Tuesday, March 14, 2017

La La Land Entrepreneurship: When Does the Specialist Entrepreneur Win?

In La La Land, Sebastian is such a dedicated jazz pianist that he cannot bear playing other kinds of music – and after many trials and travails, he succeeds as an entrepreneur, starting the jazz club of his dreams. A wonderful story of entrepreneurship (the movie had a love story too, I think), but is it realistic? It depends on who you ask.

A recurring theme in entrepreneurship is the trust in generalists – people who can master a wide range of tasks. This trust comes from one big-picture and one small-picture consideration.  The big-picture consideration is that successful entrepreneurship has a component of inspiration gained from combining ideas that others do not see as connected. You may be carrying the descendant of such a combination: the iPhone was put together by a company making compact MP3 players that had just exited an alliance with Motorola to make cellular phones. The small-picture consideration is that smaller entrepreneurs often end up being in charge of everything, first directly, then through having to find and recruit expertise in each function. Generalists are good at this.

But could Sebastian have become a capable founder of a jazz club if his interests and skills were all over the place? The argument against generalists is that they are superficial and don’t know enough about any specific topic to do well. A paper in the Administrative Science Quarterly by Olenka Kacperczyk and Peter Younkin has waded into this argument with important ideas and some evidence. Fittingly, the evidence is on music industry entrepreneurship: artists forming independent record labels.

The key idea emerging from their research is this: pure generalists have no particular advantage in entrepreneurship; what is needed is one area of specialization combined with general knowledge elsewhere. Specifically, specialization in the market pays off when combined with general knowledge on the tasks needed for production. This combination buys both credibility and the understanding of customers, which are more important to specialize in than the mechanics of making a product. The investigation showed big effects of market specialization, and effects that were complementary to functional breadth. Market specialists could double their odds of success by becoming more general in functional knowledge; market generalists had low odds to begin with and did not improve much when gaining more general functional knowledge.

So, Sebastian got lucky. Yes, he had market knowledge, but he knew little about different functions (I am not counting tap dancing as a useful function).  A more typical case would be Justin Timberlake, whose specialization in R&B and popular music was combined with band membership, songwriting, performing as a backup singer, and music production. So, today’s practical advice: if you want to form a music label, follow Justin’s lead.

Kacperczyk, Aleksandra (Olenka) and Younkin, Peter Y. 2017. The Paradox of Breadth: The Tension between Experience and Legitimacy in the Transition to Entrepreneurship. Administrative Science Quarterly, forthcoming.