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Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 3: 127–146 (2009)


Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/sej.67

ENTREPRENEURS AS THEORISTS: ON THE ORIGINS


OF COLLECTIVE BELIEFS AND NOVEL STRATEGIES
TEPPO FELIN1* and TODD R. ZENGER2
1
Marriott School, Brigham Young University, Provo, Utah, U.S.A.
2
Olin Business School, Washington University, St. Louis, Missouri, U.S.A.

What are the origins of entrepreneurial beliefs about new opportunities and the value of
resources? In this article, we outline a theory and model of the emergence of entrepreneurial
beliefs and novel strategies. We first summarize extant literature by highlighting both the
experiential and perceptual (or observational) origins of entrepreneurial beliefs and strate-
gies. Thereafter we carefully explicate the role that entrepreneurial theorizing plays in the
emergence of novel beliefs about new opportunities and make links with experiential and
perceptual arguments. We specifically discuss three key mechanisms of entrepreneurial theo-
rizing, namely: (1) the triggering role of experiential and observational fragments; (2) the
imagination of possibilities; and (3) reasoning and justification. Importantly, we also explicate
the social mechanisms of entrepreneurial theorizing and the emergence of entrepreneurial
beliefs and novel strategies, specifically by discussing the role of social interaction and self-
selection in entrepreneurial activity. Copyright © 2009 Strategic Management Society.

INTRODUCTION beliefs, and expectations (Shane, 2003; cf. Foss


et al., 2007). However, our understanding of the
Heterogeneous beliefs and expectations are central origins of these heterogeneous beliefs and expecta-
to the strategy and entrepreneurship literatures. In tions at the individual and organizational levels
the strategy literature, differing beliefs and expecta- remains underdeveloped.
tions about the value-generating capacity of particu- One common explanation for the origin of beliefs
lar resources or resource combinations drive a firm’s lies in accumulated experience and history (Dierickx
decisions to acquire and assemble resources in and Cool, 1989; Levitt and March, 1988; Shane,
pursuit of competitive advantage (Barney, 1986; 2003; Zollo and Winter, 2002). However, novel
Foss, 2007). In the entrepreneurship literature, dif- strategies and entrepreneurial opportunities routinely
fering beliefs about the value of resources and extend beyond individuals’ and organizations’ (or
resource combinations prompt the decisions and society’s for that matter) prior experience. Further-
actions that define entrepreneurship (Hayek, 1945; more, particularly for new organizations, the problem
also see Shepherd et al., 2007; also see McMullen with experience as the source of novel beliefs is that
and Shepherd, 2006). Indeed, entrepreneurship itself experience is inherently in short supply (March
is commonly defined as discovering and exploiting et al., 1991). Despite their meager experience and
opportunities based on an entrepreneur’s judgment, resources, nascent organizations nonetheless create
disproportionate amounts of value (Baumol, 2002;
also see Bhide, 2000; Rosenbloom and Christensen,
Keywords: strategic entrepreneurship; imagination; theorizing; 1994), suggesting that they are somehow able to
beliefs; novel strategies develop more accurate beliefs and perceptions about
*Correspondence to: Teppo Felin, Marriott School, Brigham
Young University, 587 Tanner Building, Provo, UT 84602, opportunities in the environment than organizations
U.S.A. E-mail: teppo.felin@byu.edu with more experience. A key question, then, is:

Copyright © 2009 Strategic Management Society


128 T. Felin and T. R. Zenger

Where do novel entrepreneurial beliefs, expecta- ORGANIZATIONAL BELIEFS


tions, and associated strategies come from? Given AND THEIR ORIGINS: A REVIEW
the meager resources and experiences of nascent AND PROBLEM
organizations, how are beliefs and novel strategies
bootstrapped? Beliefs and expectations are central to strategy and
In this article we specifically seek to further open entrepreneurship. Entrepreneurs and organizations
this black box of entrepreneurial belief formation, develop beliefs and expectations about courses of
explicating both individual-level and social aspects. action (Simon, 1964), about the shape of the envi-
To do so, we argue that entrepreneurial theorizing ronment (Gavetti and Levinthal, 2000), about the
provides a key mechanism, and we define a process potential value of resources (Barney, 1986), about
through which novel beliefs about future entrepre- which capabilities to acquire (Makadok, 2001), or
neurial possibilities and strategies emerge. Theoreti- about the opportunities that might be to pursued
cally, our arguments build on foundational work in (Shane and Venkataraman, 2000; cf. Shephard et al.,
psychology and philosophy that partly critiques the 2007). Beliefs and expectations, then, essentially are
historically dominant emphasis on experience and the upstream antecedents of organizational decision-
perception or observation as sources of beliefs. We making (Cyert and March, 1963), resource acquisi-
highlight the important role that theorizing and imag- tion (Barney, 1986), action, and behavior and, thus,
ination play in generating novel beliefs about new competitive advantage.
opportunities and beliefs about the environment
(e.g., Gopnik, 1996; Gopnik and Meltzoff, 1997; Where do beliefs come from?
Harris, 2000; Peirce, 1957; Rosenberg, 1995; Spelke
et al., 1992). We see natural links, analogies, and But, where do heterogeneous individual and organi-
extensions between a particular strand of research in zational beliefs come from? How do these beliefs
developmental learning psychology and the problem originate and change?2 Broadly, extant literature
of how entrepreneurs and nascent organizations form
novel beliefs about opportunities and their environ- and philosophy—a strand of work upon which the entrepre-
ments. Specifically, we highlight how theorizing, neurship and strategy literatures have not directly built
triggered by mere fragments of observation and (Chomsky, 1959, 2003; Gopnik, 1996; Spelke et al., 1992).
experience (cf. March et al., 1991), allows both Second, since our theoretical focus is on the origin of novel
beliefs about opportunities, we are essentially interested in
entrepreneurs and children alike to learn and create opportunities that are created rather than discovered or per-
far more than the direct application of their limited ceived (Alvarez and Barney, 2007). Our theory focuses on
experience and observations should empirically opportunities and entrepreneurial possibilities that are theo-
rized and created in the mind’s eye. However, that said, the
permit (Spelke, et al., 1992; cf. Gopnik and Schulz, somewhat artificial dichotomy between the creation and dis-
2004). We not only explicate the individual-level covery of opportunities is partly also resolved by our theory,
factors related to entrepreneurial theorizing, but also specifically as we emphasize how environmental inputs (in the
form of experiences and observations) play a central role in the
the social mechanisms that necessarily shape the entrepreneurial theorizing process. Third and finally, our goal
emergence and potential realization of entrepreneur- in this article is to explicate both the individual and social
ial beliefs and novel organizational strategies. We mechanisms that form beliefs that lead to entrepreneurial
action.
discuss how entrepreneurial beliefs are, in essence, 2
The importance of beliefs and expectations as antecedents of
aggregated and assembled within collective contexts action and behavior has been underscored in psychology. For
via social interaction and self-selection. In sum, the example, behavioral psychologists highlight the role that indi-
vidual beliefs and expectations play in shaping individual
goal of this article is to develop a model of the emer- behavior and associated choices (e.g., Ajzen, 1991; Bratman,
gence of entrepreneurial beliefs, explicating the key 1987; Ajzen and Fishbein, 1980). Specifically, individuals have
individual and social mechanisms and explaining the behavioral beliefs—subjective plans or anticipations about the
potential consequences associated with particular actions, deci-
formation of beliefs that guide novel entrepreneurial sions, and behaviors. Individuals, in essence, assign probabili-
decision-making and organizational strategy.1 ties to the consequences of certain behaviors—assessing the
potential benefits of various alternatives—and based on this
analysis, they develop a belief (cf. Goldman, 1994; Horgan and
1
While extant work in both entrepreneurship and strategy Woodward, 1985). These beliefs embody a choice and inten-
informs our efforts, our theoretical contributions are distinct in tion to take certain actions to actualize their belief. Put differ-
several ways. First, while our theory is cognitive in nature (for ently, ‘what explains [an] action is the person’s desires together
recent overviews on entrepreneurial cognition see Baron, 2004; with his beliefs about opportunities’ (Elster, 1989: 20; cf.
Baron and Ward, 2004; Mitchell et al., 2007; cf. Walsh, 1995), Davidson, 1963). Individuals then, in essence, decide
we focus on a very specific strand of research in psychology and choose to actualize a particular belief, to test whether a

