Knowledge based assets in entrepreneurial ventures
Anjali Bakhru and Robert M. Grant
The vigor and dynamism of developing research in entrepreneurship during the past decade owes much to the increased fusion of the fields of entrepreneurship, strategic management, organizational evolution, and organizational ecology. The most important contributions of strategic management have been ideas associated with resource based and knowledge based approaches to the firm. The role of resources in general, and knowledge in particular, has been important in the origins of entrepreneurial activity and in influencing the performance and early development of start up businesses. In addition, emphasis on the role of knowledge assets in entrepreneurship has provided closer links with the macro level study of entrepreneurial activity undertaken by economic and social geographers and economic historians (see, for example, Saxenian, 1994; Acs, 2000). These studies have placed emphasis on the role of localized concentrations of scientific and technical knowledge (Zucker, Darby and Brewer, 1998), on information through social networks (Aldrich and Zimmer, 1986), and the role of venture capitalists in supplying know how – as well as the financing of entrepreneurial activity (Freeman, 1986). Our knowledge-based assets in entrepreneurial ventures 167 focus is on the micro level literature, particularly upon the sources of individual entrepreneurs’ knowledge and the processes through which new enterprises convert individual know ledge into organizational capabilities.
At the root of the knowledge based view is the characterization of the firm as a repository of knowledge (Kogut and Zander, 1992). In the case of new start up enterprises, knowledge res ides primarily within the individual members of the firm – the younger the firm, the more important is individual knowledge relative to organizational knowledge. The founders of new firms have histories (Helfat and Lieberman, 2001); typically, it is their prior work experience that is the primary source of the knowledge that is critical both to the decision to found a new enterprise and to the initial performance of their new venture. The distinction between venture creation and venture performance is an import ant one. We argue that the value of prior experience relates primarily to creating the new venture and ensuring that it becomes operational. However, the greatest challenge facing the new enterprise is survival. Research across sectors and across countries shows that mortality rates among new enterprises are very high. This is notably the case in new industries, where high rates of entry are matched by high rates of failure – especially among start up firms (Carroll et al., 1996). The challenge of survival is especially great in a new industry because survival requires constant adaptation to the rapid rate of evolution of the industry environment. Despite consider able research into the biographical characteristics of entrepreneurs and the performance of the business ventures they found – including the effects of education, managerial experience, and prior entrepreneurial experience (e.g., Sandberg and Hofer, 1987), the result of the research lacks consistency and robustness. It seems likely that the knowledge of the entrepreneur – as deter mined by prior experiences – is influential in the decision to found an enterprise, in the characteristics of that enterprise, and in its initial success. However, longer term, it is the enterprise’s ability to develop and deploy its knowledge base that becomes much more important for survival and growth.
In terms of the knowledge base of individual entrepreneurs, prior work experience offers entrepreneurs two types of knowledge that are crucial to the founding and subsequent survival of their new ventures: (1) the ability to recognize business opportunities, and (2) the organizational and managerial know how for establishing and developing a new enterprise. The prior work experience of founders is relevant to both categories of knowledge, although other sources of knowledge are potentially relevant to the first category. First, research has shown that business opportunities are likely to have been identified and formalized based on an individual’s previous work experience (Shane, 2000), although the ability to recognize business opportunities could have been informed by other types of prior experience gained through educational experience or social contact, for example. Second, while the role of the prior experience of founders is shown to be important in the early performance of a new venture (Stuart and Abetti, 1990), it is increasingly being cited in relation to its effect on venture creation, where our focus here is on the knowledge gained through prior work experience that is relevant to the managerial challenge of developing and establishing a new venture. Recent research more specifically links the prior managerial experience of founders to a capability based perspective. Among the Inc. 500 high growth start ups, Romanelli and Schoonhoven (2001: 47) show ‘‘a very close as sociation between the expertise and experience of the founders and the kinds of organizations they created.’’ Alvarez and Busenitz (2001) state that the role of entrepreneurs can be considered in resource terms. The ‘‘entrepreneurial re source’’ can be considered in terms of (1) entrepreneurial recognition, or the recognition and seeking of business opportunities, and (2) the ability to combine and organize resources. Having recognized a business opportunity, an entrepreneur is further able to combine and co ordinate resources within the new venture, where these resources comprise the tangible (physical, financial), intangible (brand), and human resources that are essential to ensuring that the new venture is operational. In other words, a key component of managerial know ledge is a manager’s prior experience of creating and developing routines and capabilities.
Central to the challenge of new venture creation is the challenge of developing the routines 168 knowledge-based assets in entrepreneurial ventures and capabilities that are essential to making the venture fully operational. Research has high lighted the importance of the managerial role in relation to the selection and evolution of capabilities: the importance of the top management team’s influence on the evolution of the firm’s capability set (Levinthal, 1995; Kazanjian and Rao, 1999), and how managerial input in the selection and development of capabilities can differ greatly across firms (Amit and Schoemaker, 1993). However, it is with respect to the nature of the managerial task that we can better understand the role of managerial knowledge in the creation of routines and capabilities.
