Entrepreneurial Strategy

Front matter

oaloraverpivot

Entrepreneurial Strategy

Dean A. Shepherd Holger Patzelt alarave OPEN ACCESS Scape

Preface

Founded in 2012, Kinexon is a Munich-based startup that develops and produces tracking devices for professional sports players, including those in the National Basketball Association and National Football League. Analysts initially used these devices for tracking players’ movements to optimize training and improve television reporting. When the COVID-19 pandemic took off in early 2020, Kinexon’s business model was severely hit by the shutdown of sports events and sports television broadcasts. However, the founders quickly analyzed the situation and identified an opportunity to apply the venture’s core technology to track individuals’ distances to prevent virus infections. Specifically, through interactions with potential customers and other stakeholders, the venture developed a wristband called Kinexon SafeZone, which measures the distance between individuals to prevent infections. Indeed, the founders realized that their technology is useful across many settings and thus developed a strategy for entering various sectors as diverse as manufacturing, public administration, and sports. As a result, Kinexon’s founders were able to further scale the company’s operations and continue its quick growth.

The Kinexon example unifies the topics that underlie the core of this book. This book is dedicated to different aspects of entrepreneurial strategy. We focus on explaining how entrepreneurs identify new business opportunities from environmental changes, how they engage communities of inquiry to develop these opportunities for the market, how they create new ventures, and how they manage and scale these new ventures vil vill © PREFACE to ensure growth. To do so, we build directly on our recent studies (with coauthors) because the ideas in these studies have been tested and have passed the double-blind peer-review process. We believe (hope) that this book adds value over and above the published journal articles by bringing them together to provide a big picture of entrepreneurial strategy. We focus on our studies as the basis for these chapters because we feel freer to rely on them heavily and adapt where necessary (without upsetting the authors). We do not ignore other studies; relevant studies on new ventures are reviewed and cited. We acknowledge that we have not addressed all relevant topics nor provided all necessary details. Some oversights are due to our scholarly limitations, but some result from deliberate decisions about the scale, scope, and emphasis that we desired for this book.

Enough with the caveats and hedges and on to the topic of the book. This book is titled Entrepreneurial Strategy: Starting, Managing, and Scaling New Ventures. We focus on independent new ventures to distinguish this book’s focus from the excellent research on corporate ventures. While some of the book’s content likely applies to established organizations’ new ventures, some may not. The differences between independent and corporate new ventures are sufficient to focus on independent new ventures. We used the word entrepreneurial in the title to emphasize the central role of potential opportunities (Shane & Venkataraman, 2020) and the goal of organizational growth (Brown et al., 2001). Finally, we use the terms starting, managing, and scaling in the title because these “ing”- word extensions highlight our emphasis on activities. Indeed, we focus on the activities of entrepreneurial strategy.

Hopefully, in explaining the key activities of entrepreneurial strategy, this book can help entrepreneurs find their way through this challenging process to create value for themselves and society. For entrepreneurship scholars, we hope this book offers a solid foundation in the literature from which to explore the associated phenomena and to create new knowledge published in outlets that impact how others think about the topics. Similarly for educators, we hope this book provides a body of knowledge to draw upon for lectures and discussions.

The rest of the book proceeds as follows:

PREFACE ix

Chapter 1: Attending To The External Environment To Identify Potential Opportunities

Building on a recent study (Shepherd et al., 2017), this chapter highlights the importance of noticingopportunities as an initial step toward new venture creation. Unsurprisingly, there has been considerable interest in the processes of allocating attention to notice potential opportunities arising from changes in the external environment. We know a great deal about the role of top-down (i.e., based on knowledge and experience) processes of allocating attention to the environment in forming opportunity beliefs worthy of entrepreneurial action. However, in this chapter, we illustrate how bottom-up processes, whereby environmental changes capture entrepreneurs’ attention, shape opportunity identification. Building on the notion of guided attention, we detail an attention model of forming opportunity beliefs for entrepreneurial action that includes both top-down and bottom-up processes for allocating attention. This chapter explains how entrepreneurs can allocate their transient attention to identify potential opportunities from environmental changes. This chapter also describes how allocating sustained entrepreneurial attention influences belief formation about radical and incremental opportunities requiring entrepreneurial action.