Copyright © 2009 Strategic Management Society Strat. Entrepreneurship J., 3: 127–146 (2009)
DOI: 10.1002/sej
Origins of Novel Strategies 129

suggests that beliefs—again, beliefs that guide and Experience as a source of beliefs
determine an organization’s decisions and actions—
Organizational learning scholars have defined learn-
emerge from two sources: experience and perception
ing as synonymous with beliefs—specifically, as a
(or observation). While the literatures on these two
change in an organization’s beliefs (see March,
sources of belief overlap heavily at a broad concep-
1991: 74; cf. Levitt and March, 1988).3 Individuals
tual level—for example, as experience itself is
and organizations have beliefs about cause and effect
clearly tied to what has been observed, seen, and
relationships, the nature of the environment, reality
perceived in the past—nonetheless they represent
and possibilities, and the consequences of future
distinct streams of research. On the one hand, expe-
actions (see Fiol and Lyles, 1985; Gavetti and Levin-
riential mechanisms of belief formation have largely
thal, 2000; Huber, 1991; March et al., 1991). Impor-
originated from the organizational learning and
tantly, these beliefs guide, inform, and determine an
capabilities literature (cf. Levitt and March, 1988;
organization’s decisions, behavior, and actions
Zollo and Winter, 2002), while the entrepreneurship
(Gavetti and Levinthal, 2000 Levitt and March,
literature, on the other hand, has emphasized various
1988).4
perceptual and observational aspects of the origins
Experience and various experiential mechanisms
of beliefs (Shepard et al., 2007; Shane and Venkata-
have been highlighted as some of the key anteced-
raman, 2000). We briefly review each literature,
ents of individual belief formation and learning (cf.
highlighting the experiential and perceptual origins
Bandura, 1986; Schwartz, 1978) and these experien-
of beliefs and the links between the two. Thereafter
tial mechanisms of learning are also central in Cyert
we highlight how experience and perception are
and March’s (1963) classic behavioral theory of the
central in belief formation, but how additional mech-
firm. Organizations take actions and receive feed-
anisms are necessarily required to explain the origin
back on the efficacy of that action from the environ-
of novel entrepreneurial beliefs. We discuss how
ment, leading to an adjustment in the organization’s
entrepreneurial theorizing offers a unique, though
expectations and understanding of what is feasible
complementary, perspective for understanding the
and valuable. In essence, experience and observation
origin of novel entrepreneurial beliefs and associ-
change the beliefs and expectations of the organiza-
ated strategies.
tion about what future actions are possible, desir-
Before proceeding, we note that the mechanisms
able, and valuable (cf. Greve, 2003). In other words,
of belief formation reviewed here are relatively
an organization’s history allows an organization to
independent of focal level, whether at the individual
draw inferences about what the environment is like
or organizational level. That is, extant organizational
and helps define actions that might benefit the orga-
theories largely borrow theoretical constructs and
nization (Levitt and March, 1988).
mechanisms from the individual to the organiza-
The focus on experience and an organization’s
tional level on a one-to-one basis (for a recent
history as sources of beliefs and learning has also
review, see Whetten et al., 2009). For example,
been central in the organizational capabilities litera-
literature on individual learning from psychology
ture (Zollo and Winter, 2002). Specifically, an orga-
has been directly applied to the organizational level
nization’s history provides lessons that are encoded
(Argote, 1999). Justification for theorizing in this
fashion, where theories are directly borrowed from
another level of analysis, is provided by the func-
tional equivalence that is noted in the underlying 3
Organizational learning and capabilities-based scholars have
mechanisms at two different levels (see Morgeson largely borrowed their theoretical arguments from how indi-
and Hofmann, 1999). Thus, our review of the litera- viduals learn (Argote, 1999) and, thus, the theoretical mecha-
ture on where beliefs come from covers both the nisms are essentially the same (for a recent discussion of
theory borrowing between levels of analysis, see Whetten
individual and organizational levels, though in our et al., 2009). In other words, the argument is that belief
own theoretical development we also make key dis- formation and learning at the individual and organizational
tinctions and links between the individual and social levels have some of the same functional equivalents
(Morgeson and Hofmann, 1999).
aspects of entrepreneurial belief formation. 4
While some view learning as necessitating changes in actual
behavior, we concur with and build on others who have noted
that organizational learning also implies that the ‘range of
particular belief leads to anticipated outcomes (Ajzen and potential behaviors is changed’ (Huber, 1991: 89; also see
Fishbein, 1980) — Bratman’s (1987) belief-desire-intention March et al., 1991: 2). The distinction between actual and
model, in part, also captures this intuition. potential behaviors is central to our arguments.

Copyright © 2009 Strategic Management Society Strat. Entrepreneurship J., 3: 127–146 (2009)
DOI: 10.1002/sej
130 T. Felin and T. R. Zenger

in routines (Nelson and Winter, 1982) or in an orga- environment (Alvarez and Barney, 2007), and the
nization’s memory (Walsh and Ungson, 1991). entrepreneur’s job is to find, see, observe, and per-
Organizations may also engage in retrospective ceive them. Scholars point to entrepreneurs possess-
counterfactual reasoning (what if we had done x, for ing ‘an orientation toward seeing opportunities’
example in the case of errors), which promotes (Krueger, 2003: 105, italics added) and refer to
learning and changes in beliefs (Morris and Moore, entrepreneurs as ‘opportunity finders’ (Gaglio, 2004:
2000). More generally, the ‘experiential lessons of 536). Others also reinforce the importance of per-
history’ and associated past observations (Levitt and ception by highlighting entrepreneurial alertness (cf.
March, 1988: 320), in effect, provide organizations Kirzner, 1985; Gaglio and Katz, 2001), though alert-
with data and facts which result in beliefs about ness has also been treated as a process (see Ireland,
what actions an organization might take in the future. Hitt, and Sirmon, 2003). Overall, then, entrepreneurs
Path-dependent experiences also give an organiza- possess these types of perceptual skills in trait-like
tion its continued identity. These experiences may fashion, more so than non-entrepreneurs (Mitchell
indeed embody the most critical assets of the orga- et al., 2007). Alternatively, entrepreneurs develop,
nization as they accumulate over time in path- via experience or educational background (Shane,
dependent fashion (Dierickx and Cool, 1989). Thus, 2000; Shane, 2003), perceptual capabilities and
organizations specifically learn by associating past alertness that make them more prone to recognize
experiences and successes in problem solving with and discover opportunities.
current problem-solving situations (cf. Cohen et al., The key theoretical foundations of much of the
1972). Other experiential mechanisms of belief for- opportunity recognition literature lay in a specific
mation have included vicarious learning (Denrell, strand of theory in cognition—particularly the infor-
2003; cf. Bandura, 1986), learning by doing (Argote, mation processing theory (Neisser, 1976 Simon,
1999), and learning by analogy or association (e.g., 1979)—as well as Kolb’s (1984) experiential models
Gavetti et al., 2005). Even notions such as absorp- of learning. This theory broadly suggests that entre-
tive capacity—the extent to which an organization preneurs essentially store information (observations,
is able to glean information from the environment— experiences, and perceptions), gleaned from the
are heavily rooted in experiential antecedents in the environment, in their memory (or other reposito-
psychology literature (see Cohen and Levinthal, ries), and with this information they then interact
1990). with the current environment in discovering and
recognizing opportunities (Baron and Ward, 2004;
cf. Simon, 1979). The emphasis in this literature
Perception as a source of beliefs
clearly remains on the perception of opportunities
Individuals and organizations also form beliefs and based on observations and experience.
learn through observation and various perceptual This emphasis on perception is certainly war-
mechanisms. In fact, extant theories of entrepreneur- ranted and provides a contribution to our under-
ship—as they relate to the emergence of beliefs standing of entrepreneurship; nonetheless the
about opportunities (or the likelihood of discovering capacity to see, recognize, and find (or even create)
them)—have focused heavily on various individual- opportunities remains a black box theoretically. A
level, experiential, and in particular, perceptual and focus on perception, observation, and experience
cognitive aspects of belief formation. While entre- provides a less than complete story since—as
preneurship scholars have also focused on experi- recently noted in psychology—beliefs, expectations,
ence as a source of beliefs (see Corbett, 2005)—for and learning clearly extend beyond one’s experience
example, by showing how individuals bring with and observations (see Chomsky, 1986, 2003; Gopnik
them important knowledge and skills from incum- and Wellman, 1992 Spelke et al., 1992). While both
bent organizations (Shane, 2000)—the bulk of the experiential and perceptual mechanisms are quite
literature has emphasized various perceptual and feasible explanations for the emergence of beliefs
cognitive mechanisms. In fact, the language used by about new opportunities, they provide only a partial
much of the entrepreneurship literature is instructive explanation. In sum, while experience and percep-
with its emphasis on perception: opportunities are tion are undoubtedly important, they are (in some
recognized, identified, found, or discovered (for an part) underdetermined and incomplete, as they
overview, see Baron, 2004; Mitchell et al., 2007). In cannot completely explain the origins of radically
other words, opportunities objectively exist in the new beliefs.
Copyright © 2009 Strategic Management Society Strat. Entrepreneurship J., 3: 127–146 (2009)
DOI: 10.1002/sej
Origins of Novel Strategies 131