The managerial challenge can be considered to comprise the development of the underlying operational and technical routines that are specific to functional areas (i.e., component routines), as well as the structure of which they are a part (i.e., the architectural routines that integrate component routines both within and across functional areas). While the value of prior experience relates to the tacit knowledge (knowing how) and the explicit knowledge (knowing about) that entrepreneurs bring with them, it is argued that the relative value of the types of knowledge that the entrepreneur possesses is better understood in relation to the capability based challenge. The managerial knowledge re quired for developing routines and capabilities can be considered to comprise two elements: the requisite component knowledge underlying specific routines, as well as the architectural know ledge critical for the integration of routines and capabilities.
Kirzner (1979) makes a distinction between entrepreneurial knowledge and the knowledge expert, suggesting that it is the entrepreneur who hires the latter. Alvarez and Busenitz (2001) similarly distinguish between the specific knowledge of the expert (such as technological expertise) and the entrepreneur’s knowledge. While the entrepreneur may have specialized knowledge, it is with regard to the tacit, generalized knowledge of how to organize specialized knowledge that is the entrepreneur’s critical in tangible resource.
Recent empirical research on capability development in new online ventures provides further support for the value of the entrepreneur’s architectural knowledge assets (Bakhru, 2003). A dis tinction is made between the role of prior experience at different layers in the managerial hierarchy. The importance of the prior organizational experience of the top or senior management team relates to their ability to develop the overall blueprint for the creation of capabilities within online operations, or ‘‘capability blue print,’’ where this refers to the overall structure or architecture of the firm’s capability set, including consideration of the main tasks or processes of which these core functions comprise. In contrast, it is the next layer of management that is more directly responsible for the creation of organizational routines. The relevance of their prior organizational experience relates to the ‘‘technical’’ knowledge considered vital to creating specific functional and operational routines.
It is argued that a key resource in new ventures are the knowledge assets that entrepreneurs bring with them. While the role of entrepreneurs can be considered in relation to business opportunity recognition, the critical role of the entrepreneur is in creating the venture and ensuring that it is operational. As such, value lies in the architectural knowledge assets of the entrepreneur that are essential for the integration of routines and capabilities and that are, in turn, derived from the tacit, generalized knowledge that is a product of the entrepreneur’s prior work experience.
Bibliography
Acs, Z. J. (2000). Innovation and the Growth of Cities. Cheltenham: Edward Elgar.
Aldrich, H. E. and Zimmer, C. (1986). Entrepreneurship through social networks. In D. L. Sexton and R. W. Smilor (eds.), The Art and Science of Entrepreneurship. Cambridge, MA: Ballinger, 3 23.
Alvarez, S. A. and Busenitz, L. W. (2001). The entrepreneurship of resource-based theory. Journal of Management, 27: 755 75.
Amit, R. and Schoemaker, P. J. (1993). Strategic assets and organizational rent. Strategic Management Journal, 14: 33 46.
Bakhru, A. (2003). Competitive advantage in new markets: The case of online business. Unpublished doctoral thesis, Cass Business School, City University, London.
Carroll, G. R., Bigelow, L. S., Seidel, M.-D., and Tsai, B. (1996). The fates of de novo and de alio producers in the American automobile industry, 1885 1981. Strategic Management Journal, 17(summerspecial issue): 117 37. knowledge-based assets in entrepreneurial ventures 169
Freeman, J. (1986). Entrepreneurs as organizational products: Semiconductor firms and venture capital firms. In G. Libecap (ed.), Advances in the Study of Entrepreneur ship, Innovation, and Economic Growth. Greenwich, CT: JAI Press.
Helfat, C. E. and Lieberman, M. (2001). The birth of capabilities: Market entry and the importance of pre-history. Paper presented at the Academy of Management Annual Meeting, Washington, DC.
Kazanjian, R. K. and Rao, H. (1999). Research note: The creation of capabilities in new ventures a longitudinal study. Organization Studies, 20 (1): 125 42.
Kirzner, I. (1979). Perception, Opportunity, and Profit. Chicago: University of Chicago Press.
Kogut, B. and Zander, U. (1992). Knowledge of the firm, combinative capabilities, and the replication of technology. Organization Science, 3: 383 97.
Levinthal, D. (1995). Strategic management and the exploration of diversity. In C. A. Montgomery (ed.), Resource Based and Evolutionary Theories of the Firm: Towards a Synthesis. Boston, MA: Kluwer Academic Publishers.
Romanelli, E. and Schoonhoven, C. B. (2001). The local origins of new firms. In C. B. Schoonhoven and E. Romanelli (eds.), The Entrepreneurship Dynamic. Stanford, CA: Stanford University Press, 40 67.
Sandberg, W. R. and Hofer, C. W. (1987). Improving new venture performance: The role of strategy, industry, structure, and the entrepreneur. Journal of Business Venturing, 2: 5 28.
Saxenian, A. (1994). Regional Advantage: Culture and Competition in Silicon Valley and Route 128. Cambridge, MA: Harvard University Press.
Shane, S. (2000). Prior knowledge and the discovery of entrepreneurial opportunities. Strategic Management Journal, 11: 448 69.
Stuart, R. W. and Abetti, P. A. (1990). Impact of entrepreneurial and management experience on early performance. Journal of Business Venturing, 5 (3): 151 62.
Zucker, L. G., Darby, M. R., and Brewer, M. B. (1998). Intellectual human capital and the birth of US biotechnology enterprises. American Economic Review, 88: 290 306.