Time and complexity of competitive action repertoires in new venturesearly evolutionary patterns and growth implications

Resumen

Entrepreneurship and new venture (NV) creation are an essential source of job creation and economic wealth (Gilbert, Mcdougall and Audretsch, 2006; Dencker, Gruber and Shah, 2009). NVs (firms in their early years of activities) are important for introducing innovations that move the economy forward (Schumpeter, 1942; McKelvie, Wiklund and Brattström, 2018) and giving solutions to social and environmental problems (Shepherd, Souitaris and Gruber, 2020). A contemporary example calling for entrepreneurship and innovation is the European Green Deal, which opens up new market opportunities related to more sustainable solutions for the planet, society and the economy (COM, 2019). To reap these benefits, NVs have to survive and grow (Shane, 2009). In so doing, NVs must implement competitive actions seeking to learn and move from an early start-up stage—having a small size, limited resources, and faced with the liability of newness (Stinchcombe, 1965)—to a growth stage in profits and customers, which will be accompanied by the hiring of new employees and thus job creation. In this dissertation, we put the focus on the overall set of competitive actions NVs going public soon after creation deploy to explain variations in their growth in the number of employees, accounting for the role of time. When entering a market, NVs can deploy different competitive actions such as introducing a new product, a marketing campaign, developing new technology, enhancing their productive capacity, or setting a strategic alliance. Altogether, these actions constitute the competitive repertoire of the NV. This repertoire can be complex (or varied) if it includes a wide and balanced range of different action types such as R&D, marketing, operations, product, internationalization, or networking related actions, among others, or simple if it includes only a few types of competitive actions. For instance, it uses only marketing moves and new product launches (Miller and Chen, 1996b; Connelly et al., 2017). Because resources are scarce in NVs, conflicts between complexity and simplicity arise due to the competing demand for resources. Despite these limited resources and the liability of newness (i.e. lack of established capabilities and legitimacy) affecting NVs (Stinchcombe, 1965), some of them start competing comprehensively, using a wide variety of competitive action types, while others concentrate on one or two types of action (Miller et al., 1996). Importantly, the complexity in the orchestration of the repertoire of competitive actions (use of resources) reflects the breadth of the underlying competences and capabilities being developed and accumulated by the firm that constitutes a key element to be recognised and developed by managers to generate sustained competitive advantages (Ferrier, Smith and Grimm, 1999; Carnes et al., 2019). However, several authors stress that the generation of competences and capabilities is a time-dependent process (Dierickx and Cool, 1989; Teece, Pisano and Shuen, 1997) and hence the importance of creating dynamic capabilities (Teece, Pisano and Shuen, 1997; Teece, 2007). Moreover, recent empirical findings suggest different performance implications of the complexity of the competitive repertoire in the short- (negative) versus the long-term (positive) (Connelly et al., 2017). In the context of NVs, this trade-off may imply the significant dilemma for the entrepreneur of choosing between exploiting the available capabilities to survive (short-term/efficient) or develop (explore) capabilities for future growth (dynamic/flexible) (Sinha, 2015; Dai et al., 2017). This is, however, not a one-time dilemma, as not all strategy choices are planned and deliberate, but some emerge (Mintzberg, 1987). Especially, as NVs learn from previous results and the competitive landscape, they can fine-tune the complexity of the repertoire. Yet, as the competition unfolds, the level of the variety of the implemented actions will be closely related in a recursive way to the extent of the capabilities and skills that are being developed and made available to the NV (Ndofor, Sirmon and He, 2011), which limits the plasticity or flexibility of subsequent competitive behaviours. Once created, capabilities cannot be changed so easily (it takes time and possibly disruption), thus establishing a dependency between subsequent and previous competitive actions that parallels the path-dependent development of the NV capabilities with possible implications for subsequent growth (Hastie, 2001; Davidsson, 2006; McMullen, 2015). It appears that over time as NVs learn, feedback effects and path dependence play an important role in the evolution of the repertoire complexity and related capabilities, and the sequence with which (action-based) information is acquired matters as it affects not only the ease or difficulty of making use of it but also what can be created from it. NVs choices differentiate them and may translate into different trajectories in terms of the variety of their actions and associated capabilities. And yet, time and sequence are often absent from empirical research on entrepreneurship (McMullen and Dimov, 2013). Most research on the evolution of the complexity of the repertoire of competitive actions refers to established firms and the competence trap (Miller, 1992b). It results from the reinforcing mechanism of the learning process that subsequently favours the selection and retention of previously successful actions leading to a pattern of simplification (Miller and Chen, 1996b; Connelly et al., 2017) that may hinder exploration and future adaptation. However, what is missing in this perspective, is the case of NVs, which lack operating history and associated inertia, where alternative patterns driven by the aspirations and exploratory nature of entrepreneurs and founding teams may be possible (Aldrich, 1999; Ben-Oz and Greve, 2015). Focusing on such complexity of NVs competitive repertoires and time (entrepreneurship as a journey, taking place over time), this dissertation particularly seeks to explore two things. First, it explores the inter-temporal change of the complexity of the competitive repertoires of NVs during their early years of operations after entering the Alternative Investment Market of the London Stock Exchange (AIM). Our interest thereby is not the repertoire of NV’s competitive moves at points in time but the sequence of competitive moves over a period of time, capturing how the current scope or variety of choices affect the following decisions (Ferrier, 2001; Rindova, Ferrier and Wiltbank, 2010). In particular, we seek to explore the existence of typical early patterns in the complexity of the competitive repertoires of NVs. Second, it explores how NV growth is affected by the patterns of the complexity of their competitive repertoires during their early years of operations. When assessing these effects, we look at short-term growth rates versus long-term growth trends in employees over the course of several years as a measure of NV performance and an important indication of the rate of job creation by NVs. When developing our theoretical arguments, we build on organizational learning and dynamic capabilities approaches from strategic management research in general and the Awareness-Motivation-Capability framework from competitive dynamics research in particular. Furthermore, we build on insights from the literature of NV growth that highlights the importance of exploring the process of (sequence of actions leading to) NV growth to explain the amount or quantity of different growth indicators (Davidsson, Delmar and Wiklund, 2006; Davidsson, Achtenhagen and Naldi, 2010; McKelvie and Wiklund, 2010). We test our predictions drawing on a unique purposely created database on a sample of NVs that operate in various service industries tracked during their early years of operations and go public soon after creation. The research relies on data collected using a content analysis research design applied to the letter of the Chairman or CEO to the NV stakeholders included in their annual reports, combined with time-series clustering and econometric analysis. We find evidence of the existence of four different patterns in the complexity of the competitive repertoires of NVs, two stable at either low or high levels of complexity and two changing to either lower or higher levels of complexity. We find as well that the stable versus changing patterns vary in their short-term growth rates and long-term growth trend, indicating the existence of a trade-off in terms of growth between stable and changing patterns. Our findings have important implications for research on competitive dynamics and entrepreneurship and for practice.