The underdetermination of experience Denrell, 2003; Denrell and March, 2001; Fang,
and perception 2003). In sum, experiences, observations, and per-
ceptions represent only a small sample of actual—or
The underdetermination of experience and percep-
for that matter, feasible or imagined—possibilities
tion as the source of entrepreneurial beliefs, learn-
for courses of future action (cf. March et al., 1991)
ing, and capability is aptly illustrated by building on
and thus additional mechanisms for explaining
insights from cognitive psychology, philosophy, and
entrepreneurial activity and novel organizational
learning theory. Specifically, cognitive psycholo-
courses of action need to be sought.
gists and philosophers have similarly wondered
how—despite rather fragmented experience and
limited perception and observation—children not
only learn to talk, but learn to talk grammatically
THEORIZING AS A SOURCE OF
ENTREPRENEURIAL BELIEFS
and with infinite creativity in syntax (Chomsky,
1986). Moreover, children also manifest remarkable
We argue that a process of theorizing explains the
a priori capability and expectations in understanding
emergence of novel, entrepreneurial beliefs and
their environment—a capability that cannot, as
strategies. The process of entrepreneurial theorizing
empirically shown by Spelke and colleagues (1992),
consists of three key conceptual elements: (1) the
be completely explained with reference to experi-
triggering role of experiential and observational
ence, observation, or perception alone. Chomsky
fragments; (2) the imagination of possibilities; and
(1975: 179, italics added), in discussing a child’s
(3) the process of reasoning and justification. We
learning of language—foreshadowing arguments on
discuss these elements of entrepreneurial theorizing
which we will theoretically build—succinctly expli-
in sequential fashion as they partly suggest a natural,
cates this experience-learning underdetermination
though idealized, temporal ordering of how novel
(or incompleteness) as follows:
entrepreneurial beliefs emerge: from imagined latent
ideas and possibilities, seeded or triggered by frag-
‘One can describe the child’s acquisition of mented experience and observation, to more full-
knowledge of language as a kind of theory con- fledged conjectures, hypotheses, and models about
struction. Presented with highly restricted data, courses of future action that are reasoned and justi-
he constructs a theory of language of which this fied—all eventually leading to a collective or shared
data is a sample (and, in fact, a highly degenerate belief and an intention to, in effect, experiment and
sample, in the sense that much of it must be test the validity of an entrepreneurial theory (see
excluded as irrelevant and incorrect—thus the Figure 1 for an overview).
child learns rules of grammar that identify much We begin with the premise that entrepreneurs
of what he has heard as ill-formed, inaccurate, and engage in cognitive activities in some of the same
inappropriate). The child’s ultimate knowledge of ways as children or even scientists. We may even
language obviously extends far beyond the data think of entrepreneurs as scientists, just as some
presented to him. In other words, the theory he have labeled children as scientists (Gopnik and
has in some way developed has a predictive scope Meltzoff, 1997). Both engage in theory development
of which the data on which it is based constitute about possibilities and associated theory testing.
a negligible part. The normal use of language Whether speaking of entrepreneurs, scientists, or
characteristically involves new sentences, sen- children, we can hardly explain novel beliefs and
tences that bear no point-by-point resemblance learning and progress without reference to mecha-
or analogy to those in the child’s experience.’ nisms beyond experience and observation (Peirce,
1957; Spelke et al., 1992).5 Clearly this metaphor
Organizational scholars have, in fact, recently between entrepreneurs, entrepreneurial firms, and
highlighted this exact point; namely, that experience children may be pushed too far. Our goal, however,
and perception—whether vicarious or one’s own—
are often highly degenerate and fragmented (see 5
Naturally the theorizing efforts of entrepreneurs differ from
March et al., 1991) and experience and observation those of scientists. For example, entrepreneurs may not have
also provide a biased and rather limited sample of the time to fully vet the implications of their theories given the
need for action. But on the whole, similar theorizing processes
data and facts from which one might learn and form are evident, though perhaps in lower-order form given issues
beliefs about the future and the environment (see of timing and uncertainty.

Copyright © 2009 Strategic Management Society Strat. Entrepreneurship J., 3: 127–146 (2009)
DOI: 10.1002/sej
132 T. Felin and T. R. Zenger

triggering role of Rudolph Spreckels, an early twentieth-century entre-


experience and perception preneur and industrialist: ‘When I see something
badly done or not done at all, I see an opportunity
what if? to make a fortune’ (quoted in Williamson, 2007: 10).
entrepreneurial theorizing

Experiences and observations, then, provide the


triggering raw material from which the entrepre-
neurial possibility space is essentially bootstrapped,
theorized and created. However, our emphasis is
imagination of possibilities
specifically on the triggering, and, thus, not directly
which? causal, role of experience and observation in belief
why?
how? formation. Though individuals may have similar
experiences or observations, the observations them-
selves do not necessarily induce the same beliefs or
action patterns, or for that matter, the recognition of
reason and justification opportunities. Rather, observations may trigger the
process of entrepreneurial theorizing and belief for-
mation (thus the dotted lines in Figure 1). As noted
what?
who?
by March et al. (1991), observations and experi-
ences offer only fragmented lessons and directions
about what an entrepreneur might do as an alterna-
tive or what novel opportunities and possibilities
testing of belief and theory might be created. One way to conceptualize experi-
ences and observations is to think about these as data
or fragmented samples which inform, though do not
determine, eventual entrepreneurial beliefs.
To illustrate how experiences and observations
trigger, rather than cause, theorizing about the entre-
environmental feedback
preneurial possibility space, consider the case of
Figure 1. Stylized representation of entrepreneurial Isaac Newton. Newton observed how an apple fell
theorizing and belief formation from a tree (Westfall, 1983) and this observation
triggered within him questions about why it fell the
way it did. The fact that other apples—and other
is simply to metaphorically link the two and, more objects for that matter—had not only fallen previous
generally, to theoretically note the functional equiv- to the one observed by Newton, but had, of course,
alence between theorizing in these two different been observed by many others, illustrates that the
contexts (for an excellent discussion of theorizing observation and experience itself is only a fragment
based on functional equivalence, see Morgeson and loosely related to beliefs. Thus, additional mecha-
Hofmann, 1999). nisms are needed to understand how novel beliefs
and expectations emerge.
Interestingly, at least in the context of entrepre-
The triggering role of experiential and neurship, the more that entrepreneurial experiences
observational fragments
and observations themselves are causal in determin-
The process of entrepreneurial theorizing and asso- ing entrepreneurial beliefs, the less likely these
ciated belief formation is initiated or triggered by beliefs are to result in true novelty and breaks with
experiential or observational fragments (see Figure the past. A fairly obvious observation about an entre-
1). An entrepreneur may, for example, see— preneurial opportunity—say, of seeing something
perceive, recognize, experience, observe— done poorly by another entrepreneur or organiza-
something done poorly by another organization tion—which then in essence contains lessons learned
or see a customer problem or need that is not within it, is likely to be exploited by numerous entre-
being addressed, in which case, seeing may induce preneurs, and thus is unlikely to lead to entrepre-
theorizing about alternative possibilities (cf. Hsieh, neurial rents (cf. Barney, 1986). Now, the observed
Nickerson, and Zenger, 2007). As noted by obviousness of an opportunity can often be judged
Copyright © 2009 Strategic Management Society Strat. Entrepreneurship J., 3: 127–146 (2009)
DOI: 10.1002/sej
Origins of Novel Strategies 133

