INSTITUTIONAL ENTREPRENEURSHIP AND THE INDUSTRY LIFE CYCLE: THE LEGITIMATION OF NEW INDUSTRIES

Monica A. Zimmerman Temple University Fox School of Business and Management General and Strategic Management Department 380 Speakman Hall (006-00) Philadelphia, PA 19122 Telephone: (215) 204-6876 FAX: (215) 204-8029 [email protected] Stephen Callaway (STUDENT) Temple University Fox School of Business and Management General and Strategic Management Department 380 Speakman Hall (006-00) Philadelphia, PA 19122 Telephone: (215) 204-1692 FAX: (215) 204-8029 [email protected]

Submitted to USASBE/SBIDA 2001 Topic: The Internet and Entrepreneurship

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ABSTRACT INSTITUTIONAL ENTREPRENEURSHIP AND THE INDUSTRY LIFE CYCLE: THE LEGITIMATION OF NEW INDUSTRIES

This paper examines new ventures operating in the initial stage of the industry life cycle (e.g. Hill & Jones, 1998) and the role of new ventures in institutionalizing the industry using the concept of institutional entrepreneurship (DiMaggio, 1988; Suchman, 1995).

The paper synthesizes

literature addressing institutional entrepreneurship and the industry life cycle to address the importance of institutional entrepreneurship in defining the industry, determining industry standards, establishing the dominant design, and creating legitimacy for the new industry. Support for the theory set forth in the paper is provided from two industries – pre-packaged software and Internet service providers (ISPs). Pre-packaged software is an industry in which the industry has gained legitimacy, and Internet service providers is an industry in which legitimacy is developing.

3 INSTITUTIONAL ENTREPRENEURSHIP AND THE INDUSTRY LIFE CYCLE: THE LEGITIMATION OF NEW INDUSTRIES New ventures operating in a new industry face many challenges. One of those challenges is the industry’s lack of legitimacy. Society is unfamiliar with the industry. The industry is undefined, and there are few or no industry standards against which society can judge the industry as appropriate. Without such definition and standards, it is difficult for the industry and its members to access the resources necessary for survival. This definition and standard void in a new industry presents a great opportunity for a new venture in a new industry -- the opportunity to define the industry, determine the standards for the industry, establish a dominant design, and so create legitimacy for the industry. The new ventures which do so are institutional entrepreneurs (DiMaggio, 1988; Suchman, 1995). Using the concepts of institutional entrepreneurship and the industry life cycle model (e.g. Anderson & Zeithaml, 1998), this study explores institutional entrepreneurship in establishing the legitimacy of a new industry by defining the industry, determining industry standards, and establishing the dominant design. Two literature streams are merged to address the phenomenon of industry legitimation – strategy and organization theory literature.

The

question addressed in this study is “How does the new venture engaged in institutional entrepreneurship create the legitimacy of a new industry?”

In examining the importance of

institutional entrepreneurship in the introduction stage of the industry life cycle, the paper includes a review of the literature on the industry life cycle, legitimacy, and institutional entrepreneurship. Propositions are set forth based upon the literature and examples are provided from two industries. The first industry is the pre-packaged software industry – an industry in

4 which legitimacy has been created by a new venture engaged in institutional entrepreneurship. The second industry is Internet service providers (ISPs) – a group of related ventures in which legitimacy is currently under development, and a new venture is emerging as the institutional entrepreneur. Understanding the

importance

of the

new venture engaged in

institutional

entrepreneurship is valuable to both entrepreneurs and entrepreneurship scholars. Both parties need to better understand the importance of institutional entrepreneurship in the development of a new industry to facilitate the survival and growth of new industries and the ventures operating within the industries.

THE INDUSTRY LIFE CYCLE In examining the importance of new ventures engaged in institutional entrepreneurship and the development of new industries, the industry life cycle is an important concept. The life cycle has a significant impact upon business strategy and performance (Hofer, 1975). Multiple life cycle models have been developed to address the development of the product, market, and/ or industry. Although the models are similar, they differ as to the number and names of the stages. Anderson & Zeithaml (1984) proposed a four-stage model consisting of the introduction stage, growth stage, maturity stage, and decline stage. Hill and Jones (1998) proposed a similar model but with five stages – embryonic, growth, shakeout, maturity, and decline. Wasson (1974) proposed five stages -- market development, rapid growth, competitive turbulence, saturation/maturity, and decline. Fox (1973) also proposed a five-stage model consisting of precommercialization, introduction, growth, maturity, and decline. Common to all the models is an

5 initial stage in which the life cycle begins, and it is the initial or introduction stage upon which this paper focuses.