Chapter 2: Co-constructing An Opportunity With A Community Of Inquiry

Entrepreneurs can learn about potential opportunities through social interactions with communities of inquiry. However, how do entrepreneurs build such communities, and how do they engage community members over time to develop their potential opportunities? Building on a recent study of eight new ventures and their communities of inquiry over nine months (Shepherd et al., 2020), this chapter presents a social model of opportunity development. The chapter explains how entrepreneurial teams that progress well toward market launch consist of varied specialists who openly engage their communities of inquiry. This open engagement leads such teams to gather diverse information, generate multiple alternatives (technology and market), and test conjectures about their potential opportunities through disconfirmation. In contrast, unsuccessful entrepreneurial teams rely on focused engagement with their communities of inquiry. This focused engagement leads these

X PREFACE teams to gather specific information, generate a few related alternatives, and seek to confirm their opportunity conjectures. This chapter highlights new insights into entrepreneurial teams’ engagement with communities of inquiry to explain opportunity development and, ultimately, new venture progress.

Chapter 3: A Lean Framework For Starting A New Venture

The lean startup framework is one of the most popular contributions in the practitioner-oriented entrepreneurship literature. This chapter builds on a recent paper (Shepherd & Gruber, 2020) to highlight new insights into how new ventures are started based on the lean startup framework. Specifically, we describe the origin of the lean startup framework and its five main building blocks—(1) identifying and evaluating market opportunities in startups, (2) designing business models, (3) engaging in validated learning (including customer development), (4) building minimum viable products, and (5) learning whether to persevere with or pivot from the current course of action. We organize these building blocks into a framework suggesting how considering the contextual characteristics of and the interdependencies between the building blocks can enrich our understanding of using the lean startup framework to start a new venture.

Chapter 4: Managing New Ventures

The creation of new ventures and growing them into well-established organizations is the key purpose of managing new ventures. This chapter explains the 10 most essential subtopics for managing new ventures (Shepherd et al., 2021): (1) lead founder, (2) founding team, (3) social relationships, (4) cognitions, (5) emergent organizing, (6) new venture strategy, (7) organizational emergence, (8) new venture legitimacy, (9) founder exit, and (10) entrepreneurial environment. This chapter ties these “managing” subtopics into the three major stages of the entrepreneurial process—co-creating, organizing, and performing. The framework provides a cohesive story of managing new ventures.

PREFACE xi

Chapter 5: Scaling New Ventures

Although scaling is a “hot topic” in the practitioner literature, it has mostly been ignored (at least explicitly) in the academic literature. Building on a recent editorial, this chapter highlights the importance of scaling for new venture growth. Scaling refers to spreading excellence within a venture as it grows (organically or through acquisition) from a new (and often small) organization to an established, large organization (Shepherd & Patzelt, 2020). In this chapter, we explore the drivers and consequences of scaling and explain how knowledge management facilitates scaling, how founder replacement impacts scaling, and how current scaling influences subsequent scaling.

We close this book with concluding remarks on co-creating, scaling, and managing new ventures.

Notre Dame, USA Dean A. Shepherd Munich, Germany Holger Patzelt

Acknowledgments Dean and Holger thank Ali Ferguson for excellence in copyediting and both Marcus Ballinger and Punitha Balasubramaniam from Palgrave Macmillan.

Brown, T. E., Davidsson, P., & Wiklund, J. (2001). An operationalization of stevenson’s conceptualization of entrepreneurship as opportunity-based firm behavior. Strategic Management Journal, 22(10), 953-968.