only ex post, nonetheless, the intuition of experien- possibilities7 for courses of future action and thereby
tial and observational fragments as triggers (rather add new possibilities to a set of fragmented observa-
than causes) clarifies how new beliefs emerge. tions and experiences (see Figure 1). Imagination,
The intuition for the triggering role that frag- then, essentially adds to and creates the entrepre-
mented observations play in entrepreneurial theoriz- neurial possibility space. Whether new products,
ing and associated learning is consistent with new structures, or new markets, the creative ide-
the poverty of stimulus argument in psychology ational process of imagination importantly offers
(Chomsky, 1986; Stich and Ravenscroft, 1994). This varied and new sets of possibilities for what a nascent
argument suggests that, relative to the actual knowl- organization might choose to pursue. Imagination
edge manifest by humans, observations and experi- represents a type of ideational trial and error (similar
ences provide only limited and fragmented input and to theorizing in scholarly settings: Weick, 1989; cf.
data.6 Child psychologists, for example, persuasively Campbell, 1974; Rescher, 2005), which provides
show that humans have capabilities to infer and part of the entrepreneurial raw material that results
theorize, to in effect bootstrap knowledge, far beyond in anticipations, conjectures, and eventual beliefs
what has been observed, seen, or perceived (e.g., about the environment and possible courses of
Gopnik, 1996; Spelke et al., 1992). Similarly, phi- action. Importantly, imagination is a low-cost way
losophers, such as Charles Peirce (1957), have dis- to generate, identify, and consider a diversity of
cussed this capability under the label of abduction. entrepreneurial possibilities. Imagination avoids the
Thus, even more minor creative acts—such as the costs and time required to physically experiment and
use of language—have been shown to clearly out- wait for environmental feedback (see the comple-
strip extant inputs, observations, and experiences, mentary discussion of offline learning by Gavetti
and to rely on theorizing processes. As previously and Levinthal, 2000). Thus, far before actual entre-
noted, children manifest capability and creativity far preneurial action and trials, this type of ideational
beyond what their experience and observations work and mental trial and error provides much-
would seem to allow (Chomsky, 2003). So observa- needed guidance and learning for what possibili-
tions and experiences are, in effect, impoverished ties—new markets, new products, new structures—
and fragmented compared to actual human capabil- the entrepreneur and nascent organization might
ity and ability to infer and theorize (Fodor, 1991; pursue.
Gopnik, 1996). The concept of imagination can, in part, be sepa-
So, in the case of entrepreneurs, if experiences rated from what is (or has been) seen, observed,
and observations indeed are fragmented and only in perceived, experienced, or known. As shown by psy-
limited supply (March et al., 1991) and if they only chologists, imagination is separate from both the
trigger eventual beliefs, what then accounts for the senses and perception (Kosslyn, 1980; also see
emergence of novel beliefs beyond perception and Casey, 1971; Currie and Ravenscroft, 2003 Shepard
the senses? and Cooper, 1982). The entrepreneurial process of
imagination specifically then is not—though it may
include it—the act of bringing past or current obser-
vations and perceptions into one’s mind from
Imagination of possibilities
memory (Ryle, 1949; cf. Thomas, 1999), nor is it
Imagination provides one of the key engines of the mere processing of environmental information
entrepreneurial theorizing. Entrepreneurs imagine (Haber, 1970; cf. Kiesler and Sproull, 1982; Walsh,

6 7
The poverty of stimulus argument is succinctly summarized Much of the vocabulary that we use in our subsequent theo-
as follows: The problem that arises if we consider the matter retical development will be enlightened by work from philoso-
[of the origins of beliefs and expectations, and knowledge more phers who have described reasoning and justification as the
generally] with a little care is one of poverty of the stimulus. process of considering possibilities and possible worlds (cf.
Although our cognitive systems surely reflect our experience Lewis, 1973; Seddon, 1972; also see Goldman, 1999). The
in some manner, a careful specification of the properties of language of possibility also features prominently in related lit-
these systems on one hand, and the experience that somehow eratures, ranging from theories of imagination (Kosslyn, 1980)
led to their formation on the other, shows that the two are sepa- to theories of intention (Rosenberg, 1995; related concepts such
rated by a considerable gap, in fact, a chasm. The problem is as volition, see Zhu, 2004) to theories of pretense (Leslie,
to account for the specificity and the richness of the cognitive 1987), and other complementary conceptualizations of theoriz-
systems that arise in the individual on the basis of the limited ing and learning (cf. Peirce, 1957). . Imagination was, of
information available (Chomsky, 1986: xxv). course, also considered by Shackle, 1979.

Copyright © 2009 Strategic Management Society Strat. Entrepreneurship J., 3: 127–146 (2009)
DOI: 10.1002/sej
134 T. Felin and T. R. Zenger

1995). Though we recognize the clear links between 2004) and, more generally, the human capacity for
perception and imagination, making a distinction abduction, ‘which has to do with the elaboration of
between extant experiential and observational possibilities’ (Rescher, 1976: 72; also see Niiniluoto,
approaches and imagination is important to our 1999; Paavola, 2004). And, imagination and theoriz-
argument, as many extant approaches simply treat ing, then, essentially gives pre-experiential guid-
the mental and cognitive capabilities of humans (see ance (Rescher, 1976). Indeed, as noted by Charles
Lindsay and Norman, 1977 for an overview; cf. Peirce, ‘man’s mind has a natural adaptation to
Bower and Hilgard, 1981) as repositories for housing imagining correct theories of some kinds . . . If man
and recalling past observations and perceptions had not the gift of a mind adapted to his require-
(Crowder, 1976; Skinner, 1989; cf. Walsh, 1995). ments, he could not have acquired any knowledge’
Entrepreneurial imagination is a uniquely creative (1957: 71, emphasis added).
and generative act for supposing, conceiving, and The critical importance of imagination and its
considering various new possibilities (and, impossi- triggering links to experience and perception can be
bilities for that matter) for courses of entrepreneurial highlighted by referencing the recombination process
action (Figure 1) (Kosslyn, 1980; cf. Yablo, 1993). commonly used to explain innovation and entrepre-
Entrepreneurs specifically consider what might be neurial activity. Scholars have shown that the recom-
done. Imagination allows for completely new bination of various knowledge elements (Rosenkopf
thoughts and completely new imagined scenarios, and Nerkar, 2001; Fleming and Sorenson, 2004) can
and permits envisioning an entirely new future lead to highly promising and valuable products and
(Block, 1981; Lewis, 1986).8 The intuition here, spe- entrepreneurial possibilities. The intuition of re-
cifically with regard to imagination, is complemen- combination—particularly the recombination of
tary to the work of Gaglio (2004), who emphasizes experiences—also shows up prominently in the
the role that mental simulations play in entrepre- entrepreneurship literature where Shane, for
neurial activity. Through imagination, entrepreneurs example, defines an opportunity as a ‘situation in
cognitively simulate and think counterfactually, thus which a person can create a new means-ends frame-
allowing for the unique creation of possibilities work for recombining resources that the entrepre-
beyond the senses. Imagination encompasses thought neur believes will yield a profit’ (Shane, 2003: 18).
experimentation (cf. Brown, 1991, 2004; Gendler, Our theory directly adds to the notion of recom-
bination by articulating the underlying process used
8
A natural question, of course, is the origin of this entrepre- to judge and arbitrate between what is recombined
neurial capacity to imagine new possibilities and the related and how it is recombined (Figure 1). In other words,
human capacity to theorize. If not directly from experience, entrepreneurial imagination and theorizing explain
where do these capabilities come from? In line with develop-
mental psychologists and philosophers (e.g., Leslie, 1987; the remarkable success with which entrepreneurs
Spelke, et al., 1992; cf. Rosenberg, 1995) we argue that humans recombine. As shown by Rivkin (2000), if recombi-
have inherent and natural abilities to imagine and theorize (cf. nation is merely random, the likelihood of success
Kosslyn, 1980)—uniquely imagine, create, and piece together,
conjectured possibilities from limited observation and experi- is infinitely small. This is true even of entrepreneur-
ence. As noted by Peirce, ‘man’s mind has a natural adaptation ial activity, just as it is true of scholarly theorizing
to imagining correct theories of some kinds . . . If man had not (see Lakatos, 1973; Peirce, 1957) and human learn-
the gift of a mind adapted to his requirements, he could not
have acquired any knowledge’ (1957: 71; also see Chomsky, ing more generally (Chomsky, 1986). Imagination
2003; Leslie, 1987). To briefly contrast this with other learning and theorizing then allow for entrepreneurs to
approaches, while Bandura argues that ‘humans come with few hypothesize and conjecture about possible recombi-
inborn patterns’ (1986: 20) and, thus, places emphasis on expe-
rience and observation in learning, we build on others who note nations and to focus on those with a higher likeli-
how capabilities for imagination and theorizing are importantly hood of success. Thus, while we know from
anchored in human nature, and this allows for uniquely creative numerous literatures that recombination can lead to
acts and new learning (Chomsky, 2003; Peirce, 1957). In
related fashion, Carruthers further notes that ‘as knowledge novel outcomes and value creation (e.g., Ahuja and
seekers . . . suppositions play a crucial role. Without a capacity Lampert, 2001; also see Smith and DiGregario,
to suppose, neither science nor technological innovation would 2002), theorizing—and particularly the imagination
be possible, except on a trial and error basis’ (2002: 230). This
type of imaginative supposition and pretense, of course, is of possibilities—gives us further intuition about how
readily manifest in child’s play (Currie and Ravenscroft, 2002; and why and what elements might be recombined
Harris, 2000; Leslie, 1987), and imagination and supposition (see Figure 1).
certainly also play a key role in entrepreneurial theorizing,
specifically in expanding the set of possibilities for future In sum, entrepreneurial imagination involves
action. developing imagined representations about the
Copyright © 2009 Strategic Management Society Strat. Entrepreneurship J., 3: 127–146 (2009)
DOI: 10.1002/sej
Origins of Novel Strategies 135

