were you thinking/doing when you made an observation? If you pursued your observation further, why did you do so? If you dismissed it, why?). Note: This experiment will end with each of you submitting an idea for an entrepreneurial opportunity (which will be your property), along with a copy of your journal entries. A panel of experts will evaluate your submissions and rate them on a predetermined scale. We will weigh those scores against the cognitive processes evident in your journals. Any significant findings (e.g., a thought process that emerges as more valuable than others) will be disclosed to you via follow-up debriefings.

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APPENDIX 7.9. SESSION 4: DISCOVERY GROUP Name

Date

The instructions below are a continuation of those that you were following last week. This exercise may assist you to inventory areas of prior knowledge where you may have a comparative advantage over most other people. In addition, you have listed three information channels for each area of knowledge that may provide cues about discoveries in each area. 1. Please briefly list any venture ideas that you have discovered while searching a channel next to the channel (in the last column on the right) where you found it. 2. Please use the second chart to plan any possible revisions to your searching for the coming week. Remember that you do not need to be searching all of these information channels. It is your choice as to how you search and plan any revisions to your search plan. If you make changes to your search plan, you should make them based on what you have learned by searching. 3. Please turn in a second copy of these charts.

Areas of Prior Knowledge

Related Information Channels

1.

2.

3.

4.

5.

6.

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Venture Ideas Found in Related Channels

Revised Search Plan, If Changes Are Planned: Areas of Prior Knowledge

Related Information Channels

1.

2.

3.

4.

5.

6.

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176 The Systematic Search for Entrepreneurial Discoveries APPENDIX 7.10. SESSION 4: ALERTNESS GROUP I.

Distribute agenda.

II. Distribute attendance sheet. III. Recap session 3: a. We discussed the functional relation below: Alertness Level + Cognitive Process = p(discovery) b. We explained the importance of keeping a journal to record the observations that you make between sessions. c. We explained that at the experiment's end you will submit your venture idea(s) to be evaluated. Entries will be judged on content, not writing style. So do not worry if you have never drafted a formal business plan. IV. Introduce session 4: a. Group members will share journal entries made since the last session. Everyone in the group will be asked to share an entry. b. Group members will discuss difficulties, if any, that they may have encountered concerning their journal. V. What lies ahead: a. Two weeks from tonight will be the final training session—now is the time to begin thinking about your venture submissions. If you have not already done so, your entries should be focused on venture ideas and evaluations of them. b. From now until the end of the experiment, your journal entries should contain: i. At least one entry per day, filling the equivalent of one 8.5" X 11" piece of paper. ii. Extensive detail explaining all of the following: 1. The nature of your venture idea. 2. What you were doing at the time of the discovery (e.g., where were you? What were you doing?) 3. Your thoughts at the time the venture idea occurred to you. 4. Your evaluation of the viability of the venture idea (e.g., Is it worth exploring? Why? Should it be dismissed? Why?). VI. Your entries do not need to be structured as formally as this outline. You may find it helpful to develop your ideas in a stream of consciousness style. By Sunday, February 18, 2001 at 10:00 P.M., you should e-mail one page of your journal to Dr. Fiet. His e-mail address is Please reproduce the contents exactly as they appear in your journal—if you write sentence fragments in your journal, then write sentence fragments in the e-mail submission.

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APPENDIX 7.11. SESSION 5: DISCOVERY GROUP I.

Distribute agenda.

II. Distribute attendance sheet. III. Recap session 4: a. Last week you filled out a chart that linked your knowledge area to your information channels, which in turn were linked to your venture ideas. b. You were also given the opportunity to alter your approach to discovery in light of your progress, or lack thereof, from the previous week's search. c. You were asked to submit a one-page entry of your journal to Dr. Fiet via e-mail. If you have not already done so, please submit your journal entry by February 22, 2001 at 10:00 P.M. YOU may send it by e-mail. IV. Introduce session 5: a. Group members will share journal entries made since the last session. Everyone will be asked to share an entry. b. Group members will discuss difficulties, if any, that they have encountered vis-a-vis your journals. c. You will be shown an example of a fully developed journal entry (see reverse). V. What lies ahead: a. Next Tuesday night will be the final training session. During that session you will be instructed on how and when to write and submit your venture idea(s). b. Only one more week remains for you to complete your journals. Remember that your journals are a critical part of the research that will follow this experiment. So please continue to make your entries according to the same criteria discussed last session: i. At least one entry per day, filling the equivalent of one 8.5" X 11" piece of paper. ii. Extensive detail explaining all of the following: 1. What your venture idea is. 2. What specific knowledge area your idea relies on. 3. What information channel your idea came from. 4. Your thoughts at the time the venture idea occurred to you. 5. Your evaluation of the viability of the venture idea (i.e., Is it worth exploring? Why? Should it be dismissed? Why?). 6. Anything else that you believe is relevant. Below is an example of a journal entry submitted by a member of the Yellow Team. You may use it as an illustration of the type of entry we would like everyone to record. You should not assume that the example below was chosen because of the viability of the venture opportunity itself; only the detail of the entry was considered. Note that it satisfies all the criteria for journal entries discussed last session.

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"Collegiate Debate: 1. My idea concerns how to better market collegiate debate to high school students. 2. Since discussing this idea with the college debate coach and other experts in this field, I have discovered that there are a number of workshops on debate, but none geared toward the rural and inner-city communities where they are trying to create a debate team for their high schools. 3. My knowledge on this subject area is due to extensive experience debating against other college debate teams for five years and being the co-captain of the debate team here at the University of Louisville in my undergraduate years. I am now currently the Assistant Debate Coach. I have also debated in high school for three years so I have an understanding of what it takes to sell my product to students who are in high school. 4. I think there is an existing market for instructional video/seminars for high school students who want to learn how to debate. Many inner-city schools want to reach students who may be considered 'at risk' students and they want to find an activity for these students where they can express themselves in a constructive manner. One method of doing this is to have students speak out on current issues that affect them and their communities. Debate provides the forum and opportunity that many students need to express themselves in a constructive manner that teachers find acceptable. Also, teachers can utilize what was learned in class to emphasize the importance of learning. 5. Studies have shown that debate helps students learn communication, teamwork and conflict resolution skills that will be important later in life. 6. This idea is the best idea I have currently. I decided to not pursue the other opportunities unless I have something that turns up to be beneficial for me in those areas."

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APPENDIX 7.12. SESSION 5: ALERTNESS GROUP I. Distribute agenda. II. Distribute attendance sheet. III. Recap session 4: a. Last session group members shared journal entries with the rest of the group. b. You were given the opportunity to share any difficulties you have been encountering in your search for venture opportunities. c. We explained that, until the end of the experiment, your journal entries should be focused on venture ideas and evaluations of them. d. You were asked to send a page of your journal via e-mail to me. If you have not already done so, please send one page of your journal to me by Thursday, February 22, 2001 at 10:00 P.M. IV. Introduce session 5: a. Tonight, group members will again share journal entries made since the last session. Everyone in the group will be asked to share an entry. Please be aware that there are no wrong answers in your journals. Remember that an important part of your training is learning from each other. b. You will again be given the opportunity to share any difficulties you have encountered. Perhaps someone else in the group has already discovered a way to overcome the same difficulty. c. You will be shown an example of a fully developed journal entry (see reverse). V. What lies ahead: a. Next Tuesday night will be the final training session. During that session you will be instructed on how and when to write and submit your venture idea(s). b. Only one more week remains for you to complete your journal. Remember that your journal is a critical part of the research that will follow this experiment. So please continue to make your entries according the same criteria as discussed last session: i.

At least one entry per day, filling the equivalent of one 8.5" X 11" piece of paper.

ii. Extensive detail explaining all of the following: 1. What your venture idea is. 2. What you were doing at the time of the discovery, (e.g., where you were, what activity you were engaged in, etc.). 3. Your thoughts at the time the venture idea occurred to you. iii. Your evaluation of the viability of the venture idea (i.e., Is it worth exploring? Why? Should it be dismissed? Why?).

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Below is an example of a journal entry submitted by a member of the Blue Team. I have included it as an illustration of the type of entry I would like everyone to record. I am not commenting on the viability of the venture opportunity itself; only the detail of the entry was considered. Note that it satisfies all the criteria for journal entries discussed last session. 1. Venture idea—similar to delivery pizza, Chinese, and other foods, someone should investigate the likelihood of delivery breakfast food. Everything from various cereals to eggs, to pancakes and waffles would be offered. Even juice. 2. 6c 3. I came up with this idea Saturday morning, February 17, early in the morning. I had just awakened (approximately 9:00 A.M.) after a long night out. I thought, it sure is nice in the evening when you don't want to leave your home and you can make a simple phone call to have hot food delivered in a timely fashion. Wouldn't it be nice if someone would bring me breakfast instead of my having to put clothes on and leave the house? Hours of operation could be all day long since many people like to eat breakfast at all hours of the day. Costs would be minimal (similar to other delivery chains like Domino's Pizza). The store would operate just like a delivery pizza place. No dine-in, only carry-out and delivery. 4. I think the idea is worthy of some exploration and research; however, I think that there is a minimal chance of success. People just won't be able to accept the idea of having scrambled eggs delivered. Besides, many people don't like to be seen early in the morning before their shower/bath.

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APPENDIX 7.13. SESSION 6: B O T H DISCOVERY A N D ALERTNESS GROUPS Venture Idea(s) Submission Instructions I. Fill out the questionnaire on the reverse side of this document. II. Be sure to submit the questionnaire with your venture idea(s). III. Be sure to submit a complete copy of your journal with or before your venture idea(s). The questionnaire, a copy of your journal and your venture idea(s) should be submitted no later than March 20, 2001. IV. Type your venture idea(s) according to the following guidelines: a. Include a complete description of your idea(s). Assume that the reader knows nothing about your participation in this experiment. Include all of the following that are relevant: i.

What your product/service is.

ii. How it differs from existing products/services. iii. What added value your product/service provides. iv. Who your likely market would be. v. Anything else that you believe is relevant. vi. If you find it helpful and are familiar with the technique, you may include a SWOT analysis. b. Describe all the factors that you considered in evaluating your idea's viability. c. Describe what you believe would be needed to get your venture idea started. d. Assume your audience (the reader) is a group of venture capitalists looking for an investment opportunity. In other words, sell them your idea(s). Note: Remember that your idea(s) will not be judged according to your ability (or inability) to write a formal business proposal. However, it is vital that your typed words be able to speak in your absence, as you will not be there to answer questions that the evaluation team may have. Therefore, be as descriptive as possible. Be sure to include all of your venture ideas that you believe are viable. Please complete the following questionnaire and submit it with your venture idea(s) submission on or before March 20, 2001. It is important to the research that your responses be accurate. So please answer as truthfully as possible, and remember that your answers will in no way affect your participation credit for this experiment. Name Occupation Professional interests after graduation 1. How much time did you spend each week pursuing your venture idea(s)? (Your best estimate is acceptable)

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Week 1

Week 2

Week 3

Week 4

Week 5

Week 6

2. How much money, if any, did you spend each week in pursuit of your venture idea(s)? (You may include any charges that are relevant, including the price of a periodical, long distance phone charges, etc.) Week 1 Week 2 Week 3 Week 4

Week 5

Week 6

3. In which of these weeks did you make your discovery or discoveries? (Answer only for those discoveries that you included in your venture idea(s) submission) Week 1 Week 2 Week 3 Week 4

Week 5

Week 6

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APPENDIX 7.14. RATING INSTRUCTIONS Raters will use two scales for categorizing venture ideas. Please indicate two scores for each venture idea. Innovation Scale7 • No apparent innovation. • A product or service identical to an existing product or service, offered to an underserved market. • New application(s) for an existing product or service, with little or no modification. • Combining two or more existing products or services into one different product or service. • A significant improvement to an existing product or service. • New-to-the-world product or service, a pure invention or creation. URIE Scale • No apparent value, [score: 0] • Valuable (increases revenue or decreases cost), [score: 1] • Valuable and rare (fewer than needed to create perfect competition), [score: 2] • Valuable, rare and costly-to-imitate (patentable). [score: 4] • Valuable, rare, costly-to-imitate and requisite competence to exploit the idea, [score: 8]

NOTES I acknowledge the able research assistance of Patrick J. Miglore, as well as the financial support of the Brown-Foreman Corporation. In addition, I acknowledge the challenging intellectual environment provided by the Program for Entrepreneurship and Growth at the Jonkoping International Business School where I initiated this line of research. Finally, I acknowledge the unconditional support provided by my colleagues at the University of Louisville's Institute for Entrepreneurial Research. 1. Despite the likely importance of entrepreneurial discovery, the exploitation of an idea is probably just as important as its discovery. Clearly, both processes are necessary for the creation of new wealth. To argue otherwise would be an equilibrium argument suggesting that all ideas have equal potential, which would ignore the role of competition. Because discovery precedes exploitation, it seems reasonable to start with theorizing about how to make discoveries as a first step in understanding how to create new wealth. 2. This section reviews basic concepts from informational economics that were first introduced in Chapter 5. 3. The six experimental treatments lasted eight weeks, with a two-week break between the fifth and six treatment sessions. The subjects seemed to become more

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active searchers as they gained more experience, which made the extra two weeks useful. 4. It should be noted that during this three-week period, nearly one-half the total time for the experiment, the treatment group was not searching for discoveries, whereas the control group was busy searching for discoveries. 5. It is interesting to consider if students in actual classrooms feel as though the discovery of an idea using alertness only is some sort of a game that depends on their being lucky. In fact, during debriefing, some subjects in the control group revealed that, even using the cover story, they felt that they were in the control group, which has very important implications for how the traditional teaching of alertness could be reducing the motivation of students to make discoveries. 6. I originally told the subjects that I would use industry experts to rate their ideas. However, I abandoned this approach when I unexpectedly "discovered" the convergent ideas from both the resource-based and competency literatures, which suggested the four criteria that I eventually used to evaluate the ideas. In my view, one of the major contributions of the experiment discussed in this chapter is the identification of these four criteria, because they provide an easily understood means for systematically evaluating ideas. This four-criteria approach is superior to industry experts because of the difficulties of personal bias and comparability of ideas across different industries that could limit the generalizability of their expert appraisals, whereas use of the suggested classification does not face these difficulties. 7. I abandoned the innovation scale because it was based on a classification scheme that was not theory-based. In contrast, the VRIO scale was based on both resource-based theory and competency theory.