Shane, S., & Venkataraman, S. (2000). The promise of entrepreneurship as a field of research. Academy of Management Review, 25(1), 217-226.

Shepherd, D. A., & Gruber, M. (2020). The lean startup framework: Closing the academic-practitioner divide. Entrepreneurship Theory and Practice. https:// doi.org/10.1177/1042258719899415.

Shepherd, D. A., McMullen, J. S., & Ocasio, W. (2017). Is that an opportunity? An attention model of top managers’ opportunity beliefs for strategic action. Strategic Management Journal, 38(3), 626-644.

Shepherd, D. A., & Patzelt, H. (2020). A call for research on the scaling of organizations and the scaling of social impact. Entrepreneurship Theory and Practice. https://doi.org/10.1177/1042258720950599.

xii PREFACE

Shepherd, D. A., Sattari, R., & Patzelt, H. (2020). A social model of opportunity development: Building and engaging communities of inquiry. Journal of Business Venturing, 106033.

Shepherd, D. A., Souitaris, V., & Gruber, M. (2021). Creating new ventures: A review and research agenda. Journal of Management, 47 (1), 11—42.

CONTENTS l Attending to the External Environment to Identify

Potential Opportunities Attending to the Environment to Form Opportunity Beliefs for Entrepreneurial Action Allocating Transient Attention to Identify a Potential Opportunity (for Someone) High Top-Down Guidance (Low Bottom-Up Processing) for Attending to the External Environment to Identify Potential Opportunities Low Top-Down Guidance (More Bottom-Up Processing) for Attending to the External Environment to Identify Potential Opportunities Search, Guided Attention, and the Identification of Potential Opportunities Entrepreneurs’ Job Demands, Guided Attention, and the Identification of Potential Opportunities Sustained Entrepreneurial Attention for Acting on an Opportunity Belief Sustained Attention for Abductive Discernment and Opportunity-Belief Formation Sustained Attention for Analytical Discernment and Opportunity-Belief Formation xiv

Contents

Sustained Attention for Categorical Discernment and Opportunity-Belief Formation Sustained Attention for Absorptive Discernment and Opportunity-Belief Formation An Attention Model of Opportunity-Belief Formation for Entrepreneurial Action Conclusion References

Co-constructing an Opportunity with a Community of Inquiry Communities of Inquiry and Opportunity Development Progress in Opportunity Development Entrepreneurial Team Knowledge and Engaging a Community of Inquiry Interacting with a Community of Inquiry for Opportunity Development A Social Model of Opportunity Development Conclusion References

The Lean Startup Framework: Its Origins, Core Ideas,

Chapter 1

Attending to the External Environment to Identify Potential Opportunities

Abstract Building on a recent study (Shepherd et al. in Strategic Management Journal 38:626-644, 2017), this chapter highlights the importance of noticing opportunities as an initial step toward new venture creation. Unsurprisingly, there has been considerable interest in the processes of allocating attention to notice potential opportunities arising from changes in the external environment. We know a great deal about the role of top-down (i.e., based on knowledge and experience) processes of allocating attention to the environment in forming opportunity beliefs worthy of entrepreneurial action. However, in this chapter, we illustrate how bottom-up processes, whereby environmental changes capture entrepreneurs’ attention, shape opportunity identification. Building on the notion of guided attention, we detail an attention model of forming opportunity beliefs for entrepreneurial action that includes both top-down and bottom-up processes for allocating attention. This chapter explains how entrepreneurs can allocate their transient attention to identify potential opportunities from environmental changes. This chapter also describes how allocating sustained entrepreneurial attention influences belief formation about radical and incremental opportunities requiring entrepreneurial action.

This chapter is based on Shepherd et al. (2017). The assertions that we make in this chapter are justified, cited, and referenced in Shepherd et al. (2017).

