Santos & EisenHardt 2009

CONSTRUCTING MARKETS AND SHAPING BOUNDARIES: ENTREPRENEURIAL POWER IN NASCENT FIELD

* Abstract

How entrepreneurs shape organizational boundaries and construct markets through an inductive, longitudinal study of five ventures

How successful entrepreneurs attempt to dominate nascent markets by co-constructing organizational boundaries and market niches using three processes

1) claiming

2) demarcating

3) controlling a market

Power is the underlying boundary logic and 

"Soft-power" strategies by which entrepreneurs compete in highly ambiguous markets. 

A holistic view of organizational boundaries and Insights into institutional entrepreneurship and resource dependence theories. 

Reinvigorating the study of inter-organizational power.

* Abstract

Needs to establish its boundary to distinguish the organization from the environment and define its domain of action (Aldrich & Ruef 2006, Scott 2003)

Rich theoretical perspectives of the organizational boundaries (Santos & Eisenhardt, 2005)

1) Exchange efficiency view: Cost minimization (Dyer 1996; Williamson 1981. 1991)

2) Power lens: Control of exchange relations (Pfeffer & Salancik 1978; Thompson 1967

3) Competence view: Evolving resources and capabilities (Brusoni, Prencipe, & Pavitt, 2001; Penrose, 1959; Peteraf, 1993)

4) Identity: Cognitive frames of organization members that define "who we are" as an organization and shape of the choice of boundaries (Dutton & Dukerich, 1991; Porac, Thomas, Wilson, Paton, & Kanfer, 1995; Tripsas, 2009)

Narrow ranges of research designs of the organizational boundaries

Atomistic view primarily on the antecedents of the single-boundary decision in cross-sectional samples (David & Han, 2004)

Problematic formulation: TCE, whether to internalize or outsource (Williamson 1985) Discrete structural alternatives, make or buy

-> As if the boundary is the accumulation of independent boundary decisions in well-structured settings

+ Competencies (Argyres, 1996; Jacobides & Hitt, 2005; Poppo & Zenger, 1998)

But focusing at independent boundary decisions at specific stages in the "value chain" continued

Pitfalls

1) Potential relationships among different boundary-setting mechanisms (e.g., alliances with key partners, identity positioning, acquisitions)

2) The evolution of organizational boundaries (Santos & Eisenhardt,2005)

How organizational actors actually conceptualize and execute boundary work?

Individual boundary decision & Overall patterns of strategic action

Research designs that permit exploring the evolution of organizational boundaries and capture the micro details of boundary

Exploring the shaping of organizational boundaries over time by new firms in nascent markets

An important point in this setting (the very beginning of organizational life): boundary work is both crucial for survival and poorly explained by current theories

Nascent markets: business environments in an early stage of formation, often appearing in emerging "organizational fields" (Aldrich & Fiol,1994)

-> Unstructured settings with extreme ambiguity: undefined or fleeting industry structure (Eisenhardt, 1989a; Rindova & Fombrun, 2001), unclear or missing product definitions (Hargadon & Douglas, 2001), and lack of a dominant logic to guide actions (Kaplan & Tripsas, 2008; Porac, Ventresca, & Mishina, 2002).

Ambiguity

Definition: lack of clarity about the meaning and implications of particular events or situation (Davis, Eisenhardt, & Bingham, in press; Weick, 1995)

Sources: Unknown cause-effect relations and lack of recurrent, institutionalized patterns of relations and actions (Aldrich & Fiol, 1994)

Effect: confusion and multiple potential interpretations

Uncertainty: inability to predict the probability of specific outcomes (Davis et al., in press; Weick, 1995)

a situation that current boundary theories, especially those based on efficiency and resource dependence logic, can deal with, can deal with

Context 1: Nascent markets

Unique problems 

Executives operating lack a clear view of industry structure (Best prospects as customers, partners, competitions, and suppliers) (Rindova & Fombrun, 2001)

Unable to specify cost functions (Gilbert, 2005), primary dependence relationships (Rao 1994), Strategically valuable competencies within the industry (Bingham, Eisenhardt, & Davis, 2009), and legitimated industry logics to guide action (Aldrich & Fiol, 1994; Kaplan & Murray, forthcoming)

Nascent markets enable and reward strategic action by organizational actors (Ozcan & Eisenhardt, 2009)