environment and novel possibilities that guide even- possibilities (see Figure 1). Answering the theoreti-
tual entrepreneurial pursuits. Imagining possible cally important why question of various possibilities
entrepreneurial landscapes, even creating new ones, (cf. Kaplan, 1964; Whetten, 1989), particularly rela-
differs from random hill climbing and local search. tive to competing sets of possibilities and opportuni-
Rather than climbing extant hills, the process we are ties, is fundamental to entrepreneurial theorizing and
describing has more to do with imagination—how decision making. The logical exercise of reasoning
hills are imagined, created, and built in the entrepre- and justifying possibilities and potential courses of
neurial mind’s eye. Overall, the low cost of imagin- action moves ideas from the realm of hunches, ideas,
ing possibilities, mental simulation, and thought and possibilities, to conjectures, hypotheses, and,
experimentation permits the consideration of a wide eventually, beliefs and theories. This, of course,
range of highly risky or implausible possibilities. does not happen without significant mental effort,
Thus, rich new entrepreneurial possibilities (and, nor is this process as linear or explicit as the word
impossibilities) can be imagined, created, and theorizing itself might suggest. Initial guesses, ideas,
mentally tested. and conjectures about future entrepreneurial possi-
bilities are—through thought experimentation—
rigorously considered, mentally tested, argued,
discarded, and further developed, as entrepreneurs
Reason and justification
move toward increasing certainty and belief about a
The third key element of entrepreneurial theorizing particular entrepreneurial possibility that should be
is the process of reasoning and justification. Imag- tested and tried (see Figure 1).
ined possibilities, triggered by fragmented observa- There is an important interplay between entrepre-
tions, need to be reasoned and justified toward more neurial theorizing (specifically reason and justifica-
full-fledged conjectures, hypotheses, models, and tion) and entrepreneurial experience and observation.
theories. These theories then shape entrepreneurial Experiences and observations, even when frag-
action and strategy. Selecting among entrepreneurial mented and inconclusive, can provide anchoring
possibilities is inherent to entrepreneurial activity facts and data for considering the feasibility of par-
itself, as not all imagined possibilities can be physi- ticular possibilities and associated entrepreneurial
cally tried and tested. actions. Via association and analogy (Gavetti et al.,
Selecting the best possible hypothesis or emerg- 2005), experience and observation from neighboring
ing nascent theory to test is, of course, rather diffi- industries or markets may provide much-needed
cult, as there may be very little, if any, data or data to, in part, justify a particular entrepreneurial
experiential support for a particular entrepreneurial idea and theory. But again, given the inherent
possibility. This is almost inherently the case when newness of some entrepreneurial action—particu-
defining a novel belief and course of action that may larly of the variety that leads to radical innovation—
take the form of a new product, new business, or there are often only fragmented observations and
novel strategy. Only through trying, experimenting, biased facts to support the nascent theory. Thus, the
and doing does the entrepreneur begin to develop a entrepreneurial theory development process may
more sure belief, understanding, learning, and inherently be one that is more focused on ideas,
knowledge (cf. Cyert and March, 1963). However, imagination, and logic rather than experience, data,
prior to such testing, reason and justification provide and extant facts.9
an intermediate opportunity to carefully evaluate, Our emphasis on reason and justification
cognitively test, and ultimately refine feasible beliefs requires us to anchor our arguments on a particular,
about what entrepreneurial actions should be
taken.
Entrepreneurial theorizing, just like scholarly 9
The intuition for highlighting the role that entrepreneurial
theorizing, then, does not depend (only) on physical theorizing plays in new learning comes from one of the
trial or experience for its support, but rather, ‘during authors’ personal experiences in the venture capital industry.
Specifically, this author noted that the process of planning
the theory development process, logic replaces data ventures and entrepreneurial actions seemed highly similar to
as the basis of evaluation’ (Whetten, 1989: 491; also the process of scholarly interaction and theorizing, and extant
see Seddon, 1972). The entrepreneur or nascent models of entrepreneurial learning and activity have not con-
sidered the role that theorizing plays not only in shaping schol-
organization uses logical reasoning and justification arly learning, but also in shaping entrepreneurial learning and
to comparatively assess the merits of alternative activity.

Copyright © 2009 Strategic Management Society Strat. Entrepreneurship J., 3: 127–146 (2009)
DOI: 10.1002/sej
136 T. Felin and T. R. Zenger

emerging conception of human rationality10—one Surely this can’t all simply be the result of random
that is less bounded, though certainly not perfectly variation. Our emphasis, then, builds on this more
rational. Our conception of human nature and ratio- rational approach to human reasoning (see McKen-
nality is consistent with scholars who emphasize zie, 2005). New entrepreneuring organizations
humans’ surprising capability to reason appropri- provide an apt setting to consider this type of ratio-
ately, to get things right, and to find new solutions nality, as seemingly against all odds, in highly
to problems (see Krueger and Funder, 2004 also see uncertain environment, and often with only sparse
Gigerenzer and Goldstein, 1996; Gilbert, 2006; experience—novel solutions are nonetheless mani-
McKenzie, 2003, 2005). While experiential (and fest, new products are developed, new markets are
observational) boundedness and experiential bias created, new possibilities are explored, and radical,
have been emphasized in the extant organizational new creativity is revealed.
literature (cf. Levitt and March, 1988), conceptions
of human rationality also need to take into consid-
eration the human capacities for reasoning creatively
even in uncertain environments (cf. Rosenberg, SOCIAL MECHANISMS OF
1995)—a capacity to generate new, creative solu- ENTREPRENEURIAL THEORIZING
tions with only limited and localized experimenta-
tion and testing. In the management literature, The process of entrepreneurial theorizing discussed
Grandori (2005; cf. Grandori, 1984) has also noted above, and any subsequent testing of entrepreneurial
that theories in organizational scholarship rather theories, are seldom individual-level activities.
poorly account for rational discovery—that is, the Rather as noted by West, ‘new venture success often
evidence for organizations getting many things depends on how the founding team collectively
right, such as, planes flying, organizations working, understands its world, estimates the effects of pos-
new products emerging, etc. (Grandori, 2005). sible actions, makes decisions, and allocates appro-
priate resources’ (2007: 77, italics added). Thus,
important social processes are commonly involved.
10
We might also note that our focus on entrepreneurial reason These social processes are important to entrepre-
and justification as an important element of entrepreneurial neurial theorizing for two reasons. First, as the
theorizing parallels and is complementary with a changing and possibilities which entrepreneurs seek to address
emerging conception of human rationality. That is, some schol-
ars have recently called for a less-bounded, though certainly become more complex, the need for collective theo-
not perfectly rational, conception of human nature and rational- rizing and experimentation increases (cf. Nickerson
ity, specifically noting much evidence for the surprising human and Zenger, 2004). Moreover, the knowledge
capabilities to reason appropriately, and the surprising human
capabilities to get things right and to find new solutions to required to develop entrepreneurial theories is often
problems (e.g., Krueger and Funder, 2001; also see Gilbert, widely dispersed (cf. Hayek, 1945). Consequently,
2006; McKenzie, 2003, 2005). That is, while experiential (and effective theorizing first demands assembling or
observational) boundedness has been emphasized in the extant
organizational learning literature (cf. Levitt and March, aggregating observations and experience by effec-
1988)—conceptions of human rationality also need to take into tively organizing the individuals in whom knowl-
consideration the human capacities for reasoning correctly (cf. edge is housed. While entrepreneurial theories must
Rosenberg, 1995)—a capacity to generate new, creative solu-
tions with only limited and localized experimentation and ultimately reside within individuals, single individu-
testing. In the management literature, Grandori (2005; cf. als nonetheless are unlikely to have explored all
Grandori, 1984) has also noted that theories in organizational possible implications, designs, or marketable ideas
scholarship rather poorly account for rational discovery, that
is, the evidence for organizations getting many things right; that emerge from this theory. Second, the actual
such as, planes flying, organizations working, new products doing and testing of a given entrepreneurial theory
emerging, etc. (Grandori, 2005). Surely this can’t all simply be (see Figure 1), more often than not, requires assem-
the result of random variation. Thus, these outcomes need
further explanation, as heavily bounded conceptualizations of bling a sufficiently large collective which shares a
rationality cannot completely explain creative outcomes (cf. particular theorized belief. We highlight below two
Kitcher, 1994). Our conception of rationality, then, is comple- social mechanisms—social interaction and self-
mentary with Grandori’s epistemic rationality and recent evi-
dence in psychology. New organizations provide an apt setting selection—that contribute to the entrepreneurial
to consider this type of rationality, as—seemingly against all theorizing processes outlined above. We then discuss
odds and often without sparse experience—novel solutions are how self-selection helps define which theorized
manifest, new products are developed, new markets are created,
new possibilities are explored, and radical, new creativity is beliefs are actualized and tested in nascent
manifest. markets.
Copyright © 2009 Strategic Management Society Strat. Entrepreneurship J., 3: 127–146 (2009)
DOI: 10.1002/sej
Origins of Novel Strategies 137