© The Author(s) 2021 1 D. A. Shepherd and H. Patzelt, Entrepreneurial Strategy, https: //doi.org/10.1007/978-3-030-78935-0_1

Cognition is critical to entrepreneurial action. Entrepreneurs’ subjective representations of the environment help them identify potential opportunities, but entrepreneurs cannot form a complete understanding of the environment because of their cognitive limitations. As a result, entrepreneurs’ attention determines which aspects of the environment they notice for interpretation and action. Because identifying and exploiting opportunities make up the essence of entrepreneurship, scholars have been interested in how entrepreneurs identify and interpret environmental signals as potential opportunities requiring entrepreneurial action. Opportunities can arise from changes in the environment and represent “courses of action that seek to derive benefits from these changes” (Grégoire et al., 2010, p. 415). Environmental changes that serve as a basis for identifying new opportunities include, for example, new technologies, emerging markets, societal trends (e.g., pro-environmental), and changes in legal regulations.

Existing entrepreneurial cognition studies have primarily focused on top-down processes for allocating attention to notice and interpret environmental-change signals of potential opportunities. Top-down processes rely on existing knowledge structures to direct entrepreneurial attention. Entrepreneurs use their knowledge structures to deductively interact with the environment to notice, interpret, and respond to changes in the environment that signal a potential opportunity. For example, entrepreneurs with knowledge about the pharmaceutical industry are likely to attend to environmental changes in this industry but less so to changes in other industries, such as the semiconductor or software industries. Therefore, a knowledge structure focuses attention on aspects of the environment that are expected to inform entrepreneurial action.

We know less about bottom-up processes of attention allocation. Bottom-up processes allow prominent aspects of environmental changes to draw attention. For example, a gist—a big-picture representation of the environment—can draw decision makers’ attention to striking environmental changes (Shepherd et al., 2007). As another example, in disruptive-change contexts, individuals rely on Gestalt properties within the situation to perceive patterns and make sense of unfolding events. In contrast, relying on knowledge structures (i.e., top-down processing) directs attention to aspects that are expected to be important—these studies of bottom-up processes for allocating entrepreneurial attention act as a counterweight to studies on top-down processes. However, questions remain about how top-down and bottom-up processes work together to allocate entrepreneurial attention to form opportunity beliefs. Therefore, it is crucial to understand how the allocation of entrepreneurial attention impacts entrepreneurs’ ability to notice and discern different environmental changes to form beliefs about incremental and radical opportunities. Building on cognitive psychology theories, in this chapter, we describe an attentional model of opportunity beliefs for entrepreneurial action (see Shepherd et al., 2017) that offers three primary insights.

First, bottom-up processes for allocating attention are distinct from top-down processes, and to date, studies have primarily explored one or the other but not both concomitantly (Ocasio, 1997, 2011). This chapter describes the combination of top-down and bottom-up processes for allocating entrepreneurial attention and how the level of control that top-down processes exert on bottom-up processing influences opportunity-belief formation. By opportunity belief, we mean an entrepreneur’s anticipation that exploiting a particular opportunity is both desirable and feasible.

Second, current knowledge of opportunity-belief formation is focused primarily on opportunities arising from incremental environmental changes (e.g., Benner & Tushman, 2003). Unfortunately, it is disruptive changes (rather than incremental changes) that people have substantial difficulty noticing (Tushman & O’Reilly, 1996). This difficulty in noticing disruptive changes is likely due to top-down processes for allocating attention to aspects of the environment that are expected to be important (Tripsas & Gavetti, 2000). Therefore, the difficulty in noticing disruptive changes to identify potential opportunities is at least partly related to processes for allocating entrepreneurial attention. In this chapter, we thus offer a deeper understanding of how entrepreneurs can notice disruptive environmental changes and identify and evaluate the radical opportunities that arise from such disruptions. Specifically, we explain how a greater reliance on the bottom-up allocation of transient attention helps entrepreneurs notice disruptive changes to identify potential opportunities and how sustained attention explains the formation of opportunity beliefs for entrepreneurial action.