-> + How existing theories of organizational boundaries might apply in nascent markets where the basic elements of industry structure are ambiguous, evanescent, or nonexistent

Context 2: New firms

1) Not well addressed by existing boundary theories

Ventures typically have incipient activities and resources (Burton & Beckman, 2007; Rindova & Kotha, 2001), a fluid or nonexistent identity (Lounsbury & Glynn, 2001; Rindova & Kotha, 2001), and little power to influence other firms (Hallen, 2009; Ozcan & Eisenhardt, 2008). Also, they face major strategic hurdles that make survival, not efficiency, crucial (Graebner, 2004)

2) Pivotal condition

Due to the vulnerability of new firms

Boundary-related issues for new firms in nascent markets

1) Cognitive and sociopolitical legitimacy (Aldrich & Fiol, 1994; Rao, 1994)

-> How institutional actors act collectively to legitimate an emerging set of activities (Leblebici, Salancik, Copay, & King, 1991; Rindova & Fombrun, 2001; Sine & David, 2003), a few studies address how entrepreneurs organize their own firms

Rindova and Kotha (2001) examined how Yahoo executives used identity to shape their actions in the nascent Internet search market. 

Hargadon and Douglas (2001) studied Edison's tactics for establishing the nascent electricity industry by framing it as cognitively proximate to the established gas lighting industry.

Neither focus on boundaries per se nor address the rich set of possible boundary theories and available mechanisms (Santos & Eisenhardt, 2005).

2) Interfirm relationships (Powell, Koput, & Smith-Doerr, 1996)

Centers on single-boundary decisions using resource dependence and social network logics (Eisenhardt & Schoonhoven, 1996; Gulati & Higgins, 2003) 

But a few studies examine entrepreneurs as they form holistic patterns of ties.

Powell & colleagues (1996): Biotechnology ventures that form many ties early on gain valuable resources and attain more central network positions.

Ozcan & Eisenhardt (2009): Entrepreneurs who engage in a strategy of forming multiple ties simultaneously create more successful alliance portfolios

Hallen (2009): Several alternative strategies for forming successive ties in the garnering of resources from venture investors

These efforts neither focus directly on boundaries nor include a rich set of boundary mechanisms and theoretical logic

Extant boundary research primarily examines atomistic boundary choices in well-structured organizations and environments

A few studies take a longitudinal view and focus on emerging fields, yet they typically use a single theoretical lens and do not address boundary setting per se. # Not an organization, but an entrepreneur

How do entrepreneurs addressing nascent markets shape their organizational boundaries over time?

A multiple-case, inductive study that uses in-depth archival and field data to track closely how entrepreneurs at five new firms in different nascent markets shaped their organizational boundaries during the initial years of organizational life.

Recent calls for strategic and longitudinal studies of boundaries (Jacobides & Billinger, 2006; Santos & Eisenhardt, 2005).

Result

Actors rely on multiple boundary mechanisms centered on three processes: claiming a market, demarcating the market, and controlling it.

-> Cognitive (identity-based), Relational (alliance-focused), and Resource (acquisition-driven) structures for firm boundaries and nascent markets.

Contribution

Institutional entrepreneurship <- Emphasizing novelty and dominance, not just fitting in and legitimacy

Resource dependence <- Ambiguous environments and entrepreneurial actors

Key insight

Power is the unifying boundary logic

Power: the ability of an actor to influence the behavior of others in ways that produce outcomes favored by the focal actor (Pfeffer & Salancik 1978)

How entrepreneurs use soft-power strategies based on subtle persuasion to dominate new markets, rather than traditional hard-power tactics of coercion based on extensive resource control (Nye 2004)

Reinvigorating the study of inter-organizational power and reaffirming that agency and strategic action often rest on the rationale of power, however subtly exercised.

METHODS 

Research Design and Setting

An inductive, multiple-case research design (Eisenhardt, 1989b). 

Multiple cases permit replication logic in which cases are treated as experiments (each serving to confirm or disconfirm inferences drawn from the others (Yin, 1994)) -> More robust, generalizable theory than single cases (Eisenhardt & Graebner, 2007)

Three units of analysis: boundary decision, organization, and market

Background

The confluence of computing, electronics, and telecom industries in the mid-90s. 