Social interaction thereby adding to the aggregate observations of the


nascent organization.11
Social interaction facilitates entrepreneurial theoriz- Insights about this collective imagination of pos-
ing. Entrepreneurial theories emerge as ideas, and sibilities can be drawn from the literature on brain-
possibilities are collectively imagined, generated, storming. This literature indeed shows that specific
conjectured, hypothesized, criticized, defended, forms of collective interaction may facilitate both
debated, reasoned, refuted, discarded, justified, and, increases in the quantity and potential quality of
eventually, believed, accepted, and selected (and ideas (Paulus and Yang, 2000; cf. Sutton and
later tested or tried, or not) in a collective and social Hargadon, 1996; Taylor, Berry and Block, 1958;
context. Thus, by assembling individuals and then though see Rietzschel, et al., 2006). The literature
facilitating social interaction, ‘an organization can specifically suggests that in both idea generation and
acquire more information than any individual’ idea selection an optimal collective process can
(Arrow, 1974: 53). create results of higher quality than those achievable
Social interaction and the aggregation of obser- by any one individual (e.g., Sutton and Hargadon,
vational fragments. As noted by Hayek (1945), 1996; Hargadon and Bechky, 2006). Individuals
beliefs and knowledge are often local and thus build off of each others’ ideas and thoughts. They
widely dispersed among individuals. Individuals challenge and criticize ideas. Through such interac-
have different experiences, observations, and per- tion, they collectively engage in theory development
ceptions about what is feasible, what truly represents regarding entrepreneurial possibilities. While our
an opportunity, what resources ought to be pur- intent here is not to reify this interactional process
chased in factors markets, and what capabilities by arguing that the collective as a whole theorizes
should be developed. Social interaction both inside independent of its individuals, it is nonetheless true
and outside the firm facilitates aggregating disparate that interaction (and the associated aggregation of
observational and experiential fragments (see Figure ideas) can importantly facilitate the entrepreneurial
1). One way to think about this process of aggregat- process of theorizing. Furthermore, the collective
ing fragmented experiences and perceptions is as process is also necessary as a shared belief inher-
assembling a puzzle in which disparate observations ently must emerge for collective action to be taken
and perceptions provide an increasingly clear con- (Simon, 1964). In other words, divergent beliefs
ceptualization of opportunities in the environment. may need to ‘be compromised because others [have]
Observational fragments represent individuals’ different values and no social action is possible at
experiences, observations, and perceptions, and are all without some element of cooperation and, in par-
aggregated in a collective context. Social interaction ticular, agreement’ (Arrow, 1974: 27). Thus, both
also allows for the comparison of disparate observa- the creation and the pursuit of new entrepreneurial
tions, allows for their aggregation, and enables their opportunities generally require collective action.
use in assembling an entrepreneurial theory. Social interaction and reason and justification.
However, mere aggregated observations do not Beliefs about entrepreneurial opportunities and pos-
directly provide a nascent collective with a true sibilities are also often reasoned and justified in col-
understanding of the opportunity landscape and its lective settings. The process of interaction permits a
associated possibilities. After all, individuals may
have differing and conflicting beliefs about an
opportunity, and uncertainty about the future accen- 11
The collective process of the imagination of possibilities
tuates this problem. Aggregated experiences, thus, might be thought of as the type of generation and creation of
are a seed for imagination. alternatives or search for a course of action to which Herbert
Social interaction and the imagination of pos- Simon referred; specifically a collective process through which
‘possible courses of action [are] discovered, designed, or syn-
sibilities. Using fragmented and aggregated experi- thesized’ (1964: 7). That is, individuals jointly generate and
ences and observations as raw materials (see Figure voice disparate alternatives and potential courses of action that
1), nascent entrepreneurial organizations imagine a nascent collective might engage in. Imagination, again, pro-
vides the underlying engine and human capability through
novel ideas and theories to guide future entrepre- which this activity occurs, coupled with aggregated experi-
neurial action. Social interaction facilitates such ide- ences and observations. Individuals then voice their conceptu-
ation and theorizing beyond what has been observed alizations of what the environment might look like, or to return
to the landscape metaphor, what various peaks might look like.
and experienced. This collective effort generates a The nascent organization, then, jointly considers various alter-
wider view of the entrepreneurial possibility space, natives about what might be pursued.

Copyright © 2009 Strategic Management Society Strat. Entrepreneurship J., 3: 127–146 (2009)
DOI: 10.1002/sej
138 T. Felin and T. R. Zenger