Finally, the process underlying opportunity-belief formation involves two phases: the focal entrepreneur identifying what could be an opportunity for someone and then evaluating if the identified opportunity is personally worth acting on or not (McMullen & Shepherd, 2006). Entrepreneurship studies have generated considerable knowledge on the identification phase of opportunity-belief formation (e.g., Grégoire &

Shepherd, 2012) and the evaluation phase of opportunity-belief formation (Haynie et al., 2009) but not the link between the two. In this chapter, we explain how entrepreneurial cognition and the nature of environmental changes combine to influence opportunity-belief formation—that is, the identification and evaluation of potential opportunities desirable and feasible for entrepreneurial action.

ATTENDING TO THE ENVIRONMENT TO FORM OPPORTUNITY BELIEFS FOR ENTREPRENEURIAL ACTION

To explain the attention model of opportunity beliefs (Shepherd et al., 2017), we rely on research on the cognitive psychology of attention (e.g., Kahneman, 2003; Most et al., 2011). As illustrated in Fig. 1.1, attending to environmental changes for opportunity-belief formation comprises first allocating transient attention and then allocating sustained attention. For allocating transient attention, an entrepreneur’s search strategy and job demands impact how they use top-down guidance of bottom-up processes for allocating entrepreneurial attention, which then impacts the entrepreneur’s ability to notice incremental or disruptive environmental changes signaling potential opportunities. Allocating sustained attention begins with the identified potential opportunity (from the transient-attention phase). Depending on the entrepreneur’s cognitive mode and immersion level, he or she believes that there is an incremental or radical opportunity worthy of entrepreneurial action.

ALLOCATING TRANSIENT ATTENTION TO IDENTIFY A POTENTIAL OPPORTUNITY (FOR SOMEONE)

Guided attention explains how top-down processes for allocating attention can work with bottom-up processes. Top-down processes can allocate attention to specific aspects of the environment that entrepreneurs expect to be important (based on the entrepreneurs’ knowledge structures) but then allow bottom-up processes in which the prominence of environmental changes draws attention. Therefore, with guided attention, entrepreneurial attention is allocated to striking environmental changes and exhibits important properties as determined by entrepreneurs’ knowledge structures. However, striking environmental changes that do not meet the importance threshold do not draw attention. Therefore,

aBueyg eyuawuoulaug jo adAL spuewag gor jeuaBeuey somunpoddo jeyuawasauı uo Joy 0} sjalag Bujwi04 jo pooyıayı7 səmunyoddo jesıpey uo Joy 0} Sjallag entrepreneurs can ready themselves to notice specific types of opportunities by setting the level of control that top-down processes have over bottom-up attention allocation.

Knowledge structures direct how top entrepreneurs deductively interact with the environment to notice, interpret, and respond to new stimuli. Although entrepreneurs tend to focus on just one environmentrelated knowledge structure at any given moment, entrepreneurs use numerous non-focal knowledge structures for cognitive processing, which they do not typically apply to the current environment. To the extent that these non-focal knowledge structures are “accessible” for bottom-up activation (i.e., have not been “tuned out” by top-down control), they enable entrepreneurs to be surprised and have their attention drawn to features of the environment that are not reflected in the focal knowledge structure.

As illustrated in Fig. 1.2, when entrepreneurs scan the environment, greater top-down guidance of entrepreneurial attention relies on a more

Emphasis on Top- Down Processing of Entrepreneu rial Attention

Emphasis on

Bottom Up =

Processing cue amy a - = banal Gi = =) In. i ial Attention — |m | mm — — — |

Knowledge Structures

E Focal Knowledge Structure

= Available Non-Focal Knowledge Structures

Unavailable Non-Focal Knowledge Structures

Fig. 1.2 Entrepreneurial attention and focal and non-focal knowledge structures limited number of knowledge structures to direct attention to. For example, an entrepreneur may have his or her expert knowledge of an existing technology primarily direct his or her attention to how scientists and other researchers are improving this specific technology’s performance in a given market. Less top-down guidance (i.e., more bottom-up processing) of attention relies less on a particular knowledge structure, which makes a larger set of alternate (non-focal) knowledge structures accessible to stimulation from environmental changes (although the focal knowledge structure leads the entrepreneur to consider such stimuli to be irrelevant). For example, the entrepreneur with knowledge of a particular technology may not allocate as much attention to the development of this technology for the given market but may instead allocate part of his or her attention to other potentially unrelated technologies or markets.

