Factors Affecting Entrepreneurs Decision to Enter New Markets: Propositions and Theorized Influences

Transcription

1 Page 1 of 8 ANZMAC 2009 Factors Affecting Entrepreneurs Decision to Enter New Markets: Propositions and Theorized Influences Keith Perks k.j.perks@brighton.ac.uk Markus Steinhauser m.steinhauser@brighton.ac.uk Paurav Shukla p.shukla@brighton.ac.uk University of Brighton Business School Abstract New market entry is an important strategic decision, yet relatively little research has addressed the factors triggering the act. We seek to address this gap by evaluating the role of entrepreneurs in the decision to enter new markets through a theorized set of influences evaluated in a case study of a German financial services company. The findings suggest that an entrepreneur s tacit knowledge, networks, and the firm s resources, networks and customer contacts are important influences on their decision to enter new markets. Key words: Entrepreneurs ; decision-making; new market entry; influences; propositions

2 ANZMAC 2009 Page 2 of 8 Introduction Entrepreneurship has been defined as the act of market entry and the entrepreneur as the person in the firm who decides which markets to enter, when and how (Lumpkin and Dess, 1996). In today s increasingly complex and dynamic business environment, the act of market entry gains particular importance as a response to environmental changes (Hitt, 2000; Ireland and Hitt, 1999). Earlier definitions in entrepreneurship research by Stevenson and Jarillo (1990) and Lumpkin and Dess (1996) characterise the locus of entrepreneurial activity by the mere act, rather than the firm or event and the decision to enter new markets is made by entrepreneurs not the firm. Relatively few empirical studies have addressed the triggers which influence entrepreneurs to take the decision to enter new markets (Perks and Hughes, 2008). By taking the decision to enter new markets the entrepreneur is influenced by factors, which may either constrain or prompt the decision to exploit an opportunity. Thus we summarise our paper in the research question What factors influence entrepreneurs decision to enter new markets? We now go on to elaborate our propositions and theorized influences through the literature, followed by our methodology, analysis and discussion. Literature and Propositions Knowledge and Learning Central to the entrepreneurial process is the actual identification of the new market opportunity (Corbett 2007). In the entrepreneurial process of opportunity exploration, the role of the individual s tacit knowledge derived from experience of markets and customers is crucial (Dimov and Shepherd, 2005; Davidsson and Honig, 2003). The entrepreneur accumulates knowledge in order to reduce his or her ignorance threshold, which captures a trade-off between the time needed to increase legitimacy and the necessity to act now to minimize competition (Choi, Lévesque and Shepherd, 2008:333), i.e. the shift from exploration to exploitation is dependent on the entrepreneur s accumulated knowledge, leading us to the following proposition: P1: Entrepreneurs decisions to enter new markets are influenced by their tacit knowledge and learning. Resource Adequacy A firm s internal resources underpin strategy (Grant, 1991) and the relationship between resources and company performance has been supported in the literature (Brush and Artz, 1999; Lee, Lee and Pennings, 2001; Miller and Shamsie, 1996). A firm s resources lie at the heart of a venture s strategy however resource limitations prevent entrepreneurial managers from leveraging novel combinations to generate new customer value (Sirmon, Hitt and Ireland, 2007). However, others (Perks and Hughes, 2008) found that entrepreneurs in midsize firms did not face problems of resource adequacy. Hence, we propose that: P2: Entrepreneurs decisions to enter new markets are constrained by the firm s resources. Entrepreneurs Networks and Relationships with Customers Entrepreneurs use their networks of contacts to acquire resources and information that they would not be able to access about customers (Witt, 2004). Further it is not only entrepreneurial action that plays a role in new venture growth (Hansen, 1995), but also the strength of the ties in relation to the different phases of the entrepreneurial process, e.g. firm emergence (Jenssen and Greve, 2002; Singh, 2000), and firm maturity (Johannisson et al.,