The Introduction Stage The introduction stage of an industry is filled with challenges and opportunities for the venture or ventures operating therein.

The industry is ambiguous; it lacks definition and

standards. The ambiguity prevents the industry from developing and threatens the survival of the industry. Society’s understanding and acceptance of the ventures operating in the industry is limited. Society is unfamiliar with the industry. This lack of understanding and acceptance of a new industry, as well as lack of familiarity with the industry, results in challenging environmental and performance characteristics common to the introduction stage (Fox, 1973; Hofer, 1975; Miller & Dess, 1996; Wasson, 1974). The industry environment in the introduction stage is characterized by market growth, little competition, new technology, heavy capital investment requirements, and high prices. Market growth begins from an extremely small base and builds rapidly (Miller & Dess, 1996). Primary demand for the product begins to grow, and products are unfamiliar to potential users (Anderson & Zeithaml, 1984). Competition is slight in the early, unprofitable stage. Only a few pioneers explore the market, and competitors focus inward directing their attention to their product rather than their competitors (Miller & Dess, 1996; Wasson, 1974). Technological development in the introduction stage involves a high level of product innovation and technological change. Dominant technological designs and standards have not been established, and the technology is not fully understood by the creators (Hofer, 1975; Miller

6 & Dess, 1996). A dominant design is a specific path, along an industry’s design hierarchy, which establishes dominance among competing design paths. Early on, a product may demonstrate fragmented technological specifications and performance dimensions. As the product evolves, certain features are incorporated, fragmented technologies are synthesized, and a dominant design emerges around a few dimensions (Suarez & Utterback, 1995). Although the dominant design may be set by industry regulations and government influence, venture level strategic maneuvering is also important in the creation of the dominant design of an industry (Cusumano, Mylonadis, & Rosenbloom, 1992). The capital investment requirements in the introductory stage are significant (Miller & Dess, 1996). Investment is needed to support the costs of organizing a new venture and the development of its new products and/or services. Capital investment is needed to organize the new venture. It is also vital in the research and development of new products and/or services. For example, capital is needed to hire human resources, develop and register intellectual capital, purchase machinery and equipment, etc. In addition, prices tend to be high but quite volatile. Despite the high price and volatility, customers are willing to pay a high price for the new products and/or services and are willing to withstand explosions in the price level of the products and/or services (Miller & Dess, 1996). The innovators and early adopters are not deterred from purchasing the new product or service at a high price. Explosions in the price level do not deter innovators and early adopters from purchasing the new product or service. The environmental characteristics of the introductory stage have important ramifications for venture performance. Generally, performance of ventures in the introduction stage are poor.

7 Covin & Slevin (1990) found that ventures entering the introduction stage were less successful on a performance index than those entering in the growth stage. Sales are few and may be slow to build as new markets develop. However, as the industry develops, sales volume grows. Profits generally are negative (Miller & Dess, 1996); the ventures generate little revenue but incur high levels of expenses. The revenue per share is therefore low. Similarly, Kunkel (1991) found that ventures entering the early stage of the life cycle showed lower ROE than those entering the later stage. Cash flow, critical for new ventures, is also generally negative (Miller & Dess, 1996). Cash inflow from sales is low because sales are few, but cash outflow is high because expenses are many. For example, debt financing may require heavy cash outflow to cover interest expense. The environmental and performance characteristics of the introduction stage are summarized in Table 1. ------------------------------------Insert Table 1 About Here ------------------------------------Clearly, the introductory stage of the industry life cycle presents many challenges for the entrepreneur. The environment and performance issues suggest that the ventures operating in a new industry struggle. The lack of definition, standards, and dominant design of the industry, as well as the lack of familiarity by society with the new industry imply that there is an institutional vacuum and a need for legitimacy by the industry and its members. The challenge for new ventures is to “carve out a new market, raise capital from skeptical sources, recruit untrained employees, and cope with other difficulties stemming from their nascent status” (Aldrich & Fiol, 1994: 645). The industry and the ventures operating therein need legitimacy.

