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A process framework of entrepreneurship: from exploration, to exploitation, to exit.


We develop a process framework of entrepreneurship covering exploration and exploitation of the opportunity as well as the entrepreneur's exit, and suggest that dialectic process theories have the potential to explain the transitions between these phases of the entrepreneurial process. In addition, we apply theories from the fields of sociology, economics, and strategy to better understand and explain various salient activities within the entrepreneurial process. A particular contribution is to increase awareness of the exit phase of the entrepreneurial process, the transition into this phase, as well as the link between entrepreneurial exit and re-entry decisions.


Although many scholars advocate the view of entrepreneurship as a process (Davidsson et al., 2001; Low & MacMillan, 1988), content models dominate the literature. Those frameworks that adopt a process perspective tend to focus on narrower segments of the field, such as internal corporate venturing (Burgelman, 1983), new venture creation (Shaver & Scott, 1991) or business start-up (Baucus & Human, 1994), and family business succession (Davis & Harveston, 1998). Many of these frameworks focus solely on the exploration of opportunities, such as Ardichvilia, Cardozob, and Ray (2003), or include both exploration and exploitation of opportunities, such as Bhave (1994). This paper seeks to develop a more comprehensive process model of entrepreneurship highlighting the entire process of entrepreneurship from exploration, to exploitation, to the entrepreneur's exit, including the transitions between these three phases.

A process-oriented framework is important for entrepreneurial research because of temporal and contextual concerns. Entrepreneurial activity is not carried out in isolation--devoid of context--nor is it carried out at a single point in time. Entrepreneurship is a process that must be viewed in dynamic terms and requires linkages or relationships between key components of the process (Aldrich & Zimmer, 1986). Entrepreneurial activity is shaped and modified by event sequences and interactions among the entrepreneur, the environment, and other relevant actors that unfold over time. Although content models study the antecedents and consequences of constructs, and provide a useful context for studying processes, these models do not tell us how events unfold over time. Furthermore, prior research oftentimes has not described the salient activities and behaviors that constitute the entrepreneurial process, but instead focused on variables affecting the process rather than on the process itself (Baucus & Human, 1994). The proposed framework not only highlights the interconnectedness and dynamic nature of the entrepreneurial process, but also reflects a historical development perspective; that is, path-dependent relationships exist so that later phases are affected by activities in the earlier phases.

Reviews of entrepreneurship research also consistently call for a more theory-driven agenda in entrepreneurship research and for integration of the various theoretical perspectives (Bygrave, 1993; Low & MacMillan, 1988). One way to achieve integration is to link different theoretical perspectives along the entrepreneurial process (Poole & Van de Ven, 1989). We show how specific theoretical perspectives shed light on salient activities within this process.

In the following sections, we first develop a definition of entrepreneur and entrepreneurship. We then introduce a framework that highlights the three phases of the entrepreneurial process. Next we discuss salient entrepreneurial activities at each phase, followed by an examination of the transitions between the phases based on dialectic process theory. We conclude by highlighting the contribution of this paper to future empirical and conceptual research.


Previous work recognizes a lack of consensus on the meaning of the terms entrepreneur (the individual) and entrepreneurship (the process) (Davidsson et al., 2001). Entrepreneur and entrepreneurship are different yet inseparable. A focus on defining an entrepreneur has led to an emphasis on the characteristics and traits of the entrepreneur (Gartner, 1988), and may have impeded theory development in entrepreneurship research (McDougall & Oviatt, 2000). On the other hand, the essence of entrepreneurship is the entrepreneur (Mitton, 1989), hence a model of entrepreneurship must recognize the importance of human volition (Bygrave, 1993), or risk the neglect of the entrepreneur (Demsetz, 1982). Since entrepreneurship, as a process, is the broader of the two terms, we suggest scholars focus on adopting a common definition of entrepreneurship that recognizes the role of the entrepreneur as the central figure in the process.

We propose that entrepreneurship is a context-dependent process of creating future goods and services that involves the cycle of exploration and exploitation of opportunities by individuals or groups of individuals (the entrepreneurs), who may exit and re-enter this process.

This definition does not restrict entrepreneurship to the creation of a new enterprise (Low & MacMillan, 1988) or new organizations (Bygrave & Hofer, 1991). Instead, we adopt a dynamic perspective by emphasizing the potential cyclicality of the entrepreneurial process, which an entrepreneur can exit, remain in, or re-enter. By considering exit and re-entry as part of the entrepreneurial process, we extend current definitions that implicitly suggest the process ends with the exploitation of opportunities (Shane & Venkataraman, 2000). Furthermore, we recognize the entrepreneur as central to the process (Mitchell et al., 2002) and highlight the importance of context (Thornton, 1999).


Figure 1 summarizes the entrepreneurial process as three major discrete phases, although the boundaries between the phases may be less refined in reality. We argue that separating the phases for theory-building purposes provides a useful framework to examine and discuss the entrepreneurial process. The first two phases of exploration and exploitation are adapted from March's (1991) seminal work on organization learning, while the final phase is the entrepreneur's exit. Salient entrepreneurial activities are highlighted within each phase for discussion. The arrows (in bold) represent the transition of the entrepreneur from one phase to another. The three entrepreneurial phases are linked in a continuous loop, with the passage of time moving in a clock-wise direction.