3 Page 3 of 8 ANZMAC ; Ostgaard and Birley, 1996). Within the Service Dominant logic (Vargo and Lusch, 2004) the customer is seen as a co-creator of value, which underlies the premise that the customer is treated as an operant resource, i.e. a resource that produces effects (Lusch, 2007). Prahalad and Ramasway (2000) argue that competitive advantage in the future will be tightly linked to co-creating unique value with customers. As firms try to gain competitive advantage as well as to satisfy their customers better than competition does, it can be argued that the customer influences a firm s strategic direction. Thus, the customer may be seen as a key influence on the entrepreneur s decision-making process of new market entry. Regardless of the phase in which a venture is currently in, networks can be seen as an influential factor in the firm s overall decision-making, leading to the following proposition: P3: Entrepreneurs decisions to enter new markets are influenced by their networks and relationships with customers. Mental Organizational and Strategic Flexibility in Fast Changing Industry Environments Major changes within an industry can force businesses to reshape and redefine the context of their competitive strategies (D Aveni, 1994). The rate of industry change driven by endogenous factors can be captured using the concept of Industry Clock Speed (Nadkarni and Narayanan, 2007). Depending on the clock-speed of the industry in which a business operates specific capabilities (Eisenhardt and Martin, 2000), speed of decision-making (Bourgeois and Eisenhardt, 1997), strategic responses and organization structures (D Aveni 1994; Fine, 1998), strategic schemas and degrees of mental, organizational and strategic flexibility (Nadkarni and Narayanan, 2007) are required. Thus, we propose that: P4a: Entrepreneurs decisions to enter new markets are influenced by the industry environment and the industry clock speed. P4b: Entrepreneurs decisions to enter new markets are influenced by the mental, organizational and strategic flexibility to respond in fast changing environments. All of the propositions developed above are summarized in figure 1 below. Methodology In our study we adopt a mix of theory-first, or deductive approach to identify orienting constructs and propositions from the extant literature to develop a theoretical framework. This framework is then evaluated and developed using a theory last or inductive approach with analysis and interpretation of data from a case study (Miles and Huberman, 1994) to answer our research question. The research focuses on entrepreneurs within an independent financial advisory company operating in the German market with 108 employees, following a single-case embedded design (Yin, 1994). We interviewed three entrepreneurs on the management board. We triangulated the data captured from interviews using archival records, such as company and strategy related internal documents and publicly available data. All interviews were voice-recorded in German, transcribed and translated into English. Additional notes regarding interview conditions, researcher memos (in bracket in the analysis below) of observations of gestures, or expressions of the person when discussing issues related to the propositions and other facts observed during the interview were taken into account in order to enrich the data. The coding and analysis of the data followed a patternmatching logic (Trochim 1989). In the first phase the empirical data was matched with variables explaining the initial theory-derived propositions by using a colour-coding technique.

4 ANZMAC 2009 Page 4 of 8 Figure 1 Propositions Overview P1 Tacit knowledge & experience P2 Resources P3 Personal networks and customers Entrepreneurs decision to enter new markets P4a Industry environment & clockspeed P4b Mental, organizational & strategic response Analysis and Discussion P1: Entrepreneurs decisions to enter new markets are influenced by their tacit knowledge and learning. The influence of knowledge and learning to new market entry was indicated by statements such as I purchased a few books to see what works and how it works so my goal got more and more focused, over the past years you could always see what worked and what didn t (experience) or we ve tried many different things (experience and learning) (respondent 1). When diversifying into a new business segment If I say today, I am an asset manager and then expand my business into the area of, let s say, the automotive sector, or in engineering, and start writing about that topic in the press or in public media, then my perception is probably somehow untrustworthy, unless I ve built up some special knowledge in those areas via people who are experts in that area (experience) (respondent 1). Well, I read a lot, and I must say, good journalists have good contacts, generating ides for appropriate things we can then implement. In such cases, there is a Book of Ideas or a Box of Ideas, and no single idea must get lost and that s where I put all ideas, may the come from employees, customers, from my readings, from conversations I ve had, from seminars, and so on (learning) (respondent 2). These statements show that new market entry is based on existing tacit knowledge the entrepreneur has acquired about the initial idea in order to overcome the ignorance threshold (Choi, Lévesque and Shepherd, 2008) thus, giving credence to proposition 1. P2: Entrepreneurs decisions to enter new markets are constrained by the firm s resources. The availability of resources may influence the entrepreneur s decision to enter new markets (Sirmon and Hitt, 2003). The respondent was aware that he needed to manage the firms resources ( entering the industrial sector is always very capital intensive going international would cost enormous resources it just needs to be kept within a limit, so it won t constrain us, We would rather build up a stable infrastructure in the area of Asset