collective determination of what the nascent organi- outcomes, introducing various competing predic-
zation should pursue. Collective reasoning and tions and eventually jointly converging to the most
justification is at the heart of the entrepreneurial reasonable and best justified course of action.
theorizing process. Through collective reasoning, Of course, groups of individuals are by no means
disparate ideas and possibilities are reconciled until, a panacea in generating entrepreneurial theories that
ideally, a shared belief and understanding emerge. lead to the best of all possible actions and strategies.
Very often it is simply not feasible for nascent orga- Not all interactional collective processes are supe-
nizations to pursue multiple courses of action (cf. rior to individual-level reasoning and action, and
Simon, 1964). As noted by Katz and Lazarsfeld, ‘if groups often get things wrong (see e.g., Stroebe,
individuals cannot agree on what should come next, Diehl, and Abakoukim, 1992; cf. Sugden, 2001). In
they cannot take collective action’ (1955: 62). The fact, there may be collective productivity losses due
process of reasoning and justification, then, allows to social loafing (Karau and Williams, 1993), deindi-
for imagined ideas to be more fully vetted in a col- viduation (Festinger et al., 1952; Diener, 1979),
lective context. Entrepreneurs and other participants evaluation apprehension (e.g., Diehl and Stroebe,
may need to, in essence, sell their beliefs and ideas 1987), or groupthink (Janis, 1972). Incentives, of
to others in an effort to ensure that a shared collec- course, also are an issue in team production (Olson,
tive belief emerges. The process of reasoning and 1965). In all, any social interaction or team produc-
justification then moves ideas from the realm of tion, then, is highly sensitive to underlying incen-
conjecture and possibility to increasing certainty of tives, outside options, and any number of interactional
belief and intent about what a nascent organization team processes. Furthermore, and importantly, the
might actually do (see Figure 1). underlying composition of the team itself—in terms
Reasoning and justification, of course, do not of its individuals (see Laughlin et al., 1998)—is
guarantee that the best possibilities are selected. likely to affect what theoretical possibilities are gen-
That is, given the rather radical uncertainties associ- erated, imagined, and eventually pursued. All that
ated with nascent entrepreneurial activity, entrepre- said, the central point here is that individuals, through
neurs often are wrong. Nevertheless, the collective joint theorizing, decide what action the nascent
process of winnowing ideas and theories occurs organization should take.
through social interaction as ideas are collectively
argued, vetted, defended, and reconciled—and
Self-selection
much-needed consensus is sought. This process of
reasoning and justification is also particularly central Despite our prior emphasis on social interaction and
to firms seeking to garner support and resources collective theorizing, individuals also naturally
from external stakeholders (cf. Pfeffer and Salancik, develop their own beliefs, theories, and judgments
1978). In short, social interaction capitalizes on the about future possibilities. Individuals certainly
collective reasoning capacities and common judg- reason and justify (or question) for themselves the
ment of many individuals, with each offering their potential feasibility or value of a given entrepreneur-
opinions, insights, and observations about particular ial possibility, associated theory and strategy. This
entrepreneurial opportunities to pursue. highlights our second social mechanism: individuals
To briefly return to our landscape analogy, the self-select both into and out of nascent entrepreneur-
social interaction of individuals in collective theoriz- ial organizations. This type of individual-level
ing and imagining possibilities ideally leads to a sorting and self-selection, in part, determines the
more refined and precise theory about the formation initial conditions of the organization (cf. Huber,
of entrepreneurial landscapes (cf. Hsieh, Nickerson, 1991), that is what theories emerge from social
and Zenger, 2007). The theorizing process itself then interaction and who decides to pursue particular,
guides early exploration (or put differently, creation theorized entrepreneurial possibilities. Importantly,
or building) of this landscape. The actual trials, self-selection or sorting essentially determines which
which now can scarcely be regarded as random trial- entrepreneurial and novel strategies are actually
and-error (cf. Hartmann, 1933), are preceded by col- tried and tested. While in the previous section we
lective thought experimentation about what is likely have highlighted the importance of social interaction
to happen and why. Entrepreneurial theorizing then in generating and winnowing down imagined, theo-
is a process of collective what if-type questioning retical possibilities for action, we explicitly recog-
about potential actions and their associated nize that individuals also may have (or develop)
Copyright © 2009 Strategic Management Society Strat. Entrepreneurship J., 3: 127–146 (2009)
DOI: 10.1002/sej
Origins of Novel Strategies 139

their own (independent of their social context) antic- possess a theory and belief by which they determine
ipations and beliefs about the future. We also recog- alignment or coherence. It may simply be that indi-
nize that individuals may need to buy into the viduals are attracted (Schneider, 1987) to others’
theorized entrepreneurial possibility before entre- beliefs and theories which they find particularly
preneurial action. We will first discuss self-selection plausible, without ex ante having theorized their
into nascent entrepreneuring collectives, then self- own conceptualizations or beliefs about an entrepre-
selection out of collectives. neurial possibility. An important element of attrac-
Self-selection into nascent organizations. Indi- tion and self-selection to entrepreneurial theories is
viduals self-select into or join others who imagine the inducement that it gives to contribute to a nascent
the future in a similar manner. In other words, entre- organizational cause or purpose (March and Simon,
preneurs have or develop theories about possibilities 1958). Of course, an attraction to theories viewed as
and seek to align themselves with others who envi- particularly plausible may also result from simple
sion a similar theorized future, specifically where pecuniary motives. Individuals may simply view the
their theories and beliefs cohere with others. The pecuniary rewards from supporting more plausible
role that ex ante individual values (beliefs, interests, collective beliefs and theories as larger than the
and so forth) play in the emergence of collective rewards from supporting rather implausible ones
outcomes has been persuasively shown by Schneider (cf. Wu and Knott, 2006).
(1987). Thus, shared beliefs may not inherently Self-selection out of nascent organizations.
result from social interaction and socialization, but Self-selection out of nascent collectives intending to
rather individuals with certain types of values and pursue a particular theorized possibility plays an
beliefs may simply select interaction with others central role in not only determining who eventually
who share these beliefs. This type of self-similarity, physically tests an entrepreneurial theory but also
or homophily, has been persuasively shown to drive which entrepreneurial beliefs and theories actually
various collective processes (see McPherson et al., are physically tested (given the need for collective
2001). While social interaction, as we have dis- effort). Once individuals through social interaction
cussed, plays an important role in the emergence of have theorized possibilities and winnowed them
entrepreneurial theories, individuals themselves also down to one they will physically try, individuals
have or develop their own beliefs, anticipations, may self-select out if they disagree (see Hirschman’s,
expectations, hopes, dreams, interests, and desires 1970 related discussion of exit in organizations).
about possible future states which drive their partici- That is, an individual may self-select out if their own
pation and contribution to collective efforts (cf. conceptualization and associated reasoning, even
Elster, 1989; Hirschman, 1970). after social interaction and theorizing, differs
In the case of entrepreneurship, individuals may radically from the general consensus around what
have their own unique theories for entrepreneurial theorized entrepreneurial possibility should be
possibilities and novel strategies, and individuals experimented—why and how. Thus, social interac-
then seek to align themselves (through participation tion does not necessarily result in agreement or theo-
and collective action) with those whose theories most retical coherence, as individuals may yet have their
closely match their own imagined theories and con- own theories and associated beliefs about which
ceptualizations. The process of self-selection is product to develop, what market to create, or how to
similar to that observed in the nascent stages and specifically organize. Entrepreneurs may then self-
emergence of social movements and collective action, select out of one nascent entrepreneuring organiza-
specifically where individual-level interests, expec- tion to pursue a different theorized possibility,
tations, beliefs, dreams, and more general attraction, perhaps attracting their own supportive collective.
drive participation and contribution to a particular Importantly, self-selection out of organizations in
collective cause or purpose (Olson, 1965; cf. Hardin, effect arbitrates between which entrepreneurial
1982; Oliver, 1993). Additionally, one’s sense of activities are actually pursued and which are not. If
self—of who one is—and general identity may also a sufficiently large group of people is not convinced
play an important role in choosing and selecting to of the feasibility and promise of a particular strategy
participate in nascent collective action, such as a and course of action, the idea and its accompanying
social movement (cf. Polletta and Jasper, 2001). theory may go untested.
The social mechanism of self-selection, however, In sum, the end result of the process of social
does not necessarily require each individual to interaction and self-selection (both into and out of
Copyright © 2009 Strategic Management Society Strat. Entrepreneurship J., 3: 127–146 (2009)
DOI: 10.1002/sej
140 T. Felin and T. R. Zenger

