Strategy Formation in Entrepreneurial Settings: Past Insights and Future Directions

• DOI: http://doi.org/10.1002/sej.1257
• Author: Kathleen M. Eisenhardt,Timothy E. Ott,Christopher B. Bingham
• Published date: 01 September 2017
• Date: 01 September 2017

Strategy Formation in Entrepreneurial Settings:

Past Insights and Future Directions

Timothy E. Ott,

1

Kathleen M. Eisenhardt

2

and

Christopher B. Bingham

3

*

1

Strategy & Entrepreneurship, Kenan-Flagler Business School, University

of North Carolina at Chapel Hill, Chapel Hill, North Carolina

2

Stanford Technology Ventures Program, Stanford University, Stanford,

California

3

Strategy & Entrepreneurship, Kenan-Flagler Business School, University

of North Carolina at Chapel Hill, Chapel Hill, North Carolina

Research summary: Examining the strategy formation process is central to under-

standing why some firms in entrepreneurial settings create competitive advantage and

succeed while others do not. The strategy formation process, however, remains

unclear. While existing work shows the value of learning from experience or having a

holistic understanding of how the pieces fit together, there is limited empirical research

that fuses the two streams. We first review the extant literature on strategy formation

in entrepreneurial settings by organizing around this fundamental tension between

strategizing by “doing”versus “thinking.”We then describe recent work that blends

the two and conclude with a future research agenda.

Managerial summary: An effective strategy can be the difference between becoming

the next Google or Netflix or floundering as an also-ran. But how should executives in

entrepreneurial settings form strategy? Are they better off letting strategy emerge

incrementally by learning from experience? Or should they create a holistic under-

standing of the interdependent activities that constitute strategy with cognitive struc-

tures like mental models and analogies? Here, we indicate the extant research findings

on strategy formation in entrepreneurial settings for each of these approaches. We also

discuss the new research on how they can be effectively combined and outline an

agenda for future research to help executives improve their strategy formation process.

Copyright © 2017 Strategic Management Society.

In 1997, Reed Hastings and Marc Randolph spotted

a promising opportunity at the intersection of the

emerging Internet and DVD technologies, and they

launched Netflix. But while Netflix is now a huge

success, its success was not assured. Forming a

winning strategy that linked together key activities

like movie acquisition, pricing, and recommenda-

tions was a mistake-filled and time-consuming

process (Shih & Kaufman, 2014). They worked for

more than 2 years to form the strategy that eventu-

ally led Netflix to dominance of Blockbuster and

success.

As the Netflix vignette suggests, strategy forma-

tion is central to understanding why some firms in

entrepreneurial settings succeed while others do

not. By strategy formation, we mean the process by

which executives create a unique set of interde-

pendent activities to create and capture value. By

entrepreneurial settings, we mean the context of

entrepreneurial firms (i.e., young firms competing

in nascent or highly unpredictable markets) and of

established firms competing in similar markets or

with innovation-driven strategies.

Keywords: strategy; process research; entrepreneurial strategy;

opportunity; learning; cognition

*Correspondence to: Christopher B. Bingham, Strategy &

Entrepreneurship, University of North Carolina at Chapel Hill,

300 Kenan Center Drive, McColl Suite 4600, Chapel Hill,

NC 27599-3490. E-mail: cbingham@unc.edu

Copyright © 2017 Strategic Management Society

Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 11: 306–325 (2017)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1257

Despite the importance of strategy formation in

entrepreneurial settings, this process remains

unclear. Should strategy emerge incrementally by

taking actions and then learning from those actions

(Baker & Nelson, 2005; Bingham & Eisenhardt,

2011)? Or is it better to create a holistic understand-

ing of the interdependent activities that constitute

strategy (Gary & Wood, 2011; Gavetti, Levinthal, &

Rivkin, 2005)? At its core, this dichotomy between

doing and thinking stems from the tension between

the novelty of the opportunity and the complexity

of the set of activities that must mesh together to

capture that opportunity. On the one hand, execu-

tives in entrepreneurial settings must form viable

strategies around novel ideas in nascent markets.