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LEGITIMACY AND THE INTRODUCTORY STAGE Legitimacy results from society’s acceptance of, desire for, and determination of the appropriateness of an organization (Ashforth & Gibbs, 1990; Dowling & Pfeffer, 1975; French & Raven, 1959; Suchman, 1995). A new industry needs legitimacy in order to survive (Aldrich & Fiol, 1994). Legitimacy provides access to resources necessary for survival – resources such as financial, technological and human resources. The resources accessed through legitimacy facilitate the survival of a new industry and the individual new ventures operating within the industry (Barnett, 1990; Carroll & Delacroix, 1982; Hannan & Freeman, 1989; Manigart, 1994; Mascarenhas, 1996; Singh, Tucker, & Meinhard, 1991). Starr and MacMillan (1990) assert that legitimacy is key to the success of new ventures because it allows them to overcome Stinchombe’s (1965) liability of newness. Legitimacy results when society judges an organization or organizations as acceptable, appropriate and/ or desirable with respect to its institutions. The institutions include definitions, standards, and dominant designs. In a new industry, the institutions idiosyncratic to the new industry are not established, and so it is often difficult to determine if the ventures in industry are appropriate, acceptable, and/or desirable to society. It is difficult for new ventures to gain legitimacy at least with regard to institutions unique to them. Nonetheless, new ventures need legitimacy to access resources necessary for survival (e.g. DiMaggio & Powell, 1983). According to Aldrich & Fiol (1994), there are multiple ways to legitimate a new industry. The strategies include the organizational level, intra-industry level, inter-industry level, and institutional level. At the organizational level, ventures must build trust with customers, firms in

9 related industries, and industry members. They must also develop a knowledge base by clearly defining issues (e.g. the level of abstraction, use of existing knowledge, internal consistency, etc.). At the intra-industry level, new ventures must develop reliability of the industry with customers, firms in related industries, and industry members. New ventures must also create a dominant design. Ventures must coalesce around a set of accepted standards or designs, collaborate and generate collective action, form networks, etc. At the inter-industry level, newcomers must form linkages with third parties (e.g. established firms in related industries) in order to help bring legitimacy and ensure access to resources. At the institutional level, new ventures must organize collectively and develop knowledge by establishing educational curricula.

INSTITUTIONAL ENTREPRENEURSHIP Institutional entrepreneurship is a key force in establishing the legitimacy of a new industry and facilitating the survival of the industry. An “institutional entrepreneur” (DiMaggio, 1988; Suchman, 1995) creates a new institutional context or manipulates existing institutions in order to define or redefine the context. Borum and Westenholz (1995) assert that institutional entrepreneurs are socially construct or destroy organizations. In new industries, new ventures which define, construct, or shape their institutional environments are institutional entrepreneurs. They can define their industry and create or shape the institutional pressures to which they are subject. A venture in a new industry has the opportunity to change create new standards and change existing ones, “paving the way for an emerging industry to grow” (Aldrich & Fiol, 1994: 647).

10 Institutional entrepreneurship involves pioneering and innovating. New ventures engaged in institutional entrepreneurship enter an industry in the introduction stage with the opportunity to pioneer or establish the rules of the game (Anderson & Zeithaml, 1984; Miller & Dess, 1996). They can innovate by defining many of the standards idiosyncratic to their economic or technical needs – standards adopted by later entrants. As Etzioni stated “entrepreneurs are the shock troops of innovation; innovation managers are the infantry that follows” (1987: 179). The institutional entrepreneur counters the institutional view of legitimacy, which requires organizations to conform to institutions in order to be judged as appropriate. Conformance yields legitimacy (DiMaggio & Powell, 1983, 1991; Meyer, 1994; Meyer & Rowan, 1977). However, in a new industry, many of the institutions to which a venture is subject do not exist. Thus, new ventures can engage in strategic legitimacy. Strategic legitimacy allows the venture to manage the legitimation process and modify existing standards (Suchman, 1995). Strategic legitimacy also allows new ventures to create standards against which they will be judged. In the introductory stage, society is unfamiliar with the new industry and the standards idiosyncratic to the industry do not exist. A venture operating in a new industry has the opportunity to strategically determine the standards upon which the new industry and its members are or will be judged. The venture can engage in institutional entrepreneurship. Institutional entrepreneurship also provides opportunity to create the industry’s technological standard – the ‘dominant design’ (Utterback & Abernathy, 1975). According to Aldrich and Fiol (1994), the lack of a technological standard or dominant design limits the diffusion of knowledge within an industry, constrains new activities, and limits the industry’s reliability because confusion exists as to the appropriate standards.