Innovations are accepted

1) The emergence of numerous nascent markets in this industry confluence

2) The related burst of entrepreneurial foundings

# Issue: co-constructing organizational boundaries and market niches

Issue: The evolution of the organizational boundaries of five new firms

Population

Selected in mid 2000 from the population of U.S. firms founded in late 1994 and early 1995

1) The period of highest ambiguity - Just prior to the take-off of the Internet-related sector (Sine, Mitsuhashi, & Kirsch, 2006)

2-1) This period was sufficiently distant to allow longitudinal patterns to emerge 

2-2) Sufficiently recent to allow accurate, detailed data collection at the time of our study

Sample

1) Five distinct types of nascent markets

1-1) Virtual marketplace

1-2) Digital services

1-3) Online commerce

1-4) Distributed enterprise software

1-5) Networking hardware

2) Controls

1) Founding contexts

2) Founding teams

3) Initial funding

i.e. Lone engineer who stumbled serendipitously into an opportunity

i.e. Entrepreneur owning technology and searching for a market opportunity

i.e. Seasoned executives with detailed business plans and strong ties to professional investors 

# Studying a diverse set of firms -> firmer grounding of theory (Harris & Sutton 1986)

Research design

Longitudinal design: Track multiple boundary decisions during the firm's initial five years

Requirement: Firms with rich archival histories and willingness to grant diverse, multiple interviews

Not a random sample?: A process-focused and theory building study (Siggelkow 2007)

Bias: Longer-lived than many new firms & More successful than most new firms

Nonetheless: Many variations in the boundary decisions and outcomes

Data Collection

Definition

Boundary decision: an organizational choice that shapes the demarcation of an organizatino relative to its environment (Santos & Eisenhardt 2005; Scott 2003)

Expansive approach

Broad definition -> Allow focussing on topic avoiding a restrictive theoretical or empirical lens

Includes boundaries specified by a firm's resource portfolio (Brusoni et al., 2001), the sphere of influence (Pfeffer & Salancik, 1978), organization members' cognitive mindset (Tripsas & Gavetti, 2000), and governance of activities (Williamson, 1991)

Examples: acquiring a firm, ending an alliance, redefining organizational identity, and making an outsourcing choice.

Data sources: archives and interview

1) Archives 

1-1) Internal sources 

All press releases since firm founding (5o per year by the firm)

Securities and Exchange Commission (SEC) filings

Initial public offering (IPO) prospectuses (1,000-1,200 pages per firm)

Internal reports and presentations (70-150 pages per firm)

Video and audio archives of presentations made by firm executives at various points in time (4 per firm)

1-2) External 

Media articles about each firm identified using ABI Inform (80-120 articles per firm)

Analyst reports

Books about each firm when available

Media articles about competitors and the relevant nascent markets

Chronological case histories for each firm (60 pages) 

Structured by a chronological list of boundary decisions 

Organized the cases by year detailing the relevant boundary decisions 

Tables and graphs of each case (Revenue, Market share, Employees, Growth rates, Changes in the composition of the executive team)

2) Semistructured interviews with internal and external informants

9 interviews per firm (46 interviews from early 2001 to mid 2002)

1st interview 

CEO and/or founder lasted several hours 

To identify major boundary decisions (matched with archival material)

Defined a boundary decision with the formal definition 

and added a conceptually consistent lay language, describing such decisions as

"Choices that shape the firm scope and its domain of action."

-> Validating the initial list of boundary decisions

: Identifying decisions that were unavailable in archival sources (Major acquisitions not consummated, alternative identities not chosen, and outsourcing opportunities not pursued)

13 to 15 major boundary decisions for each firm 

and at least three internal informants who could provide firsthand accounts of how each decision evolved.

Selection of internal informants

1) Long tenure in the firm (providing a temporal perspective on the firm's boundaries

2) Direct involvement in at least some major boundary decisions (providing deep, first hand knowledge)

3) Functional and hierarchical variety (variety of perspectives)

External informants

Former employees, business partners, competitors, and industry experts

Multiple informants

1) Mitigates the potential biases of any individual respondent by allowing information to be confirmed by several sources

(Golden 1992; Miller, Cardinal, & Glick 1997)

2) Induces richer and more elaborated models, complementary aspects of major decisions

Interview

45 minutes to two hours

Record and transcribe generating 800 double-spaced pages

Interview guide

1) Open-ended questions about a broad view of the evolution of the relevant nascent market, the focal firm, and its boundaries.