Figure 1 captures the various paths in the entrepreneurial process. Generally, entrepreneurs enter the process through exploration, transit to exploitation, eventually exit, and potentially re-enter the process again. However, some entrepreneurs may transit from exploration to exit, without exploiting the opportunity (arrow 1). In addition, entrepreneurs who have transited to the exploitation phase may re-enter the exploration phase without making any exit (arrow 2). For example, "portfolio entrepreneurs" exploit more than one entrepreneurial opportunity at a given time without exiting the entrepreneurial process (Hall, 1995). Furthermore, arrow 2 reflects options theory's suggestion that the exploration and exploitation of an opportunity may occur at the same time (McGrath, 1999). Finally, not all entrepreneurs who exit the entrepreneurial process after exploitation will re-enter the process again (arrow 3). While we focus our discussion on individual entrepreneurs, we believe this process applies in principle to entrepreneurial teams as well. In the following section, we shall discuss the activities of the entrepreneurial process, followed by another section on the transitions between the entrepreneurial phases.


The entrepreneurial activities shown in Figure 1 are not intended to be comprehensive, but are chosen for their salience and relevance to the entrepreneurial process based on a thorough review of the literature. More importantly, these activities illustrate the utility of different theoretical perspectives in entrepreneurial process research.

Exploration Phase

The entrepreneurial process begins with the exploration phase. According to March (1991), exploration includes search, risk-taking, experimentation, discovery, innovation and other activities. Applied to the entrepreneurial process, exploration begins with the discovery of opportunities (McCline et al., 2000). An alert entrepreneur is the first to discover market imperfections (Kirzner, 1997). Entrepreneurial discovery may be viewed as a vehicle for realizing opportunities in a constantly changing marketplace (Jacobson, 1992). Opportunities arise as a result of market imperfections or inefficiencies that lead to market disequilibrium. Market imperfections may stem from changes in the economic system and the way knowledge is imperfectly distributed, communicated and acquired by economic actors (Hayek, 1945). Such changes in the economic system may arise from continual changes in taste, resource availabilities, and known technological possibilities (Kirzner, 1997).

After discovery of the opportunity, effective and efficient discernment of the nature of the opportunity is critical. Entrepreneurial errors occur frequently in differentiating between actual and perceived opportunity (Kirzner, 1997). Although entrepreneurial errors also occur in the exploitation phase, a wrong perception of the actual opportunity will aggravate resource shortages, surplus or misallocation. The magnitude of entrepreneurial errors is primarily determined by the uncertainty regarding the nature of the opportunity. Hence, after discovering an opportunity, entrepreneurs attempt to reduce uncertainty through information searching and sensemaking at the exploration phase reflected in Figure 1. However, not all entrepreneurs who discover opportunities will engage in information search and sensemaking. For instance, some may decide to exit the entrepreneurial process (arrow 1 of Figure 1) if the discovery immediately appears not to fit well with the entrepreneurs' stock of resources, and may subsequently re-enter the process in search for opportunities better aligned with their resources.

Searching for information is a central task for the entrepreneur (Cooper et al., 1995). Although there is a variety of information sources (Welsch & Young, 1982), they may be generalized into two categories: the entrepreneur's own stock of knowledge and experience, and external sources of information including those available to the public as well as the entrepreneur's private network of economic and social actors. These actors include family members, colleagues, business associates, or professional information brokers. When information is sought from external sources, social network theories offer interesting insights into the quality of information search. For instance, Granovetter's (1973) concept of strong and weak ties may shed light on the quality of information obtained from an entrepreneur's social network (Hills et al., 1997).

Given the novelty of the opportunity, uncertainty will not be totally eliminated through accumulation of information. Furthermore, cognitive limitations suggest that entrepreneurs are boundedly rational (Simon, 1957) and exhibit cognitive biases in evaluating an opportunity (Keh et al., 2002). Hence, the amount of uncertainty reduced through a systematic information search not only depends on the availability of information, but also on the entrepreneur's information-processing capabilities. Even if information is available, entrepreneurs will not continuously engage in systematic information search because the marginal utility of additional information is expected to decrease as entrepreneurs approach their maximum information processing capacity. Hence, the act of sensemaking is not only required to make sense of the accumulated information, but also to establish closure in the information search.

Few studies apply the concept of sensemaking to better understand the entrepreneurial process (Forbes, 1999; Hill & Levenhagen, 1995). Sensemaking, with its emphasis on plausibility rather than accuracy in inference, and on a social rather than individual process, provides valuable insights into the entrepreneurial process. Although Weick (1995) posits sensemaking as primarily retrospective in nature, the domain of sensemaking can also include prospective elements (Gioia & Mehra, 1996). This is particularly relevant in the exploration phase when both retrospective elements (such as framing from past experience) and prospective elements (such as envisioning the exploitation of opportunity) are crucial determinants of future action. Sensemaking uses an individual's cognitive schemas to interpret the environment (Gioia, 1986; Shaver & Scott, 1991). These schemas are derived from an entrepreneur's existing stock of knowledge and experience (Shane & Venkataraman, 2000).