REFERENCES Arrow, K.J. 1989. Economics of information. Public lecture, reproduced in first report, March 1989, to Indira Gandhi Institute of Development Research, Bombay, 4 1 . Bar-Hillel, M., 6c Faulk, R. 1982. Some teasers concerning conditional probabilities. Cognition 11: 109-122. Barney, J.B. 2001. Gaining and sustaining competitive advantage, 2nd ed. Englewood Cliffs, NJ: Prentice Hall. Baumol, W.J. 1993. Formal entrepreneurship theory in economics: Existence and bounds. Journal of Business Venturing 8: 197-210. Demsetz, H. 1983. The neglect of the entrepreneur. In J. Ronen (Ed.), Entrepreneurship. Lexington, MA: Lexington Books. Dreyfus, H.L., 6c Dreyfus, S.E. 1986. Mind over machine. Oxford: Basil Blackwell. Fiet, J.O. 1996. The informational basis for entrepreneurial discovery. Small Business Economics 8: 419-430. Fiet, J.O. 2001. Entrepreneurial competence as knowledge. Working paper, University of Louisville. Fiet, J.O., Piskounov, A. 6c Gustavsson, V. 2000. How to decide how to search for entrepreneurial discoveries. Paper presented at the Babson/Kaufman Research Conference, Wellesley, MA. Fiet, J.O., 6c Samuelsson, M. Forthcoming. Knowledge-based competencies as a

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platform for firm formation. In Frontiers of entrepreneurship research. Wellesley, MA: Babson College. Gaglio, C M . 1997. Opportunity identification: Review, critique and suggested research directions. In J. Katz 6c R. Brockhaus (Eds.), Advances in entrepreneurship, firm emergence, and growth, vol. 3. New York: JAI Press, pp. 139202. Gilad, B., Kaish, S. & Ronen, J. 1988. The entrepreneurial way with information. In S. Maital (Ed.), Applied behavioral economics, vol. II. Brighton, England: Wheatsheaf Books, pp. 480-503. Hayek, F.A. 1945. The use of knowledge in society. American Economic Review 35: 519-530. Hirschleifer, J. 1970. Investment, interest, and capital. Englewood Cliffs, NJ: Prentice Hall. Hirschleifer, J., 6c Riley, J.G. 1979. The analytics of uncertainty and information: An expository survey. Journal of Economic Literature 17: 1375-1421. Jensen, M.C., 6c Meckling, W.H. 1992. Specific and general knowledge and organizational structure. In L. Werin 6c H. Wijkander (Eds.), Contract economics. Cambridge, MA: Blackwell. Kaish, S., 6c Gilad, B. 1991. Characteristics of opportunities search of entrepreneurs versus executives: Sources, interests, general alertness. Journal of Business Venturing 6: 45-61. Kirzner, I. 1979. Perception, opportunity, and profit: Studies in the theory of entrepreneurship. Chicago: University of Chicago Press, pp. 142-143. Kirzner, I. 1985. Discovery and the capitalist process. Chicago: University of Chicago Press. Kirzner, I. 1992. The meaning of market process: Essays in the development of modern Austrian economics. London and New York: Routledge. Kirzner, I. 1997. Entrepreneurial discovery and the competitive market process: An Austrian approach. Journal of Economic Literature 35: 60-85. Palich, L., 6c Bagby, R. 1995. Using cognitive theory to explain entrepreneurial risk taking: Challenging conventional wisdom. Journal of Business Venturing 10: 425-438. Shane, S. 2000. Prior knowledge and the discovery of entrepreneurial opportunity. Organization Science 11: 448-469. Shane, S., 6c Venkatraman, S. 2000. The promise of entrepreneurship as a field of research. Academy of Management Review 25: 217-226. Venkatraman, S. 1997. The distinctive domain of entrepreneurship: An editor's perspective. In J. Katz 6c R. Brockhaus (Eds.), Advances in entrepreneurship, firm emergence, and growth, vol. 3. New York: JAI Press, pp. 119-138.

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Chapter 8

The Promise of Systematic Search for Aspiring Entrepreneurs

The accumulated resources, contacts, good looks, charm and personality or anything else possessed by an entrepreneur count for less toward making a discovery than ongoing informational investments, although clearly these resources and attributes may reduce an entrepreneur's cost of obtaining information. General information about the state of markets for information is useful for identifying a domain within which a search for information could commence. However, specific information is required to assess the prospects for individual opportunities or deals. Concerning the requirement to invest systematically in specific information, nothing counts more than making the investments, which should be within the capacity of most aspirants. Moreover, certain investment behaviors can be emphasized that will increase the probability of making a discovery. These are very encouraging messages for anyone seeking to be an entrepreneur. To understand the support for these ideas, this chapter summarizes the logic and empirical evidence for them, which I have developed in the previous chapters. I will attempt to summarize these ideas as succinctly as possible, which will require that I do not re-state definitions developed in previous chapters, nor dwell on ideas and concepts developed earlier.

THE ESSENTIAL ROLE OF DISCOVERY IN ENTREPRENEURSHIP Entrepreneurs make discoveries. What sets them apart from others is that they make discoveries that may be exploited to create new wealth. The exploitation of the right idea is a prerequisite for wealth creation, which

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means that exploitation leading to the creation of new wealth must be preceded by a discovery, regardless of its origin.1 A by-product of striving to understand how to make discoveries is that the effort itself may tacitly impart greater competence. This is a rather strong assumption because it forms the basis for the premise that the discovery process can be taught and learned. In addition, it focuses scholarly attention on the informational aspects of entrepreneurship. Essentially, both discovery and exploitation are informational problems. Because of the central importance of the informational aspects of discovery and exploitation, Chapter 1 argued that scholars have missed an important opportunity to teach students about how to search for information leading to the facilitation of both discovery and exploitation. This omission occurred because of a lack of theory and empirical research to support the teaching of the informational economics of discovery and exploitation. As noted previously, this book focuses on discovery alone. Another reason that scholars have not developed more informative research about discovery is that they have generally focused on describing what entrepreneurs do. Complicating this historical description is the fact that entrepreneurs do different things, the sum total of which frequently leads to the discontinuance of their ventures, with the consequent development of weak theory. Dwelling on description only is really unfortunate because if there is anything idiosyncratic about entrepreneurship, it is that a discovery can provide both the blueprint and the impetus for a new venture. In fact, it is the uncommon nature of discovery that protects it from those who would expose its secrets. Chapter 1 argued that there was an optimal way to teach entrepreneurial discovery to both aspiring entrepreneurs and practitioners. This optimal way did not include how entrepreneurs actually made discoveries, which undoubtedly frequently occurred as the consequence of a lucky accident. It was about how they could make discoveries in order to maximize their economic rate of return and minimize their risk. Thus, it argued that courses and texts should emphasize theory, not historical description, if their purpose was to instruct aspiring entrepreneurs. History, it argued, was an account of the past. Effective theory enabled economic actors to develop assumptions about the future, even if the future appeared to be uncertain and unknown. It might be that an underlying source of difficulty in building entrepreneurship theory was that discovery was the theoretical lynch pin that held most of the process together. In other words, numerous aspects of entrepreneurship could be more or less dependent on the common discovery phenomenon, which, if left uninterpreted, could preclude the development of a unified theory of entrepreneurship. In the next section, I will review the theoretical implications of some of these aspects and how they could be tied together in a contingency framework.

The Promise of Systematic Search for Aspiring Entrepreneurs 189

TOWARD A THEORY OF ENTREPRENEURSHIP Chapter 2 examined the broader context of discovery by treating the theoretical side of entrepreneurship. In the process, it examined obstacles that have impeded the formulation of a general theory of entrepreneurship. One of the criticisms of recent efforts to develop entrepreneurship theory is that scholars tend to accumulate separate rather than cumulative theories. These separate theories fail to build cumulative insights, perhaps in part, as mentioned in the previous section, because they largely ignore how entrepreneurs could make discoveries. Based on evidence presented in Chapter 2, these same problems are reflected in the entrepreneurship courses being taught. In Chapter 2, I developed a modest proposal for resolving these theoretical and pedagogical concerns. I argued that research and teaching in entrepreneurship should not emphasize descriptions of what entrepreneurs do. In fact, if I had followed this commonly accepted mandate to focus on description, I never would have written this book, which probably would make many of my readers happy. However, I continue to argue that scholars should focus on what aspiring entrepreneurs can do, which is coded language for theory. The recommendation to emphasize theory over description depends on several assumptions that I summarize in Table 2.1. Furthermore, I supported Professor Whitehead, who argued that this world is a world of ideas whose theoretical connections matter to the success of aspiring entrepreneurs. To resolve these problems, I suggested that scholars focus on answering a narrow set of questions intended to highlight issues seemingly connected with the discovery process, which places them squarely within the distinctive domain of entrepreneurship. Once scholars focused on a limited set of questions they would begin to refer more frequently to theory developed by scholars who have already addressed similar questions. To extend this earlier work, scholars needed to make sure that as they tried to develop more general theory and that they did not combine theories with contradictory assumptions. However, when these assumptions did contradict each other, I suggested that it would be possible to utilize them side by side in a complementary framework that emphasizes their contingent relationships. A more developed, general theory would be able to incorporate these contingent relationships. I concluded Chapter 2 by arguing that scholars had a responsibility to teach aspiring entrepreneurs about theory. They also had a larger institutional responsibility to the field to move it toward a general theory of entrepreneurship. Meanwhile, they could teach what was known on a contingent basis. The business of the separate endeavors of entrepreneurship scholars was to construct a more accurate, general theory about the future in which entrepreneurs would find themselves. An important perspective to

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consider as scholars embark on an examination of the informational aspects of discovery was economic implications. THE INFORMATIONAL ECONOMICS OF DISCOVERY Scholars generally studied what entrepreneurs do after discovering a venture opportunity. Taking this approach, the risk of a venture failing was associated with the uncertain outcome of implementing either an intentional or emergent strategy. However, risk also attended the choice of the type and means of acquiring information to discover a venture idea that could be exploited to create new wealth. Information could be acquired for a price like any other commodity, but the acquisition expense could also become a sunk cost if a venture idea turned out to be unpromising. Purchasing the wrong information also took time, which added to the cost of making discoveries. The objective of acquiring information to launch a new venture could be to acquire the most informative signals in the least expensive way possible, which is an issue for those who study economics. Chapter 3 focused on the ex ante process of acquiring information through discovery, rather than on the ex post process of exploiting a venture idea. Figure 3.1 summarized the informational arguments in Chapter 3. A central premise of this model was that entrepreneurs could chose to be profit maximizers who purchased information about prospective ventures that they could use to improve their risk-adjusted return on investment. Chapter 3 introduced the concepts of market efficiency, specific information and signaling by suggesting that the existence of valuable venture ideas depended on their being located in private, rather than public markets for information so that they would not be widely available to others. Thus, a good place to begin assessing the effectiveness of a contemplated search for an idea was the efficiency of a market with its associated level of competitive rivalry. This chapter also introduced the moderating role of previous experience as an enhancer to the effectiveness of specific information. Historically, scholars have viewed entrepreneurs as playing four separate roles as they endeavored to identify discoveries—(1) risk bearer, (2) innovator, (3) risk bearer and innovator and (4) risk arbitrageur. In each role, they invested in specific signals to enhance the quality of the information required to identify a discovery or to reduce the risk of acquiring the requisite information. By extension, an entrepreneur could be viewed as a person who optimized the trade-off between investing too much or too little in specific, risk-reducing signals. I did not argue that many entrepreneurs actually took such a rational approach to discovery. My only argument was that they could take such an approach, which would be conducive to being taught and learning.

