Opportunity Related Absorptive Capacity and Entrepreneurial Alertness

Opportunity related absorptive capacity and entrepreneurial alertness

Abstract

Extending the conceptualization of absorptive capacity, we propose the concept of opportunity related absorptive capacity, defined as an entrepreneur’s absorptive capacity during the opportunity development phase. Alertness, as an entrepreneurial schema bridging internal knowledge-building activities with external opportunity-related knowledge, could be positively associated with opportunity related absorptive capacity. In this exploratory study based on a sample of 93 Swedish entrepreneurs who had at least one patent associated with their venture, alertness is positively associated with opportunity related absorptive capacity.

Introduction

The concept of absorptive capacity has been studied at the alliance-, firm-, department-, team-, and individual-level (Apriliyanti and Alon 2017; Cosaert and Volberda 2016). We have a limited understanding, however, of the nature of absorptive capacity during opportunity development phase. The lack of formal structures, the liabilities of newness and smallness, and fledgling routines call for a better understanding of how entrepreneurs develop opportunities by leveraging absorptive capacity (Kazanjian 1988; Kazanjian and Rao 1999).

Understanding this conceptualization is important for two reasons. First, although studies have focused on the entrepreneurial mindset and schemas to explain knowledge structures during early venture stages (Haynie et al. 2010; Mitchell et al. 2007), a limited understanding remains regarding how individual characteristics drive the development of opportunities. The coalescence of the entrepreneurial schema with the development of entrepreneurial opportunity could further shed light on our understanding of the opportunity development phase (Brush, Greene and Hart 2001; Macpherson, Jones and Zhang 2004). Second, the early stage development of absorptive capacity surrounding entrepreneurial opportunity forms the building blocks of future absorptive capacity and could, therefore, contribute to our understanding of the path-dependent process of developing absorptive capacity (Cohen and Levinthal 1989).

Entrepreneurial alertness could be central to managing recursive and cyclical nature of opportunity evolution during the early stages of the venture life cycle and in explaining how these distinct structures could be amalgamated (Jansen, Van Den Bosch and Volberda 2005; Zahra and George 2002). Opportunity related absorptive capacity is closely associated with the entrepreneurial schema of alertness. As recently acknowledged in the literature, alertness is a schema associated with entrepreneurial and career outcomes (Gaglio and Winter 2017; Vaghely and Julien 2010). In bridging the individual characteristics driving venture-related capabilities, alertness could play a pivotal role for several reasons. First, during the early stages of venture development, entrepreneurs must update, revise, and refresh the structure of their ventures’ opportunities. The nebulous nature of an opportunity requires vigilance in the external environment to identify emerging knowledge gaps in the context of available resources. Alertness allows entrepreneurs to continuously scan, search for, and evaluate external conditions to revise, update, and select the knowledge structures necessary to gestate opportunities. As a schema, alertness allows an entrepreneur to recursively fill such knowledge-resource gaps by validating and updating processes related to absorptive capacity as an opportunity is developed (Krueger Jr 2007). Second, alertness could be a pacemaker in aligning external information and opportunities with internally developing opportunity. As a pacemaking schema undergirding emerging entrepreneurial opportunities, alertness could help devise early stage absorptive capacity necessary to develop opportunities. Based on the above discussion, we propose a positive association between alertness and opportunity related absorptive capacity. In the following sections, we first discuss opportunity related absorptive capacity and then propose formal hypothesis. We next discuss the results and implications of the present study.

Hypotheses Development

Opportunity Related Absorptive Capacity

Cohen and Levinthal (1989) developed the concept of absorptive capacity and defined it as the ability to “identify, assimilate and exploit knowledge from the environment,” which is central to recognizing “the value of new information, assimilate it and apply it for commercial ends” (Chen and Belcher 2010, page 193). The concept of absorptive capacity has been theorized and tested at the firm-, department-, team-, and individual-level (Apriliyanti and Alon 2017; Cosaert and Volberda 2016; Marabelli and Newell 2014). The ability to identify new information and assimilate it into the organization is the centerpiece of gaining new knowledge for commercialization ends. Absorptive capacity consists of acquiring external knowledge, assimilating that acquired knowledge into organizational routines and processes, and transforming that knowledge into organizational capabilities and routines to exploit it for commercial ends (Zahra and George 2002).