2) Specific boundary decisions in which the informant was directly involved

( + ask to relate the chronological story of the decision + Probing questions)

Questions concentrated on facts, events, and direct interpretattions (Eisenhardt 1989b)

Matching

Reduced the potential for retrospective bias by triangulating data

Epistemological approach

To understand the meaning-making and conceptualizations of informants

While ensuring that those interpretations had substantively informed behaviors and were not a product of later impression management

Strength of the interview

1) Revealed details and motives for decisions that were unavailable in the archival data

2) "Reality" check with ousider perspective on boundary decisions

Final case

6 months: Interview + Archive

100 pages for each firm

The context, decision process, implementation, and outcome of each boundary decision

Its impact on firm and market boundaries

Rich, triangulated, and relatively accurate understanding of the phenomena (Kumar, Stern, Anderson, 1993)

Analysis

Research question: How do entrepreneurs addressing nascent markets shape their organizational boundaries over time?

6 months -> A theoretical model of how entrepreneurs shape boundaries in nascent markets

Within each case

Goal: to identify independently the theoretical constructs, relationships, and longitudinal patterns within each case and with respect to our research question

Tools: Tables and graphs to facilitate analyses (Miles & Huberman, 1994)

Each developed an understanding of the major boundary decisions, which we reconciled by going back to the data and, occasionally, back to the informants.

Identified interactions among boundary decisions and found connections among emerging categories, which led to the specific patterns of decisions that emerged from the data.

Cross-case analysis

The insights that emerged from each case were compared with those from other cases to identify consistent patterns and themes (Eisenhardt & Graebner 2007)

Comparisons

Varied pairs of cases -> Patterns emerge -> Other cases were added (to develop more robust theoretical concepts and causal relations)

Iterative cycling among theory, data, and literature and refine the findings, relate them to existing theories, and clarify the contribution

RESULTS: CONSTRUCTING MARKETS AND SHAPING BOUNDARIES

Summary

Monopolistic imperative <- Patterns of inter-related boundary decisions that are organized in three processes: 

Claiming: Claim a and distinct market space and become its "cognitive referent" through identity-based actions 

Demarcating: Demarcate this market by specifying firm and market boundaries through alliances with established firms 

Controlling: Control the market by overlapping boundaries of the firm and market over time through acquisitions that eliminate entrepreneurial rivals

Underlying power tactics: creating illusions, using strategic timing, and exploiting the tendencies of others, that form the strategic arsenal of entrepreneurs in nascent mar

Claiming the Market

Claiming the market: defining a distinct identity for both the firm and market so that the two become synonymous

Three identity mechanisms to claim a market: adopt templates, signal leadership, and disseminate stories.

"Adopt templates": well-known cognitive models from other domains (either in isolation or combination) to convey a unique identity.

"Disseminate stories": spreading symbolic narratives (real or fictitious) to raise awareness about the firm and its market, and communicate the firm's identity

"Signal leadership": taking concrete actions that convey superior power and expertise within the market

Challenge 

1) Communicating the identity

2) Winning against dozens of competing for market conceptions.

Effective claiming

1) Templates are effective because they exploit the tendency of individuals to be attracted to the blend of novelty and familiarity (Davis, 1971)

2) Stories are effective because they exploit the tendency of individuals to overvalue vivid stories

3) Leadership signals are effective because they convey firm importance while being relatively inexpensive

Demarcating the Market

How to deal with established firms as the potential threat (Considerable ambiguity regarding key dependencies and exchange partners)

Co-opting with alliance mechanism: create viable industry roles (supplier, complementer, buyer)

Revenue-sharing agreement: An alliance mechanism by which a partner firm benefits from a nascent market through distribution, advertising, or supplier contracts with a focal venture

Equity investment: An alliance mechanism by which entrepreneurs allow partner firms to purchase financial stakes in their ventures

Anti-leader positioning: An alliance mechanism by which entrepreneurs seek other established firms to join an alliance opposing this leader (when there is a very strong firm dominating a proximate market)

Effective demarcating

1) Alliances exploit the natural tendency of large firms to delay entry into nascent markets until these markets are well defined (Ozcan & Eisenhardt 2009) 