The Promise of Systematic Search for Aspiring Entrepreneurs 191 This was a nontrivial argument because it implied that the acquisition of information could be viewed as an investment, over which entrepreneurs could exert some control. Because they could exert control, Chapters 5, 6 and 7 were able to develop and test a model of how entrepreneurs could most efficiently invest in the acquisition of signals to uncover valuable venture ideas. Without the capacity of entrepreneurs to evaluate the trade-offs in investing in specific information, the arguments in these three chapters would not have been possible. Chapter 3 proposed a view of entrepreneurial discovery wherein entrepreneurs could most efficiently identify discoveries by optimizing their investment in specific, risk-reducing signals. This implied that signals could be purchased at a price. If an entrepreneur could not see a market opportunity, this did not necessarily mean that no opportunity existed. It might be that he or she had not invested sufficiently to recognize it. Nor did lack of entrepreneurial insight suggest that one lacked what it took—namely, some as yet undescribed talent. It certainly did not suggest that one was not smart enough. Where no investments in specific signals had been made, there were no insights to be discovered. It might mean that one had not been sufficiently diligent. Diligence could be expected to vary depending on what attracted an entrepreneur's gaze, and once again, that depended on his or her previous specific investments in signals. The primary implication of this approach was that discovery depended on actions by those who aspired to be entrepreneurs, many of which were within their control. Unlike the approach taken by neoclassical economists, the model in Chapter 3 recognized the preeminent role of an entrepreneur in the discovery process. Moreover, it went beyond the position advocated by Austrian economists by identifying a micro-level mechanism for making discoveries, namely, the optimization of investments in specific information. The advantage of this approach was that it made explicit provision for the efficacy of initiative by individual actors. Their success depended on proactively combining new signals with specific information from previous experience. This was a hopeful message for aspiring entrepreneurs that they could acquire the competence to understand the external factors that influenced their prospects for making a discovery. THE IMPACT OF COMPETITIVE STRUCTURE ON DISCOVERY Chapter 4 examined the competitive structure within which discoveries could occur. This structure determined in part whether the identification of a discovery could result only from being alert or whether searching systematically could help make discoveries. This chapter suggested that it was probably possible for entrepreneurs to make discoveries in most industries,

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regardless of their structures, provided they followed the strategies discussed. In addition, this chapter developed a basic logic that could be taught to aspiring entrepreneurs. Like most of the other chapters in this book, it was not a description of how entrepreneurs actually made discoveries. Its sole purpose was to highlight major, actionable contingencies that could improve an entrepreneur's odds. This discovery logic suggested that industry structure constrained the set of advisable entrepreneurial strategies, which constrained the set of possible discovery options. It began with the assumption that entrepreneurs could learn how to identify four different types of industry structures, which were: (1) perfect competition, (2) Schumpeterian competition, (3) imperfect competition and (4) unobserved competition. Possible entrepreneurial strategies were: (1) risk bearer, (2) innovator, (3) risk bearer and innovator, (4) risk arbitrageur, (5) tacit and (6) exit. Possible types of discovery included (1) discovering a new market, (2) discovering a new process for serving an existing market and (3) discovering a new technology. The proposed discovery logic consisted of general information that could be easily conveyed in a classroom setting. This general information contrasted with the specific information that aspirants would need to uncover by themselves to earn a temporary competitive advantage and abovenormal returns. Chapter 4 also incorporated markets for information that were introduced in the previous chapter. The purpose of this discussion was to introduce a framework to assist entrepreneurs to know what kinds of discoveries to pursue, based on industry structure. Market forces set prices that determined the allocation of products and information. In other words, there were two parallel markets for every product. There was the actual market in which goods and services were traded and there was a corresponding informational market, which informed buyers and sellers about their value. The decision regarding whether to invest in the acquisition of riskreducing information, or whether to engage directly in an activity subject to its associated risks, was central to what entrepreneurs do. This decision could be influenced in a major way by the structure of an entrepreneur's prospective product market, which influenced its market for information. To develop this discovery logic, I assumed that each industry structure existed in the real world, even though actual conditions were likely to vary somewhat from the simplified ideals presented in the industry models. One way that entrepreneurs could make discoveries more effectively was to match these ideal types as closely as possible with their perception of actual market conditions. Just as some modification of industry types might be necessary to accommodate actual differences, the proposed entrepreneurial strategies could be modified to facilitate strategy implementation. The value in this matching exercise for entrepreneurs was that each industry structure

The Promise of Systematic Search for Aspiring Entrepreneurs 193 had certain predictable attributes, which could serve as cues about which type of discovery to undertake. A major limitation of the logic in Chapter 4 was that it assumed greater homogeneity among entrepreneurs than existed in the real world. Entrepreneurs actually possessed idiosyncratic combinations of entrepreneurial competence, which depended on their prior knowledge. One way to view discovery was as a fit between entrepreneurial competence and environmental conditions, over which entrepreneurs possessed limited control. Thus, all entrepreneurs were not equally equipped to make the discoveries described in this chapter, regardless of their industries. The appropriate fit between an entrepreneur's competence and the discovery of a venture idea might most often occur because of luck. In the same way that there might not be any generic entrepreneurial competencies because of differences in prior knowledge, there probably were no typical venture ideas to be discovered and exploited. Nevertheless, these fit restrictions did not limit an entrepreneur's capacity to search for discoveries within a more limited consideration set of possible venture ideas whose search costs might be less as a result of economies of scope. The arguments in Chapter 4 were important for aspiring entrepreneurs because they provided them with a logic for selecting both a consideration set of search possibilities and a framework for analyzing industry structure and its effects on venture strategizing. Those entrepreneurs who possessed the competence to perform such an analysis could develop a competitive advantage over those who did not know how to do so. ENTREPRENEURIAL COMPETENCE AS KNOWLEDGE Chapter 5 examined the informational elements of entrepreneurial competence, which influenced what could and could not be known about venture ideas and the factors that affected their potential value. The chapter demonstrated that an entrepreneur's prior knowledge determined his or her competence to make a specific discovery and circumscribed how and where he or she could search. The model developed in this chapter was tested in Chapter 6 and employed in Chapter 7 as a basis for training aspiring entrepreneurs. Chapter 7 also discussed the significant improvement in search effectiveness that was achieved by subjects who attempted to make discoveries using it. Chapter 5 discussed an alternative view of conceptualizing entrepreneurial discoveries from those presented by information search theory and entrepreneurial alertness. The alternative view was based on the use of consideration sets, which are groupings of information channels. The basic rationale for the consideration set-based approach was that entrepreneurial discovery depended on a fit between an entrepreneur's idiosyncratic prior knowledge and a particular venture idea, which might be

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discovered through systematic search. This competence or prior knowledge was moderated by an entrepreneur's specific knowledge of people, places, timing, special circumstances and technology. It would not be prudent for entrepreneurs to search outside their consideration sets where they presupposed that venture ideas complementing their competencies could be found. Moreover, a consideration set could and should be a dynamic, ongoing reflection of an entrepreneur's prior knowledge and newly received signals. If an entrepreneur were to encounter an outside venture idea, it was highly unlikely that he or she would possess the requisite competencies to discover or exploit its value, which suggested that individual entrepreneurs possessed different types of competence. In addition, ideas were not valuable until they were exploited and exploitation itself depended on an entrepreneur's acquiring the requisite knowledge-based competencies and resources, which might lead to the creation of new wealth. Finally, regardless of how entrepreneurs actually searched for discoveries, they could learn to apply a consideration set-based approach. It was important to note that discovery could be an ongoing process closely connected with exploitation. Exploitation provided immediate feedback about a venture idea. As indicated in Figure 5.1, there was a feedback loop to evaluate the viability of exploited ideas, which can affect the composition of a consideration set. The model in Figure 5.1 also indicated that entrepreneurs could have choices if they had positioned themselves in time and space to take advantage of the signals coming from their consideration sets. This positioning represented a commitment for which there were costs and benefits. If they could not make such a commitment, they probably did not have access to the same venture-specific information. Moreover, for at least one brief moment, they had a monopoly over a particular venture idea. The choice as to what to do about it was theirs alone. They could continue to invest in information to attempt to reduce any remaining uncertainty or they could accept it presumably at a low level, and act to exploit the idea. Entrepreneurs could acquire competence in two stages: (1) through an existing stock of prior knowledge and (2) through newly evaluated signals that had been converted into knowledge. Because the exploitation of a venture idea depended on specific knowledge, that portion of competence that consisted of newly evaluated specific information was costly or impossible to transfer. There were several ways that newly evaluated signals could be costly or impossible to transfer. First, signals about a discovery that were based on unique historical conditions could not be effectively transferred to someone else and exploited by them. Their exploitation depended on their unique place in time and space, which could not be re-created for someone else. Thus, signals of historically based discoveries were of little value to someone else, regardless of their clarity. Second, signals of path-dependent dis-

The Promise of Systematic Search for Aspiring Entrepreneurs 195 coveries could not be transferred to someone else and exploited by them because their value depended on the significant effects of earlier events. Entrepreneurs who were not positioned to benefit from the same pathdependent events would find their signals to be of little value. Third, the utility of causally ambiguous signals could not be transferred to another entrepreneur. Causally ambiguous signals did not offer a clear picture of their value to their recipients, thereby leaving potential imitators uncertain about what to transfer. Fourth, the utility of signals, which was based on social complexity, could not be transferred to another entrepreneur because of not knowing what to transfer. The most important implication of the above discussion was that it was possible for entrepreneurs to search their consideration set for an appropriate fit between their individual entrepreneurial competencies and a potentially valuable signal about a venture idea. Once discovered, such a signal might inform an entrepreneur about how to allocate resources and develop tactics that could provide at least a temporarily sustainable competitive advantage. Discoveries were not equally valuable for all entrepreneurs because of differences in competence. However, simply because someone's particular competence did not equip him or her to profit from a particular discovery did not imply that the missing competence could not be acquired. Unfortunately, by the time a competence had been acquired, the related discovery might have already lost its value. The time-sensitive nature of discovery required aspiring entrepreneurs to ask—competency for what? This was not an easy question to answer because the "what" often took place in the future and depended on entrepreneurs accurately foreseeing it. Nevertheless, entrepreneurs could develop tactics within a consideration set in anticipation of future events. Entrepreneurs should care about the ideas in Chapter 5 because it presented them with an option to choose to invest more efficiently in the acquisition of signals to make discoveries, even if they currently lacked the resources to exploit them. Discoveries might be used to attract needed resources, which made entrepreneurship a viable career option for more aspirants. Regardless of their resources, Chapter 6 demonstrated that it might be possible to conduct an optimal search and terminate it in accordance with an entrepreneur's prior planning. Thus, it provided decision support to entrepreneurs in deciding how they could search for discoveries. DECIDING HOW ENTREPRENEURS CAN SEARCH FOR DISCOVERIES Chapter 6 used existing mathematical formalism to establish that it was possible to conduct an optimal search by imposing informed constraints.

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This was an important milestone because it contradicted many years of received theory that supposed that discoveries could only be made accidentally. It relied on the supposition that as entrepreneurs gain experience, they become more knowledgeable about venture ideas and their sources. In the same way that scholars would not expect all information to be equally valuable to aspiring entrepreneurs, they would not expect all sources of information to be equally valuable. Chapter 6 demonstrated that to the extent that information channels can provide access to exploitable venture ideas, they also might represent an entrepreneur's best chance of conducting an optimal search. Restricting search to known information channels was also consistent with the expectation that entrepreneurs would update their ongoing search patterns as they interpreted environmental signals. They could update their searching in the same way that accomplished entrepreneurs actually narrowed their searching to known domains in anticipation of making discoveries. Chapter 6 also demonstrated that an entrepreneur's consideration set would probably be unique based on idiosyncratic, prior knowledge and ongoing feedback signals from previously selected information channels. Some scholars could protest that limiting entrepreneurial search to known channels was too costly a price to pay in missed discoveries that could lie outside a consideration set. Such criticism assumed that entrepreneurs were equally qualified to exploit all venture ideas when, as demonstrated in Chapter 5, scholars know that they vary in their competence, depending on their experience-based prior knowledge. Perhaps the most important finding presented in Chapter 6 was that aspiring entrepreneurs had a choice—they could either exploit a venture idea with their current knowledge or they could continue searching for more related, informative signals. Because searching for information within a consideration set was less costly (due to economies of scope) and risky than actually launching a venture, this recognition offered them a chance to leverage their resources even if they were minimal. The opportunity to discover an exploitable venture idea, even with limited resources, was not inconsequential. Here were a few of these consequences. First, the chances of entrepreneurs making discoveries were greater within a consideration set than in the rest of the world. Second, entrepreneurs would have different consideration sets based on their prior knowledge. Third, entrepreneurs were not equally equipped to discover or exploit venture ideas. Fourth, given that entrepreneurs could evaluate their prior experience, they could use it to select their own, probably unique consideration sets, which could endow them with a competitive advantage. Fifth, entrepreneurs could update their consideration sets as they processed information. Searching using consideration sets made it affordable for more people to make their own discoveries, which suggests that more people could become entrepreneurs.

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The evidence presented in Chapter 6 was important because it demonstrated that it might be possible to reduce the discovery process to a routine series of steps, which would be unique for each aspiring entrepreneur. Although making discoveries would never be routine, clearly this chapter presented evidence that the discovery process could theoretically become more routine. Chapter 7 applied the constraints developed through the use of mathematical formalism to test whether actual subjects would outperform a control group using conventional entrepreneurial alertness. DISCOVERY AS EITHER THE RESULT OF ACCIDENTAL ALERTNESS OR SYSTEMATIC SEARCH Chapter 7 reported on an experiment using 52 graduate students in entrepreneurship to pit the alertness perspective against my new approach to searching for venture ideas to create new wealth. My new approach used self-selected consideration sets to restrict an entrepreneur's search domain, which made an optimal search possible. The restricted domain conformed to the behavior of accomplished entrepreneurs who did not search the whole world for venture ideas. Subjects in the treatment group were successful 37.5 percent of the time compared with a 2.9 percent success rate for the control group. Fourteen percent of the control group emulated the treatment group without receiving instructions to do so, and still the results were statistically significant. In addition, this chapter presented clear evidence that an entrepreneur's prior experience as it relates to his or her occupation might not contribute as much to discovery as the specificity of one's prior knowledge. It appeared that training graduate students in how to use consideration sets could significantly enhance the potential of the ideas they discovered. Subjects in the treatment group discovered more ideas that were valuable, rare, costly-to-imitate and that fit their particular entrepreneurial competence. These four criteria determined whether an idea could be exploited to provide an entrepreneur with a sustainable competitive advantage, as well as an opportunity to create new wealth. In addition, the treatment group tended to consider ideas that were an extension of an existing product or service, whereas the control group found more low-potential ideas based on personal problems. Identifying an optimal way to search for discoveries was notable for two reasons. First, many studies of opportunity recognition have concluded that it was impossible to search systematically for unknown discoveries, which left alertness as the only alternative for aspiring entrepreneurs. Scholars who argued against the feasibility of systematic search were correct if they assumed that a search domain was unknown, which effectively made it unbounded. No optimal solution existed for searching an unbounded do-

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main. Second, it provided an explanation for the observation that novice entrepreneurs scanned widely while trying to make a discovery, whereas accomplished entrepreneurs narrowed their search efforts to known domains. Received theory offered no explanation for their switch in search tactics. An important finding of the research presented in Chapter 7 was that knowledge specificity was an important correlate of the potential of ideas, whereas previous occupational experience was a statistically insignificant source of high-potential venture ideas. This was important because received theory suggested that a person's occupation was an important source of prior knowledge. Clearly, though, a person's occupation was not the determining factor in whether he or she discovered a high-potential idea. Instead, it appeared to have been the specificity of prior knowledge. Ninetytwo percent of the treatment group used specific knowledge to make a discovery compared with 8 percent of the control group.