Convergence upon a

11 dominant design promotes legitimacy. The initial player in a new industry has the opportunity to establish industry standards and specifically the dominant design. The initial player is known as the first mover and has advantages in addition to the opportunity to establish the industry standards and the dominant design. First mover advantages may arise from technological leadership (Lieberman & Montgomery, 1988).

Technological

leadership stems from “advantages derived from the ‘learning’ or ‘experience’ curve, where costs fall with cumulative output, and [from] success in patent or R&D races, where advances in product or process technology are a function of R&D expenditures” (1988: 42). Clearly, a new industry faces many challenges due in a large part to the lack of definition. As the new industry develops standards and a dominant design, the public becomes familiar with the industry and the industry gains legitimacy. At the organizational level, legitimacy derived from industry standards enables new ventures to survive by providing them access to resources. The creator and/ or manipulator of the institutions to which the industry is subject is the institutional entrepreneur. The new venture engaged in institutional entrepreneurship pioneers the standards and dominant design for the industry and facilitates the survival and growth of the industry. Proposition 1: The new venture engaged in institutional entrepreneurship creates legitimacy for its industry by creating standards for the industry. Proposition 2: The new venture engaged in institutional entrepreneurship creates legitimacy for its industry by creating a dominant design for that industry.

In addition, a new industry may benefit from the linkages formed by the new venture engaged in institutional entrepreneurship (Aldrich & Fiol, 1994). Linkages are formed through

12 networks and identification with established firms, and those established firms often operate in related industries. Networks are a source of legitimacy (Aldrich & Fiol, 1994; Deeds, Mang, et al., 1997; Oliver, 1990; Zimmerman & Deeds, 1997). They aid the survival of new ventures by providing insight, credibility, contact, and support for the entrepreneur; facilitating access to resources; building a positive image of the new venture; etc. (Ostgaard & Birley, 1996; Westhead, 1995; Zhao & Aram, 1995). Identification is another source of legitimacy for a new industry (Deeds, Mang, et al., 1997; Dowling & Pfeffer, 1975; Timons & Bygrave, 1986). A new venture which identifies with established ventures gains legitimacy through “piggybacking” – using the credibility of other parties to legitimate itself (Starr & MacMillan, 1990). For example, a new venture identifies with the professional firms servicing it, and the professional firms’ legitimacy spills over onto the new venture as the firms service the new venture. Proposition 3: The new venture engaged in institutional entrepreneurship creates legitimacy for its industry by forming linkages with other established firms.

Furthermore, the new venture which defines the industry and creates legitimacy by successfully creating standards, the dominant design, and linkages with established firms will likely reap much of the industry-level benefits arising from such legitimation. That is, the new venture engaged in institutional entrepreneurship will reap the benefits of being a first mover (Lieberman & Montgomery, 1988) and will perform superior to its competitors. The first mover is able to create reputation, generate strong customer awareness, control scarce resources and distribution channels (Lieberman & Montgomery, 1988), and capture demand growth (Robinson, 1999).