Opportunity related absorptive capacity could explain how entrepreneurs acquire, assimilate, and exploit knowledge during the opportunity identification phase. The processes associated with opportunity related absorptive capacity focus on identifying information, assimilating such information into the existing knowledge base related to the opportunity, transforming the recombined knowledge into a more refined conceptualization of the opportunity, and finally, exploiting the opportunity towards commercialization ends.

The opportunity identification and exploitation process are recursive processes in which an entrepreneur constantly seeks novel knowledge and identifies gaps that help exchange meaningful knowledge for commercialization potential. Alertness could be central to ensuring that searching for, soliciting, accessing, and understanding external knowledge could enhance commercialization efforts.

 

Alertness

Entrepreneurial alertness is a construct of perennial interest in entrepreneurship (Gaglio and Katz 2001; Gaglio and Winter 2017; Valliere 2013; Kirzner 1997; Kirzner 1999). Tang, Kacmar and Busenitz (2012) defined alertness as a “scanning and searching for information, connecting previously disparate information, [and] making evaluations on the existence of profitable business opportunities” (page 77). Rooted in the Kirznerian perspective of entrepreneurship, the concept of alertness explains the process of identifying opportunities, wherein individuals who are “alert” to changing the industry and market conditions or disruptions are better able to identify valuable entrepreneurial opportunities. Later work has significantly expanded our understanding of this key construct, and Tang, Kacmar and Busenitz (2012) recently proposed a scale of entrepreneurial alertness where alertness is “the degree to which decision makers sense and anticipate entrepreneurial opportunities associated with the current and future states of their business environment [and] is part of a key mechanism through which entrepreneurial opportunities are recognized, constructed, and acted upon” (Roundy et al. 2017, page 1). Elemental to alertness are the abilities to search for, sense, and anticipate market and industry arbitrage opportunities (Vaghely and Julien 2010). Increasingly, support is emerging for alertness in corporate entrepreneurship (Burgelman 1983) and career progress (Uy et al. 2015), among other business processes. Uy et al. (2015), based on a sample of university students in Singapore, found that entrepreneurial alertness improved career adaptation and is an essential mindset for entrepreneurial tendencies.

Despite the significant theoretical interest in alertness, until recently the concept was not psychometrically formalized (Gaglio and Katz 2001; Gaglio and Winter 2017; Roundy et al. 2017; Tang, Kacmar and Busenitz 2012; Valliere 2013), Tang, Kacmar and Busenitz (2012) proposed three dimensions of alertness—searching and scanning, perceiving and interpreting, and selecting information. Their three dimensions involve collating and accumulating information by searching and scanning, followed by leveraging cognitive resources to interpret newly acquired information. The dimensions also involve discarding unnecessary and incorporating relevant information into existing opportunity knowledge stock (Simsek and Heavey 2011; Zahra and Filatotchev 2004). In summary, alertness refers to an individual’s ability to accumulate, select, and transform information from external sources to identify market and industry gaps.

The body of work on entrepreneurial alertness has moved from alertness as a mode to identify opportunities to a much broader stance of alertness as a “chronically activated, hierarchical set of schemata” (Roundy et al. 2017, page 9). Alertness is critical to rapidly identifying changes in the environment associated with intuitive decision-making and predicting the value of opportunities. Alertness plays a central role in improving entrepreneurial behavior by not only help identify patterns and opportunities in the early phases of developing the firm but also forms a continued base of entrepreneurial adaptation during opportunity development phase. Entrepreneurial efforts require continued alertness to emerging information and challenges to acquire and evaluate the knowledge needed for entrepreneurial opportunities. A constantly changing environment, as well as limited and evolving venture resources, require entrepreneurs to be alert to emerging information about their gestating opportunity (Alvarez and Barney 2007).