THE PROMISE OF SYSTEMATIC SEARCH IS WELLFOUNDED I began the current chapter by asserting that accumulated resources, contacts, good looks, charm and personality or anything else possessed by entrepreneurs count for less toward making a discovery than ongoing informational investments. This chapter has reviewed evidence that specific information that could lead to the discovery of an exploitable venture idea is not evenly distributed nor assessable to all of those who would be entrepreneurs. Thus, it is very possible for a knowledgeable entrepreneur to gain an informational, and thus competitive, advantage, leading to the creation of new wealth. The uneven distribution of specific information would not benefit aspiring entrepreneurs if there were no way to gain a comparative advantage in accessing it, based on an entrepreneur's prior knowledge. The differential advantage provided by prior knowledge establishes a basis for possessing greater entrepreneurial competence than potential competitors. The good news is that entrepreneurs can increase their comparative informational advantage if they will restrict their searching to the information channels within their consideration set. Restricting one's search to a consideration set reduces the required resources for searching, which provides novice entrepreneurs possessing few resources with an opportunity to compete effectively with more richly endowed competitors. Thus, although the possession of knowledge and information matters to searching, the resources required for searching seem to matter much less, which is the basis for the encouraging messages with which I began this chapter.

The Promise of Systematic Search for Aspiring Entrepreneurs 199 NOTE 1. In my view, alertness advocates argue tautologically that because a discovery is necessary, it must have occurred due to luck. They are probably correct that most discoveries do occur by luck. However, I have shown in Chapters 6 and 7 that entrepreneurs who know how to use consideration sets can find them through a process of deliberate, systematic search.

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Chapter 9

The Pedagogy of Entrepreneurship Theory The preceding chapters have developed and tested a theory for searching systematically for discoveries, which was based on concepts from informational economics. These chapters have also emphasized that an entrepreneur's competence to make discoveries was moderated by many factors, which I have described from a variety of theoretical perspectives. Typically, these factors come into play when entrepreneurs do not act rationally, which we can expect to occur most of the time because irrationality is a human tendency. When aspiring entrepreneurs act irrationally, they slow down the rate at which they can acquire the competence to search systematically for discoveries. However, as a practical matter, it is useful to understand some of the factors that influence whether an entrepreneur chooses to act rationally. This chapter examines the question of how to convey an understanding of these factors and perspectives to aspiring entrepreneurs in such a way that it will improve their competence. It is not enough for scholars to generate new knowledge; they must also serve as teachers to ensure that students can apply what they teach, which requires the dissemination of the new knowledge in a pedagogically effective manner. If the pedagogical objective is to teach aspiring entrepreneurs how to master requisite competencies, this chapter argues that the most effective method for engaging them is to use theory-based activities. This chapter suggests that entrepreneurial scholars may want to ask, "What am I going to have my students do today?" rather than, "What am I going to teach my students today?" This chapter also argues that it is essential to ground learning activities in theoretical frameworks and that scholars ought to be engaged in the process of generating theory-based knowledge. The chapter concludes by proposing

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a strategy for implementing the approach. The next section examines the growing interest in entrepreneurship education and the pedagogical side of entrepreneurship theory. THE PEDAGOGICAL SIDE OF ENTREPRENEURSHIP THEORY The United States has entered an important new era of entrepreneurship, which has increased student interest in the field. A surprising demand for information about how to launch a business has resulted in an explosive growth in the number of classes and programs. In 1971, there were only 16 colleges and universities teaching entrepreneurship. Today, there are over 800 colleges and universities with entrepreneurship classes, programs and initiatives. This new interest is more than just a fad; it accurately reflects an emerging economic environment created by a confluence of changes in the corporate world, new technology and emerging world markets (Venkatraman, 1997). Scholars will undoubtedly have increased opportunities to influence aspiring entrepreneurs, as well as positively impact economic development, but are they ready to meet the challenge? A 1994 national Gallup poll showed that 70 percent of high school students want to start their own companies sometime in the future. At the same time, it indicated that colleges and universities throughout the United States have reported tremendous growth in their students' interest in learning about entrepreneurship and ultimately becoming entrepreneurs. For example, Northwestern University's Kellogg School of Business reported that a record 45 percent of incoming first-year students in 1996 expressed an interest in entrepreneurship as a major. This percentage showed a substantial increase compared with 30 percent in 1995, 12 percent in 1994 and 7 percent in 1993. Another example comes from data provided by Stanford University's Career Center. Whereas 3 to 4 percent of the country's population actually starts a business annually, it reported that the percentage of its M.B.A.s starting businesses immediately after graduating increased from 3 percent in 1994 to 10 percent in 1995. In addition, approximately 40 percent of Harvard's current class of graduating M.B.A. students planned to pursue a career in the venture capital industry (Bygrave, 1997). This desire to work at evaluating prospective deals contrasts with previous M.B.A. classes of students at Harvard who aspired to landing top-paying jobs on Wall Street. Increasing numbers of current students desire to participate in the birthing process of new ventures (Bygrave, 1997). However, students are not the only ones interested in associating themselves with entrepreneurship programs. Donors from many quarters demonstrate their willingness to financially support the establishment of entrepreneurship centers and underwrite en-

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dowed faculty positions (cf. E-Web site at Saint Louis University). Also, there have been more students participating in business-plan competitions nationwide and greater interest from foundations that are willing to help make entrepreneurial education available to ever-widening audiences. Deans and department heads also have seen the need to ensure that their units keep pace with this gathering wave of interest in entrepreneurial education. Their interest is partially in response to indications from the American Assembly of Collegiate Schools of Business (AACSB) that entrepreneurship will play a future role in the accreditation of academic programs. The AACSB recently concluded a gathering for member institutions, titled "AACSB Workshop on Business Schools and Entrepreneurship." One noteworthy aspect of the workshop was that the invitation to attend was extended to entire faculty teams from participating institutions, not just to individual entrepreneurship scholars. Its stated purpose was to provide programmatic guidance on how to better integrate entrepreneurship issues into their missions and programs. Finally, during November 1996, in Cambridge, Massachusetts, seven top business schools convened a meeting of their deputy deans and heads of their entrepreneurship programs. Their purpose was to discuss how they ought to respond collectively and individually to the new market for entrepreneurship education (Low, 1997). Although these institutional leaders espoused different approaches for responding to the new need for entrepreneurship scholars at their institutions, they were all paying close attention to the rising interest in this area. Can there be any question about the importance and timeliness of the topic of entrepreneurship education? As Jerry Brown, a former California governor stated when approached by the legislature to increase funding for education, "I am in favor of education, but education for what?" The answer to his question as it relates to entrepreneurial education ought to be education using theory-based activities to teach entrepreneurial competencies. In Chapter 2,1 proposed that our classrooms should be a world of ideas in which students learn theories that teach them what they can do to succeed. I also argued that without theory, we really do not have very much to teach students, because we do not know how to teach students to be lucky or intuitive, which actually may be the objective of some courses. In addition, I argued that it would be better if our classrooms were not places where we merely exposed our students to atheoretical descriptions of what entrepreneurs actually do. I based these arguments on an analysis of 18 different entrepreneurship courses, which covered 116 different topics. In this chapter, I continue by exploring another aspect of the relationship between theory and the content of entrepreneurship courses. I argue that entrepreneurship scholars must link theory with classroom teaching if they are to succeed in honing student competencies to make judgments about

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the consequences of present decisions.1 Next, I examine pedagogical problems associated with teaching theory-based concepts. Third, I introduce a strategy for developing theory-based activities for teaching entrepreneurial competencies. I also provide examples of successful activities for teaching theoretical concepts. THE LINK BETWEEN RESEARCH AND TEACHING IN ENTREPRENEURSHIP EDUCATION In 1974, I graduated from the first master's-level program in entrepreneurship. The curriculum consisted largely of listening to very successful entrepreneurs recount how they had launched their ventures. It was enjoyable, motivational and very entertaining—what some might refer to today as "edutainment." However, by the end of the semester I was beginning to ask myself what I had learned. I can only identify a few lessons that actually could help me to start a business. After graduate school, I started six different businesses in which I achieved varying degrees of success. To my surprise, there was very little in my entrepreneurship courses that could help me to explain these different outcomes. Of greater concern to me now is that I am not certain how what I learned would help me to improve my future chances of success. During the time since my M.B.A. studies, researchers have deepened our understanding of entrepreneurial outcomes and provided us with powerful frameworks to interpret what entrepreneurs do, as well as to predict their success.2 Chapters 5, 6 and 7 in this book represent the latest installment of a theoretical framework based on informational economics that can inform aspiring entrepreneurs about how to make discoveries that can lead to the creation of new wealth. Although most entrepreneurship theory does not have a distinctive origin in entrepreneurship, it nevertheless can help students to better understand how they can create wealth. For example, agency theory (Fama & Jensen, 1983; Jensen, 1994; Jensen & Meckling, 1976); procedural justice theory (Fiet, Busenitz, Moesel 6c Barney, 1997; Lind, Kulik, Ambrose & de Vera Park, 1993); and transaction cost economics (Williamson, 1979,1985) can help students to understand how entrepreneurs without resources can marshal the means to launch an entirely new business. Informational economics (Fiet, 1996; Gifford, 1992, in press; Hayek, 1945) and decision-making theory (Busenitz & Barney, 1997) can help students to understand why some entrepreneurs are able to recognize an economically lucrative opportunity that others miss. Industrial organization economics (Porter, 1985) and game theory and competitive dynamics (Barney, 1997; Nielsen, 1988) provide insights into why some industries are simply more attractive than others; the resource-based theory of the firm (Barney, 1997) can help students to understand the sustainability of competitive advantage; Austrian

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economics (Jacobson 1992) and the theories of hypercompetition (D'Aveni, 1994) and the new competitive landscape (Hitt, 1997) can help students to understand the necessity of continually reinventing a company's offerings if it hopes to avoid obsolescence and oblivion. These theories, among others, provide cogent intellectual premises that students can use to analyze complex scenarios.3 Most of these areas of inquiry were either not developed until recently or were not applied to the study of entrepreneurs. 4 Despite how far scholars have come in their understanding of entrepreneurs, there is still much that they do not know about them. Furthermore, if they are to improve the content of what they teach to entrepreneurship students, in my view, they need to do two things. First, entrepreneurship scholars must pursue theory-driven research agendas. Second, they must ensure that their students understand that there are various theoretical explanations of the differences in entrepreneurial outcomes. 5 THE IMPORTANCE OF THEORY-DRIVEN RESEARCH AGENDAS Colin Camerer (1985) observed that many research findings tend to "accumulate rather than cumulate." This accumulation of inconsequential facts occurs because too much research is exploratory rather than confirmatory. Many scholars have tended to report interesting bits of data without answering the "so what" question, which is—"Why should scholars care about this new bit of data?" The difference between data and information is that information signals the observer that a response from the observer is appropriate, whereas data must be interpreted and is often interpreted differently by those who receive it. Too much research provides scholars with data only and fails to answer the "so what" question. The inevitable result is that it makes little or no theoretical contribution to what scholars know about entrepreneurs. Researchers should not be satisfied with this type of work because "it is insufficient to transmit and apply present knowledge. It is the function of higher education to advance the state of knowledge as well" (Barney, 1997). If scholarly research is to pass the "so what" test, in my view it should satisfy two criteria. First, much more of it should be theory-driven rather than descriptive, because after all, scholars have been reporting descriptive research findings for most of the last 25 years. This descriptive research has done little to help predict entrepreneurial outcomes. Second, scholars should integrate research findings and theory in a way that can be understood and applied by students. The Role of Theory in an Entrepreneurship Course As Bill Bygrave, the Director of Entrepreneurial Studies at Babson College, noted, "there are two ways to ruin an entrepreneurship course. The

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first way is to have it consist entirely of the practical application and analysis of cases. [A course consisting only of practical applications and cases provides students with no basis for assisting them to act on the basis of their decisions.] The second way is to have it be entirely theory" (1993). [A course consisting only of theory could be an arid wasteland where only the most intellectually curious students would succeed. Most of the rest of the students would become bored and would simply not listen for understanding.] Clearly, Kuhn was correct when he noted, "there really isn't anything quite as practical as a good theory" (1970). Ideally, good theory will help entrepreneurs to make predictions about the consequences of their decisions. A good course requires the practical application of theory to "immediate events" and scholars must take some responsibility for its application (Whitehead, 1917). PEDAGOGICAL PROBLEMS ASSOCIATED WITH TEACHING THEORETICAL CONCEPTS "Theory is boring! Lectures are boring! School is boring!" All three of these—theory, lecture and school can also be irrelevant. Scholars as teachers can also be boring and irrelevant!6 Scholars as teachers can become boring when their classroom style becomes predictable. Predictability means that their students are never surprised. When they use approaches that are predictable, students become bored. Some negative consequences that can result are students who daydream, students who are uncooperative and students who substitute previously learned skills for those that they were supposed to have learned in class. Students did not learn the new concept because they were too bored to listen when it was introduced. Taken to the extreme, individual boredom can translate into collective boredom that can even infect scholars teaching a class. Scholars become irrelevant as teachers when they fail to apply theory as a tool to answer student questions. This can occur in three ways. First, when scholars are teaching weak theory that was not generated in the search for practical solutions to entrepreneurial problems. Second, when scholars resort solely to recounting war stories and anecdotes that lack generalizability. Students can discern between education and entertainment. 7 The former exposes them to principles that enable them to make predictions about the consequences of their decisions. The second way provides short-term satisfaction through its entertainment component. The third way that scholars can become irrelevant is when they fail to apply theory to resolve situations that students can reasonably expect to encounter in their own careers. Thus, good theory can always pass the test of applicability. If scholars fail to teach their students how to apply it, it is they who are at fault, not the theory.

