The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs

Transcription

1 The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs A quantitative research on cognitive biases that explain entrepreneurial behaviour of both independent entrepreneurs and intrapreneurs Ahmed Bulut VU University Amsterdam Master thesis Faculty of Social Sciences Strategy, Communication & Organization August 2008 First instructor: dr. Ingrid Wakkee Second instructor: drs. Eveline Stam

2 Table of contents PREFACE 3 1. INTRODUCTION RESEARCH GROUND CENTRAL QUESTION THEORETICAL RELEVANCE PRACTICAL RELEVANCE CENTRAL CONCEPTS THESIS STRUCTURE THEORY OPPORTUNITY RECOGNITION TWO LINES OF OPPORTUNITY EXPLOITATION Independent entrepreneurship Intrapreneurship COGNITIVE BIASES Overconfidence Illusion of control Representativeness Status quo bias RISK PERCEPTION THEORETICAL MODEL AND HYPOTHESES Cognitive biases and risk perception Risk perception and Entrepreneurial Orientation RESEARCH METHOD RESEARCH METHOD RESEARCH BIASES, RELIABILITY AND VALIDITY PRE-TEST OPERATIONALIZATION Entrepreneurial Orientation (E.O.) Overconfidence Illusion of control Representativeness Status quo bias Risk perception General background and controls HANDLING PROCEDURE General procedure Handling of the data Checking for biases FACTOR ANALYSIS AND RELIABILITY ANALYSIS Confirmatory factor analysis Reliability analysis RESULTS DESCRIPTIVES HYPOTHESES TEST DISCUSSION FINDINGS THEORETICAL IMPLICATIONS 45 The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 1

3 5.3 PRACTICAL IMPLICATIONS CONCLUSION RESEARCH CONCLUSIONS LIMITATIONS 55 REFERENCES 57 APPENDIX 1: INVOLVED PARTIES 64 APPENDIX 2: QUESTIONNAIRE 65 APPENDIX 3: QUESTIONNAIRE (TRANSLATED) 70 APPENDIX 4: ADDITIONAL STATISTICS 76 The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 2

4 Preface Ultimately, I did it! Before starting to write this master thesis, I knew that it was the final challenge to bring my academic skills into practice. By carrying out my research, step by step, I discovered that making a contribution to science is not difficult. What is needed is just good reasoning, especially analogically, and finding practical evidence for your way of thinking. Specifically, it was a great pleasure for me to think about ways to question existing knowledge about entrepreneurship. Looking for the truth, then, is a very nice activity and fortunately, I felt the importance of constantly deepen into literature and thinking about the authors route in ending up into knowledge. I wrote this master thesis for the final part of my master education program Strategy, Communication & Organization at the VU University in Amsterdam. Completing this master thesis could not be happen without the involvement of several people and parties. First, I would like to thank dr. Ingrid Wakkee for her suggestions and commitment to my research. I would also thank drs. Eveline Stam for her comments upon my research. Also, I am very grateful to ABN AMRO for its interest and great assistance in my research. Most significantly, Jaspar Roos was deeply involved in the course of my research. Thank you so much! I also appreciate the involvement of secondary parties, i.e. VNO-NCW, Philips, Kobalt and Vesting Finance. And last but not least, I would like to thank my family for their support and patience while carrying out my research. Amsterdam, August 2008, Ahmed Bulut The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 3

5 1. Introduction In this first chapter, I will explain the research question of my master thesis. Also, an initial background of the research question will be given, in order to understand the theoretical relevance of my research. Furthermore, I will explain why my research is important for practioners. Additionally, I will define the central concepts of this thesis. Finally, the outline of the next chapters will be given. 1.1 Research ground The entrepreneurship and intrapreneurship fields receive considerable attention today. There is a growing call for the establishment of a theoretical framework within these fields. For example, Shane and Venkataraman (2000) argue that theory within the entrepreneurship literature is underdeveloped. By the same token, they argue, data are difficult to obtain in this field. Similarly, Bruyat and Julien (2003) argue that it is time to develop theoretical tools, in order to enable progress in the field of entrepreneurship. Therefore, exploring gaps in the entrepreneurship research is a serious task for scholars. Fortunately, scholars are devoting the required attention to entrepreneurship in the recent years. The same applies to entrepreneurship within an organization, also known as intrapreneurship. This is argued to be a subfield of entrepreneurship, in which research is growing (Antoncic & Hisrich, 2003). In fact, intrapreneurship is in bloom, as we will see later. Why is entrepreneurship so important? The importance of it becomes clear when we look at the consequences of engaging in entrepreneurship. Fortunately, these are more or less known. For example, engaging in intrapreneurship 1 will lead to improved financial performance, especially in hostile environments (Zahra & Covin, 1995). Similarly, Morris and Sexton (1996) found that entrepreneurial intensity 2 has a significant relationship with five out of six performed performance measures. With respect to the strategic management literature, the resource based view of the firm (RBV) suggests that those with an entrepreneurial cognition can facilitate a potential competitive advantage (Alvarez & Busenitz, 2001). In modern open economies, it is more important for economic growth than it has ever been (Wennekers & Thurik, 1999), for example in terms of employment and GDP creation (Van Praag & Versloot, 2007). In sum, from an economic point of view, engaging in entrepreneurship seems profitable for firms. 1 Including components were: (1) product innovation, (2) proactiveness, and (3) risk taking. Zahra and Covin (1995) label intrapreneurship as corporate entrepreneurship. 2 This encompasses the (1) frequency and (2) degree of entrepreneurship. The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 4