The outcome of sensemaking and information search is selecting, the final act in the exploration phase when the entrepreneur decides on whether to exploit the opportunity or exit the entrepreneurial process given the accumulated information. The final decision is likely rooted in economic and social factors (Kouriloff, 2000; Shaver et al., 2001). Economic issues include the type of resources required to exploit the opportunity and the ease of garnering these resources. Eventually, economic considerations lead to estimating the expected entrepreneurial rents from exploitation, defined as the difference between the ex post value (or payment stream) generated from exploiting the opportunity and the ex ante cost (or value) of the resources combined to exploit the opportunity (Rumelt, 1987). Entrepreneurial rents increase with uncertainty, for with certainty, rents will be competed away or appropriated by the factors of production (Coff, 1999). Therefore, given high uncertainty and bounded rationality, resolution of economic issues will be far from satisfactory, and the mode of decision making becomes one of satisficing among alternatives (Aldrich & Martinez, 2001). The entrepreneur is also likely to consider social norms and conditions (Dubini & Aldrich, 1991). For instance, the social nature of sensemaking implies that entrepreneurs would take into account the likely impact of their own actions on other significant stakeholders, such as direct family members and friends (Kouriloff, 2000).

Exploitation Phase

According to March (1991), exploitation includes refinement, choice, production, efficiency, implementation, and execution. As part of the entrepreneurial process, the decision to exploit an opportunity triggers a chain of salient activities, as shown in Figure 1, specifically organizing, negotiating, strategizing, and learning.

Organizing refers to the institutional arrangement employed to exploit the opportunity (Venkataraman & MacMillan, 1997). According to Shane and Venkataraman (2000), there are two major modes of exploitation--the creation of new firms (hierarchies) or the sale of opportunities to existing firms (markets). Accordingly, the chosen mode of exploitation may be explained by transaction cost theory (Williamson, 1985). Broadly speaking, the decision to exploit an opportunity through hierarchy occurs in the presence of market failure. One type of market failure is that knowledge created and exploited by entrepreneurs may have public good characteristics. As a public good, knowledge once transferred is hard to protect. Therein lies the dilemma for entrepreneurs. If entrepreneurs wish to sell their knowledge in the market, they may find it difficult to convince existing firms to buy the knowledge at the requested price without revealing the nature of the knowledge (Mosakowski, 1991). However, once the knowledge is revealed to potential buyers, there is no guarantee that the buyers will not engage in opportunistic behavior by exploiting the entrepreneurs' knowledge-base for the buyers' advantage. If the market mode of exploitation is adopted, entrepreneurs exit the entrepreneurial process upon completing the sale of their knowledge base. Entrepreneurs adopting the hierarchical mode of exploitation create new ventures and remain in the entrepreneurial process.

Negotiating refers to the process of accumulating critical resources necessary to exploit the opportunity. This activity is likely to have the greatest impact on the appropriation of entrepreneurial rents by the entrepreneur. For instance, entrepreneurs negotiate with venture capitalists (Hoffman & Blakey, 1987) and suppliers (Massaro & Light, 2001). Resource-dependence theory, which suggests that one actor's dependence on another for critical resources affects the relationship between the actors in predictable ways (Pfeffer & Salancik, 1978), sheds light on negotiation processes and outcomes. Entrepreneurs have an incentive to engage in activities that reduce their dependency on other stakeholders of the environment or, conversely, increase these stakeholders' dependency on them. Hence, the stakeholders' relative bargaining power determines the outcome of the negotiation process (Coff, 1999). Generally, the lower the dependency of an entrepreneur on other stakeholders, the greater the entrepreneur's bargaining power and the larger the entrepreneurial rent appropriated (Green & Light, 2000).

Strategizing refers to the way acquired resources are deployed to improve new venture performance (Lichtenstein & Brush, 2001). In the long run, strategizing aims to create and sustain a new venture's competitive advantage and may be better understood by applying theories in business strategy. Rumelt (1984) characterizes a firm as a bundle of linked and idiosyncratic resources and resource conversion activities. The knowledge-based view (Conner & Prahalad, 1996; Grant, 1996) and the dynamic capabilities approach (Teece et al., 1997) identify knowledge and capabilities embedded within the firm as critical resources. To sustain a new venture's competitive advantage derived from the entrepreneurs' knowledge-base (Willard et al., 1992), entrepreneurs focus on building isolating mechanisms that impede the ex post imitation and dissipation of entrepreneurial rents (Rumelt, 1987). Hence, the strategizing act of entrepreneurs in sustaining competitive advantage lies in building these isolating mechanisms and investing in barriers to imitation (Reed & DeFillippi, 1990). However, a strategy of sustaining the venture's original competitive advantage may prove fatal in the long run due to the erosion of a firm's knowledge stock (Dierickx & Cool, 1989) as a result of technological obsolescence (Anderson & Tushman, 1990). Hence, learning is important for entrepreneurs to create new competitive advantages to generate entrepreneurial rents.

Learning refers to the process of accumulating experience and new capabilities over time. This activity is critical for the entrepreneur to create new competitive advantage. Entrepreneurial learning determines a new venture's strategic direction by integrating environmental, organizational, and individual processes to create strategic value (Honig, 2001). Learning is a process involving repetition and experimentation that improves the content of the entrepreneur's knowledge stock (Minniti & Bygrave, 2001). Hence, the entrepreneur's knowledge stock is the cumulative result of knowledge flows that builds upon prior knowledge, where prior related knowledge confers an ability to recognize the value of new information, assimilate it, and apply it to commercial ends (Cohen & Levinthal, 1990). Although the creation of competitive advantages necessarily builds upon the entrepreneur's original stock of knowledge, the entrepreneur's role in knowledge-creation diminishes with the creation of a new venture. As the new venture grows, the core capabilities of the firm become an interrelated knowledge system made up of the entrepreneur's and the employees' knowledge-base, the firm's technical and managerial systems, and the culture associated with the process of knowledge creation and control (Leonard-Barton, 1992). This path-dependent, firm-specific, cumulative knowledge-base of the firm acts as a source of competitive advantage as well as a constraint (Nelson & Winter, 1982). In other words, entrepreneurial learning is supplemented by organizational learning over time, where the absorptive capacity (Cohen & Levinthal, 1990) of the new venture to assimilate and exploit new knowledge is the key to creating new competitive advantage.