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Many entrepreneurship textbooks contribute to the boredom problem because they consist largely of discussions of the functional areas of business—mostly reworked discussions of introductory courses. Where is the theory in these treatments? What do these books contribute that will help aspirants to recognize the future ramifications of their entrepreneurial decisions? These approaches contain few surprises for students, so not only are these functional-level treatments repetitious, they are also shopworn. Because functional material tends to change very slowly, scholars as teachers can make it appear even more shopworn by lecturing from old notes. Even instructors who are assigned the responsibility of teaching these concepts can find it difficult to maintain their excitement about them. They, too, can become bored—bored with the material and bored with students who are bored with the material. A STRATEGY FOR TEACHING THEORY-BASED ENTREPRENEURIAL COMPETENCIES An effective strategy for teaching theory-based entrepreneurial competencies must be approved by students and monitored by scholars to be effective. An entrepreneurial competency consists of a combination of skills, knowledge and resources that distinguish an entrepreneur from his or her competitors. Entrepreneurs largely acquire competencies on an individual basis. For student-entrepreneurs to master a competency in the classroom, they must be fully engaged in activities that will teach it to them. Thus, both students and scholars have a role in the acquisition of competencies. A Student-Approved System If the strategy of entrepreneurship teachers is to assist students to become skilled in theory-based competencies, the most effective method is to establish a student-approved system for class meetings that requires students to practice specific skills until they become competencies. I argue for theorybased competencies so that we scholars can always answer the "so what" question for our students. I argue for a student-approved system because almost any system of learning will work better if the students feel good about it.8 In contrast, if students have reservations about the appropriateness or fairness of an approach, even the most thoroughly reasoned and well-intended approach will not work as well as it could. Consequently, one of the most important class sessions is the one where teachers initially gauge the extent of student acceptance of the approach. 9 If they do not secure student acceptance, their approach will fail in the sense that students will be less willing to take responsibility for their own learning. On the surface, it may appear that they are complying with classroom requirements. However, during class

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their reservations are likely to distract them from concentrating on the key concepts under discussion, and away from class they will not be dreaming and scheming about how they can use them to launch their own venture. If teachers substitute fear tactics for student approval, they will probably secure compliance. However, over the long term, when students have a choice about whether to consider starting their own businesses, they may be inclined to avoid it based on the unpleasantness of their earlier entrepreneurship class. My approach is also based on the assumption that to the extent that a scholar as the teacher is the initiator of knowledge transfer, students tend to practice less and acquire fewer competencies. This occurs because it is the teacher who is the most engaged, not the students, which is the reverse of what would be optimal. It is the students who are most in need of learning. Worse, as argued previously, students tend to become bored with predictable class routines in which they play a limited role, which further inhibits their learning and mastery of skills.10 One way to evaluate scholarly involvement, or overinvolvement, in a classroom is to ask if the goal is to have students leaving class talking about how great the teacher is, rather than about how wonderful it would be to be an entrepreneur. If students leave talking about being entrepreneurs instead of about the wonderful teacher, the teacher has probably figured out how to involve them in activities that help them to develop personal competencies. The Scholar's Role as a Teacher The scholar's primary role as a teacher is to achieve student approval of the learning contract and to identify the competencies to be mastered.11 Thus, the question for scholars faced with ensuring student mastery of competencies is not, "What am I going to teach today?" 12 but "What am I going to have my students do today?" Moreover, the question of "What am I going to have my students do today" can be delegated to students and there are some advantages to doing so. Delegating responsibility for the selection of specific learning activities to students can introduce more variety and surprises into the classroom, each of which can alleviate boredom. At the beginning of each class, the teacher introduces the concept to be mastered and the associated learning activities. These activities should be extensions of previously assigned reading material that provides the theoretical basis for the competency to be mastered. During the activities that follow it is imperative that students understand that the activity is only one application of the underlying theoretical concept from the assigned readings. The theoretical application can also be productively related to why some entrepreneurs succeed and others fail. I do not recommend reviewing

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the assigned reading materials in class unless they are widely misunderstood. Normally, the theoretical issues can be exposed as students engage in the assigned activities. I know that I have had a successful class when the students were so engaged that I felt like a referee in an intellectual wrestling match. The responsibility for deciding which activities are most appropriate for teaching a competency may be assigned to groups of students or to a single student, or it may be retained.13 The activities should be ones that assist students to understand and apply underlying course concepts. A common characteristic of each of these activities is that they must involve every student. This enables students to receive immediate feedback from those in the class. In this setting, the teacher may move around the classroom as a coach, rather than an evaluator of student performance. During student-led activities, the scholar as a teacher participates by initiating discussion and facilitating learning by individual students as they participate in the activities. Teachers should also feel free to participate in the activities. Judgment about the appropriateness of teacher participation is required, however, when the activities become competitions among student teams. Sometimes teacher participation stimulates the competition, and at other times, particularly if the opposition feels overwhelmed, it diminishes it. I find that the most stimulating activities are those that arouse competitive discussion among students about the appropriateness of competing analyses. The discussion of these analyses frequently becomes very animated, but seldom becomes rancorous because students have previously accepted the format for the class and realize that they will have their turn to "win" with their particular activity, if they choose. Appendix 9.1 contains an example of an activity that one of my students designed to teach his classmates about agency theory. It is a negotiation exercise intended to illustrate some of the difficulties involved with trying to marshal resources to launch/acquire a new venture. Appendix 9.2 contains an example of an activity that I used to illustrate how the use of biases can intercede to change the predictions of the theory of rational expectations and market efficiency. This particular activity is also an effective method for interrupting the boredom of a class routine that has gone on for too long. ADVANTAGES OF THEORY-BASED ACTIVITIES There are several advantages in using theory-based activities. For example, it avoids boredom by inviting student-generated surprises to a play a role in the learning environment. It is also easier to enlist the entire class as mentors in a theory-based learning approach, which facilitates classwide learning. In addition, if the learning activities are part of a clearly outlined

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set of procedures for succeeding as an entrepreneur, focusing on specific skills avoids students' asking the "so what" question, which is really an issue of relevance. Using theory-based activities positions the scholar as a teacher, as a coach and a mentor rather than a lecturer who delivers information from a textbook or a lesson in a boring, predictable manner. Finally, using theory-based activities can potentially involve every student in the learning process OBSTACLES T O USING THEORY-BASED ACTIVITIES Switching from a traditional lecture format to theory-based activities can be quite difficult, especially for someone who enjoys exercising professorial control. Lecturers feel responsible for what their students learn and they want to control how the learning occurs. They may secretly harbor fears that their students will learn less and that they will be responsible for allowing that to occur.14 When they feel this way they forget that they are deluding themselves if they believe they can control everything their students think or learn. They forget that most of what captures the attention of their students during class is controlled by the students themselves, and not by them, which is the reason it is fundamentally important for their students to accept the change. The loss of predictability during class can be threatening to professors who would prefer to more closely control the process themselves. Surprisingly, it can be threatening to students also because they think that the evaluation of their work and learning could be adversely affected by their perception of less classroom structure. 15 Many of these students expect their teachers to tell them what is most important to learn. What they do not realize is that teachers are freer to do so without structure because they can intervene at any time. Because this is a legitimate student concern, it is critical that, at the end of each class, teachers summarize what has been learned. In essence, scholars in their role as teachers have to answer the "so what" question for their students. If they ritualistically tell students what they have learned at the end of class, they will soon relax and join in the fun of learning that precedes the summary. Suppose a student were making an oral presentation of her understanding of a concept that she misconstrued. Under a more rigid system, courtesy could dictate that a scholar patiently refrain from providing feedback during a presentation, or at least wait until after the student had finished. However, using a theory-based activity format, a teacher can explain to students that the acceptable classroom norm will be a freewheeling exchange of ideas that does not allow for a "wait until you are finished" protocol. Instead, class members and the scholar as a teacher may interject questions that are directed at both the class and the presenter. For example, any listener might say, "Class, given Sally's argument, what conditions

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would have to hold for her to be correct?" Also, the listener might follow up with, "What evidence is there for Sally's conditions?" Finally, the listener might add, "What alternative conditions might also explain her conclusions?" Such a series of questions could expose her logic, which could normally be true, so long as we understand her conditions and evidence. Another obstacle to the use of theory-based activities is that it seemingly requires preparation for multiple class scenarios. The fallacy in this concern is that it presupposes that all preparation for these scenarios occurs right before class. This fallacy is well illustrated by the wag who claimed that "The secret to good teaching is to act as if you have known all your life the things that you have prepared just before class." However, if we were limited in the learning that we could bring with us to class, we would probably be less successful than we would wish using theory-based activities. Finally, scholars as teachers who use theory-based activities will quickly learn that it requires a major time commitment when done correctly, with few institutional rewards. Thus, they rely more on passive lecture approaches because they can be accomplished within acceptable evaluative tolerances, particularly when the institution is dependent on grants to support its research agendas. THE DISCOVERY OF THEORY-BASED ACTIVITIES Specific theory-based activities are usually discovered one at a time through the process of trying things. Some will work and others will be less successful, but the process will never be boring. My experience is that the most effective activities for teaching theory are related to specific people, places, timing, relationships and special circumstances (cf. Hayek, 1945). These activities often have ephemeral results, because otherwise students would be expecting them and they would be less surprised. Someone has referred to them as "silver bullets." When the class seems to be getting bored, he fires a "silver bullet" to liven things up. Sharon Gifford at Rutgers University refers to "lobbing grenades" to shake things up. The most effective teachers are able to shake things up in their own way by making students do things that generate surprising, theory-based results. The most stimulating classes are those in which the members of the class are constantly on the alert for a "silver bullet" or are ducking a "grenade." Compiling a list of theory-based activities may not be effective because as the activities become known to students, they may cease to be surprising.16 This may not be a short-range problem, but repetition of the same techniques can become as well-known to students as our test banks, if we use them. When the activities cease to be surprising to students, they no longer say to themselves, "ah ha." Losing the "ah ha" factor also means that the activity has lost most of its pedagogical benefits. Worse, if the list

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became well-known, it could become trivialized and an obstacle to learning. If a teacher could not think of one theory-based activity, he or she might want to do the following: assign a group of students the responsibility to present a particular theory-based topic. Explain to them that they can present it any way they wish, except that originality will be rewarded and boredom will be penalized. Plead with them not to bore the class. In this way, we share the responsibility for creating the activity with our students. We do not have to worry that our students will not be able to create an interesting activity because we can and should review their activities with them before class. Our students will develop everything from TV game shows to invited role-playing, to in-class calisthenics. I suspect that our own enjoyment of teaching and learning will increase as we participate more in the process.

APPENDIX 9.1. A STUDENT-DESIGNED THEORY-BASED ACTIVITY Theoretical Applications As suggested by agency theory, this activity illustrates the difficulties that entrepreneurs may encounter as they attempt to marshal resources. Agency theory suggests that they must provide incentives to entice a resource supplier because he or she has separate and possibly divergent interests from those of the entrepreneur. Practical Application Structuring the deal. References Fiet, J.O. 1995. Risk avoidance strategies in venture capital markets. Journal of Management Studies 32(4): 551-574. Harrison, J.S., 6c Fiet, J.O. 1999. New CEOs pursue their own self-interests by sacrificing stakeholder value. Journal of Business Ethics 19(3): 301-308. Jensen, M.C. 1994. Self-interest, altruism, and agency theory. Journal of Applied Corporate Finance 7(2): 40-45. Instructions for Instructor This exercise works well as a contest between competing teams of sellers and buyers. Several teams can negotiate simultaneously until all pairs of teams have struck a deal or agreed that they are too far apart to eventually agree. A short recap of the process of negotiation in each pair provides an instructive and often entertaining way to conclude the session, which can take 30 to 45 minutes. Instructions for Seller You are in the ski and sports equipment manufacturing business. You want to retire. You decide to sell your business and all its assets and head to Bermuda

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to wear flowered shirts and sit on the beach all day drinking nonalcoholic beverages. Current balance sheet: Assets Accounts receivable Inventory Equipment Building Liabilities Accounts payable

$1,000,000 2,500,000 500,000 1,000,000 $2,000,000

You have had another offer for $6,000,000, but the buyers have questionable backgrounds and you are not sure if you want to entrust your business to them. Negotiate! (The other group has received slightly different information. That is, they do not know everything you know.) Instructions to Buyer You really want this ski and sports equipment manufacturing business! This business is a great setup. It is already established with steady sales and a good customer base. You have had a chance to examine all the records with the help of your trusted, long-time CPA friend and you are both positive that there are no discrepancies in the records. Current balance sheet: Assets Accounts receivable Inventory Equipment Building Liabilities Accounts payable Estimates by an independent appraiser Book value of company Present value of estimated cash flows for next 5 years

$1,000,000 2,500,000 500,000 1,000,000 $2,000,000 $3,000,000 11,500,000

You have a $4 million line of credit with your local bank, which must be paid back at 20 percent within one year unless you can renegotiate it. You also have a rich uncle with $1 million to invest (he trusts your judgment). In addition, you have inherited $2 million. The amount to be paid and the terms of the deal (how the purchase price will be paid) need to be negotiated. How much are you willing to pay for this business? You should now negotiate with the seller to buy the business. Start dealing! (The other group has received slightly different information. That is, they do not know everything that you know.)