High Top-Down Guidance (Low Bottom-Up Processing) for Attending to the External Environment to Identify Potential Opportunities

Entrepreneurs’ beliefs about the external environment drive top-down guidance of entrepreneurial attention. These beliefs about the external environment are based on learning from experience and are stored as knowledge structures. Top-down processes of allocating attention are highly effective for performing tasks efficiently, predictably, and reliably. For example, top-down decision making allocates attention to aspects of the external environment that entrepreneurs’ knowledge and experience lead them to believe are likely to reveal potential opportunities. Given that attention is a limited resource, top-down processes also direct attention away from environmental aspects that entrepreneurs expect to be unimportant. Incremental changes to the environment—changes consistent with the current trajectories of technologies, consumers, competitors, and institutions—typically occur when and where entrepreneurs expect them to occur. Thus, entrepreneurs’ allocation of attention to these aspects of the external environment is more transient when there is high top-down guidance in the allocation of entrepreneurial attention than low top-down guidance.

While high top-down guidance of entrepreneurial attention helps entrepreneurs notice incremental environmental changes to identify incremental potential opportunities, it also obstructs entrepreneurs from noticing unexpected changes in the external environment. Thus, entrepreneurs are unlikely to identify potential opportunities from disruptivechanges (i.e., changes involving new configurations of technologies, consumers, and competitors that generate new market categories and industries). Indeed, when people rely heavily on their focal knowledge structures, they are unlikely to attend to unexpected environmental changes, even striking environmental changes. For example, various experiments have revealed that when people are highly focused on performing a specific task, they are blind to unrelated information even when that information is highly prominent. Interestingly, when a task is considered less important, individuals are more likely to notice a prominent change in the environment (Neisser, 1976). It appears that when a focal task is less important, observers can “relax” top-down processes for allocating attention. This relaxation allows for the individual to engage more bottom-up processes to allocate transient attention to non-focal knowledge structures to notice and interpret unexpected environmental changes. In contrast, observers for whom a focal task is very important concentrate their attention on the focal knowledge structure relevant to the task, which starves non-focal knowledge structures of the transient attention needed to notice unexpected changes.

There is broad evidence in the business context indicating that the effects of high top-down guidance contribute to individuals’ failure to notice disruptive changes. For example, Polaroid’s managers used their past experience to focus attention on technology consumables rather than on hardware. As a result, they were blind to prominent changes in the imaging industry (Tripsas & Gavetti, 2000). Polaroid’s managers attended to environmental aspects that they expected to be important (based on a continuation of current practices) but did not notice environmental changes that were inconsistent with their beliefs about the nature of the business. They relied too little on bottom-up processes that would allow their transient attention to be drawn to striking environmental changes through non-focal knowledge structures. Therefore, while high top-down guidance of attention helps entrepreneurs identify potential opportunities from incremental environmental changes, it obstructs entrepreneurs from identifying potential opportunities from disruptive environmental changes.

l1 ATTENDING TO THE EXTERNAL ENVIRONMENT TO IDENTIFY... 9

Low Top-Down Guidance (More Bottom-Up Processing) for Attending to the External Environment to Identify Potential Opportunities

In reducing the level of control of top-down processes for allocating attention, entrepreneurs rely more on bottom-up processes for making transient attention more accessible for non-focal knowledge structures. This availability of transient attention to be drawn to non-focal knowledge structures enables entrepreneurs to be surprised by prominent environmental changes and allocate attention to them. The most prominent environmental changes are the environmental aspects most likely to capture attention when there is lower top-down guidance of (or control over) bottom-up processes for allocating entrepreneurial attention. Therefore, greater reliance on bottom-up processes (less top-down guidance) enables entrepreneurial attention to be drawn to prominent unexpected environmental changes to identify potential opportunities. This greater reliance on bottom-up processes of allocating attention helps entrepreneurs identify potential opportunities for disruptive environmental changes.