Exit Phase

The final phase of the entrepreneurial process is exit. There is a need to define exit because it has received little attention in the entrepreneurship literature. Ronstadt (1986) views exit as the ending of entrepreneurial pursuits in favor of working for someone else. Gimeno, Folta, Cooper, and Woo (1997) define entrepreneurial exit as the discontinuation, as opposed to the survival or sale, of the entrepreneurial venture, while Petty (1997) defines exit as the harvesting of the new venture business. Hence, current definitions of entrepreneurial exit focus on either the entrepreneur or the new venture. We adopt the approach that an entrepreneur's exit from the entrepreneurial process should not be equated with the status of the new venture. Although the discontinuation of a new venture is a sure sign of exit, the continuation of a new venture does not mean that the entrepreneur is still actively exploiting the entrepreneurial opportunity. For instance, an entrepreneur may exit the entrepreneurial process by selling the entire stake in the new venture to a third party. Therefore, we define entrepreneurial exit as the cessation of an entrepreneur's active exploitation of an opportunity and/or the absence of rights to the residual returns of exploitation. This characterization of entrepreneurial exit is illustrated in Figure 2.

In Figure 2 we employ the two dimensions of entrepreneurial exit, active management and ownership rights, to form a matrix that identifies the different types of entrepreneurial exit. The ownership of a new venture is a dichotomous variable that measures whether the entrepreneur continues to retain an ownership stake in the new venture. To determine whether an entrepreneur is actively involved in the management of the new venture, we use the criterion of whether the entrepreneur is able to influence the venture's corporate strategy. Hence, active management is not only restricted to being a member of the top management team, it also applies to membership on the board of directors where the service roles of directors include initiating and formulating corporate strategies (Johnson et al., 1996).

In Cell A, where the entrepreneur retains ownership rights and continues to be actively involved in the management of the new venture, the entrepreneur has not exited from the entrepreneurial process and is still exploiting the opportunity. In Cell B, where the entrepreneur retains ownership rights but has ceased active management of the new venture, the entrepreneur has exited from the entrepreneurial process and is considered an investor in the new venture. In Cell C, where the entrepreneur does not retain any ownership rights but continues to be actively involved in the management of the new venture, the entrepreneur has exited from the entrepreneurial process and is considered a manager of the new venture. Finally, in Cell D, where the entrepreneur does not retain any ownership rights and has ceased active management of the new venture, the entrepreneur has exited from the entrepreneurial process through a complete divestment of ownership rights in the new venture, or has liquidated an unsuccessful new venture.

The salient activities in the exit phase are derived from the definition of exit represented in Figure 2, that is, investing, managing, as well as divesting and liquidating. Our classification of managing in Cell C as an act of entrepreneurial exit is consistent with earlier distinctions between managers and entrepreneurs (Aldrich & Zimmer, 1986). Whereas the act of managing in the exit phase is similar to the acts during the exploitation phase, the critical difference between these activities during exploitation and during exit is that the entrepreneur still retains ownership rights to the new venture--and associated risk--in the exploitation phase, but not in the exit phase. Also, Cell A distinguishes a manager who owns equity in a firm from an entrepreneur because the entrepreneur in Cell A is the founder of the new venture, which was set up to exploit a specific opportunity perceived at the exploration phase. Hence, an entrepreneur is not simply any manager who has equity stakes in a firm. However, a manager who was once an ex-entrepreneur may continue to explore or exploit new opportunities to create future goods and services within the new venture. Research on corporate entrepreneurship specifically examines this activity (Zahra, 1991), which is beyond the scope of this paper.

Divestment of ownership rights in a new venture may occur through various modes. Examples include initial public offerings (Prasad et al., 1995), mergers and acquisitions (Petty, 1997), private sale for cash, debt and/or equity such as employee and management leverage buy-outs and buy-ins (Wright et al., 1993). There is some evidence, although inconclusive, that the initial public offering (IPO) route is the preferred option (Holmburg, 1991). Current research on exit strategy tends to focus on firm-level or higher-level variables (Lerner, 1994; Wright et al., 1992). As a result, the choice of entrepreneurs regarding appropriate exit strategies has received lesser attention (Birley & Westhead, 1993).


As in any process model, transitions are critical. Transitions within the entrepreneurial process refer to an entrepreneur's decision to transit from one phase to another. Internal and external factors shape the decision on whether to transit and the sequence of transit. As a result, not all entrepreneurs will transit between phases and some may transit in a non-sequential manner.