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APPENDIX 9.2. An Instructor-Designed Theory-Based Activity Theoretical

Application

Biases can predispose us to view the world in a certain way, which could be contrary to the theory of rational expectations and market efficiency. Learning Objective To help students realize that critically evaluating their conclusions as entrepreneurs and in life is not a process that should come naturally to most of them. Related Objective I ask students which is more important to them as aspiring entrepreneurs, theory or understanding real situations that entrepreneurs face. I try to help them to realize that theory helps them to make predictions and that the best theory is based on real situations facing entrepreneurs, so the question really presents a false dichotomy. In addition, I note that if they answered "real situations facing entrepreneurs," that itself is a theory about the value of theory. I suggest to them that although they may have a negative view of theory, one of the objectives of the course is to show them how theory can be useful in making predictions using incomplete information. References Busenitz, L.W., & Barney, J.B. 1997. Biases and heuristics in strategic decision making: Differences between entrepreneurs and mangers in large organizations. Journal of Business Venturing 12: 9-30. Tversky, A., 6c Kahneman, D. 1974. Judgment under uncertainty: Heuristics and biases. Science 185: 1124-1131. Instructions for Instructor I emphasize to my students that all theory is a simplification of reality. However, we assume that it can be useful, if properly applied, to assist us in making predictions about the future. The proper application of theory depends on not violating the assumptions of the theory. Because no theory is without flaws, I attempt to expose them to as many theoretical perspectives as possible during my courses. Meanwhile, I explain to them that they can determine themselves if they are properly applying theory to their personal circumstances by using three criteria: (1) Upon what assumption(s) does this conclusion depend?, (2) What evidence is there for the assumption? and (3) What alternative assumptions could also explain their conclusion? If a real situation only satisfies some of a theory's assumptions, the students must develop a modified version of the theory that does coincide with reality. Because the world is complex, and because we often are influenced by our habits, we fail to apply these three tests. Thus, we often fail to properly apply theory to improve our decision making, if we apply it at all. To demonstrate that we make many decisions without thinking, I have the students engage in the following activity.

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Activity

Steps: 1. Request that everyone stand and separate themselves as much as they can from their neighbors (so that they do not collide with each other). 2. I then ask everyone to imitate what I am doing by raising their hands to about shoulder level and wiggling their fingers. 3. I next ask them to follow me by quickly clasping their hands with their fingers interlaced. Afterward, I ask them to note which thumb is on top of their clasped hands. 4. We repeat steps two and three twice more, each time noting which thumb was on top after clasping their hands. 5. In nearly all cases, students will observe that the same thumb was on top each of the three times. 6. Next, I ask the students to begin flapping their arms like a bird. This will cause some giggling, but maintain your composure and insist that everyone follow your lead. (I have done these exercises with undergraduates, graduates, executive education students, community luminaries—each time enjoying very good success.) 7. At the count of three, ask everyone to fold their arms very quickly and to note which arm was on top. 8. Repeat step #7. 9. Again, ask everyone to repeat step #7, but this time trying to change the arm that was on top. They will find this very awkward to do; however, some will succeed through the force of will and concentration. 10. Ask them if they realize why it was difficult to change the arm that was on top or why it was the same thumb that was on top after each round. 11. I tell them that I do not know about their thumbs, but they have been folding their arms in the same way for a very long time. Then I ask them if they know for how long. The answer is since before they were born. Sonograms of babies in the womb show them crossing their arms in the same way as they do later in life. This suggests that some of the things we do, we do without consciously thinking of them.

NOTES 1. Entrepreneurship as a field is in the process of creating a body of theorybased knowledge; much of it is the product of the diverse backgrounds of those who are attracted to the field from other disciplines. 2. Many of these frameworks are discussed in Chapter 2, "Toward a Theory of Entrepreneurship." 3. A related issue is that many of those researchers who do test theory-driven questions tend to use single perspectives in doing so, which may limit their fields of vision. They may in fact subject their work to academic autobiography. (Refer

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to previous chapter for a discussion of academic autobiography.) Some researchers justify single-perspective approaches based on the internal consistency of their arguments. However, these approaches are not necessarily contradictory; they could in fact be complementary and could lead us to a more sophisticated level of understanding (cf. Fiet et al., 1997). A worthwhile discussion would be to examine the merits of multidisciplinary approaches to doing research. Unfortunately, this important topic is beyond the scope of this chapter. 4. As mentioned in Chapter 2, there is some debate about whether each of these areas of inquiry has actually matured into a full-fledged theory. Because they originate from different disciplines, it is more difficult to arrive at a consensus about what constitutes a theory. This chapter uses a Daftian approach that assumes that theory is nothing more than telling a story about how certain factors may influence future events. 5. This chapter makes a distinction between entrepreneurial theories and the indicated competencies for starting a business. In most cases, students can assume the major responsibility for learning these theories from assigned readings before they come to class. Class time is better used for the application of these theories to specific problems faced by entrepreneurs. Ideally, these applications would be activity-based exercises. 6. A potentially challenging issue for entrepreneurship scholars is that students know that most entrepreneurs have succeeded without formal training in entrepreneurship. So not only do we have to avoid being boring—we have to convince them that we can provide them with tools and information that will increase their prospects of success as entrepreneurs. 7. Examples such as case studies, guest speakers and discussion of current events should be used to illustrate theory, but overreliance on them without exploring their theoretical context is inappropriate because, by themselves, they lack generalizability. 8. I argue that there is much that can be learned from the Hawthorne studies about participants feeling good about group processes. Although the Hawthorne studies did not examine student subjects, these studies suggest that teachers should be sensitive to achieving the proper mood in class as a part of achieving their learning objectives. 9. The most memorable session for gaining approval of my activity-based approach happened by accident before I knew of its effectiveness. I had been using a lecture-based approach laced with a voluminous number of overheads. I had just completed a contract for producing overheads for a textbook. As I walked confidently to the first class with my folder of 25 overheads, the following question occurred to me: "If I were a student, would I want to see any of these overheads?" The answer that came to me was a resounding "No!" So when I arrived at class, I handed the folder of overheads to a student in the first row, and asked him to describe its contents to the class. He said that it contained "a bunch of overheads." I then mentioned to the class that I had a similar folder of overheads for every session scheduled during that semester. They were quite surprised when I asked them, "How many of you want to see them?" The hisses and boos were so loud that it took a while to hear their collective pleas for mercy. "Anything but the overheads"—that part was unanimous. I said that I would make a deal with them that they would not have to see the overheads if everyone of them agreed to become

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involved in class activities. All of this was spontaneous, and the most successful teaching experience that I had ever had. I have never gone back to my lecture-based approach. 10. It is certainly true that any material could be taught in a boring, predictable fashion, so this particular argument is not about course content; it is about how to make the teaching of entrepreneurship concepts and competencies more inviting to students. 11. "The contract is a two-way street, and the teacher must be willing to more than meet the students' commitments. On the instructor's side, the professional nature of the contract and its surrounding relationship will be shown by: (1) careful and complete preparation for the classroom experience; (2) concern and devotion to the students in all dealings, including those in the classroom and in the office and (3) striving to make the course a satisfying developmental experience. By and large, the more the teacher does, the more the students will do" (Harvard Business School Publishing, 1994). 12. Some advocates of active learning approaches from educational psychology would argue that a more relevant question is, "What should students learn through self-discovery today" (Miles, 1997). It is true that a lot of what we call learning is self-discovery. I prefer the emphasis on "doing," however, because it provides teachers with an observable way of gauging student learning outcomes. Personally, I am less confident that a teacher can guide the learning process without observable outcomes. 13. If the instructor decides to delegate the selection of learning activities to students, it is normally beneficial to have them explain the activity to the instructor before class. By checking with them prior to class, the instructor can be assured that they will effectively facilitate the achievement of the learning objectives by class members. An advantage of using students to organize the activities is that they often develop unique approaches, which are fun for students, and which introduce more variety into the classroom. Nevertheless, delegating to students will fail to achieve its learning objectives if the teacher views it as a way of avoiding work. The teacher is always responsible for what occurs in class. In some ways, delegating to students requires more work because it requires more out-of-class preparation by the instructor than simply delivering a lecture or organizing the learning activity by him or herself. 14. My own limited experience refutes concerns that students will learn less. Using examinations of comparable difficulty, my average scores increased by 20 percent by switching to theory-based activities. This improvement has remained stable since I made the change. I should also add that my teacher evaluation scores have also improved by more than 20 percent on a five-point scale. Not only are my students learning more, but they think that I am doing a better job by allowing them to become active participants. 15. A theory-based activity approach follows a clear pedagogical structure and the more alert students who have understood the theory presented in their readings will perceive it without assistance. Most students who have had difficulty with the theory will probably understand it during class as it is applied in specific activities. Once this latter group understands the theory, it will probably also see the structure. At the end of each class, the instructor summarizes the concepts that have been taught and applied in class. At that point, the majority of students who have not

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learned the theory through classroom activities should understand them. Those who are still unclear about what has been taught should be invited to visit privately with the instructor. 16. I have had some success collaborating with colleagues at the Rensselaer retreat to compile a list of theory-based activities. However, I am planning to rotate the use of these activities to keep them out of student circulation and to maintain their freshness. REFERENCES Barney, J.B. 1997. Gaining and sustaining competitive advantage. Reading, MA: Addison-Wesley. Busenitz, L.W., 6c Barney, J.B. 1997. Differences between entrepreneurs and managers in large organizations: Biases and heuristics in strategic decisionmaking. Journal of Business Venturing 12(1): 9-30. Bygrave, W.D. 1993. Personal conversation. Bygrave, W.D. 1997. Address given at the Babson/Kaufman Entrepreneurship Research Conference, Wellesley, MA. Camerer, C. 1985. Redirecting research in business policy and strategy. Strategic Management Journal 6: 1-15. D'Aveni, R.A. 1994. Hyper competition. New York: The Free Press. Fama, E.F., 6c Jensen, M.C. 1983. Agency problems and residual claims. Journal of Law and Economics 26: 327-349. Fiet, J.O. 1995. Risk avoidance strategies in venture capital markets. Journal of Management Studies 32(4): 551-574. Fiet, J.O. 1996. The informational basis of entrepreneurial discovery. Small Business Economics 8: 419-430. Fiet, J.O., Busenitz, L.W., Moesel, D.D. 6c Barney, J.B. 1997. Complementary theoretical perspectives on the dismissal of new venture team members. Journal of Business Venturing 12(5): 347-365. Gifford, S. 1992. Innovation, firm size and growth in a centralized organization. RAND Journal of Economics 23(2): 284-298. Gifford, S. In press. Limited entrepreneurial attention. Small Business Economics. Harrison, J.S., 6c Fiet, J.O. In press. New CEOs pursue their own self-interests by sacrificing stakeholder value. Journal of Business Ethics. Harvard Business School Publishing. 1994. Hints for case teaching. Boston: Harvard Business School Publishing. Hayek, F.A. 1945. The use of knowledge in society. American Economic Review 35: 519-530. Hitt, M. 1997. Personal discussion at the Babson/Kaufman Entrepreneurial Research Conference. Jacobson, R. 1992. The "Austrian" school of strategy. Academy of Management Review 17: 782-807. Jensen, M.C. 1994. Self-interest, altruism, and agency theory. Journal of Applied Corporate Finance 7(2): 40-45. Jensen, M . C , 6c Meckling, W.H. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics 3: 305-360.

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Kuhn, T. 1970. The structure of scientific revolutions. Chicago: University of Chicago Press. Lind, E.A., Kulik, C.T., Ambrose, M. & de Vera Park, M.V. 1993. Individual and corporate dispute resolution: Using procedural justice as a decision heuristic. Administrative Science Quarterly 38: 224-251. Low, M. 1997. Special report presented at the 1997 Rensselaer Entrepreneurship Retreat, Lennox, MA. Miles, J. 1997. Personal communication. Nielsen, R.P. 1988. Cooperative strategy. Strategic Management Journal 9: 4 7 5 492. Porter, M.E. 1985. Competitive advantage. New York: The Free Press. Small Business Administration, Office of Advocacy. 1995. The third millennium: Small business and entrepreneurship in the 21st century. A special publication prepared for delegate to the 1995 White House Conference on Small Business. Tversky, A., 6c Kahneman, D. 1974. Judgment uncertainty: Heuristics and biases. Science 1S5: 1124-1131. Venkatraman, S. 1997. Personal correspondence. Whitehead, A.N. 1917. The organisation of thought, educational and scientific. London: Williams and Norgate. Williamson, O.E. 1979. Transaction cost economics: The governance of contractual relations. Journal of Law and Economics 22: 233-261. Williamson, O.E. 1985. The economic institutions of capitalism. New York: The Free Press.