6 After given some attention to the consequences of entrepreneurship, the antecedents that determine whether one engages in entrepreneurial activities are numerous. These antecedents could be classified into several categories. According to Shook et al. (2003), the enterprising individual consists of three parts: (1) psychological (e.g. personality and beliefs), (2) characteristics (e.g. demographics and abilities) and (3) cognitions (content and process). With respect to the latter, content focuses on knowledge structures, while process focuses on biases and heuristics. Shook et al. (2003) argue that the threefold parts of the individual influence all aspects of the venture creation model. 3 Indeed, Shook et al. (2003) try to systematize the antecedents of entrepreneurial behaviour in a framework that consists of personal attributes. Another possibility is to look at the entrepreneurial opportunities themselves and how potential entrepreneurs deal with them. According to Shane and Venkataraman (2000), the decision to exploit opportunities depends on the nature of the opportunity and on individual differences. With respect to the latter, the authors distinguish between (1) differences in weighting the value and costs of the opportunity, (2) differences in perceptions (e.g. in willingness to bear risk), (3) differences in optimism and (4) differences in willingness to exploit opportunities. Furthermore, with respect to knowledge, information possessed by potential entrepreneurs may lead to the discovery of entrepreneurial opportunities and to the exploitation of these discovered entrepreneurial opportunities (Shane, 2000). Finally, experience with earlier ventures can trigger entrepreneurs to additional pursuit of entrepreneurial activities (Alvarez & Busenitz, 2001). There are several fields that shed light on the factors that explain the occurrence of entrepreneurial behaviour; I will focus on cognitive biases that can influence entrepreneurial behaviour. First, scholarly research on cognitions has yielded conflicting results in the past (Chell et al., 1991). Second, as compared to traits of entrepreneurs, cognitions give better explanations of entrepreneurial behaviour (Simon et al., 1999). By the same token, cognitions are not stable attributes, but changeable and open to be influenced. For example, emotion and affect can influence a variety of entrepreneurial cognitions (Mitchell et al., 2007). And theoretically, there are many unanswered questions in the cognitiveentrepreneurial field (Shook et al., 2003). For example, these authors wonder whether individual factors help to explain why one chooses to start a new venture instead of selling the innovation to an existing firm. At the same time, there is a growing attention to the biases and heuristics with regard to entrepreneurial business decisions (Miner & Raju, 2004). Both these gaps give a drive to do research on biases and its influence on entrepreneurial decisions. In the next paragraphs, I will explain the question to be answered with this master thesis. 3 The model in question here is depicted as: entrepreneurial intent opportunity search and discovery decision to exploit by new venture creation opportunity exploitation activities. The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 5

7 Before turning back to the topic, it is useful to highlight which part of the entrepreneurial process is central in this thesis. In their review, Van der Veen and Wakkee (2006) argue that activities that lead to the exploitation of entrepreneurial opportunities could be seen as an iterative process. The process consists of five steps: (1) initial idea, (2) business opportunity (under influence of attainable resources and perceived market need), (3) decision to exploit, (4) constructing a resource base and (5) exchange with the market. This process, they argue, would constantly be influenced by two mechanisms: (1) the actor and (2) the environment. In my thesis, I will focus on entrepreneuring individuals, whether or not exploiting entrepreneurial opportunities. 1.2 Central question The conceptual model of De Carolis and Saparito (2006) is the starting point for this master thesis, in which the authors connect three cognitive biases to entrepreneurial actions (see figure 1). Overconfidence Illusion of control Risk perception Exploitation of entrepreneurial opportunities Representativeness Cognitive biases Figure 1 Adjusted conceptual model of De Carolis and Saparito (2006). The rationale behind the theoretical model of De Carolis and Saparito (2006) will be discussed in the second chapter. In brief, De Carolis and Saparito (2006) argue that three cognitive biases reduce the level of perceived risk, which result in risky actions. Although De Carolis and Saparito (2006) additionally put forward that these cognitive biases are preceded by social capital factors, I only focus on the part depicted in figure 1. Although the model in figure 1 was tested empirically by Simon et al. (1999) and to a large extent replicated by Keh et al. (2002), I think that this model can refined in three ways. First, in a recent study on the decisions of entrepreneurs, it is argued and partly empirically affirmed that many of the decisions made by entrepreneurs suffer from the status quo bias (Burmeister & Schade, 2007). 4 The authors define status quo as the behavioural tendency to decide for a status quo option disproportionately often (ibid., p. 343). Burmeister and Schade (2007) argue that people rely 4 However, the authors found also that with respect to status quo bias, entrepreneurs do not differ significantly from others. The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 6