We use dialectic decision-making to enhance our knowledge of entrepreneurial decisionmaking regarding transit between the entrepreneurial phases. Although various notions of dialectic process theory have been proposed (Nielsen, 1996), they all have a common starting point: a contradiction (Mason, 1996). Dialectics emphasize contradiction and change, where changes occur as a result of tensions and conflicts generated by contradictions (Van de Ven & Poole, 1995). For instance, Bazerman, Tenbrunsel, and Wade-Benzoni (1998) discuss conflicts occurring within individuals as a result of the tension between what people want to do versus what they think they should do. Dialectic process theory suggests that internal opposing tendencies within an entity is exacerbated or made apparent by external events (Ford & Ford, 1994). In other words, one may view an entity as existing in a pluralistic context where internal and external events, forces or values contradict and compete for dominance. This tension provides the impetus for change by stimulating activities aimed at striking a balance among opposites (Bresser & Bishop, 1983).

The concept of dialectics has been applied to various fields of study (see Kahle, Liu, Rose, and Kim (2000) as well as Seo & Creed (2002) for examples). The most common application in management research is Churchman's (1971) thesis-antithesis-synthesis interpretation of the Hegelian dialectic change process. Although the concept of dialectics has been used extensively in many fields of study, it has not been applied to the field of entrepreneurship. However, Farjoun (2002) recently demonstrated the utility of dialectics to explain path-dependent process evolution, hence lending credence to the application of dialectics to explain transitions in the path-dependent entrepreneurial process.

Dialectic process theory may be relevant in explaining the transition between entrepreneurial phases because research shows that an entrepreneur (the entity) experiences various internal and external forces such as age, education, need for achievement, risk-taking propensity, protestant ethic, unemployment rates, tax rates, per capital income, business failure rates and changes in government policies (Bygrave, 1989; Gnyawali & Fogel, 1994; Shane, 1996). We argue that some of these forces not only contradict one another, but also compete for dominance during the decision-making process. The likelihood of transition between entrepreneurial phases increases as contradictions develop, deepen, and permeate the entrepreneur's decision-making process. For the remainder of this section, we shall highlight the internal and external sources of contradiction as well as the relative power of the entrepreneur vis-a-vis other stakeholders that drive the transitions between phases.

Sources of Contradiction

Contradictions may be modeled according to the decision outcome at each phase of the entrepreneurial process. For instance, at the exploration phase, resolution of contradictions may mean a transition to the exit phase, a transition to the exploitation phase, or continued exploration. Similarly, resolution of contradictions at the exploitation phase may mean a transition to the exit phase, a transition back to the exploration phase, or continued exploitation. Finally, resolution of contradictions at the exit phase may mean a transition to the exploration phase or continued exit from the entrepreneurial process. Although there are various sources of contradiction that influence transitions in the entrepreneurial process, brevity constrains our exposition of all sources. Instead, we shall focus on a few examples to illustrate how these varied sources may influence transitions in the entrepreneurial process.

At the exploration phase, the event triggering an imbalance in contradictory forces is the discovery of the entrepreneurial opportunity. The resulting imbalance pushes the entrepreneur to search for more information, further exposing the entrepreneur to competing external forces and values. Furthermore, the entrepreneur will have to grapple with internal forces and values that change as a result of the sensemaking process. Finally, the tension created by the imbalance provides the impetus for change. Contradictory forces generating opposing tensions between not exploiting versus exploiting the opportunity may be internal, such as the entrepreneur's need for financial security (hence, transition to exit) versus the entrepreneur's need for achievement (hence, transition to exploitation). However, such opposing tensions may also be both external, such as the lack of government advice and counsel to entrepreneurs (hence, transition to exit) versus normative admiration for entrepreneurial activity that values creativity and innovative thinking (hence, transition to exploitation). In addition, such opposing tensions may have an internal and external source, such as the entrepreneur having a low risk-taking propensity (hence, transition to exit) versus the entrepreneur as a victim of downsizing (hence, transition to exploitation). Although the preceding examples provided dual examples of contradictory forces, in reality, entrepreneurs are likely to experience a myriad of such forces. Furthermore, the impact of these forces also varies according to the existing exigencies. For instance, when one expects a prolonged economic downturn, the external threat of corporate downsizing may weigh heavily on one's mind. These external forces, plus the perceived anxiety of family and one's internal value of having to provide for family members may drive the individual to exploit an opportunity for the sake of financial security. On the other hand, when times are well and financial security is provided, internal forces may drive the individual to exploit an opportunity simply to prove oneself.

At the exploitation phase, one driving force behind transition is the discrepancy between what the entrepreneur wants (the desired end state) and what the entrepreneur has. Depending on the circumstances, the desired end-state could be economic such as having sufficient financial capital to provide for the entrepreneur's family, or it could be non-economic such as the personal satisfaction the entrepreneur derives from self-employment, or the psychic income from entrepreneurship (Gimeno et al., 1997). Transition to exit may occur when the entrepreneurs encounter opposing forces that widen the discrepancy between what they want and what they have beyond a threshold level. For instance, Ronstadt (1986) found that other than financial reasons, entrepreneurs also exit the entrepreneurial process because of personal and family related reasons such as family problems, personality conflicts, divorce, and illness, as well as environmental and venture related reasons such as legal problems, competition, etc. Therefore, contradictory forces generating opposing tensions in the exploitation phase include the entrepreneur's satisfaction from self-employment (hence, continued exploitation) versus family problems resulting from increased priority of business success over the family (hence, transition to exit), or the entrepreneur's desire to earn more money (hence, continued exploitation) versus increasingly intensive competition in the market (hence, transition to exit).