2) Alliances are also effective because they enable entrepreneurs to use self-serving illusions

3) Third, the demarcating process relies on timing

When entrepreneurs anticipate threats early, pre-emptively approach the established firms, and offer something very significant (e.g., an equity stake, revenue sharing, and/or strategic value against a leading firm that often becomes an enemy) to entice potential competitors to be partners

-> When the market blossoms, then they become competitors

Alliances in TCE, RDP, RBV

As a means to access resources

In terms of the power and co-optation: Alliances can be used to delay competition and define a favorable industry structure by deterring the entre of strong potential competitors, clarifying a firm's boundaries vis a vis others, and creating supporting roles for potential  competitors as suppliers, complementers, and buyers

Controlling the Market

Overlapping the organizational boundary with the market boundary so that the firm occupies as much as possible

Through acquisition (and often destruction)

Elimination of competing models: an acquisition mechanism aimed at destroying the resources of threatening rivals

Increasing coverage: an acquisition mechanism aimed at expansion of acquirer's presence into emerging areas of a nascent market so that the boundaries of the market and firm continue to be aligned as the market expands

Blocking entry: an acquisition mechanism aimed at  removing possible stepping stones into a market

Effective controlling

1) Alliances exploit the natural tendency of entrepreneurs to prefer other venture's acquisition (Graebner & Eisenhardt 2004) 

2) Alliances are also effective because they enable entrepreneurs to engage in self-serving illusions

RBV

Ignored the destruction of acquired resources

A MODEL OF ENTREPRENEURIAL ACTION IN NASCENT FIELDS

Processes to corresponding propositions

1: Firms that proactively use identity-claiming mechanisms (templates, stories, and leadership signals) -> Likely to become the cognitive referents in distinctive markets.

2: Firms that proactively use demarcating alliances with established firms (revenue sharing , equity investment, anti leader positioning) -> Likely to face lower levels of competition

3: Firms that proactively use controlling acquisitions of entrepreneurial rivals (elimination, market coverage, entry blocking) -> Likely to have higher market share

Holistic approach

Optimizing atomistic boundary decisions < Interrelate decisions to form patterns of boundary processes

The combination is synergetic: Intertwined three processes -> Dominant position in a distinct market

4: Entrepreneurs that intertwine boundary processes are more likely to (a) become the cognitive referents in distinct markets, (b) face lower levels of competition, and (c) have higher market share.

Soft and Hard (Nye, 2004)

"Hard power": based on coercion, direct rewards, and extensive resource deployment to force others' behaviors

"Soft power": based on subtle influence mechanisms that cause others to willingly behave in ways that benefit the focal agent 

# Power could be operationalize?

Softer power tactics of entrepreneurs

Why the boundary processes that we observe are effective, and how they enable new firms in nascent markets to gain advantage and even dominance over established firms and entrepreneurial rivals:

1) Illusion: the use of deception, shielding intentions and exaggerating one's importance to gain the advantage

2) Explotition of the tendencies of others: Rather than attempting to force other actors to act in a desired way, entrepreneurs exploit their natural tendencies

3) Timing: Either preemptive or delaying

5: Firms that use soft-power tactics to shape boundaries (i.e., illusion, exploiting others' natural tendencies, timing) are more likely to achieve (a) cognitive dominance (become the cognitive referent in a distinct market) and (b) competitive dominance (face a lower level of competition, have greater market share).

Bias

Retrospective bias 

<- multiple informants with different focuses

<- Do not require hyperrationality

DISCUSSION

Boundary mechanisms operating in three distinct domains

1) Cognitions

2) Relations

3) Resources

-> How entrepreneurs interrelate decisions over time to shape boundaries and construct markets to their advantage

The Role of Ambiguity in Market Creation

Two reactions to ambiguity (Weick 1995)

1) Ambiguity as confusion created by multiple meanings -> Social construction and invention (the nuature of entrepreneurs)

2) Ambiguity as ignorance created by insufficient information -> Careful scanning and discovery (the nature of executives in established firms)

Nascent markets as 

1) Competitive fields for alternative conceptions espoused by young firms vying for dominance, 

2) Established firms wait on the sidelines for the outcome

"Structuration"

Market conception > Product concept

Structuring industry roles through the negotiation of boundaries with power incumbents in proximate markets 