8 on what they have chosen before. Accordingly, I think that this bias could reduce risk perception among entrepreneurs. Adding the status quo bias as an antecedent of risk perception will complete the picture. I will elaborate this argument further in chapter 2. Second, Simon et al. (1999) tested their model among students. I argue that testing the model among students is maybe more appropriate as a control group. Basically, it is an independent entrepreneur or intrapreneur who decides to engage in entrepreneurial behaviour. Scholarly research in entrepreneurship (and starting new ventures) among students does not generalize to real world entrepreneurs (Robinson et al., 1991). Therefore, from a methodological point of view, in involving actual entrepreneurs and intrapreneurs, one can make better predictions about entrepreneurial behaviour. Indeed, an important shortcoming of laboratory research is that the external validity of the results can be questioned (Davidsson, 2005). Third, and related with the previous argument, the model is too general. The model in figure 1 suggests that it holds true for everyone who engages in entrepreneurial behaviour. Thus, it does not reckon with the distinction between independent entrepreneurship (i.e. starting a new firm) and corporate entrepreneurship (i.e. starting a new venture within an existing firm). This point is fundamentally important. In his review, Forbes (1999) concludes that too many studies hold the assumption that entrepreneurs as a group are homogenous. According to him, this assumption may be unreliable, in referring to studies in which heterogeneity exists with regard to entrepreneurial cognitions. Specifically, the exploitation of an opportunity can be labelled as either independent entrepreneurship or intrapreneurship. In their empirical research on biases and heuristics, Busenitz and Barney (1997) found that entrepreneurs are more overconfident and are manifesting representativeness more extensively than do managers in large organizations. I would like to extend this finding. While managers, like corporate entrepreneurs, work for organizational gain, I think that corporate entrepreneurs will show less cognitive biases than do independent entrepreneurs. Conversely, independent entrepreneurs work for their own gain. They cannot wait until all the facts are known, because the opportunity they are seeking could be gone by the time more complete data becomes available (Stevenson & Gumpert, 1985 in: Busenitz & Barney, 1997). Therefore, independent entrepreneurs would be more susceptible for cognitive biases than intrapreneurs. Finally, methodological literature on entrepreneurship suggests that comparing entrepreneurs with nonentrepreneurs may not fruitful (Davidsson, 2005). Here, then, I will compare two groups within the larger set of entrepreneurs. As Hisrich et al. (2007) rightly mention, the nature of the cognitive processes underlying opportunity recognition and exploitation deserves more attention. The purpose of my thesis is filling the above The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 7

9 mentioned gaps, in which I will refine the model as presented in figure 1. These arguments lead to the central question of my thesis, which could be described as: How do cognitive biases explain entrepreneurial behaviour in differentiating independent entrepreneurship and intrapreneurship? This broad defined central question entails several sub questions, which I separate as follows: 1. What distinguishes independent entrepreneurship from intrapreneurship? 2. How do independent entrepreneurs and intrapreneurs differ in entrepreneurial behaviour? 3. Which cognitive biases relate to entrepreneurial behaviour of these entrepreneurs? Exploiting entrepreneurial opportunities entails risky consequences, such as failures. Therefore, exploiting an entrepreneurial opportunity is a form of risky behaviour. In general, risky behaviour is preceded by risk perception and risk propensity. This is proposed by Sitkin and Pablo (1992). However, empirical research showed that only the former is causally related to risky behaviour. Additionally, in earlier entrepreneurship publications about cognitive biases and the exploitation of entrepreneurial opportunities, it was argued and empirically confirmed that risky action (like starting a firm) is preceded by lower risk perception (Simon et al., 1999). Accordingly, compared with others, entrepreneurs perceive less risk (Palich & Bagby, 1995). Risk perception is clearly a variable to reckon with in entrepreneurship research. Therefore, a fourth sub question will be answered in this thesis: 4. What is the function of risk perception among cognitive biases and entrepreneurial behaviour? All four questions will be answered in the theory section. The second, third and fourth questions will additionally be tested empirically. In this manner, the central question of this thesis can both theoretically and empirically bound. 1.3 Theoretical relevance One of the nouveau areas within the entrepreneurship literature is cognition (Baron, 2004), which is an understudied aspect of the enterprising individual (Shook et al., 2003). Within the cognition field, one of the issues that is not addressed is: do entrepreneurs reason or make decisions differently than other persons (Baron & Ward, 2004)? One of the examples these authors give concerns whether entrepreneurs differ from other persons in the ways in which they cope with conditions like cognitive errors (p. 558). The authors seek the importance of this issue in the fact that successes and failures of new firms often depends heavily on decisions reached by entrepreneurs. Here, I do not make a distinction between entrepreneurs and other people, but between independent entrepreneurs and intrapreneurs, an argument partially based on the findings of Busenitz and Barney (1997). These authors make a distinction between entrepreneurs and managers in large firms. Analogous, making a The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 8