However, because low top-down guidance means that entrepreneurs must approach the external environment with few preconceived expectations, we note that attention might be drawn to environmental changes that have little relevance to possible markets or technologies. Indeed, having their attention drawn to prominent environmental changes may lead individuals in the wrong direction and interfere with their cognition and decision-making processes. Furthermore, greater reliance on bottom-up processes for allocating attention reduces reliance on past experience, so entrepreneurs may “reinvent the wheel,” or make the same mistakes again and inefficiently apply action repertoires to potential opportunities.

Therefore, the extent of top-down guidance of attention impacts entrepreneurs’ identification of potential opportunities from different environmental changes. Specifically, greater top-down guidance of attention helps entrepreneurs identify potential opportunities from incremental environmental changes but potentially obstructs them from identifying potential opportunities from disruptive environmental changes. In contrast, greater reliance on bottom-up processes for allocating attention helps entrepreneurs identify potential opportunities from disruptive environmental changes but obstructs them from identifying potential opportunities from incremental environmental changes.

SEARCH, GUIDED ATTENTION, AND THE IDENTIFICATION OF POTENTIAL OPPORTUNITIES

Entrepreneurs’ searchstrategies determine where they focus their attention to gain new information and knowledge. Search strategies differ based on the scope of the terrain covered to reveal potential information. Narrow-scope search involves covering local terrain for new information—that is, searching markets and technologies that are related, familiar, or similar to entrepreneurs’ previous markets and technologies. In contrast, broad-scope search involves covering distant terrain for information—that is, searching markets and technologies that are unrelated, unfamiliar, or dissimilar to entrepreneurs’ previous markets and technologies.

A narrow-scope search strategy likely triggers high top-down guidance of allocating entrepreneurial attention. That is, searching the neighborhood of operations in which they have prior experience, entrepreneurs will use this familiarity to engage their experience in this terrain— namely, to engage their knowledge structures for allocating attention. With top-down processes strongly allocating attention, entrepreneurs are more likely to identify potential opportunities from incremental environmental changes and are less likely to identify potential opportunities from disruptive environmental changes.

In contrast, broad-scope search refers to investing effort to seek information and knowledge that is unrelated to one’s current knowledge base. This conscious effort to move away from one’s most recent experiences relaxes top-down guidance and thereby increases the use of bottom-up processes for allocating entrepreneurial attention. Thus, distant search provides greater exposure to new information, such as disruptive environmental changes. This greater reliance on more bottom-up processes enables entrepreneurs’ attention to be drawn to these changes to identify radical opportunities from them.

Therefore, the level of top-down guidance for allocating entrepreneurial attention mediates the relationship between an entrepreneur’s search strategy and his or her ability to identify potential opportunities. Specifically, the more local the search strategy, the greater the top-down guidance for allocating entrepreneurial attention. Local search strategies help entrepreneurs identify potential opportunities from incremental environmental changes but obstruct them from identifying potential opportunities from disruptive changes. In contrast, more distant search strategies increase the bottom-up allocation of attention, which

1 ATTENDING TO THE EXTERNAL ENVIRONMENT TO IDENTIFY ... ll helps entrepreneurs identify potential opportunities from disruptive changes but obstructs them from identifying potential opportunities from incremental changes.