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Chapter 10

Opportunities for Future Research

I began this book by asserting that the discovery process was at the heart of entrepreneurship and that if scholars were to remove discovery from definitions of entrepreneurship, what would remain would be small business management, which could be reduced to managerial dictums that could be imitated by competitors. In the long run, imitation would limit the creation of new wealth for aspiring entrepreneurs as well as their incentives to risk their assets, time and reputation on ventures that could fail. Even acknowledging the connection between wealth creation and discovery, some would say, does not assist aspiring entrepreneurs to create new wealth, because educators do not know how to instill in their students the competence to make discoveries. If skeptics were saying that acquiring entrepreneurial competence is a passive process that occurs solely as a result of being lucky, this book has taken aim at this argument and hopefully debunked it to your satisfaction. Acquiring competence may occur accidentally to a large extent. However, I have tried to show that it is possible to train entrepreneurs to make discoveries, which increases their competence. Despite showing that aspiring entrepreneurs can be trained to make their own discoveries, there is much more work to be done to understand the potential of this approach, as well as what it could mean for the building of a general theory of entrepreneurship. The purpose of this chapter is to summarize some of these opportunities. I intend to proceed in the following order with this exploration. First, I will examine some of the methodological issues that have impeded progress, not just in the examination of the discovery process, but also in the field of entrepreneurship research. Second, I will examine opportunities to advance the study of entrepreneurial com-

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petence. Third, I will treat how the present study of discovery can be extended as well as applied to related areas of inquiry, all for the purpose of creating new wealth. Finally, I will review other opportunities to conduct research within the distinctive domain of entrepreneurship, which I identified in Chapter 2. METHODOLOGICAL PROBLEMS IMPEDING PROGRESS IN THE FIELD OF ENTREPRENEURSHIP RESEARCH Most entrepreneurship researchers are probably truly fascinated by what they study—so fascinated, perhaps, that they at times make the mistake of thinking that it should be enough to solely report what they observe, regardless of any methodological limitations that may obscure interpretation. They may reason that the phenomenon itself is inherently interesting and that it should be enough to capture the interest of readers or potential providers of financial support to conduct research. In the view of these scholars, the process itself is paramount, not its outcome. However, as entrepreneurship becomes more common in the United States and elsewhere, aspirants have their own interesting stories to relate. What these aspirants want to know is how they personally can become wildly successful. Aspirants will increasingly look to scholars for validated, reliable, theoretically based approaches that they can use. Clearly, research must be properly designed and implemented to be useful to aspirants. The following tendencies, in my view, should be reconsidered. Description without Prescription I have already argued excessively that limiting research solely to describing a population, most of whom will discontinue the pursuit of their original entrepreneurial vision, can be very misleading. Such an approach will itself depend on being lucky if it is to draw reliable inferences. Another way to consider this problem is as an overreliance on inductive observational techniques to the exclusion of deductive theory testing. Induction may be used together with empiricism to generate new hypotheses. However, deduction is also necessary to test the validity of these hypotheses. The exclusion of deductive reasoning from research will hinder the formulation of hunches and the testing of hypotheses, which leads to the next problem. A Predominance of Exploratory Research Reviewers are inundated with studies claimed by their authors to be exploratory. They read like ex post rationalizations of serendipitous outcomes. Still, their authors act as though after more than 30 years of

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conducting entrepreneurship research, it is quite acceptable to continue conducting such studies. These exploratory studies must accept much of the blame for the fact that the field of entrepreneurship research has failed to build a cumulative body of knowledge that addresses the question of how entrepreneurs can be more successful. These exploratory studies could make a much greater contribution if they were more grounded in the literature, particularly literature that was theory based. I can hear the protests now from scholars who argue that they do not have any basis for formulating hypotheses about a particular study. Perhaps, in a strict sense, a particular issue has not been addressed before. However, if scholars think of theory building as telling a story, there are very few incidents where they would not have a hunch about how things were going to turn out. Then, with a little more effort, they could link these hunches to an existing body of knowledge and formulate hypotheses according to their hunches and the theory that was available. Faulty Experimental Design Causality is very difficult to establish conclusively. However, many researchers are very careless in the way that they design studies. Often, their studies appear as data-dredging with little forethought given to design. Here are some of the difficulties that are common in the field. The first problem that I will address is convenience sampling that fails to establish that a particular sample is representative of a population. As its name implies, a sample was chosen because it was convenient and not selected in such a way that it would facilitate hypothesis testing. Thus, convenience samples are suspect because their results are likely to be an artifact of a chosen sample. A second problem is a failure to control for stochastic outcomes. The purpose of controls is to make sure that any observed variance from a treatment was actually caused by the treatment and that it would not have occurred by itself without the treatment. Randomization of subjects is an acceptable way to control for stochastic outcomes. A third problem is drawing inferences retrospectively from studying successful entrepreneurs, and then inferring that subjects were successful for a particular reason when the investigator did not use any controls because ex post, it was not possible to use controls. The only way to correct this sort of a problem is to track subjects longitudinally. Event history analysis using Box-Cox regression analysis is an effective way to control for lagged effects. A fourth problem is drawing improper inferences about causality from cross-sectional, correlational studies. A statistically significant association or correlation does not establish causality. Causality requires a logical precursor as a first cause with an effect predicated to have occurred because

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of its hypothesized influence, which presupposes that longitudinal studies have greater prospects for establishing causality than cross-sectional ones. Adequate controls are also necessary to begin to establish causality. A rigorous application of these conditions severely limits the number of relationships that can be said to be causal. More often than not, scholars disconfirm a null hypothesis. They do not establish causality. Still, they can be criticized deservedly if they fail in attempting to establish causality. A fifth problem is failing to pit competing theoretical explanations against each other when there is more than one plausible explanation for an observation. The result is that theory with weak predictive validity persists when ones with more power could supplant it. The result would be to build more cumulative theory, which would move the field toward a more general theory of entrepreneurship. I suspect that researchers do not pit theories against each other more often simply because it complicates their literature reviews. A sixth problem is an overreliance on regression studies that lack the power to accommodate curvilinear relationships. It may be that many relationships between an entrepreneur and his or her environment are curvilinear, particularly as learning occurs. In addition, regression analysis can only identify relationships among variables that already exist. It is not useful for the application of a treatment under controlled experimental conditions. As a result, regression tends to be used for inductive studies to the neglect of deductive studies. A seventh problem is self-reported data from respondents who see themselves differently from how they are viewed by independent observers. Because the study of entrepreneurs often borders on hero worship, investigators tend to be quite forgiving when respondents portray themselves as the prime mover in a drama in which the forces in the world were set against them. Such accounts are simply unreliable and must be independently verified using other sources. An eighth problem is failing to take nonsurvivors and nonrespondents into account when drawing inferences. These failures lead to biased interpretations and ignoring the influences of spurious factors. A ninth problem, common method variance, can occur when investigators draw conclusions from the use of one source of data or from the use of one analytical technique. Those who do not guard against common method variance will incur the risk of generating results that are an artifact of their methodology. Failing the Relevancy Test It is quite possible to design and conduct a study that does not suffer from any of the foregoing methodological limitations and still fail the relevancy test, which I have referred to as the "so what" question. The "so

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what" question asks why other scholars should care about a particular result, typically descriptive, when its authors have failed to ascribe a theoretical interpretation to it. A failure to address the "so what" question typically results in atheoretical classification schemes that will be questioned by the next scholar to address similar issues. If the approach of the second is also atheoretical, the authors of the competing schemes may very likely find themselves debating each other without being able to resort to theory as their referee. In the end, their studies and schemes will likely accumulate separately, which will not matter much if they have not even attempted to build cumulative theory. Few readers will care about their studies anyway. Methodological Problems Are Commonplace Research conference attendees frequently complain that they only hear a couple of good papers at typical conferences. Their complaints can be reduced to two underlying concerns. First, the research was uninteresting because it failed the test of relevancy; or, second, the research was so encumbered with methodological problems that its inferences were unreliable or invalid. One would think that the first problem would be obvious and that the second problem would be easily corrected through peer review and more careful research design. However, these problems persistently impede progress in the field of entrepreneurship research. Although such problems may be typical of a field that has drawn researchers from different disciplines, they also evidence that the field has not matured. The result has been a lack of convergence around a few paradigms, which would be characteristic of a more mature discipline. I will now address opportunities to research entrepreneurial competence. RESEARCH OPPORTUNITIES IN THE AREA OF ENTREPRENEURIAL COMPETENCE One of the most important research opportunities is to understand how entrepreneurs can improve their competence to discover and exploit venture ideas. If prospective entrepreneurs were born with a given quantity of competence that could not be improved, which would mean that their success was largely predetermined, this would have a profound impact on the field of entrepreneurship education. Educators could not alter a student's competence through education. Educators would be reduced to screening prospective entrepreneurs to find those who already were born with what it takes to succeed. As an example, a person would either be the first-born son of immigrant parents or not, and if not, educators could serve as the benevolent informants of this fact, so as to not waste a person's time, effort and resources on a hopeless endeavor.

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Researchers could test the 11 propositions developed in Chapter 5 and summarized in Table 5.1, which are related to the competence to discover valuable venture ideas. A greater understanding of the theory underlying these propositions would lay the groundwork for studying the exploitation of venture ideas. A major opportunity in studying competence would be to compare the informational aspects of both discovery and exploitation. From the arguments developed in this book, it would appear that they are both informational, to which a consideration set-based approach could be applied effectively to increase one's entrepreneurial competence. EXTENSIONS OF A CONSIDERATION SET-BASED APPROACH FOR SEARCHING An area of tremendous promise for future research is the influence of specific information on the systematic search for discoveries. Studying the role of specific information has both public policy and pedagogical implications. For example, can social groups draw on private sources of information for making discoveries, which have not been recognized to date? Do economically disadvantaged groups possess unknown informational advantages that they could exploit to create a sustainable competitive advantage? It is not likely that education that provides exposure to general information will make disadvantaged groups extraordinarily successful as entrepreneurs. However, teaching them how to exploit the specific and perhaps private information that they already possess may have a surprisingly beneficial impact. Research designs that compare how different groups can make discoveries are the way to control for spurious effects, including luck. Studying each of the following groups promises to add to our theoretical understanding of what scholars can teach students. First, accomplished entrepreneurs may already recognize the advantages of searching domains that are an extension of their prior knowledge, in the same way that 14 percent of the control group in Chapter 7 narrowed its searching. By studying them, perhaps researchers could generate testable hypotheses about how to search more effectively than the simplified view presented in Chapter 5. Second, I would expect that technologically trained employees who have already advanced in their own fields would be especially effective in discovering ideas that they could readily exploit. Studying this group of subjects could improve the management of technological development and technology transfer. Universities and consortiums engaging in basic research should be especially interested in what they could be learning about enhancing the competence of technologically trained employees to discover valuable venture ideas.

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Third, economically disadvantaged groups may be able to substitute their possession of deal-specific prior knowledge for a presumed lack of formal education, which could enable them to create new wealth despite any educational handicaps. Although members of such groups might opt to return for more formal education, in the meantime, they could support themselves by exploiting what they had discovered. Fourth, it would be important to compare aspiring entrepreneurs with 10 years or more of business experience to determine the differential effect of consideration sets on their performance. How much do they use them? What is the nature of their consideration sets? How do they select information channels for their consideration sets? Which types of consideration sets and information channels generate the highest-performing ventures? If they are not already using consideration sets, how could they leverage their prior knowledge to accelerate their use? Fifth, scholars need to do additional research with students who aspire to become entrepreneurs because they are part of their professional mandate. In the process, scholars can learn how to teach more effectively as well as ask and answer questions that can make a real difference to their students' success. I will now consider research opportunities within the broader area of the distinctive domain of entrepreneurship. RESEARCH OPPORTUNITIES WITHIN THE DISTINCTIVE DOMAIN OF ENTREPRENEURSHIP Some research questions are simply more important than others. I have identified six questions whose answers will move the field forward toward a more general theory of entrepreneurship. Focusing on the answers to these questions can protect scholars from the accusation that they have failed to answer the "so what" question. The first one addresses the primary subject of this book—the problem of the proverbial black box that has impeded theory development because it addresses the lynch pin that probably ties the entire field together. Although this book challenges readers to consider how entrepreneurs can make discoveries, clearly there is more work to be done, so question number one is: Question One: How Can Entrepreneurs Discover Lucrative Opportunities That Others Miss? Accomplished entrepreneurs seem to have a special knack for repeatedly discovering hidden value. Are they simply luckier than the rest of us? If so, how can scholars in their role as teachers make our students "luckier" (i.e., better informed), so that they can also discover valuable venture ideas? If the discoveries of accomplished entrepreneurs depend on luck, it follows that students should resist the urge to be entrepreneurial, unless of course,

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they feel especially lucky. A lack of theoretical insight into this conundrum is impeding progress in the fields of entrepreneurship research and education. Hopefully, researchers will accept the challenge to future inquiry commenced by the research reported in this book on searching for discoveries. Question Two: How Can Entrepreneurs Identify the Most Attractive Industries? The pharmaceutical, medical devices and semiconductor industries have historically been much more profitable than intercity buses, steel and corn farming. If scholars knew the causes for these differences in industry attractiveness, they could coach entrepreneurs to avoid competing in certain industries or alternatively, to attempt to restructure them through cooperative strategies, regulation and government lobbying. Chapter 4 addressed the influence of competitive structure on an entrepreneur's prospects for making a discovery. It presented a rudimentary argument that there really were no unattractive industries, only ones whose structural attributes did not fit a particular entrepreneur's strategies for discovering and exploiting venture ideas. Perhaps one way to identify attractive industries is to be active in creating them at their inception. However, there is still a great deal of research that could be done about how entrepreneurs can influence an industry's structure so that it better fits an entrepreneur's competencies. Question Three: How Can Entrepreneurs Marshal the Resources to Launch an Entirely New Business? Aspiring entrepreneurs and public policy makers have lamented the capital gap that purportedly exists, which may prevent those with deserving ideas from being funded. Several theories contribute to understanding how this capital gap can be overcome; however, a great deal of empirical work remains as to whether the gap actually exists, and if so, how it would survive in the face of varying degrees of capital market efficiency. Assuming that entrepreneurs operate as suggested in Chapter 4, in pockets of market inefficiency, how can they marshal the resources to launch an entirely new business? Prudence would seem to dictate that aspiring entrepreneurs should resist the temptation to launch a venture because of a shortage of resources. They persist because in their view they will be able to acquire the missing resources by trading equity in the business for them. Perhaps they believe that the risk of launching an underresourced business will be outweighed by its great promise. In other words, although there is a risk of failure, there is a tremendous upside that merits taking on the risk of failure.