As a schema, alertness allows entrepreneurs to consistently enhance the association between external knowledge and internal resource configurations necessary to develop opportunities (Gaglio and Winter 2017; Valliere 2013). In assimilating, transforming, and exploiting knowledge and developing capabilities to commercialize opportunities, an entrepreneur must identify both internal and external gaps that are not clearly bounded. Active stakeholder involvement, fledgling routines and persistent circulation of test-validation of an entrepreneur’s hypotheses about the potential of an opportunity call for alertness to match external opportunities with internal resource combinations and gaps (Kazanjian 1988; Alvarez, Barney and Anderson 2013). Being able to “perceive patterns more accurately and…better than the non-alert [decision makers] at inferring the likely implications and consequences” (Gaglio and Katz 2001, page 97), alert entrepreneurs can more effectively assess environmental patterns and connect the dots, both internally and externally to align opportunity related absorptive capacity with external events and internal resources (Van Den Bosch, Volberda and De Boer 1999; Gray 2006).

For example, in the lean startup methodology, recursive negotiation, both with available resources and external conditions, for a viable product requires an ongoing alertness to scan and search the environment. Alertness helps improve opportunity related absorptive capacity by improving the entrepreneur’s recognition of new knowledge through scanning and searching to identify how external needs fit with internal resource availability (cf. Roundy et al. 2017). To transform newly acquired knowledge, the alertness schema could help improve the association between internal knowledge gaps and external needs. Alertness could help reconcile these gaps by making the understanding of opportunities more accessible. As entrepreneurs aim to transfer knowledge related to opportunity, the alertness scheme could be an important bridge in translating opportunities into commercialized value.

In summary, opportunity development, a cyclical process, requires not only internal resource adjustments but also tweaking opportunities when resources are not fungible in the short-term (Bingham and Eisenhardt 2008). As entrepreneurs develop opportunities they must combine and realign knowledge that, in turn, would not be flexible in the short term. Alertness could help bridge internal and external gaps by either adapting opportunities to fit with internal resource availability and fill gaps internally to further develop opportunities (Baron and Ward 2004; Vaghely and Julien 2010; Roundy et al. 2017). Finally, exploitation requires applying new knowledge to existing problems or re-jiggering prior opportunity structures. As such, alertness could help maintain continuity in exploring the next iteration of updating opportunities. Alertness provides the necessary aptitude to recognize patterns that in turn help the entrepreneur anticipate and develop an opportunity during early stages of the firm (Roundy et al. 2017). Furthermore, because alert entrepreneurs are primed to seize opportunities (Gaglio and Katz 2001; Gaglio and Winter 2017), they also take rapid actions to develop opportunity related absorptive capacity before emerging windows of refined or new opportunities close. In summary, we hypothesize that alertness provides an undergirding schema so that improving opportunity related absorptive capacity is developed consistently:

Hypothesis. Opportunity related absorptive capacity is positively associated with

alertness.

 

Data

Swedish venture data, which is considered highly representative of entrepreneurial activity in developed countries (Short et al. 2009), has been used in numerous entrepreneurship studies (e.g., Delmar and Shane 2004, 2006, Eckhardt et al. 2006, Steffens et al. 2012). The initial sampling frame included firms identified through the Orbis database, a well-recognized database with extensive coverage of Swedish firms. To ensure we had a representative sample of new ventures, we used the following filters: (a) firms established between 2010 and 2014; (b) firms with less than 10 employees at founding; and (c) firms that had filed for patents. Based on these filters, we included 603 active ventures as representative of our final sample. The last filter, filing for a patent, was essential for ensuring that the new firm had made a credible commitment to a new opportunity.

A self-administrated questionnaire was developed to test the proposed hypotheses. To enhance external validity, the questionnaire was pre-tested with five CEOs of ventures from, as well as, two entrepreneurship researchers. The revised version of the questionnaire was mailed in spring 2016 with a cover letter explaining the study’s purpose. Because the unit of analysis is at the firm level, and to get the holistic view of a venture’s early-stage entrepreneurial activities, it was deemed more appropriate to send the questionnaire to the CEO. Within the sample of 603 firms, 10 questionnaires did not reach the identified firms, and it was not possible to contact these firms using available information. Eight firms replied that they could not participate in the study due to high workload. In total, we received 110 replies to our survey. Of these responses, three were completed incorrectly and five came from firms in which the CEO addressed another entity than the one targeted (for example, a group of firms instead of a single firm).