Economic action: producers seek market niches to maximize profit and minimize competition (White 2002)

+ Firms construct these markets by finding roles in relation to rivals to create a pecking order of quality (White 1981, 1992)

- Entrepreneurs largely ignore their close rivals and proactively focus on establishing a structure of roles (suppliers, customers, investors, complementers) for powerful but more distant firms (this paper)

-> Active shapers of a new industry architecture by defining boundaries and division of labor (Jacobides, Knud- sen, & Augier, 2006; Ozcan & Eisenhardt, 2009)

Require sharing information and regular resource exchanges, and can lead to dependence

Often weak initial resources, entrepreneurs have the ability to engage established players, construct a market with a favorable industry structure, and achieve dominance. <- This ability is surprising and rests on the clever use of power

Power as Dominant Logic

Key contribution: inter-organizational power

Power as the dominant logic for boundary formation in the nascent market

How organizations attempt to control key exchange relations to reduce the uncertainty they face

1) Organizational sociology

Selznick's (1949) study of co-optation, 

Thompson's insights on the interdependence (1967), 

Zald's (1970)focus on open systems, 

Pfeffer and Salancik's (1978) resource dependence theory 

2) Industrial organization economics

Bain's (1956) analysis of barriers to competition and entry deterrents,  

Porter's conversion of these ideas into a manual for strategic action (Caves & Porter, 1977; Porter, 1980), 

3) Stalled research on inter-organizational power

Mizruchi and Yoo noted in their review (2002: 602, 614)

Resting on distant, archival data that offer little insight into how firms actually exercise power

4) Our in-depth field study

Anti-competitive power logic (<-> Value creation arguments in archives) 

The monopolistic imperative of entrepreneurs

Contribution to power

1) Power of ambiguous environments

Managing uncertainty in structured environments: reducing the dependence of a focal firm on external forces

Little or no market structure, no clear meaning, and unknown dependence: Attempt to reduce ambiguity while shaping a favorable market structure before others do it (Davis et al., in press) # Preemption

To succeed entrepreneurs must engage powerful others and increase dependence: To reduce dependence would isolate a venture and probably doom it

The trade-off between ambiguity and uncertainty # When?

1) An initial strategy is to reduce ambiguity through favorable market structuring

2) A later strategy, enacted after the market crystallizes, is to managing unertainty as suggested by current theory

2) Power to entrepreneurial firms

Why one firm would accept reducing the dependence of another, particularly when dependence is asymmetric (Casciaro & Piskorski 2005)

Hard-power tactics: feasible for resource-rich firms in established markets, such as making major resource commitments to create entry barriers, threatening predatory pricing strategies that cut profits for all, and interlocking boards with powerful peers (Caves & Porter, 1977; Pfeffer & Salancik, 1978; Porter, 1980)

Soft-power tactics: Ventures with few resources having "strategic manual" that advises conformity to established recipes and legitimating ties with high-status firms, with illusion, timing, and exploitation of others' natural tendencies

3) Well-known mechanisms are part of a firm's strategic arsenal for creating dominance

(Identity, Alliances, and Acquisitions)

i.e. Identity can be a sense-making device but also be a sense-giving device to help a firm with the contest to be the cognitive reference in the market

i.e. Alliances can access resources, but also co-opt rivals (favorably shape an emerging industry structure), block other's access to resources, destroy threatening resources, and eliminate competition (therefore, acquisition not lowering costs or yielding new businesses are not always a failure)

Therefore, power is the key strategic rationale for common mechanisms

In sum

Strategic theory of power

Blends institutional (cognitive) and resource dependence (competitive) lenses

Primary strategy <- Strategic actions rest on the nuances of soft power

1) To understand entrepreneurial actors with high aspirations in ambiguous settings

2) Explain how young firms are able to dominate nascent markets

Conclusion

Generalizability

1) Firms operated in distinct areas and had very different starting conditions

2) Not all firms began with superior resources with mistakes

3) Soft-power strategies are realistic for many entrepreneurs

Implication

Bargaining power back into the discourse on strategy and organizations

Social networks, Dynamic capabilities, Legitimacy, and Innovation

+ Agency and strategic action often rest on the rationale of power

아량 = 돈 * 안정감 

여유 = 아량 + 환경 (직장, 주위 네트웤) + 성향