ENTREPRENEURS’ JOB DEMANDS, GUIDED ATTENTION, AND THE IDENTIFICATION OF POTENTIAL OPPORTUNITIES

Entrepreneurs face numerous challenges in performing entrepreneurial tasks. Indeed, entrepreneurs often need to be jacks-of-all-trades because they need to perform many varied tasks, particularly in the early stage of venture development. For example, these tasks include seeking finance, acquiring new talent, identifying and building relationships with new customers and suppliers, developing new technologies and products, setting up an organizational structure, coordinating with the rest of the entrepreneurial team, etc.

These tasks can be even more demanding in some external environments. For example, hostile environments create many challenges that require entrepreneurial attention. Facing a hostile external environment, entrepreneurs may have to develop creative ways to conserve current resources, allocate attention externally to acquire information to appraise the nature of the focal threats, and form new strategies to address those threats (see Miller & Friesen, 1983). Similarly, more complex environments pose considerable challenges for entrepreneurs because they need to consider many factors and possible contingencies between those factors to gain an understanding of the environment. Furthermore, entrepreneurs of new ventures face the liabilities of newness and must therefore try to convince potential stakeholders to support their ventures despite these (potential) new ventures lacking legitimacy. Finally, the more dynamic the external environment, the more often entrepreneurs must change and adapt their tasks and the attention they allocate to different (aspects of) tasks. These challenging external environmental conditions place greater information-processing demands on entrepreneurs.

Facing more task-related demands produces greater strain on entrepreneurs’ cognitive and attentional limitations. Therefore, they may turn to the efficiency provided by relying heavily on top-down processes for allocating attention. In contrast, entrepreneurs who face fewer job demands are likely to rely less heavily on top-down processes to allocate entrepreneurial attention. In other words, although entrepreneurs with few job demands still depend on a focal knowledge structure, more transient attention is accessible for non-focal knowledge structures for the entrepreneur to notice and interpret unexpected environmental changes.

Therefore, Shepherd et al. (2017) suggested that the level of top-down guidance for allocating attention mediates the relationship between entrepreneurs’ job demands and their ability to identify potential opportunities. Specifically, job demands increase top-down guidance of entrepreneurial attention, which helps entrepreneurs identify potential opportunities from incremental environmental changes but obstructs them from identifying potential opportunities from disruptive environmental changes. In contrast, lower job demands increase bottom-up processes for allocating entrepreneurial attention, which helps entrepreneurs identify potential opportunities from disruptive environmental changes but obstructs them from identifying potential opportunities from incremental changes.

Although attending to environmental changes (via transient attention) may help entrepreneurs identify potential opportunities, this identification is necessary but not sufficient for entrepreneurial action. Entrepreneurial action requires sustained attention to evaluate whether an opportunity for someone (third-person opportunity) represents an opportunity for the focal entrepreneur (i.e., an opportunity belief) that is worthy of entrepreneurial action (first-person opportunity). We now explain the allocation of sustained attention necessary for entrepreneurial action.

SUSTAINED ENTREPRENEURIAL ATTENTION FOR ACTING ON AN OPPORTUNITY BELIEF

We can classify opportunities in terms of their proximity to current technological and market trajectories. On the one hand, incrementalopportunities often arise from small changes in the technological trajectory and/or existing customer needs. The exploitation of such incremental opportunities typically builds on existing knowledge. For example, over the last decades, large automotive manufacturers have improved cars’ combustion engines to consume less and less fuel. On the other hand, radicalopportunities often arise from substantial changes to the technological trajectory or the creation of new markets. The exploitation of radical opportunities typically requires a departure from existing knowledge. For example, introducing electrical engines in cars requires automotive manufacturers to build up their knowledge of battery production and new software development so they can connect all the electronic components of electric cars. Disruptive environmental changes (e.g., legal restrictions on carbon dioxide emissions for new cars) often provide the basis for the departures required for identifying radical opportunities. After identifying a potential opportunity (from an incremental or disruptive environmental change), an entrepreneur must evaluate the desirability and feasibility of this opportunity for him- or herself before forming an opportunity belief that requires entrepreneurial action.