After exiting the entrepreneurial process, the ex-entrepreneur may seek regular employment, permanently retire, and/or become an angel investor by bringing both capital and entrepreneurial experience to help other entrepreneurs (Osnabrugge, 1998). Alternatively, the ex-entrepreneur may re-enter the entrepreneurial process. Similar to the other transitions, the potential contradictory forces that may create opposing tensions between the desire to re-enter and to permanently exit the entrepreneurial process are likely to include economic and social reasons, such as the entrepreneur's wealth, the reasons for the previous exit, the entrepreneur's age and health, as well as family conditions.

Path-dependency of the entrepreneurial process suggests that re-entry decisions are likely to be linked to the experience gained from previous entrepreneurial engagements. For instance, Krueger (1993) found that the perceived feasibility and desirability of starting a new business was positively associated with the breadth and success of prior exposure. Also, the failure of prior new ventures may be viewed as limiting the entrepreneur's exposure to downside risks and preserving access to attractive opportunities and maximizing gains (McGrath, 1999). In addition, learning from prior entrepreneurial activities may increase the entrepreneur's confidence in certain actions and add to the entrepreneur's knowledge stock (Minniti & Bygrave, 2001). The conditions surrounding any previous exits are thus likely to affect re-entry decisions, for example by influencing entrepreneurial self-efficacy, a useful construct to explain the development of both entrepreneurial intentions and actions or behaviors (Chen et al., 1998). However, re-entry decisions based on an overconfidence of one's entrepreneurial ability in light of a prior successful exit could also result in a high rate of new venture failure (Camerer & Lovallo, 1999).

The Relevance of Power

Other than contradiction, another principle of dialectical analysis is praxis, or simply put, human agency. According to Seo and Creed (2002), one component of the concept of praxis is the actors' action to reconstruct the existing social arrangements. Hence, the power to act has to be taken into account when applying a dialectical perspective. Specifically, the entrepreneur's power vis-a-vis other stakeholders is an important consideration in the transitions between entrepreneurial phases because the resolution of internal and external contradictions may require addressing competing interests between the entrepreneur and other stakeholders.

According to cognitive dissonance theory, since entrepreneurial decisions to transit or not to transit involve mutually exclusive alternatives, such important decisions are likely to be accompanied by cognitive dissonance that entrepreneurs seek to reduce (Festinger, 1957). The magnitude of such dissonance is likely to vary according to the social context in which entrepreneurial decisions are made, such as immediate family members influencing the decision on whether to exploit an opportunity, continued exploitation of the opportunity, or exit from the entrepreneurial process (Ronstadt, 1986). For instance, if entrepreneurs decide to exploit an opportunity despite repeated objections from their spouses, the resulting dissonance creates pressure on these entrepreneurs to reduce or eliminate the dissonance through the use of influence tactics. Such tactics may include the imposition and enforcement of the entrepreneurs' conceptions of reality (such as the attractiveness of the opportunity) unto their spouses. However, successful tactics is likely to be dependent on the relative power between the entrepreneurs and their spouses.

To understand power, one has to understand the sources of power that accrues to an individual. Researchers have sought to create classification schemes that captured the multiple dimensions of power (Lippitt et al., 1952). The most widely used classification has five sources of power, namely reward, coercive, expert, legitimate and referent power (French & Raven, 1959). Simply put, reward power depends on the ability to administer positive outcomes and to remove or decrease negative outcomes; coercive power stems from the ability to punish deviations; expert power depends on the possession of relevant knowledge-base; legitimate power stems from internalized values which dictate that one has a legitimate right to influence others and that others have an obligation to accept this influence; referent power stems from others' identification with one.

In the above example where the objection of spouses create cognitive dissonance after the entrepreneurs' decision to exploit an opportunity, successful influence tactics to assure their spouses may be derived from the entrepreneurs' expert power, such as familiarity with the nature of the opportunity or having experienced prior successful entrepreneurial ventures. The relevance of power extends beyond reducing cognitive dissonance and the social context of an entrepreneur's family members. For instance, the decision on whether to continue exploiting the opportunity or transit to exit may be a function of the relative power between the entrepreneur and suppliers of critical resources. Or, entrepreneurs with coercive power (perhaps from enforcement of patent rights) may be more successful at fending off competition from other new ventures and hence facilitate continued exploitation of opportunities, while those with referent power (perhaps prestige from successful ventures) may be able to command a higher premium in IPOs hence facilitating the transition to exit.

In summary, the application of dialectics in analyzing transitions between entrepreneurial phases has to take into consideration the presence of contradictory forces that provide the impetus for transition and the entrepreneur's relative power that explain the presence/absence and sequence of transition. Unfortunately, extant research has largely ignored both factors in explaining the entrepreneurial process.


The utility of any framework must be assessed by its contribution to the advancement of theory. Hence, this section seeks to highlight the implications of our proposed framework by offering specific suggestions about future research areas.