Institutional entrepreneurship likely builds a lead because of the new venture’s

reputation, access to resources, linkages, etc. such that it would be difficult for late movers to

13 overcome this lead. However, once the standards have been set, later entrants may be able to cut into the institutional entrepreneur’s profits and market share to capture a second mover advantage. The assessment of the superior performance of the new venture engaged in institutional entrepreneurship, of course, can only be made after standards have been set, the dominant design created, and inter-firm linkages established i.e. near the end of the introduction stage. The introduction stage is generally not profitable for any venture in the industry. The new venture engaged in institutional entrepreneurship struggles through the introduction stage but will likely be successful as the industry moves into the growth stage. Thus, superior performance will not be evident until the growth stage of the life cycle. That is, the following hypothesis represents hindsight. Proposition 4: The new venture engaged in institutional entrepreneurship will demonstrate superior performance in the growth stage if it does not lose its first mover advantage.

14 THE PRE-PACKAGED SOFTWARE INDUSTRY

The Pre-packaged software industry is a relatively new industry. It was first assigned a Standard Industrial Classification (SIC) Code – 7372 in 1987.

The role of the institutional

entrepreneur in legitimating the industry is clear as discussed below. Microsoft defined the industry, was the first mover, created industry standards, and developed the dominant design. It engaged in institutional entrepreneurship. The environmental and performance characteristics of the introduction stage of the pre-packaged software industry fits the characteristics discussed earlier in the paper. The Environment. The environment of the pre-packaged software industry clearly fits the characteristics outlined in Table 1. The market was initially quite small. Pre-packaged software was initially sold generally to businesses, and there was limited access to the software within the businesses. Prior to the development of DOS, a limited number of software ventures existed. Without a standard operating software platform, the market for software was small. A few pioneers such as Microsoft explored the market.

Little attention was directed upon

competitors as each software producer sought to create demand and address current or potential market needs. After the adoption of DOS, the market grew rapidly. Technology developed and continues to develop rapidly. Performance. The performance of the software industry is currently quite profitable, but it was not always so. In the introduction stage, huge levels of capital were invested in intellectual capital and human resources with little or no profit generated therefrom.

The

standardization provided by Microsoft’s DOS technology benefited not only Microsoft but also

15 the industry. The market grew, and the costs to which software ventures were and are subject dropped substantially. The standardization also benefited the users of the software, as the availability of software increased and the price of software relative to its functionality decreased dramatically. Creator of Industry Standards. Microsoft determined the standards for the software industry such as the standard that prepackaged software should be functional to, affordable by, and accessible to the average person. Microsoft also created value in the minds of the average person for the use of the computer and software applications.

It determined that software

manufacturers create software that can be mass-produced to benefit the mass market.

In

addition, software producers only recently began to lobby lawmakers to shape the rules and regulations to which the industry is subject, and Microsoft is a leader in the industry’s standard setting efforts. Creator of the Dominant Design.

In the introductory stage of the pre-packaged

software industry, Microsoft developed and commercialized its Disk Operating System (DOS) which emerged as the industry’s dominant design. Microsoft created a technological standard upon which the pre-packaged software industry converged. DOS defined the industry by enabling industry members to develop software programs, standardized software technology, enabled software ventures to act collectively and develop reliability, and enabled the public to understand software. The dominant design introduced by Microsoft unified the industry and allowed the public to understand and use the technology. The public’s familiarity with the dominant technology facilitated the legitimacy of the industry.

16 Linkages.

In defining the dominant design, Microsoft formed a linkage with the

computer hardware giant IBM by collaborating with them. The licensing agreement Microsoft created with the established and trusted giant IBM provided Microsoft and the software industry with credibility and public trust. The linkage also enabled Microsoft and other industry members to gain wide market access because of IBM’s market control. The relationship between IBM and Microsoft facilitated the development of the dominant design, and the legitimacy of the prepackaged software industry. First Mover. Although Microsoft did not create the first personal computer operating system, it was first to identify, refine, and commercialize a personal computer operating system. Microsoft was publicly the “first mover” in the industry. It established the industry standard, gained reputation, generated strong customer awareness, and captured demand growth. Microsoft’s superior performance was evident in the growth stage of the industry. Microsoft is one of the most successful companies in history. For the year ended June 1999, Microsoft’s revenue was $19,747,000,000 and net income was $7,785,000,000 (Microsoft Annual Report, 1999). No later entrants have been able to mount a serious threat to Microsoft’s first mover dominance.