We did not use any filters. Based on casewise deletion, the final sample included 93 responses.

 

Measures

For opportunity related absorptive capacity, we use a modified 21-item measure adapted from Jansen, Van Den Bosch and Volberda (2005) (Appendix). The Cronbach’s alpha was 0.90.

To measure alertness we used the scale from Tang, Kacmar and Busenitz (2012) (α = 0.62).

To limit the influence of alternate explanations, we controlled for the age of the entrepreneur. Age, as a proxy for accumulated human capital and changing preferences over the life course, could explain the efficacy of alertness. Prior work has shown systematic variation in venture processes and outcomes between males and females. We thus controlled for sex (male = 0; female = 1). Next, because years of experience as a founder or co-founder proxies for accumulated entrepreneurial experience, we included this control. Finally, to assess the scope of entrepreneurial opportunities pursued by ventures, we ask the entrepreneur about the scope of their market sales “international, national, regional, local (propose in percentage, i.e. should equal to 100% at the end).” Finally, we included 2-digit industry codes as a level-2 variable in our multilevel model, because the dynamics of identifying opportunities could vary systematically across industries.

Table 1 presents the means, standard deviations, and correlations. Including only the direct effects and the controls (with industry dummies), the mean variance inflation factor (VIF) was 3.87. An average entrepreneur had 4.93 years of entrepreneurial work experience, 25.8% were females, and about 15.1% had a market scope that leaned toward national or international.

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Insert Tables 1-2 about here

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To test the proposed hypotheses, we used a multilevel model using NAICS 2-digit industry codes at level-2. We use the mixed routine in Stata 15. The hypothesis proposed that alertness is positively associated with opportunity related absorptive capacity (Table 2, Model 2: β = 0.8815, p < 0.01). Adding control for the number of employees (from Orbis) in the latest available year the estimates were consistent (β = 0.9146, p < 0.01; N = 85).

 

DISCUSSION AND CONCLUSION

During the early stages of opportunity development, ventures may not have the necessary structures, resources, and guidelines to manage knowledge. A complex confluence of entrepreneurial cognition, the process of dabbling through, and the nature of opportunity explain how knowledge is sought, organized, recombined and exploited to develop an opportunity. The proposed framework is one of the first frameworks attempting to understand opportunity related absorptive capacity in the early stages of opportunity development.

In the present paper, absorptive capacity, a widely studied construct in organizational research, is extended to a venture setting using a construct—entrepreneurial alertness—that have found broader support in entrepreneurship. The constant recursivity necessary for developing a viable entrepreneurial opportunity calls for alertness (Krueger Jr 2007; Keh, Foo and Lim 2002). The results show that alertness is positively associated with opportunity related absorptive capacity. Lacking formal structures and routines (Kazanjian and Rao 1999), entrepreneurs must rely on schemas to improve internal knowledge structures. The early years of venture formation are indeed challenging, and alertness could be central to building and developing a framework to absorb and assimilate knowledge. Alertness could be a bridge to explore and assimilate knowledge during opportunity development stage and could also be an overarching schema for entrepreneurs to manage the process of translating opportunity related knowledge into the internal, tangible knowledge structures needed for long-term survival. We call on future research to complement this line of work through the theoretical frameworks of both sensemaking and information processing (Weick 1979).

As with all studies, the present study’s findings are not without limitations. First, due to smaller sample size, we could not test for the dimensionality of the opportunity related absorptive capacity scale. As such, the study should be considered exploratory, and inferences based on rigorously tested scale validity is not stated or implied, despite the high Cronbach’s alpha. We call for future studies to test for the scale dimensionality.

Second, we focused on a shorter timeframe to understand the early stages of opportunity development processes that could be subject to recall bias. We, however, relied on recently established ventures. Individual and venture dynamics could lead to a complex interplay between alertness and firm knowledge structures. Using the proposed scales, we could not assess the rich micro-dynamics that drive early-stage opportunity development-related knowledge structures. Additionally, an additional inquiry into founders’ imprinting and related organizational ecology dynamics could further help unpack the proposed relationships. Third, although we control for industry effects, the nature of industry effects could provide an additional contingency in the identified relationships. Finally, the findings cannot be generalized beyond Sweden.

