How Much to Know? Entrepreneur Experience and Venture Failures

We are well aware of the advantages of knowledge, both when doing something conventional and when making innovations. People who teach entrepreneurship do it because knowledge helps the foundation of a successful venture. But is there such a thing as too much knowledge?

When I work alone, more knowledge is better – it generally gives performance at a higher level, and it gives the creativity that can yield outstanding outcomes. My earlier research on innovations in the comic book industry is one of many research projects showing this effect. Things get more complicated when multiple people come together to do something complex like founding a new venture. The great benefit of having much knowledge and many kinds of knowledge is the potential for combinations that others cannot think of. The problem with doing this in a team is that combining knowledge requires communication, and communication gets harder when each member has different types of knowledge.

So how to resolve this dilemma? Research by Florence Honoré published in Academy of Management Journal shows a nice path.
The idea is simple: variety in knowledge is great as long as it stays within one person, but teams should also have shared knowledge that transfers directly to the problem they are solving.

This makes sense if we think of specialized knowledge as roughly equivalent to languages. People with shared experience speak the same language, while people who have different experiences need to translate. A person with many kinds of knowledge is a polyglot, and that is OK because we are all good at talking to ourselves.

So what did the research show? New ventures were at great risk of failing if their venture team had a mixture of experiences across team members, and this problem got worse the more founders had earlier been employed by multiple firms. On the other hand, more shared experience among the founders helped the firms survive, and this was especially true if the venture had multiple founders who transitioned from the same prior employer to founding a venture together.  

The implication for entrepreneurship is obvious. A team with experience in the same industry that they are forming a venture in will perform better, and they will do especially well if they make sure to also have one member with a variety of experiences. And, they should listen carefully to that person, because it is exactly the integration of knowledge from this polyglot member that can benefit the venture most. In other words, this research is another win for diversity in business.

Honoré, Florence. 2021. "Joining Forces: How Can Founding Members’ Prior Experience Variety and Shared Experience Increase Startup Survival?" Academy of Management Journal forthcoming.

Who does Strategy? Organizations!

A new book will be published soon, “Strategic Management:  State of the Field and Its Future,” edited by the excellent scholars Irene Duhaime, Michael Hitt, and Marjorie Lyles. My chapter is titled “The organizational view of strategic management,” and it synthesizes how the fields of organization theory and strategic management have moved towards each other already and will probably continue to do so in the future.

Why is this, and why does it matter? Let us start with the second question. There are two widespread myths among students of strategy, including researchers, and executives also believe them. The first is about the power of the individual decision maker. This myth almost makes sense. All of us make decisions many times a day, starting with simple stuff like choosing goods to buy and moving up to life-changing decisions such as educational choices. We feel powerful when doing that. But are we independent? Maybe we think we are, but do you really think that the enormous sums spent on marketing to influence our decisions are wasted? Research says they are not. We make decisions, but not independently.

Executives making decisions feel powerful too, only more so. And why not, executives making strategic decisions can allocate and redirect enormous sums of money and hours of effort. But are the executives independent? It does not take a large organization to make the executive completely dependent on information about the internal organization and external environment that is captured, processed, and presented to the executive by others. The individual choosing a cereal is influenced by marketing. The executive making strategic decisions is a product of the organization.

The second myth is that strategic decisions are a simple matter of picking the option that maximizes the economic value of the firm. If only that were true: life would be easier and we could pay executives much less because it is not hard to line choices up by value and pick the best. But strategic decisions are about uncertainty and evolution. They reach into the future, so the alternatives cannot be lined up by value, but it is possible to understand the type and size of uncertainty, and it is also possible to make choices that alter the uncertainty. They reach into the future, so it is important to guess how the world changes, and how the organization can evolve to match the world, or even influence it.

The solution to these two myths is to view the organization as the strategist. The responsibility for being strategic does not really lie with specific executives like the CEO, it is spread throughout the organization as its divisions, functions, teams, and individuals deal with a changing world, seeking to adapt to it and communicate what they have learnt to each other. It is in this interface that the fields of organization theory and strategic management communicate with each other. Strategies are shaped by societal groups outside the organization, individuals and groups inside it, the commitment and learning resulting from past strategies, and the goals formulated to manage past strategies. All of this is organizational, and all of it is strategic.

Despite these overlaps, organization theory and strategic management do not always communicate well. Organizations do not determine strategies, but some researchers think they do. Strategies cannot be chosen independent of organizations, but some researchers think they can. The reality is that organizations are stuck in an adaptive strategic cycle. The modern synthesis of organization theory and strategy is that problem and opportunity discovery by internal decision makers directs strategic change, and this strategic change in turn modifies the organization over time. More and more researchers in organization theory and strategy do their work with this adaptive cycle in mind, and in doing so they advance both fields of research. And this research in turn improves the teaching of management, and the practice of management.