10 distinction between independent entrepreneurs and intrapreneurs is also interesting, because they cannot be considered the same. Furthermore, insight in the cognitive biases that influence risk perception and subsequent decision to exploit an opportunity is not fully developed yet. For example, the status quo bias (e.g. Burmeister & Schade, 2007) is not considered as an antecedent so far. With this thesis, reply will be given to the call for the refinement of the entrepreneurial cognition research on biases, as formulated by Mitchell et al. (2002): While previous research has examined cognitive biases, it has not thoroughly detailed the relationships between certain of the specific entrepreneurial cognition constructs in a specific context, such as the decision to pioneer (p. 98). Similarly, Forbes (1999) insists on exploring whether some entrepreneurs are more likely than others to show the cognitive processes associated with entrepreneurial cognitions (p. 430). Therefore, I will walk into a new avenue by comparing independent entrepreneurs with intrapreneurs. In doing so, scholars can gain more insight in the phenomenon of exploiting entrepreneurial opportunities within the light of cognitive biases, that is. 1.4 Practical relevance In the global economy, organizations in the profit sector provide solutions to supply and demand of goods and services. It is the entrepreneur who decides to pioneer, in order to respond to market needs. Also, entrepreneurs provide an employment base. Without entrepreneurs, a good working economy is unthinkable. Getting insight in the factors that enhance entrepreneurial behaviour of entrepreneurs has many benefits. Specifically, if we know what cognitive biases affect entrepreneurial behaviour, a potential entrepreneur can estimate his level of entrepreneurial orientation. Similarly, larger organizations can screen potential intrapreneurs on the cognitive biases, in order to estimate whether these persons will behave entrepreneurially within the company. Also, larger organizations can develop a tool to estimate whether incumbent employees will show entrepreneurial behaviour. Dutch companies, especially the larger ones, are trying to get the personnel more entrepreneurial in the last years. According to the Dutch weekly magazine Intermediair, entrepreneurship under the wings of the mother company fits within the trend in which employees want more freedom and responsibilities, without carrying risks. The results of this thesis will show whether intrapreneurs within large organizations are comparable to actual independent entrepreneurs with respect to cognitive biases. Additionally, companies wonder The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 9

11 whether their personnel behave as entrepreneurial as independent entrepreneurs. This thesis will answer these questions. 1.5 Central concepts In this paragraph, I will shortly explore the concepts that fit in the area of entrepreneurial behaviour, cognitive biases and risk perception. Note that I will explore these concepts as loose bricks. In the second chapter, I will explore these constructs in more detail. Entrepreneur type An entrepreneur, in this thesis, could be an independent entrepreneur owning a firm with at least ten employees. An intrapreneur is an individual acting like independent entrepreneurs, but an intrapreneur does not work for self gain (as opposed to independent entrepreneurs). Entrepreneurial behaviour Entrepreneurial behaviour means practicing entrepreneurial mind, in which an individual takes risk, get involved in innovative actions and behave pro active. Cognitive biases Cognitive biases are mental shortcuts used to make judgments (e.g. Simon et al., 1999). Put differently, biases are decision rules, cognitive mechanisms, and subjective opinions that are helpful in making decisions on an effective and efficient manner (Busenitz & Barney, 1997). Thus, using cognitive biases makes it easier to take decisions quickly by relying on existing mental rules. Four cognitive biases central in this thesis are: (1) overconfidence, which is a mental failure, in which somebody does not know the limits of his or her knowledge (e.g. Russo & Schoemaker, 1992), (2) illusion of control, which is an expectancy of a personal success probability inappropriately higher than the objective probability would warrant (Langer, 1975), (3) representativeness, 5 which means that one generalizes a situation from a sample to true facts and (4) status quo bias, which refers to solving a decision problem by doing nothing or maintaining a current or previous decision by an individual (Samuelson & Zeckhauser, 1988). Some scholars make a distinction between biases and heuristics, but actually cognitive biases emanate from heuristics (Bazerman, 1990 in: Simon et al., 1999). Busenitz and Barney (1997) combine both terms by using the name biases and heuristics and cognitive biases interchangeably. Recent publications about entrepreneurial cognitions (e.g. De Carolis & Saparito, 2006; Keh et al., 2002; Simon et al., 1999; Mitchell et al., 2002, 2007) employ the term cognitive biases. For clarity, I will 5 This is also called believe in the law of small numbers. The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 10

12 follow them. The term cognitive bias is consistent with the psychology literature (De Carolis & Saparito, 2006:45). Risk perception Risk perception is a decision maker s assessment of the risk inherent in a situation (Sitkin & Pablo, 1992). This assessment is a subjective judgment (Keh et al., 2002). With regard to entrepreneurship, risk perception involves risk associated with a particular business situation (De Carolis & Saparito, 2006). 1.6 Thesis structure In this fist chapter, I shed light on the questions to be answered by this thesis, in depicting gaps in the entrepreneurship literature. Also, central concepts were defined, in order to establish a filled lens for the rest of this master thesis. The rest of this thesis is organized as follows. In the next chapter, I will present the theoretical model that I will test empirically. Before testing this, I will explain the method to be used in order to test the hypotheses. In the results section, I will explore the findings. After that, I will explain the findings in the light of the theory, as exposed in chapter 2. I will also give practical and theoretical implications of my findings. The thesis will end with a conclusion. The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 11

