The competitive advantage of theories, mental representations, and experimentation
PDW @AOM 2023

Industry emergence is contingent of uncertainty resolution, given incomplete knowledge in technical, demand, ecosystem and institutional dimensions. Such contexts require economic experiments by diverse entrepreneurs to build knowledge and in so doing, endogenously shape their evolving environment. Rajshree Agarwal discusses how antecedents of prior knowledge and purpose frame these economic experiments. From the distinct vantage point of prior knowledge within their own world--the places they go, the people they meet and the things they do--entrepreneurs define their purpose as the problems they perceive as worthy of solving. Such problem framing not only dictates which experiments they engage in to create what novel knowledge, but also the pathways they pursue for collaboration with other actors and aggregation of knowledge for industry emergence. 

Dan Levinthal’s presentation will contrast the sequential decision making of a “journey” with that of an “experiment”. An experiment connotes the specification of a well posed hypothesis and a mechanism for testing that hypothesis. Levinthal suggests that pivots and the path to product-market fit might be better thought of as a journey. A goal is in mind at the outset, but actors are also mindful (thinking while acting) of other possibilities that present themselves. Objectives are pursued until hopes for their viability fade or a superior alternative presents itself. Thus, opportunity cost becomes at least as critical consideration as hypothesis testing 

Ramana Nanda’s presentation will discuss experimentation in the context of entrepreneurial finance, such as VCs learning about a startup’s potential through a sequence of investments over time.  Nanda will discuss how systematic differences in the costs and information value of these experiments play an important role in shaping the ideas that receive VC funding and can also help explain variation in the patterns of VC funding across industries and over time. He will also touch on a particular application of this insight that he is working on: helping to unlock more venture capital for ‘deep tech’ ventures - that have the potential to solve important global challenges but have historically had a hard time attracting sufficient funding from Venture Capital investors 

In Frank Knight’s (1921) famous formulation, understanding strategy under uncertainty requires investigation into the nature of knowledge itself. Violina Rindova will discuss how strategic postures under uncertainty reflect two fundamentally different approaches to knowledge generation that reflect strategists’ subjective orientations toward uncertainty and knowledge itself. Whereas an adapting posture is oriented toward modifying the firm’s knowledge, including the theory of value that its strategists espouse, a shaping posture is oriented toward creating novel theories at the market and stakeholder levels of analysis. Violina’s comments will focus on how strategists use design epistemology to develop and communicate new valuation frameworks intended to change market actors’ beliefs and steer industry emergence, change, or transformation in their preferred directions of development. 

The central challenge facing a strategist seeking to establish competitive advantage is how to choose. In a dynamic environment, a strategist facing multiple alternatives would ideally like to undertake commitment-free, cost-free and timely experimentation to learn about the benefits and costs of alternative options, and make a choice corresponding to the “best” alternative.  However, in most strategic circumstances, the type of learning and experimentation that would point to a single “best” option requires commitment, cost and time. As such, strategists face a fundamental tradeoff between experimentation to assess alternative strategic commitments, and the commitments that are necessary to learn about the value of a particular strategic option. Given this paradox, conceptually efficient decision-making approaches – such as the use of explicit theorizing about the strategic impact of alternative paths -- that allow strategists to infer strategic tradeoffs at a lower level of commitment, cost or time can enhance the potential and scope for establishing competitive advantage. This presentation will synthesize a rapidly emerging body of theoretical and empirical work on the interplay between theory development, experimentation, and strategic choice, and the implications of these perspectives for decision-making in dynamic environments, with a particular focus on entrepreneurship. 

Todd Zenger’s presentation will highlight theory composition as a central vehicle for strategy formation under uncertainty — a perspective in which economic actors function much like scientists who formulate problems, develop causal theories to solve them, gather feedback and data to test and update their theories, and then use these theories to guide efforts to create value. The presentation will highlight the foundations of this largely normative perspective, discuss its connections to the Carnegie tradition, as well as note its differences from prior work. The presentation will also discuss the (potential) origins of theories, their means of updating and revision, and their central role in guiding and improving search, learning and experimentation.