The Diffusion of Differences: Two Paradoxes in Management Research

Is it possible to copy what others do and still become different from them? That seems like a paradox, but it could be reality in the world of organizations. Here is how it happens: Some new practice appears that claims to solve a problem, for example a technological innovation or a management technique. Is the claim true? It might be, but it might not, and the uncertainty about the value of an innovation is a problem that management needs to solve. Often, looking at what others do and copying them is an easy and smart solution. But if that is what organizations do, they should become similar to each other, right?

Wrong. Organizations are multidimensional in their activities and the environments they face. Some organizations copying others does not mean that all organizations do; they are often trying to solve different problems. Some organization copying specific other organizations does not mean that all organizations do; they often have different peer reference groups. Some organizations copying other organizations does not mean that they fully accept what the others do as true; they often try out innovations and reject those that do not fit their needs. For each new practice all these processes occur, and organizations live in a chaotic environment with many new practices that spread and are copied. What we see is the diffusion of differences.

How do we know this? In a recent research paper published in the Academy of Management Annals, Ivana Naumovska, Vibha Gaba, and I checked the last 20 years of diffusion research – 178 research articles in total. What did we find? First, less than half the studies reported how many organizations adopted a practice at the end of the study period, but from the studies that did report, less than 20 percent adopters was the most common result. Why did organizations react so differently? Usually because they faced different environments, so they were solving different problems, though other differences such as past learning and network ties also distinguished adopters from non-adopters. Looking over the past research, the diffusion of differences is a consistent finding across the articles.

This brings me to the second paradox. Most diffusion researchers believe that diffusion leads to similarity, or in their language, “mimetic isomorphism.” Why? One reason is that the diffusion of differences is surprising conceptually. It is hard to believe until you examine the evidence and think about the process. The more important reason is that the researchers have started with a deservedly famous theory article, “The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizations Field” by Paul DiMaggio and Woody Powell, and have gone on to over-interpret its conclusions. In that paper, copying other organizations was one process that could lead to similarity. Researchers these days say that copying other is a process that does lead to similarity. These are very different claims.

Our conclusion? First, obviously, theory should not get in the way of evidence. Second, the strong belief in diffusion creating similarity means that there are lots of holes in our knowledge about what diffusion processes do. Because differences among organizations have been overlooked, we simply do not know enough about their sources.

Naumovska, Ivana, Vibha Gaba, and Henrich R. Greve. 2021. "The diffusion of differences: A review and reorientation of 20 years of diffusion research." Academy of Management Annals forthcoming.

Creativity and Instability: Lessons for Management

In the news we just learnt that the famous painter Edward Munch wrote “painted by a madman” on his most famous painting “The Scream.” As in all his endeavors, that inscription and painting neatly combined insight and instability. His insight preceded research on the management of creative work by 125 years.

Management scholars just caught up. Research by Guiseppe Soda, Pier Vittorio Mannucci, and Ronald S. Burt published in Academy of Management Journal investigated what distinguishes teams that can produce highly creative products. Their work is quite a feat because it focused on one of the greatest strings of creative successes in modern television: the science fiction series Doctor Who produced by BBC. This is a series that has been widely praised as being high quality and creatively conceived throughout, but differences among episodes in the creativity were still large enough for the researchers to find the sources of creativity.

Ready for the answer? It is instability, as Munch noted and practiced. But the lesson is a little more complicated than that. It is well known that certain kinds of network connections generate creativity, specifically open networks in which each person gets diverse information by being connected to people who are not connected to each other. This is well known and makes sense but is not as reliable a predictor of creativity as one would expect. It also follows that getting a stream of diverse information creates creativity (indeed, some of my research shows that), but again it is a less reliable predictor than one would expect.

Why do these two factors work sometimes but now always? The answer is instability. An open network does not generate much creativity if it is stable, because there simply is not enough new people to spur creativity. Similarly, new content helps creativity little when the network is stable because it keeps being interpreted by the same people. Add some instability to the network, and suddenly openness and information diversity start operating as expected, increasing creativity.

In the case of Doctor Who, the effects were big enough that many modern fans do not even realize that the TV series has been canceled because of lack of audience interest, before being restarted and again experiencing significant success. Creativity won the day.