collectives) is that nascent entrepreneuring organiza- emergence of strategies. In this article we argue that
tions are composed of collections of individuals who these extant mechanisms are important but incom-
have jointly (or independently) imagined and created plete. Experiences and observations provide the
a shared belief and associated theory about a particu- underlying raw material or data for the generation
lar entrepreneurial action. The emerging entrepre- of novel beliefs and associated strategies. But, expe-
neurial collective represents, in some significant part, riences and observations themselves, particularly in
a more homogeneous group of individuals who, in uncertain environments, do not provide sufficient
essence, have a belief or buy into a hypothesized information and knowledge for the generation of
theory about a future entrepreneurial possibility new beliefs and novel strategies. Thus, through the
and jointly intend to pursue it (cf. Bratman, 1987; process of theorizing and imagination, entrepreneurs
Tollefsen, 2002, 2006).12 Our theoretical develop- can add vital data and insights about the possibility
ment explicitly stops short of discussing changes in space beyond past experience. And, through reason-
beliefs that result from testing these entrepreneurial ing and justification, these possibilities are further
theories and thereby gaining environmental feedback vetted in deciding which of them might be pursued
and experience (see Figure 1). These learning mecha- by the nascent organization. Importantly, the process
nisms have, of course, been carefully explicated in of entrepreneurial theorizing involves not just indi-
behavioral and experiential models of organizational vidual-level mechanisms, but we have also outlined
learning (Cyert and March, 1963; Greve, 2003). the central role that social mechanisms, social inter-
action and self-selection, play in the formation of
beliefs and the emergence of novel organizational
DISCUSSION: CONTRIBUTIONS, strategies.
OPPORTUNITIES, AND LIMITATIONS Our contribution also links to extant efforts to
understand how organizations, somehow, are able to
Prior research on the origins of entrepreneurial generate novel beliefs even with limited samples of
beliefs, expectations, and associated strategies has experience. March and colleagues (1991) make the
focused on the role that experience, observation, conjecture that imagination may provide a key
and perception play in belief formation and the mechanism of belief formation and learning for
organizations with limited samples of experience
12
and data. We have further developed this point by
Three brief caveats related to our assumptions about entre-
preneurial theorizing and social dynamics need to be men- highlighting the role that imagination plays in the
tioned. First, our theory assumes that the features of the generation of novel possibilities, and we have more
theorized entrepreneurial possibility itself will result in buy-in generally linked imagination with entrepreneurial
by others (based on reasoning and justification), without con-
sideration for matters related to how the theorized possibility theorizing. We have also linked extant experiential
is sold or framed by a nascent entrepreneur (cf. Polletta and and observational mechanisms to our model by
Jasper, 2001). Matters related to rhetoric and framing prove highlighting the role that experiences play in trigger-
quite important here, as rhetoric and framing (or entrepreneur-
ial stories; see Lounsbury and Glynn, 2001; cf. Emrich et al., ing entrepreneurial theorizing and belief formation
2001) may persuade and influence others to join in, particularly (see Figure 1).
where there is much uncertainty about the future. Second, an Importantly, our arguments shed light on emer-
alternative way of linking individuals with collective intentions
and beliefs, specifically compared to the mechanisms of social gence of beliefs at the early, nascent stages of orga-
interaction and self-selection, may be through socialization. nizations. Understanding what happens at the birth
That is, perhaps individuals are socialized to see an entrepre- of an organization is critical, as early organizational
neurial theory and associated possibility as attractive, indepen-
dent of its real benefits, which may or may not be known and, beliefs and choices disproportionately affect the
thus, social interaction in the form of social construction’ may organization far into the future. As noted by Huber
play a very different type of role from how we have conceptual- (1991: 91):
ized it (Barnes and Bloor, 1982; Latour and Woolgar, 1986).
Third and finally, we have, in part, assumed a rather frictionless
world in terms of social interaction and self-selection and, thus, ‘What an organization knows at its birth will
clearly, various additional social matters such as the entrepre- determine what it searches for, what it experi-
neur’s initial social network (e.g., Hite and Hesterly, 2001), or
the initial founding conditions and logics of organizing (e.g., ences, and how it interprets what it encounters.
Baron et al., 1999; Burton and Beckman, 2007; Stinchcombe, While there seems to be universal agreement [that
1965) may play an important role in entrepreneurial theorizing, this early] knowledge strongly influences future
resultant learning, and nascent organizational activity. These
matters remain outside the scope of our theory, though we hope learning, many of the rich details of the matter
that links are carefully made in future research. are yet to be investigated.’
Copyright © 2009 Strategic Management Society Strat. Entrepreneurship J., 3: 127–146 (2009)
DOI: 10.1002/sej
Origins of Novel Strategies 141

We believe that the early theorizing processes out- whether social interaction, indeed, facilitates ide-
lined in this article contribute to our understanding ation and other creative processes (Amabile, 1996).
of organizational initial conditions (cf. Baron et al., While some have suggested that there are significant
1999), specifically as we have explicated the emer- benefits to this type of social interaction (Sutton and
gence of nascent organizational beliefs that shape Hargadon, 1996), others have found highly negative
the path-dependent future of the organization. effects (Stroebe et al., 1992). Thus, a key question
Finally, central to our contribution are the social concerns what the contingencies of social interaction
dynamics associated with belief formation. Theories are and when social interaction leads to better or
of strategy and organization often treat organizations more accurate beliefs about opportunities.
as unitary actors, rather than collections of individu- Third, we have specifically focused on explaining
als (for an overview, see Gavetti et al., 2007). We how radical, new beliefs emerge, but we have not
have also sought to contribute to the organizational tackled the question of how these beliefs emerge in
literature by highlighting the critical emergent, incumbent settings (and, in particular, why incum-
social, and aggregational processes associated with bents perhaps appear more myopic) (Levinthal and
entrepreneurial theorizing and novel strategy making. March, 1993). It may simply be that an organiza-
Our theory has emphasized how beliefs about poten- tion’s experience and history often leads to a curse
tial entrepreneurial opportunities are often negoti- of knowledge (Levitt and March, 1988). Experience
ated through a collective process that allows for the may lead to rigid and myopic beliefs that theorizing
potential aggregation of individual observations, and cannot unsettle given the heavy reliance of incum-
social interaction and self-selection further shape the bent organizations on their past experience. Organi-
emergence of novel beliefs and strategies. zations, after all, are heavily path dependent and this
path dependence may somehow obviate and temper
an organization’s ability to engage in novel activities
Opportunities for future research
that create new entrepreneurial opportunities. Evi-
There are a number of limitations to our arguments dence of organizational innovation activity seems to
and theory, and each provides an opportunity for support this argument, at least on the surface, spe-
future research. First, matters of affect, emotion, and cifically as new organizations are disproportionately
passion may play an important role in entrepreneur- more likely to create new products and markets
ial belief formation, opportunity recognition, and (Rosenbloom and Christensen, 1994; Zenger,
creation (e.g., Baron, 2008), and thus also in the 1994).
creation of opportunities and the entrepreneurial Finally, our theoretical effort remains at a fairly
theorizing process explicated previously. We have high level of abstraction and, thus, questions about
largely focused on the rational and logical aspects how theorizing (and the imagination of possibilities,
of entrepreneurial theorizing. Clearly, however, the etc.) might be measured and empirically tested
manner in which ideas and theories are presented provide an important opportunity for future research.
and discussed has much to do with whether there is We believe that a grounded approach provides the
large-scale buy in by others. This provides a clear natural next step for these arguments. For example,
opportunity for future research. Second, the link the process of entrepreneurial theorizing can be
between the individual and collective processes of readily observed and studied during critical organi-
theorizing deserves further consideration. Specifi- zational events, such as when a new organization is
cally, while we think that these entrepreneurial seeking venture funding. The social processes of
theorizing processes are, in some ways, mutually entrepreneurial theorizing may be most salient when
instantiated between the individual and collective the nascent organization is pitching and selling its
levels, important questions remain. For example, the belief, strategy, and opportunity to other, vital,
question of how fragmented, individual-level obser- external constituents or stakeholders, such as venture
vations and experiences are aggregated is a critical capitalists or suppliers (cf. Zott and Amit, 2007).
one. Furthermore, it may be that matters of power Nascent organizations specifically engage in these
and more general individual influence drive the vital activities early during their formation, and
emergence of a collective belief. Our theory implic- studying this setting will likely surface many of the
itly assumes that all individuals somehow have equal underlying processes suggested by our theory. For
voice in the entrepreneurial theorizing process. And, example, venture capitalists and other investors must
there are many questions about imagination and evaluate radically new ideas and entrepreneurial
Copyright © 2009 Strategic Management Society Strat. Entrepreneurship J., 3: 127–146 (2009)
DOI: 10.1002/sej
142 T. Felin and T. R. Zenger

theories that may have very limited support in terms valuable feedback from a presentation at the Strategic
of data, and limited corollaries with past experience Management Society meeting and an Academy of Man-
and observation. Intuitively at least, our theory also agement conference symposium titled: Entrepreneur-
provides a link between the nascent organization and ship and Strategic Organization: Taking Stock, Problems,
these external stakeholders. In effect, entrepreneurs and Future Directions. Feedback from presentations at
several universities—Washington University in St. Louis
try to reason and justify their proposed course of
(the Opportunity Discovery conference), the Helsinki
action to external constituents and, thus, this theoriz- University of Technology, the McQuinn Center for
ing process may be surfaced in these vital interac- Entrepreneurial Leadership, the University of Missouri,
tions. The nascent organization may then also Brigham Young University, and the University of
theorize jointly with relevant external stakeholders Utah—also helped improve this manuscript.
and, thus, through broader social interaction with
external constituents, justify and define an intended
direction for the organization.
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Copyright © 2009 Strategic Management Society Strat. Entrepreneurship J., 3: 127–146 (2009)
DOI: 10.1002/sej

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