13 2. Theory In this section of my thesis, I argue how the concepts as discussed shortly in paragraph 1.5 relate to each other, but only after made a thorough analysis of the concepts first. This will result in a conceptual model. In doing so, I will derive several hypotheses that would at the core of the empirical section of this thesis. 2.1 Opportunity recognition The exploitation of an entrepreneurial opportunity is the point where actual pioneers begin with their real adventure. Let me first illuminate what an entrepreneurial opportunity actually is. Within recent entrepreneurship literature, it is proposed that an entrepreneurial opportunity is a creative result from a scale, ranging from an initial insight to a fully shaped idea about starting and operating a business (Dimov, 2007:720). He also proposes that this idea development is influenced with the individual s immediate and social context. The economic literature suggests that an entrepreneurial opportunity is characterized with profit seeking, in which new goods and services are introduced (e.g. Companys & McMullen, 2007). From both perspectives, however, an attempt to develop and market something new is an important element. The origins of entrepreneurial opportunities are immense. Holcombe (2003) proposes that the factors that create opportunities should be classified into three groups, viz.: (1) factors that disequilibrate the market, (2) factors that enhance production possibilities and (3) entrepreneurial activities that create additional future entrepreneurial possibilities. 2.2 Two lines of opportunity exploitation After having identified an entrepreneurial opportunity, one can decide to exploit it. The exploitation of an opportunity refers to those activities and investments committed to gain returns from the new product arising from the opportunity through the building of efficient business systems for full-scale operations (Choi & Shepherd, 2004). Note that this can entail many activities in general. For example, marketing managers are constantly seeking for opportunities. People with ambitions may decide to pursue the opportunity on behalf of the organization where he or she actually works, advising someone to pursue it, selling the opportunity to an organization, starting a new firm and so on. Classical literature focuses on new firm creation, whereas recent literature places more emphasis on entrepreneurship within a firm, generally known as intrapreneurship. Shane and Venkataraman (2000) distinguish between two forms of exploitation: (1) the creation of new organizations and (2) the sale of opportunities to existing firms. They argue that while the most entrepreneurial activities occur through the creation of new startups, some entrepreneurs behave in a manner in which they pursue entrepreneurial opportunities on behalf of their existing firms. Likewise, Hisrich (1990) makes a distinction between entrepreneurs (persons who start their own business) and intrapreneurs (entrepreneurship within an organization). As far as the latter is concerned, intrapreneuring thus does The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 12

14 not necessarily require selling an opportunity to an existing firm, as opposed to the vision of Shane and Venkataraman (2000). Hisrich (1990) implicitly argues that both forms of pioneering overlap. According to him, intrapreneurs share the same entrepreneurial spirit as entrepreneurs (ibid., p. 209). In his later study, Hisrich et al. (2007) discuss several possible types of entrepreneurs, in which they also mention the distinction between entrepreneurs in absolute terms (i.e. new firm versus no new firm). Others argue that entrepreneurship should not be seen as a dichotomous variable, but as a scale from very weak to very strong entrepreneurial intensity (Morris & Sexton, 1996). In many empirical researches, distinction is made between independent venturing/entrepreneurship and corporate venturing (e.g. Schrader & Simon, 1997; Corbett & Hmieleski, 2007). As Sharma and Chrisman (1999) and Kunkel (2001) classify the many existing definitions and typologies of entrepreneurship, they argue that within entrepreneurship, a distinction should be made between independent entrepreneurship and corporate entrepreneurship. Entrepreneuring within a firm could be classified in four categories, which could be presented as corporate entrepreneurship as an umbrella. These are: (1) corporate venturing, (2) intrapreneuring, (3) organizational transformation and (4) industry rule-breaking (Thornberry, 2003), although others argue that corporate venturing and intrapreneurship are synonyms (Stopford & Baden-Fuller, 1994). With regard to the exploitation of an opportunity, De Carolis and Saparito (2006) see it as new firm creation, while Shook et al. (2003) advises to also consider existing organizations in future research: Another research opportunity regarding the decision to exploit opportunities by venture creation is to examine the role of individual factors on choice between markets and hierarchies. More specifically, do individual factors help to explain why individuals choose to create a new venture instead of selling the innovation to an existing firm? (p. 391). Like what Shane and Venkataraman (2000) do, Shook et al. (2003) talk about selling a pioneering idea to an existing firm. One can also decide to exploit an opportunity in this existing organization, instead of selling to it. This is what is called intrapreneurship. Indeed, intrapreneurship, like entrepreneurship, is one possible form of exploitation of entrepreneurial opportunities. In this thesis, exploitation of entrepreneurial opportunities means having started an own firm (i.e. independent entrepreneurship) or pursuing an entrepreneurial opportunity in favour of an existing organization (i.e. intrapreneurship), as mentioned in chapter 1. This distinction is in line with a systemization made by Sharma and Chrisman (1999) and partly in line with Hisrich (1990) and Hisrich et al. (2007), because corporate entrepreneurship encompasses intrapreneurship. According to Christensen (2004), intrapreneurship is the most appropriate label for entrepreneurship within an The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 13

15 existing firm. In sum, the distinction between independent entrepreneurship and intrapreneurship seems Independent entrepreneurship The most obvious manifestation of entrepreneurship is new firm creation (Antoncic & Hisrich, 2003) that is clearly a key issue in entrepreneurship (Shook et al., 2003). According to Pinchot (1985), an entrepreneur is someone who fills the role of an intrapreneur (see next sub paragraph) outside the organization (p. IX). With this in mind, the creation of a new firm is a necessary condition for calling somebody, who exploits entrepreneurial opportunities, an independent entrepreneur. Therefore, in highlighting the creation of a new firm and simultaneously pursuing entrepreneurial opportunities, the term independent entrepreneurship is used in this thesis. This argument is in line with existing literature on entrepreneurship (e.g. Alvarez & Busenitz, 2001; Busenitz & Barney, 1997; Sharma & Chrisman, 1999). The definition of independent entrepreneurship as given by Sharma and Chrisman (1999) seems most relevant: ( ) the process whereby an individual or group of individuals, acting independently of any association with an existing organization, create a new organization (p. 18). Clearly, independent entrepreneurship entails the creation of a firm. But how does this manifest concretely? It is important to make this clear, because identifying entrepreneurs has been problematic in the past (Gartner, 1988 in: Busenitz & Barney, 1997). In their empirical study, Busenitz and Barney (1997) used two prerequisites to identify entrepreneurs. The first is responsibility. Drawing on previous research, they concluded that being responsible for an independent start-up is a criterion. Methodological entrepreneurship research suggests the same, namely that explicit consideration of new venturing is needed before placing an individual to the entrepreneurship domain (Davidsson, 2005). Thus, like what Hisrich (1990) states, an independent entrepreneur works for self gain. The second is involvement. According to Busenitz and Barney (1997), to be an entrepreneur, one must have started his or here venture within last two years. Or, he or she is planning on starting another venture within the next five years. Therefore, an independent entrepreneur should be actively involved with his or her company in order to call this person an independent entrepreneur. These two criteria will be adopted in this thesis Intrapreneurship Existing literature on entrepreneurship suggests that intrapreneurship is concerned with pursuing entrepreneurial opportunities on behalf of a company in which intrapreneurs work. Various terms are used to describe intrapreneurship. The most common are intrapreneuring, corporate entrepreneurship, internal corporate entrepreneurship and corporate venturing (Antoncic, 2007), although these terms are sometimes seen slightly different from each other. The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 14