Of course, this research was not done for the purpose of giving us more good TV. Firms depend on creativity in many areas of activity, most conventionally in research and development, but also for product updates, new business model generation, and re-launch of product and service lineups that have gone obsolete in in the minds of consumers. This research tells managers that fans can and should shake up the teams that make such changes whenever significant creativity is needed. When managers follow Munch’s lead and generate instability, team members who are moved around may scream, but the increase in creativity is worth it.

Soda, Guiseppe,Pier Vittorio Mannucci, and Ronald S. Burt. 2021. Networks, Creativity, and Time: Staying Creative through Brokerage and Network Rejuvenation. Academy of Management Journal, forthcoming.

A Surge and Emotion: When Meaningful Work Becomes Too Busy

If you are like many of us, you are secretly or openly envious of those who have especially meaningful work. We may find meaning in some parts of our work but not all, and we are very aware of those who connect their work and passion perfectly. There is the artist who is so successful that all their time is spent creating art, not selling it. There is the humanitarian who works with an NGO that keeps its people in the field, in the places with the greatest need and effect of their work. There is the medical doctor who has stayed away from the repetition of general practice and specialist clinics and instead spends all the time diagnosing and helping unique cases.

In our envy, we overlook something special about meaningful work. It derives much of the meaning from the pursuit of quality, and as a result, it needs to be done at a slow pace. The violinist who has to prepare too many pieces resents the sacrifice in preparation. The humanitarian and doctor who need to solve problems too fast worry about failures. But then, what happens with the people doing meaningful work when there is a surge in the workflow? This is the topic of research by Winnie Yun Jiang published in Administrative Science Quarterly. Her research context is perfect for the topic because she examined how a US refugee-resettlement agency was overwhelmed by a surge in refugees, most from the Syrian war.

Consider the transition from doing meaningful work to being overwhelmed with work. The purpose of the work is unchanged – so many people are in great need, and this organization is their main line of support to find a place to live, find work, and quickly integrate into a new and very different society. This takes time and effort. Except there isn’t any time because there are many more refugees than before, so either the workers have to stretch their hours and efforts to the maximum or do less for each refugee, or maybe both. The work is the same, but the motivation and meaning fade.

Can an organization built on meaningful work handle this? They cannot easily expand because meaningful work is typically meaningful for some people but not others. They cannot reward their workers more because most organizations with meaningful work are low-budget outfits to begin with – they are built around the idea that meaningful work means that high pay is not needed. They cannot routinize work for speed because tailoring is at the core of meaningful work. This type of organization is not well suited to handle workload surges, so its members have to adapt.

Can the members handle it? Jiang found they adapted in multiple ways, with varying levels of success. One approach was to change their work by drawing new boundaries that eliminated the most time-consuming tasks, while still performing faster versions of the same service. For example, they would no longer go with the refugees to get drivers’ licenses but would make and give out information sheets on how to do so. A deeper change was to redefine the work so that the meaning given was a better fit to what they could accomplish in the new situation. The most common redefinition was to focus on the number of new resettlements they could handle instead of the attention to each one. Typically, though, the members would find a middle road with some focus on individuals while also making sure they handled the surge.

Were managers useful? Some of them were very helpful in the transition because they focused on sense-giving. They were able to reframe the work in ways that gave meaning even as the refugee surge made the old style of working impossible. They explained how essential the organization had become, and they empowered its members through expressing and focusing on positive emotions. Even as the organization had difficulty dealing with the surge, its leaders helped the members adapt. And that is a central feature of leadership: When the organization fails, or nearly fails, leaders can still keep its members motivated and functional.  

Jiang, W. Y. 2021. Sustaining Meaningful Work in a Crisis: Adopting and Conveying a Situational Purpose. Administrative Science Quarterly, forthcoming.

The Adolescence of Performance Feedback Theory

Organizations have goals, and members of organizations try to meet those goals – especially if they are managers. This is obvious, but what has been less obvious is what level of performance on each goal they aspire to meet, and how they react to falling short of this level or exceeding it. Performance feedback theory is a body of research looking at this issue, starting with the classic book “A Behavioral Theory of the Firm” by Cyert and March and continuing with a long string of research articles, nearly all of them following “Organizational Learning from Performance Feedback” written by me.

The basics are well known by now. Firms – and people – learn how to aspire from their own past and from others like them. They do not try to improve when doing better than the aspiration level, but when doing worse they will sometimes try hard to improve, and at other times go rigid. When they have multiple goals, it is often possible to find out which goal is more important and is addressed before the others. The long string of repeated findings are typical of research that has captured an important piece of reality.