5 Page 5 of 8 ANZMAC 2009 Management instead of dissipating our energies, (respondent 1). In certain cases, the respondent was unable to take the decision to enter new markets, as the required resources were not available at that time, i.e. there have been products which we couldn t exploit because the financial expenses would have been too high for us (respondent 2: memo said with emphasis). Decisions with regards to new market entry depends on the amount of resources (respondent 3) and the unavailability of such may constrain the firm and the entrepreneurs decision to diversify in new areas ( I do obviously need relevant personnel it always depends on, I d like to do it but I don t have the appropriate partner (respondent 1: showed signs of frustration at the lack of resources). Thus, there is some credibility for proposition 2. P3: Entrepreneurs decisions to enter new markets are influenced by their networks and relationships with customers. While discussing the role of networks and relationships, a respondent suggested that, customer contacts are mutually important. You may get offered personnel, or you get to know people, and those people, as you ve seen in my example when I left the bank, may show you a completely new direction (respondent 1, memo earnest expression seemed to be significant to him). As such, networks may be built up just for the purpose of gaining access to new markets, i.e. Mr. X built up an adequate network (with regards to entering the new market of Renewable Energies) (respondent 2). Networks not only enable the respondents to gain access to new markets, but may also provide them with ideas of new markets to enter. Network members can be as close as the family my wife was the innovator (respondent 1), or may even come from a personal network external people from outside the company approach us and offer patents to extend or develop various business areas (respondent 2). Therefore, the company tries to build strong relationships with business partners (respondent 3), which may lead to new market opportunities. Customer satisfaction may even serve as a trigger for taking the decision to enter new markets, i.e. frustration of investors, i.e. in their willingness to invest led to the development of new business areas, which were separated from the stock market customer needs were growing at that time, so we started to invest heavily in that area (respondent 3). At the centre of the entrepreneurs attention is how the company is perceived by the customer, that s of major importance the worst thing that could happen, is that the customer does not know anymore what business the company is in (respondent 1). The responses clearly highlight the importance of the top managers networks and customers in influencing their decision to enter new markets, thus giving credence to proposition 3. P4a: Entrepreneurs decisions to enter new markets are influenced by the industry environment and the industry clock speed. P4b: Entrepreneurs decisions to enter new markets are influenced by the mental, organizational and strategic flexibility to respond in fast changing environments. The company operates in a fast-paced industry ( in the financial business speed may be quite important, (respondent 1), reflected in the company s strategic flexibility ( quite often extensions happen by luck we as a company want to grow we ve got absolute flexibility, which enables us to use our human resources most efficiently, (respondent 2, memo emphasized the importance of this through a hand gesture), and its complex strategic schema ( try out five different things we ve tried many different things, starting from, respondent 3), i.e. a combination, which is proven successful in fast-paced industries (Nadkarni and Narayanan, 2007). I don t need a panel or board. In a medium sized entrepreneurial

6 ANZMAC 2009 Page 6 of 8 company you agree between the directors, and I don t need to consult a works committee (respondent 2, memo real conviction in his voice). This enables the company to respond to changes you always need to be adaptive, because as your company grows, the dimensions grow accordingly. Well, for my area decisions are still relatively fast (respondent 1, memo expression of sincerity when making this point). Looking at the above evidence propositions 4a and 4b have credible support. Conclusions and Future Research We set out to address a gap in our cumulative understanding of triggers which influence an entrepreneur to take the decision to enter new markets. Our case evidence suggests that four theory-derived propositions appear to give credible explanations of the decision to enter new markets taken by the entrepreneurs in the case study. The next challenge is to quantitatively examine these propositions to whether they hold for a population of firms. Our work is constrained by a single-case design despite its advantages in terms of data and insight enrichment. Therefore, quantitative analysis would enable us to learn whether these combinations of strategic and entrepreneurial factors do indeed explain differences in new market decisions and generalize more broadly. Since our propositions bring together multiple literature streams, our analysis helps us to determine the broader network of factors affecting entrepreneurs new market entry decision-making. Future research might also benefit from examining which set of factors (entrepreneurial versus strategic versus marketing for example) receive greater bias or emphasis from entrepreneurs.

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