16 Most studies regarding intrapreneurship refer to the work of Pinchot (1985), who espoused the term intrapreneuring. Typically, an intrapreneur is a corporate entrepreneur, which allows entrepreneurship to occur in an existing organization (Hisrich, 1990; Heinonen & Korvela, 2005), usually in large corporate settings (Thornberry, 2003). Intrapreneurs operate at organizational margins or boundaries, thus not at the core, which consists of the usual management (Antoncic & Hisrich, 2003). The definition of an intrapreneur as formulated by Hisrich (1990) is in line with the definition as given by Pinchot (1985). According to Pinchot (1985), an intrapreneur is someone who: ( ) takes on hands-on responsibility for creating innovation of any kind within an organization. The intrapreneur may be the creator or inventor but is always the dreamer who figures out how to turn an idea into a profitable reality (p. IX, emphasis added). With this definition in mind, if an employee is willing to walk after entrepreneurial opportunities, he or she can decide to do so within a company. Or, by using Pinchot s words, you don t have to leave the corporation to become an entrepreneur. For lasting intrapreneurship to be occurring, an intrapreneur should build new businesses continually. Therefore, according to Pinchot, the intrapreneur should get increasing freedom in order to use corporate resources. Which conditions are necessary to expect an organization in having intrapreneurs working? First, we have to consider intrapreneurship as a matter of degree, thus not as a categorization in a dichotomous fashion (Antoncic & Hisrich, 2003). In concrete terms, as compared to independent entrepreneurs, we can call someone an intrapreneur when (1) he or she is in the pay of an organization and (2) the company where he or she works has at least 50 employees. The first criterion stems from the fact that an intrapreneur works for organizational gain (Hisrich, 1990) and the second one originates from the principle that intrapreneurship usually occurs in large companies (Thornberry, 2003). Specifically, in doing empirical research among intrapreneurs, Antoncic (2007) postulated a lower limit of 50, although Stull (2005) aimed at 40 employees as criterion. Looking back on the discussion in this chapter, what distinguishes intrapreneurs from (independent) entrepreneurs? In general, the difference between them is that the former is for organizational gain and the latter for self gain (Hisrich, 1990). This is from an organizational and economic point of view. According to Hisrich (1990), intrapreneurs and entrepreneurs possess the same entrepreneurial spirit. The contribution of both entrepreneurs and intrapreneurs is that they both take new ideas or even working prototypes and turning them into profitable realities (Pinchot, 1985:32). Indeed, they both run one or more businesses for the sake of pursuing entrepreneurial opportunities The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 15

17 2.3 Cognitive biases Later in this chapter, I will argue that four cognitive biases as introduced in the former chapter are causally related to entrepreneurial behaviour, though not to the same extent. However, before arguing how these four cognitive biases relate to other constructs, it must first be clear what we exactly mean when we talk about these four cognitive biases. Note that I will only discuss four cognitive biases that are relevant in this thesis. 6 People rely on a limited number of heuristics, which reduce the complex tasks of assessing probabilities and predicting values to simpler judgmental operations (Tversky & Kahneman, 1974). Das and Teng (1999) argue that decision makers rely on these few judgmental rules, in order to simplify complex decision situations. Decision makers are not only top executives and managers, but also entrepreneurs. These entrepreneurs are argued to be people that often work in situations and under conditions that would be expected to maximize the impact of such factors (Baron, 1998). Busenitz and Barney (1997) provide empirical evidence for the assertion that entrepreneurs make more use of biases than managers do Overconfidence Overconfidence is the first cognitive bias in the theoretical model of De Carolis and Saparito (2006). The overconfidence bias refers to the failure to know the limits of one s knowledge (Russo & Schoemaker, 1992). It exists when decision makers are overly optimistic in their initial assessment of a situation, and then are slow to incorporate additional information about a situation into their assessment because of their initial overconfidence (Alpert & Raiffa, 1982 in: Busenitz & Barney, 1997). Early work on overconfidence (Oskamp, 1965) showed that increasing feelings of confidence are not a sure sign of increasing accuracy in drawing conclusions. Therefore, overconfidence is indeed a bias. Decision makers who are overconfident trait their assumptions as facts (De Carolis & Saparito, 2006; Simon et al., 1999) and empirical research has shown that entrepreneurs are more overconfident than managers (Busenitz & Barney, 1997). However, Barnes (1984) argues that overconfidence is dangerous, because it indicates that we actually know little. However, thanks to overconfidence, entrepreneurs behave entrepreneurially, as we will see. According to Busenitz and Barney (1997), the use of heuristics can, in general, lead to acceptable solutions for problems in an effective and efficient way Illusion of control The second cognitive bias that is central in De Carolis and Saparito (2006) is illusion of control. Illusion of control could be defined as an expectancy of a personal success probability inappropriately 6 For early work on cognitive biases as exhibited by decision makers, see Barnes (1984). The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 16