Exploration and Exploitation

Few studies have applied the concept of sensemaking to better understand the entrepreneurial process. To spur research in this area, we discuss the utility of social-information-processing and network theories in providing useful insights into the act of sensemaking and how an individual responds to uncertainty. Sensemaking is a social process influenced by external actors (Gioia et al., 1994). Festinger (1954) suggests that social information processing is important under conditions of uncertainty because individuals are motivated to communicate with others to arrive at socially derived interpretation of events and their meaning. Social-information-processing theory posits that attitudes, behaviors and beliefs are adapted to the social context and to the reality of one's own past and present behavior and situation (Salancik & Pfeffer, 1978). When applied to entrepreneurship research, the theory suggests that economic and social actors influence an entrepreneur's perception of and attitude towards the entrepreneurial opportunity when searching for information. Here, social network theory enriches the analysis by providing the structural context in which information within the network influences one's perception and attitude. One property of social networks that links social-information-processing and social network theories is network proximity. Although network proximity is a multi-dimensional concept, relational proximity is of interest here (Rice & Aydin, 1991). The influence mechanism for relational proximity is the extent to which individuals interact directly and indirectly (Rogers & Kincaid, 1981). An example of network ties with high relational proximity is friendship ties. These ties tend to be symmetrical and cluster in dense interconnected cliques (Krackhardt, 1992), are more credible and influential (Brass, 1992), and more suited for social support than for access to information and resources (Ibarra & Andrews, 1993). Since social-information-processing theory suggests that credibility of the information source affects the influence of socially constructed meanings (Shaw, 1980), one may posit that network ties with high relational proximity are likely to have the greatest influence in an entrepreneur's sensemaking process. By extension one may suggest that weak ties with access to nonredundant information are more appropriate for discovering entrepreneurial opportunities and information search, while strong ties are more appropriate for entrepreneurial sensemaking (Granovetter, 1973).

We suggest above that transaction cost theory may explain an entrepreneur's chosen mode of exploitation. For instance, we assert that entrepreneurs exploiting knowledge-based innovations are more likely to adopt the hierarchical mode by creating a new venture. Market failure explains why entrepreneurs set up a new venture to exploit the opportunity rather then sell the knowledge to existing firms because entrepreneurs might overvalue their knowledge-base while the external market's pricing mechanism undervalues the entrepreneurs' knowledge-base. Hence, entrepreneurs maximize rent appropriation by internalizing transactions within a new venture due to market failure. Furthermore, we expect that the propensity of entrepreneurs to set up a new venture remains despite insufficient private funds as long as there is a formal investor market, such as a well-developed venture capital market. This is because venture capitalists have a lower potential to act opportunistically due to the importance of reputation capital (Norton, 1995). The strength of the existing property rights regime is also a relevant consideration since opportunistic behavior is more likely to occur under conditions of a weak property rights regime (Shane & Venkataraman, 2000).

We further suggest that resource-dependence theory may predict the distribution of entrepreneurial rents among various stakeholders. Although an entrepreneur's dependencies on the environment for human and financial capital are likely to dominate the negotiation process (especially for de novo start-ups), there exist mitigating factors that might tip the power imbalance between the entrepreneur and other stakeholders in the entrepreneur's favor. For instance, if the external capital market is highly competitive, and there is high uncertainty about whose preferences in the capital market should dominate, an entrepreneur may gain bargaining power by brokering tension between capital providers and playing their demands against one another (Burt, 1992). Internal mitigating factors include the entrepreneur's experience in new venture business, highly developed persuasive and leadership skills, the ability to correctly perceive and respond to the interdependencies in the environment, and the entrepreneur's tacit knowledge regarding the nature of the entrepreneurial opportunity. Internal factors tend to increase the entrepreneur's legitimacy and hence of the new venture, allowing easier access to resources.

Entrepreneurial Exit: A Neglected but Promising Area of Study

An important contribution of this paper is to highlight an area of entrepreneurship research that has been neglected in the past, the entrepreneur's exit. Petty (1997) raised several research questions that have yet to be adequately studied, such as how does an entrepreneur's personal preferences and situation influence the choice of the exit strategy, and how important is the timing of the exit. However, the importance of understanding entrepreneurial exit appears to be increasing (Ucbasaran et al., 2001). One reason why exit options are important is that it provides an informal source of capital to the novice entrepreneur in the form of angels. These offer an alternative to venture capital funds, hence reducing the entrepreneur's dependency. Also entrepreneurs who have successfully exited the entrepreneurial process may act as role models for future generations and increase their propensity towards and attachment to entrepreneurial activities (Bruderl et al., 1992).

The process perspective facilitates the study of entrepreneurial exit. The dominant approach to study stocks and flows of entrepreneurship has been to identify the individual and environmental factors that facilitate the rise of entrepreneurship. These studies typically neglect the entrepreneurial process. By focusing on content models, scholars may overlook an important factor in the study of entrepreneurship. By viewing entrepreneurship as a process, we hypothesize that an important factor in determining the stock of entrepreneurship at any point in time is the number of and quality of exit options for an entrepreneur. In other words, the decision to exploit an opportunity may be dependent on whether entrepreneurs are able to voluntarily exit the venture and realize returns from the initial investments. For instance, when studying the conditions conducive for entrepreneurship, research may need to include factors pertaining to the entrepreneur's exit, such as a well-developed IPO market or an active mergers and acquisitions market that provide incentives to engage in opportunity exploitation. Other than examining how exit influences re-entry decisions, future research might also examine how entry decisions influence exit options. Thus there likely is a two-way interdependence between exit and entry (Love, 1996).

Future research may also examine the impact of external and internal factors on an entrepreneur's choice of exit strategy. Potential factors include the preference of venture capitalists, the new venture's performance, or the relative attractiveness of the IPO market and the mergers and acquisition market. For instance, one may speculate that entrepreneurs pushed to exploit an entrepreneurial opportunity due to downsizing at the entrepreneurs' previous employment are more likely to select the IPO route than a merger with an existing firm.