So why is there a new book now, “Organizational Learning from Performance and Aspirations,” by Pino Audia and myself? Because researchers are different from the firms we study.  When things go well we wonder what else we can do, and how to improve. The answer, we think, is that there are quite a few things that are missing or can be fixed in this research. In the book we go into detail, but here are some of the leads to what we think can and should be done so that this research – which we think is still at its adolescent stage – can grow up.

First, take into account that individuals have goals too, and often these are simply to feel good about themselves. This is a major problem for self-improvement, and also for organizations that rely on managers to acknowledge that low performance is a problem that needs to be fixed. Managers who self-enhance will ignore warning signs. When does this happen, and what are the consequences?

Second, acknowledge that organizations and individuals do not just have one or possible two goals, but are often surrounded by multiple goals. They need to pick which one(s) to address, and it is not simply a matter of checking which goals are most consequential and show the lowest performance. In particular, hierarchies influence which goals matter most, and self-enhancement complicates things too.

Third, look to the organizational environment as a source of goals that the organization may not voluntarily adopt, but may be forced to adopt because powerful others want it to or, almost the opposite process, may be led into by managers who perform poorly on their main goals but discover environmental goals that they do well on and can use to impress their superiors. 

Fourth, order our thinking about performance feedback to take into account all the levels of decision-making in organizations. Individual managers matter, organizational units matter, the organization as a whole is important, and the environment sets the stage.

In the book, we develop these threads of ideas further and try to make a wide set of proposals of research that can be pursued. We hope you find it useful and inspiring!

Audia, Pino G. and Henrich R. Greve. 2021. Organizational Learning from Performance and Aspirations: A Behavioral Perspective on Multiple Goals. Cambridge, UK: Cambridge University Press.

The Diffusion of Cleverness: Ups and Downs of Reverse Mergers

Management scholars have spent much time studying the diffusion of innovations, starting with work on new technologies and continuing to research on social practices such as institutional innovations and even strategic positions in markets. By now we know a lot about why some organizations are early adopters, and how other organizations are influenced by the number and status of early adopters, and by how close to them they are geographically or in social networks.

How about the diffusion of cleverness? By cleverness I mean small inventions that manipulate the rules in ways that are beneficial for the user, and may or may not be harmless to others. Clever innovations are very common in financial markets, where rules are everywhere, and clever interpretations of rules can be used as shortcuts. Because such clever interpretations often go against the original intent of the rule, they are usually controversial. A great example of cleverness is reverse mergers, which were studied by Ivana Naumovska, Ed Zajac,and Peggy Lee in a recent article in Academy of Management Journal.

A reverse merger (RM) is done as follows. A law firm registers a publicly listed company with stock, but the company does no business – it is just a shell. A private company that actually does business then goes public through a merger with the shell company, paying a small fee for the shell company and keeping the same ownership, unless the private owners also want to use the reverse merger to invite new ownership. This is a simple and inexpensive way to go public compared with an initial public offering. Clever, right? And as you might expect, US capital markets saw the diffusion of cleverness in the form of RMs during the mid-2000s, as Naumovska and coauthors found. They also found that this looked a lot like a regular diffusion process, where firms were more likely to use an RM the more prior RMs had happened.

So, is there anything special about the diffusion of cleverness? Yes, because clever innovations are shortcuts, and with shortcuts come controversy. Those who lose their advantage from the rules will be opposed, the press may become interested, and the regulators who made the rules will not be happy. And this happens more the more adoptions of cleverness have happened, so the cleverness is promoted by past adoptions but also undermined by past adoptions. Indeed, the SEC made rules to increase the reporting requirements of RM, though they did not otherwise make RMs harder. More importantly, the press turned against RMs and even stock market investors became skeptical and delivered lower returns to RM firms.

So, what does this teach us about the diffusion of cleverness? In some ways, it is similar to the diffusion of technological or business innovations, because innovations always come with uncertainty, and often the drawbacks of innovations are not discovered until many have adopted. When that happens, the process that follows is very similar to the RM diffusion and its later collapse. But there is an important difference that we need to keep in mind. Technological innovations are uncertain, so we know that some of them are mistakes but we do not know which ones.

Cleverness is different. Cleverness involves controversy nearly every time, so we can be confident that the diffusion of cleverness will see a collapse at some point. That is a good reason to be careful when evaluating a clever innovation, especially in financial markets where they are so frequent.

Naumovska, Ivana, Edward J. Zajac, and Peggy M. Lee. 2020. "Strength and Weakness in Numbers? Unpacking the Role of Prevalence in the Diffusion of Reverse Mergers." Academy of Management Journal forthcoming.