18 higher than the objective probability would warrant (Langer, 1975). This means that decision makers may overestimate the extent to which the outcomes of a strategy are under their control (Schwenk, 1984). Specifically, entrepreneurs strongly prefer exerting control to their outcomes, because they indeed believe they can exert control over people and events (Shaver & Scott, 1991 in: Keh et al., 2002). It may seem that the illusion of control bias resembles the overconfidence bias. That is, a decision maker who suffers from illusion of control overestimates his extent to which he controls a decision outcome. However, these two constructs differ. Overconfidence has to do with certainty of one s knowledge (i.e. facts ), whereas illusion of control has to do with ability in predicting different-tocontrol, future business events (Simon et al., 1999) Representativeness The third type of cognitive bias in the model of De Carolis and Saparito (2006), then, is representativeness. It is a tendency to regard a sample as a representation; people consider a randomly sample as highly representative for the population in all essential characteristics (Tversky & Kahneman, 1971, 1974; Barnes, 1984), whatever the reliability of the evidence for that (Barnes, 1984). This generalizing situation is argued to be a common phenomenon for entrepreneurs (Katz, 1992 in: Busenitz & Barney, 1997). Schwenk (1984) argues that this generalizing process could be responsible for viewing strategic decisions as simple analogies. Furthermore, he proposes that decision makers tend to view the past as representative of the present and thereby offering solutions for problems that existed in the past. Busenitz and Barney (1997) provide empirical evidence that entrepreneurs experience much more representativeness than managers. In suffering from the representativeness bias, an individual bases his simplistic generalization in which the sample contains much positive information. This is because the smaller the sample, the greater the chance that an individual receives only positive information (Simon et al., 1999), with logical consequence that an individual does not see the true reality. A small and non-random sample is by definition not statistically valid (Keh et al., 2002) and is thus a bias. Here is an example of this bias. If a car salesman notices that he sells twice more cars than before, he would experience this as a rosy expectation for tomorrow Status quo bias The fourth type of cognitive bias not included in the study of De Carolis and Saparito (2006), but one that might highly relevant is the status quo bias. The status quo bias has got the attention from economic psychology, marketing and public health literature, but not from the entrepreneurship literature till now (Burmeister & Schade, 2007). Status quo means doing nothing or maintaining one s The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 17

19 current or previous decision (Samuelson & Zeckhauser, 1988:8). In recent research, a similar definition is proposed, namely the behavioural tendency to decide for a status quo option disproportionately often (Burmeister & Schade, 2007:343). Decision makers often face this problem (Samuelson & Zeckhauser, 1988). Specifically: Instead of considering all available information in the decision making process, people tend to rely on what they have chosen before, on what represents the current state, or even what someone else has chosen for them and consequently is the status quo (Burmeister & Schade, 2007: ). Many decisions depend on the status quo (Tversky & Kahneman, 1991). Are entrepreneurs, then, more affected by the status quo bias than others? Surprisingly, the answer is no. Specifically, in comparing entrepreneurs with bankers and students, entrepreneurs appear to be as biased as students, but less biased than bankers (Burmeister & Schade, 2007). This is a remarkable finding, because entrepreneurs are decision makers and could be expected as very compliant to the status quo bias in decision making. For example, Baron and Ward (2004) wonder whether entrepreneurs rely on the first decision that works instead of searching for new procedures. I think that the status quo bias should be reconsidered in searching for cognitive biases as antecedents of entrepreneurial behaviour, because repeating earlier made decisions enhances quick decision making and this may lower perceived risk in rejecting alternative decisions. Furthermore, a single study cannot constitute a sound empirical generalization (Aldrich, 2001), so it is worth to replicate those kinds of studies (ibid.). Therefore, I will use this construct by relating it to other constructs. 2.4 Risk perception Cognitive biases are argued to be antecedents of the entrepreneurial behaviour, but with mediating of risk perception. That is, cognitive biases affect risk perception associated with exploiting an entrepreneurial opportunity. Subsequently, this perceived risk perception leads to entrepreneurial behaviour. Early work on risk perception indicates that people are susceptible to perceiving lower risks than it actually appear (Slovic et al., 1980). Conceptually, risk perception is a decision maker s assessment of the risk inherent in a situation (Sitkin & Pablo, 1992:12). Risk, then, is defined as the extent to which there is uncertainty about whether potentially significant and/or disappointing outcomes of decisions will be realized (Sitkin & Pablo, 1992). With respect to entrepreneurship, then, risk perception means the beliefs about the magnitude of potential losses associated with a particular business situation (De Carolis & Saparito, 2006). This definition is concentrated on entrepreneurs and will be therefore adopted in this paper, as we focus on entrepreneurial behaviour as performed by independent entrepreneurs and intrapreneurs. The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 18