In conclusion, we know little about the nature of absorptive capacity during the early stages of opportunity development the process. Limited information processing structures during the early stages of venture formation call for a more informed understanding of early stage opportunity development through the lens of entrepreneurial schemas such as alertness.

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Table 1. Means, Standard Deviations, and Correlations

	variable	N	mean	sd	min	max	1	2	3	4	5	6
1	Opportunity related absorptive capacity	93	5.3114	0.8469	3.8421	6.5	1
2	Entrepreneur’s Age	93	57.0215	9.8731	35	84	0.2507*	1
3	Sex	93	0.2581	0.4399	0	1	0.3863*	0.2339*	1
4	Years of entrepreneurial experience	93	4.9247	4.1839	0	30	0.0455	0.4095*	-0.1547	1
5	Market scope	93	0.1505	0.3595	0	1	-0.0723	-0.4817*	-0.2483*	-0.4548*	1
6	Alertness	93	5.3236	0.6545	3.1667	6.5417	0.4624*	0.1397	-0.2806*	0.3644*	-0.0591	1

 

Notes.

*p < 0.05 (two-tailed); the industry measure included but not reported. The descriptives are based on casewise deletion.

Table 2. Multilevel Regression (level-2: NAICS 2-digit)

	(1)	(4)	(7)	(10)
VARIABLES	Controls	Alertness	Controls	Alertness
Alertness		0.5990***		0.8815***
		(0.116)		(0.100)
Entrepreneur’s age			0.0168*	0.0126*
			(0.010)	(0.007)
Sex			0.7661***	1.0805***
			(0.200)	(0.152)
Years of Entrepreneurial Experience			0.0208	-0.0267
			(0.023)	(0.018)
Market Scope			0.3954	0.2801
			(0.275)	(0.204)
Constant	5.3028***	2.1225***	3.9916***	-0.3113
	(0.086)	(0.622)	(0.544)	(0.633)
Observations	95	95	93	93
Number of groups	30	30	29	29
Log-Likelihood	-117.7	-106.1	-105.9	-79.44
Degrees of Freedom	0	1	4	5
p-value		2.58e-07	0.000153	0
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1

Appendix

Scale items for the Opportunity related absorptive capacity

“The following statements refer to how you searched, acquired, assimilated, transformed and exploited knowledge in developing opportunity related to your current venture. Indicate the extent to which you agree or disagree with the following statements.

1 = Strongly disagree  7 = Strongly agree”

Acquisition

E1. interacted frequently with external stakeholders to acquire new knowledge.

E2. sought knowledge from one technology area regularly from other technology areas.

E3. typically collected industry information through informal means (e.g., lunch with industry friends, discussions with trade partners).

E4. the technology areas in the opportunity rarely were combined and synthesized. (R)

E5. periodically organized special meetings with customers or stakeholders to acquire new knowledge.

E6. regularly approached third parties such as accountants, consultants, or tax consultants to understand the nature of the opportunity.

Assimilation

E7. was slow to recognize shifts in the market associated with the opportunity (e.g., competition, regulation, demography) (R)

E8. new opportunities to serve potential buyers were quickly understood.

E9. quickly analyzed and interpret changing market demands.

Transformation

E10. regularly considered the consequences of changing market demands in terms of the underlying opportunity.

E11. recorded and stored newly acquired knowledge for future reference.

E12. was quick to recognize the usefulness of new external knowledge to existing knowledge base of the opportunity.

E13. rarely drew on practical experiences in developing the opportunity (R)

E14. worked diligently to develop the opportunity based on new external knowledge

E15. periodically meet with customers and advisors to discuss the consequences of market trends and new product development associated with the opportunity.

Exploitation

E16. clearly understood how activities of opportunity exploitation must be conducted

E17. client complaints fell on deaf ears during opportunity exploitation (R)

E18. had a clear division of roles and responsibilities within the venture during opportunity exploitation phase.

E19. constantly considered how to exploit the opportunity more effectively.

E20. had difficulty implementing new products and services related to the opportunity (R)

E21. Stakeholders in the venture had a common language regarding our products and services.

(R) = reverse coded