INTERNET SERVICE PROVIDERS The Internet service providers (ISP) industry is a group of related ventures with a short history of operation. The industry developed as a result of the commercialization of the Internet. ISPs make the Internet available, affordable, and understandable to the public. The Standard Industrial Classification Code for Internet service providers is 7375. As noted below, although

17 the industry standards have not been fully developed and a dominant design has not been finalized, the industry is gaining legitimacy. America Online (AOL) has been the leader in the industry and is emerging as the institutional entrepreneur. The Environment. The initial market for Internet access was small, but demand has grown exponentially every year. AOL’s market share accounts for a significant portion of that growth. Internet ventures are concerned with the actions of their competitors. Although their initial focus was upon the development of their own products and services. The competition has since become intense, and competitors’ products and strategies are now of great interest. The price of Internet service was initially costly relative to the functionality provided.

It later

decreased relative to the functionality. The capital investment of the ventures was initially huge as the infrastructure and brand awareness were developed. Performance. Many ISPs have been and continue to be unprofitable. The initial sales were low when there were few subscribers. More recently, the subscriber base has exploded. The sales volume has grown significantly. The goal has been to build market share and grow revenue, with the expectation of a profitable future as the industry matures. AOL, however, has been quite successful in just the last couple of years. The company struggled in the early years of the industry, but is now very profitable, with net income of nearly $800 million last year. AOL’s revenue has increased to nearly $5 billion, a five-year growth rate of 83%, and the company continues to have the largest subscriber base in the industry (AOL Annual Report, 1999). Creator of Standards. AOL has helped to set the standards for ISPs. It led the way to making the Internet commercially useful and understandable to the public. AOL has also led the

18 way to filtering Internet content, emphasizing on-line safety, protecting privacy, and providing security, and so AOL has contributed substantially toward shaping the standards to which ISPs are subject. Specific rules and regulations to which ISPs are subject are not fully developed, although AOL is active in the lobbying efforts of ISPs. Furthermore, AOL’s president describes AOL’s role in determining the industry standards (AOL Annual Report, 1999). Specifically, it states that AOL is “working to develop a set of industry-wide best practices, including thirdparty enforcement mechanisms.” AOL is the clear industry standard setter. Creator of the Dominant Design. The Internet itself is becoming a standard of communication and information, which is fast gaining legitimacy. As the public gains increased familiarity with Internet technology, including the convenience and resources it provides, the legitimacy of ISPs grows. However, the rapidly evolving nature of the Web is such that there has been no single dominant design to emerge as the standard in providing Internet service. Technology standards are still being shaped, though HTML has become a standard for website design. This has greatly enhanced the capabilities and user-friendliness of the Web, of which AOL has played a major part. Linkages. In creating a dominant design, ISPs formed linkages with established firms in related industries. From the start, users required access to the Internet through phone lines, requiring collaboration between ISPs and telephone companies.

More recently, ISPs have

collaborated to expand their market share and technological capability. AOL recently purchased Time Warner and formed strategic alliances with Sun Microsystems, Circuit City, and Wal-Mart. The collaboration with established firms creates legitimacy for AOL and ISPs in general. Moreover, the 1999 AOL letter from the president refers to AOL’s efforts to partner with other

19 institutions. It states that AOL is working to build “partnerships with government and public interest groups” including strategic partnerships with educational institutions, to build a global medium. Clearly, AOL is attempting to emerge as the leader in the industry, and its efforts to shape the industry in part by developing linkages suggests that it is emerging as the institutional entrepreneur (AOL Annual Report, 1999). First Mover. The company that led the way to bringing the Internet to the mass market, and which now has over 20 million subscribers, more than any other Internet company, is AOL. This company was not the inventor of Internet service, but rather was among the first to commercialize the service nationwide. Other ISPs have followed AOL’s lead in making the Internet accessible to the average person. AOL has benefited from its first mover position through increased reputation, strong customer awareness, and a large share of the increased demand for ISPs. As noted above, AOL has experienced a five-year growth rate of 83%, and the company has the largest subscriber base in the industry (AOL Annual Report, 1999).