20 In the past, it was argued that risky decision making behaviour is preceded by both risk propensity 7 and risk perception (Sitkin & Pablo, 1992). However, empirical research only supports the latter (Sitkin & Weingart, 1995; Weber & Milliman, 1997). Furthermore, the reason why risk perception instead of risk propensity is central in relevant studies (e.g. De Carolis & Saparito, 2006; Simon et al., 1999; Keh et al., 2002) and also in this thesis is that entrepreneurs do not prefer to take risk. Instead, they perceive less risk than nonentrepreneurs. Empirical support for this can be found in Palich and Bagby (1995) and Norton and Moore (2006). Thus, models in which risk perception mediates the effects of situational characteristics on decision making behaviour among decision makers make better explanations than direct effects models (Sitkin & Weingart, 1995; Weber & Milliman, 1997). 2.5 Theoretical model and hypotheses In this paragraph, I will make explicit how the above discussed concepts relate to each other. In doing so, I will derive six hypotheses. First, I will describe the relationship between cognitive biases and risk perception. Next, I will describe the relationship between risk perception and Entrepreneurial Orientation (E.O.) Cognitive biases and risk perception With respect to entrepreneurial decision making, the relationship between overconfidence and risk perception was first espoused by Simon et al. (1999). Later, Keh et al. (2002) and De Carolis and Saparito (2006) adopted this in their studies. However, the influence of overconfidence on risk perception is relatively novel in the entrepreneurship literature. Early work on this relationship suggests that overconfidence is a bias that reduces risk perception (Slovic et al., 1980). However, this relationship was not proved among entrepreneurs in the eighties. Overconfidence occurs because of exaggerated feelings in analyzing new data (Simon et al., 1999). They argue that decision makers treat their initial assumptions as facts and are therefore blind to seeing uncertainties associated with conclusions that stem from those assumptions. Individuals base their certainty on the ease with which they can recall earlier reasons for confidence (Keh et al., 2002). Accordingly, these people erroneously conclude that taking action is not risky. Recall that entrepreneurs are more susceptible to overconfidence than their counterpart decision makers, namely managers (Busenitz & Barney, 1997). In a later study, this finding was reconfirmed (Forbes, 2005). As argued earlier, I reason that intrapreneurs will be less susceptible to cognitive biases than entrepreneurs. This has to do with the fact that intrapreneurs work for organizational gain, as opposed to entrepreneurs who work for self gain. The setting in which an intrapreneur operates (an existing 7 An individual s current tendency to take or avoid risks (Sitkin & Weingart, 1995). The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 19

21 company) is totally different than of independent entrepreneurs, who have their own business. Overconfidence, then, enables an entrepreneur to proceed with an idea before all steps to that specific venture are fully known (Busenitz & Barney, 1997:15). Managers in large companies, on the other hand, do not have to rely on their personal confidence (ibid.). Therefore, they argue that entrepreneurs are more overconfident than managers. They provide empirical evidence for this proposition. Like managers, intrapreneurs work for organization gain, between the walls of an existing company. Also, managers have much in common with intrapreneurs: managers in corporations are almost always intrapreneurs (Geisler, 1993). Geisler argues that the survival and success of a changing company requires middle managers that act like intrapreneurs. In sum, independent entrepreneurs are more faced with situations in which they have to rely on cognitive shortcuts than intrapreneurs. An additional interesting argument can be found in Stevenson and Gumpert (1985, in: Busenitz & Barney, 1997). They argue that (independent) entrepreneurs cannot wait till all the facts are known, because the opportunity they are seeking for, can be gone by the time more complete data becomes available. Therefore, I think that intrapreneurs, while behaving entrepreneurially, would be less susceptible to the overconfidence bias than independent entrepreneurs. With this discussion in mind, I propose the following: H1a: Independent entrepreneurs and intrapreneurs exhibiting higher overconfidence will perceive less risk. H1b: The relationship between overconfidence and risk perception will be stronger for independent entrepreneurs as compared to intrapreneurs. Illusion of control gives an entrepreneur the idea that the future outcomes are under his control, as discussed earlier. In doing so, he overemphasizes the extent to which his personal skills can increase future performance where chance plays a greater role than actual skills (see Langer (1975) for early work on this). The illusion of control, then, brings an entrepreneur to an atmosphere, in which he does not realize how risky the concerning venture is (Simon et al., 1999). In feeling that he controls and predicts outcomes, an individual will evaluate possible hazards in a more favourable light (De Carolis & Saparito, 2006). Additionally, people exhibiting an illusion of control may underestimate risk, because of the fact that they believe their skills are greater than those of others (Simon et al., 1999). Therefore, entrepreneurs exhibiting an illusion of control will underestimate risk, because they believe their skills can prevent negative occurrences (Keh et al., 2002). An example may clear the above theorem. Consider a GSM shop manager who decides to amplify his personnel with employees who speak many foreign languages, so that more phones could be sold to foreign customers. In doing so, the manager thinks that he can increase the shop turnover. This strategy gives the manager the feeling that he controls this situation, not realizing that this decision entails possible risky consequences. Foreign customers may not by definition buy more phones by The battle of entrepreneurial orientation between independent entrepreneurs and intrapreneurs 20