But the ambiguity and unpredictability of these mar-

kets limit executives’ability to predict the conse-

quences of their actions and makes them more

likely to form strategy by doing—using experiential

processes that emphasize learning about what works

in the market (Baker & Nelson, 2005; Bingham &

Eisenhardt, 2011; Rindova & Kotha, 2001). On the

other hand, executives must also form strategies that

combine many individual activities, like product

development and sales, into a complex activity sys-

tem in which each activity fits and reinforces the

others (Porter, 1996; Rivkin, 2000; Siggelkow,

2002). This complexity requires comprehending the

interdependencies among activities and makes

executives more likely to form strategy by think-

ing—using cognitive structures that promote a

holistic understanding of the strategy and its causal

logic. The limited resources of many firms in entre-

preneurial settings exacerbate this tension and so

further complicate the strategy formation process.

In this article, our goal is to illuminate the past

insights and future research directions related to

how strategy forms in entrepreneurial settings. We

begin with a literature review that we organize

around the core tension: doing (action) versus

thinking (cognition). We then discuss the limited

work that directly addresses this tension and con-

clude with a future research agenda.

Strategizing by Doing—Learning

From Experience

One prominent research stream on strategy forma-

tion in entrepreneurial settings looks at how execu-

tives strategize by doing—i.e., form strategies by

taking action and then learning from their experi-

ence (Table 1). The underlying assumptions are

that executives cannot effectively think through the

consequences of firm actions or predict the future

in entrepreneurial settings because they are charac-

terized by high velocity—i.e., novel, unpredictable,

ambiguous, and fast-paced markets (Eisenhardt,

1989). Instead, executives effectively form strategy

by engaging in flexible behaviors like trial-and-

error learning (Bingham & Davis, 2012), bricolage

(Baker & Nelson, 2005), improvisation (Miner

et al., 2001), and experimentation (Andries et al.,

2013) that emphasize learning from experience.

1

Finally, while these processes involve cognition,

their emphasis is on action.

Trial-and-error is a learning process by which

executives persist in their behaviors when out-

comes are positive, but adjust their behaviors in

response to negative outcomes (Bingham & Davis,

2012). Thus, executives who engage in trial-and-

error learning (and relatedly, local search (Cyert &

March, 1963; Nelson & Winter, 1982)), attempt to

form their strategies incrementally based on the

consequences of their actions. Core to the effective-

ness of trial-and-error learning is codifying experi-

ential learning into structure such as “simple rules”

heuristics (Bingham, Eisenhardt, and Furr, 2007)

and routines (Zollo & Winter, 2002). For instance,

Bingham and Eisenhardt (2011) explore how entre-

preneurs at six technology-based ventures used

trial-and-error learning to create simple rules that

formed the basis of their strategies. Moreover,

those entrepreneurs who converted their trial-and-

error learning to simple rules built more successful

ventures than those entrepreneurs who simply

gained experience, but failed to learn explicit sim-

ple rules (Bingham et al., 2007).

Bricolage is a second learning process by which

executives in entrepreneurial settings form strategy

by doing. Following others, we define bricolage as

“making do by applying combinations of the

resources at hand to new problems and opportu-

nities”(Baker & Nelson, 2005, p. 333). When

executives engage in bricolage, they ignore com-

monly accepted constraints such as traditional uses

of materials in order to form strategies based on

1

Although we do not directly discuss the effectuation

(Sarasvarthy, 2001) and lean start-up (Reis, 2011) approaches,

they are amalgams that draw heavily from “strategizing by

doing”processes like bricolage and experimentation.

Strategy Formation in Entrepreneurial Settings: Past and Future 307

Copyright © 2017 Strategic Management Society Strat. Entrepreneurship J., 11: 306–325 (2017)

DOI: 10.1002/sej.1257