DISCUSSION AND CONCLUSION

20 The purpose of this paper is to examine the role of the institutional entrepreneur in legitimizing a new industry by integrating the concept of institutional entrepreneurship and the industry life cycle model. The literature on the introductory stage of the life cycle and legitimacy were synthesized, and two industries were examined -- pre-packaged software and Internet service providers (ISPs). The industries are at different stages of development with pre-packaged software being the most developed and ISPs being the least developed. Today, the pre-packaged software industry has clearly moved beyond the introductory stage to the growth stage. In the introductory stage, the industry was defined and standards were developed by the institutional entrepreneur -- Microsoft. The industry gained legitimacy through the efforts of Microsoft. For ISPs, the increasing usage of the Internet and rapid growth of online business suggests that they are gaining legitimacy. Although the standards of the Internet are still evolving, AOL is emerging as the leader in the development of the industry. In both of the industries, a new venture engaged in or is engaging in institutional entrepreneurship to create legitimacy for the industry. The environment characteristics of the introduction stage such as fast growth from a small base, slight initial competition, no established dominant design, high prices, and significant capital investment are evident in both the prepackaged software and ISP industries. In addition, performance characteristics such as low but growing sales, negative profits, increasing revenue, and negative cash flow are also evident. The new venture creates the definitions and standards for the industry. The new venture engaged in institutional entrepreneurship also creates the dominant design used by the industry. In both cases, a new venture engaged in institutional entrepreneurship was the “first mover” – at least in the eyes of the mass market.

21 The role of the new venture engaged in institutional entrepreneurship in creating the dominant design appears to be key at least in high tech industries such as the industries discussed in this paper. The creation of a technology standard adopted by the industry allows the industry to grow and society to gain familiarity with the industry. The dominant design and industry familiarity enable society to judge the industry and its members as to their appropriateness, acceptance, and desirability. In addition, in the introductory stage, new ventures develop linkages with established firms to share risks and establish legitimacy. They need to collaborate with established firms (Aldrich & Fiol 1994). In the pre-packaged software industry, Microsoft set the standard for the software industry and helped to drive the industry forward. Microsoft, the pioneer, made tremendous strides in building legitimacy for software companies. AOL, a pioneer in the ISP industry, is developing the industry and the commercial success of the Internet. Microsoft collaborated with IBM, and AOL is linked to Time Warner, Sun Microsystems, Circuit City, and Wal-Mart. The software first-mover Microsoft has successfully maintained its dominant market position.

Microsoft continues to maintain its leadership position as the top pre-packaged

software firm. The later entrants have been unable to overthrow them, and this institutional entrepreneur is one of the most profitable companies in history. The first-mover of Internet service providers, AOL, also has a strong market position and is quite profitable. However, with the precise form of the Web still evolving, and with such fierce competition, this industry leader could still be overthrown.

22 This study is an initial examination of the role of the institutional entrepreneur in legitimizing a new industry. The theory was developed, and examples were given to support the theory set forth. Future work is needed to empirically test the propositions addressing the creation of the industry standards and the dominant industry design, as well as the importance of linkages with established firms. Empirical work is needed to test if institutional entrepreneurs do exhibit superior performance. Furthermore, the examples of new ventures given in this paper operate in high-tech industries. Expanding the study to include a greater variety of industries will enrich the theory. In addition, exploration of industries more established than the relatively young software industry would be beneficial to understanding further the role of the institutional entrepreneur over time.

23 TABLE 1 CHARACTERISTICS OF THE INTRODUCTION STAGE

Environmental Market Growth

Rapid market growth from very small base Products/services are unfamiliar

Competition

Slight competition; unprofitable Few pioneers begin to explore the market Competitors focus inward on product rather than competition Market exploration

Technology

High level of technological change and product/service innovation No established dominant design or standard Technological development requires a high level of investment Technology is not fully understood by the creators

Capital Investment

Significant investment to support venture start-up and creation of new products/services

Prices

High and volatile Market will pay high price for new industry’s products/services

Performance Sales

Low but growing volume

Profits

Negative; revenue per share is low but increasing as industry matures

Cash Flow

Negative cash flow due to heavy expenses including debt service costs

_______________________________ Based upon the works of Fox (1973), Hofer (1975), Miller & Dess (1996), and Wasson (1974).

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