Transitions between Entrepreneurial Phases

In this paper, we advocate the use of dialectic process theory to explain the transition between entrepreneurial phases. Dialectics emphasize the impact of various external and internal factors that provide the impetus for entrepreneurs to transit between phases. Clearly, given the variety of external and internal factors, the transition process is complicated, not easily modeled, and suggests a need for multiple levels of analysis.

For instance, an individual level of analysis for transitions should take into account an entrepreneur's proclivity to process and accept the duality inherent in contradictions. Proclivity to accept duality has been shown to vary with psychological characteristics (such as motivation), demographics (such as age and education), cultural background, and the characteristics of the decision problem (Kahle et al., 2000; Williams & Aaker, 2002). We expect an increase in the likelihood of transition when an entrepreneur has a low, rather than high, propensity to accept duality, because the felt tension caused by contradictory factors would be more intense, hence creating a greater need for a change. At an individual level of analysis for transitions from exploration to exploitation, one should take into account that existing entrepreneurs are likely to possess relevant stocks of knowledge and experience that are generic across entrepreneurial opportunities. This knowledge and experience, such as the experience of having started a new venture or a failed attempt to successfully exploit a previous opportunity, would influence the perceived level of uncertainty associated with a new opportunity and thus affect the likelihood of exploitation (Palich & Bagby, 1995). At the group level of analysis, social-information-processing and social network theories may be used to posit that family role models (Dyer & Handler, 1994) are important in the decision to exploit opportunities given that family ties are likely to have high relational proximity (Rice & Aydin, 1991). At the market level of analysis, essential factors include the availability of funding and human capital, while at the societal level one may examine the impact of culture or national policies that facilitate or impede entrepreneurial activities (Shane, 1996).

Another potential area of research on entrepreneurial transitions between phases is to link re-entry decisions with the exit of entrepreneurs. For instance, it is plausible that entrepreneurs may be more likely to enter the entrepreneurial process if exit options are attractive, such as having highly liquid capital markets, an active market for mergers and acquisitions, or favorable bankruptcy regulations. Another reason why exit options are important for entrepreneurship is that a successful exit converts the value of the new venture into financial capital that reduces an entrepreneur's dependency on external capital markets when exploiting a subsequent opportunity. This in turn may encourage the proliferation of serial entrepreneurs that will continue the entrepreneurial process by constantly identifying and evaluating new opportunities and creatively accessing resources to put ideas into practice and make them succeed.

Finally, research may also explore the transition from exploration to exit. For instance, although individuals may discover an opportunity, it is important to explain why some individuals decide to continue exploration of the opportunity (such as engaging in information search and sensemaking) while others exit the process. Furthermore, the antecedents for continued exploration may be different for experienced entrepreneurs when compared with individuals with no entrepreneurial experience.


The main contribution of this research is to present a theoretically driven process framework that focuses on the entrepreneur's salient activities and to offer a broad perspective of the entrepreneurial process. The proposed process framework can provide a platform demonstrating the cumulative nature of widely segmented studies on entrepreneurship and serve as a useful road map by alerting researchers to the salient activities at each phase of the entrepreneurial process as well as the transitions between phases. Our model also contributes to the advancement of theory to the extent that it successfully integrates the disparate body of research in entrepreneurship and thus offers insights into areas of potential research.

One important contribution of process models such as the one introduced here is that content models can be informed by theorizing at the process level, with the following advantages. First, entrepreneurial activities are path-dependent, that is, the nature and outcome of current activities are necessarily influenced not only by current circumstances, but also by the entrepreneur's past. For instance, the quality of information search and sensemaking at the exploration phase may be a function of whether the entrepreneur is a novice or a habitual entrepreneur re-entering the entrepreneurial process. Similarly, negotiations at the exploitation phase to secure critical resources are necessarily constrained by the entrepreneur's comprehension of the opportunity at the exploration phase. To the extent that environments are enacted, the ability of an entrepreneur to secure resources is a function of the entrepreneur's ability to persuade resource providers towards greater overlap in representations, in favor of the entrepreneur's enactment (Weick, 1979), thus influencing rents appropriated by the entrepreneur.

Second, as the entrepreneur progresses through the phases of the process, the nature of the entrepreneurial activities suggests that group, organizational, and environmental levels of analysis gradually increase in importance. For instance, an important implication of using dialectic process theory is that researchers not only have to consider the various external and internal forces and values, but also their directions and relative magnitudes. Given the myriad of forces that exert themselves on the potential entrepreneur, application of multi-level models has been encouraged in entrepreneurship research. More comprehensive frameworks such as ours might provide venues to overcome such limitations.


We thank the management faculty at Texas A&M University and Mike Wright for their insightful comments on earlier drafts of this manuscript. All errors and omissions are entirely our own.


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Eugene Kang, Nanyang Technological University

Klaus Uhlenbruck, The University of Montana
Figure 2: The Definition of Exit from the Entrepreneurial Process

 Active Management of the Venture

 Yes No

 Cell A Cell B

 Yes Continued Exploitation Entrepreneurial Exit:
Ownership of of Opportunity From an
Venture as an Entrepreneur Entrepreneur To an

 Cell C Cell D

 No Entrepreneurial Exit: Entrepreneurial Exit:
 From an Entrepreneur Divestment or
 to a Manager Liquidation
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Title Annotation:MANUSCRIPTS
Author:Kang, Eugene; Uhlenbruck, Klaus
Publication:Academy of Entrepreneurship Journal
Geographic Code:1USA
Date:Jan 1, 2006
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