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Question Four: What Strategies Can Entrepreneurs Pursue So That Their Ventures Survive and Prosper? As mentioned previously, Michael Porter heightened our awareness of the desirability of a competitive advantage in his second book (1985). He suggested that firms that possessed a competitive advantage would be positioned to earn higher profits. Still, his ideas originated from industrial organization economics that relied on the study of larger, established competitors, whereas new firms report that competition has very little effect on their prospects. It could be that competitive pressure has less effect on new firms because they are able to sequester themselves in market niches where there is little or no competition. An interesting research question pertains to the difference in the competitive positions between new and small firms and the larger, more established firms studied by industry organization economists and strategists. If new firms tend to enter niches, how can they best protect themselves from potential entrants so that they can maintain their competitive position? Can the strategy of a new firm entail more than simply flying below competitive radar so that they can continue to compete in isolation? The answers to these questions may determine a firm's long-term viability and the amount of new wealth it can create.

Question Five: What Is the Nature of Entrepreneurial Competence and How Does It Relate to the Discovery and Exploitation of Wealth-Generating Venture Ideas? Entrepreneurial competence in its many forms may be the most studied attribute of entrepreneurs. Whether it is referred to as traits, characteristics or a special knack, scholars want to know if there is something innately different about entrepreneurs that provides them with a competitive entrepreneurial advantage. To answer this question, scholars must first access the nature of entrepreneurial competence. As I argued in Chapter 5, entrepreneurial competence consists of the prior knowledge to discover and exploit venture ideas. The most sophisticated and reliable technique for assessing competence is an assessment center that uses multitrait, multimethod procedures. Assessment centers have never been used to assess entrepreneurial competence, which is surprising given their attributed reliability. Once scholars understand entrepreneurial competence, they can begin to analyze its components to determine if certain types of prior knowledge relate better to either the discovery or exploitation processes. A very salient area of inquiry for scholars is to determine how educators can augment the entrepreneurial competence of an aspiring entrepreneur's.

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Question Six: How and What Can Scholars Teach to Students So That They Acquire Entrepreneurial Competence? How scholars teach students and what they teach them depends on what they determine about the nature of entrepreneurial competence. I argued in Chapter 9 that if our goal is to instill competence, scholars as teachers can do that best by engaging students in theory-based learning activities, which suggests that what students do during class is more important than the topics that teachers plan to cover with them. An area of research with tremendous promise concerns the nature of the activities that would be best suited to allow students to discover their own competencies. In my view, the treatments outlined in the appendices to Chapter 7 provide a useful beginning for understanding learning activities. Meaningful progress in pedagogy depends on first understanding the nature of entrepreneurial competence so that learning activities which can engender it can be identified. These relationships between competencies and theory-based activities offer important opportunities for theory development. A FINAL CHALLENGE TO RESEARCHERS There is no shortage of opportunities for scholars to learn more about the search for discoveries and its role in entrepreneurship. Because discovery plays a role in the advancement of many areas of human endeavor, theory developed for entrepreneurs presents many more additional opportunities for curious and dedicated researchers. It would not surprise me if some future student could use discovery theory to become a better pianist, homebuilder or gardener, despite the fact that the theorist who paved the way for future accomplishment did not anticipate his or her contribution. To take advantage of these opportunities and to serve those who will follow, scholars themselves can engage in a process of entrepreneurial discovery, which makes them academic entrepreneurs searching for clues to the causes of future events. It would not surprise you as my reader at this point if I were to argue that scholars should select their personal consideration sets very carefully. Simply staying alert for the next fad to appear cannot provide the direction or cumulative progress that will be necessary to prepare students for the future. Moreover, progress to develop better search theory need only depend on acquiring specific information from searching a consideration set for signals about the future. May researchers be rewarded for their personal informational investments as they pave a theoretical path into the future for those of us who will follow them.

Index Alderfer, Clay, 40 Alertness perspective, 11, 95-96, 100101, 108, 137, 199 n.l. See also Systematic search versus accidental alertness experiment Austrian economics, 31-32, 82; versus neoclassical economics, 47-49 Barney, Jay, 12 n.3 Baudeau's theory, 62, 65 Bygrave, Bill, 205-6 Camerer, Colin, 205 Capital gap issues, 32-33 Competitive structure, impact on entrepreneurial discovery, 10, 73-74, 8788, 191-93; barriers to entry (reducing competition), 85; competitive context, 74-75; creating competitive advantage, 33, 36; imperfect, 51-53, 79, 84-86; perfect, 79, 81-82; Schumpeterian, 79, 82, 84; unobserved, 79, 86-87; and venture strategy/performance, 77-78, 142. See also S-C-P model Consideration set, 11, 97, 108-9, 11819, 139, 194; advantages, 110 n.l; channel searching, 115; research di-

rections, 226-27; and signal processing, 101-3. See also Entrepreneurial competence; Information channels; Search process modeling; Systematic search versus accidental alertness experiment Contingency approach for teaching theory, 36-37; alternative assumption considerations, 40-41; evidence for assumptions, 39-40; underlying assumptions, 37, 38-39 Creative destruction concept, 62, 82 Discovery process, 1, 9-10; and entrepreneurship, 187-88; informational elements, 1, 11, 188; and mathematical formalism, 10-11, 197; omission from entrepreneurship models, 7-8; recognition literature, 137; teaching/ learning, 4; as a venture idea, 94. See also Search process modeling Drucker, Peter, 9 Entrepreneurial competence, 3-4, 9 4 95, 108, 195; acquisition of, 105; consideration set-based model, 9 6 97, 99; and declarative knowledge, 102; entrepreneurial alertness theory,

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95-96, 100-101, 108; and idiosyncratic knowledge, 103, 117-18, 133, 140; as knowledge, 10, 93, 140-41, 193-95; and luck, 87-88, 96, 101, 107; and procedural knowledge, 1023; research opportunities, 225-26. See also Exploitation process; Signals Entrepreneurial discovery, 2 - 3 , 8-9, 23, 66; descriptions of conduct versus theory of discovery, 5-6, 188; in economics literature, 47-49; importance of, 6-7; innovator role, 61-62; lack of curriculum/research, 4-5; risk arbitrageur role, 62-63, 86; risk bearer and innovator role, 62, 84; risk bearer role, 61, 85-86; roles in (overview), 59-61, 66, 79, 190; theoretical directions, 5, 19. See also Competitive structure, impact on entrepreneurial discovery; Informationbased model of entrepreneurial discovery; Market-based logic for entrepreneurial discovery; Risk evaluation Entrepreneurs: as equilibrators, 63; heterogeneity, 193; as innovators, 61, 65; as investors in risk-reducing signals, 64; versus managers of small businesses, 137; motivational benefits of studying, 22; and psychic wellbeing, 58-59; risk-taking propensities, 55 Entrepreneurship, 215 n.l; descriptive models, 7-8; generalization difficulty, 7; idiosyncratic aspect of, 6; models inferring discovery, 8; models omitting discovery, 7-8; scholarship criticism, 22-24; and small business management, 1; theoretical perspective, 2; and theory of market efficiency, 21. See also Discovery process; Exploitation process; General theory of entrepreneurship Entrepreneurship courses/survey, 16; academic autobiography, 16-17; complexity versus reductionism, 17; conclusion (proposal), 19-20; growth of courses, 202-3; rigor/rele-

vance, 18-19; texts, 18; topics covered, 17-18; underlying assumptions, 20-22. See also Contingency approach for teaching theory; Pedagogy of entrepreneurship theory; Theoretical issues in the study of entrepreneurship Entrepreneurship research: critical open questions, 227-30; descriptive/"exploratory" research, 28-29, 222-23; in entrepreneurial competence area, 225-26; faulty experimental design, 223-24; future directions, 221-22; methodological problems, 11, 22225; phenomenological emphasis, 15; relevancy issues, 224-25; theoretical concerns, 15-16. See also Theoretical issues in the study of entrepreneurship Exploitation process, 1, 94, 108-9, 183 n.l, 194; as an element of competence, 104-5; as an information problem, 105, 188 General theory of entrepreneurship, 23, 189-90; building requirements, 40-41; research questions, 227-30. See also Theoretical issues in the study of entrepreneurship Gifford, Sharon, 211 Heuristic, defined, 3 Inalienablility, 141-42 Industry, 75; identification issues, 3 1 32; structures within a market, 79 Information channels, 117-18, 196; mathematical optimization of, 117, 131. See also Consideration set, channel searching; Search process modeling Informational economics perspective, 2 9 , 3 1 , 4 7 , 116, 190-91 Information-based model of entrepreneurial discovery, 10, 49, 51, 66, 94, 116; allocationally efficient markets, 51; information search theory, 95-96; informationally efficient

Index markets, 51; public and private markets, 51-53; research implications, 67; specific information, 56-57, 99100; systematic search, 101, 116. See also Risk evaluation; Signals; Systematic search versus accidental alertness experiment Interdependence concept, 86 Internet, impact on competition, 105 Kirzner, I. M., risk-arbitrage theory, 62-63, 65-66 Lewin, Kurt, 9 Market, 74-75; contestable, 81; exit the, 81-82 Market-based logic for entrepreneurial discovery, 74, 79-81; structures within a market, 79. See also S-C-P model Markets for information, 75-76; private, 76-77; public, 76 MKCD (Matula-Kadane-ChewDeGroot) approach, 120, 122. See also Search process modeling Neoclassical economics, 48; and perfect competition concept, 81 Pedagogy of entrepreneurship theory, 201-2; courses in what to do, 203; effective teaching strategy, 207; examples of instructor-designed theorybased activities, 214-15; examples of student-designed theory-based activities, 212-13; issues in teaching theoretical concepts, 206-7; researchteaching link, 204-5; scholar as teacher role, 208-9; studentapproved system of learning, 207-8; theory-based activities, 211-12, 21718 n.l5; theory-based activities (advantages of), 209-10; theory-based activities (obstacles), 210-11; theorydriven research, 205-6 Performance, for new ventures, 78

233

Porter, Michael, 31, 33, 86 Price-searchers, 81 Rensselaer Polytechnic Institute research workshop, 16, 41 n.l; theoretical synthesis, 28; theory-building exercises, 25, 28 Risk evaluation, 54, 192; agency risk, 54; cost reduction of, 55-56; market risk, 54; risk-taking propensities of entrepreneurs, 55 Schumpeter, Joseph, 61, 63, 65; competition type, 79, 82; teaching innovation concept, 115 S-C-P model, 77-78. See also Marketbased logic for entrepreneurial discovery Search process modeling: assumptions, 119; empirical testing, 133; illustrative examples, 123, 128-30; implications, 131-32, 133-34; optimal search sequence model, 120, 122, 130, 138-39, 195-96; probability of discovery limitations, 11920; search budget, 125; search termination model, 125-28; search termination options, 123-25 Signals, 3, 97, 110, 191, 194-95; accessing, 100-101; choices in acquisition, 103-4, 196; costs of transfer, 105-6; information channel source, 53, 97; information in risk reduction, 56-57; optimization of tradeoffs by entrepreneurs, 63-66, 11819; from previous experience, 58; and quickness, 106-7, 195; as resource allocation cues, 100; role of, 99-101; security arrangements, 5 3 54; and systematic search, 101, 115; as venture-specific information, 9 9 100. See also Consideration set Small Business Administration study (1976-1990), 84 Systematic search versus accidental alertness experiment, 138, 149-50, 197-98; feasibility of systematic search, 138-39; methodology, 143-

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Index

46; pedagogical implications, 15051, 198; rationale and hypotheses, 139-42; research directions, 151-52; research material/documents/forms, 153-83; results, 147, 149 Theoretical issues in the study of entrepreneurship, 2, 4 1 , 188, 205-6; agency theory, 32, 37, 42 n.7; assumptions (categories of), 37; decision-making theory, 3 1 ; directions in entrepreneurial discovery, 5, 19; in entrepreneurship research, 15-16; game theory, 32; hypercompetition, 36; industrial organization economics, 3 1 ; ineffectiveness of atheoretical arguments, 24-25; multiplicity of theories, 2 8 -

29; procedural justice theory, 32-33, 37, 38, 42 n.7; resource-based theory, 33, 36; social embeddedness theory, 33, 39; theory-building exercises, 25, 28; transaction cost economics, 33, 39. See also Austrian economics; Contingency approach for teaching theory; General theory of entrepreneurship; Informational economics perspective; Pedagogy of entrepreneurship theory Value, of discovery, 2 Venture idea, attributes determining potential, 142 Whitehead, Alfred North, 24 Windows 95/98, as examples of innovating discovery, 62

About the Author JAMES O . FIET is Brown-Forman Chair in Entrepreneurship and Professor of M a n a g e m e n t at the University of Louisville. H e also serves as the director of the university's Institute for Entrepreneurial Research and as the Associate Dean for Research of the College of Business and Public Administration.