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CHAPTER SEVEN. An Optimal Stopping Model for the Exploration and Exploitation of a New Venture Opportunity

Subject Business and Management » Entrepreneurship

DOI: 10.1111/b.9780631235118.2002.00009.x


Entrepreneurs discover new business opportunities. Discovering and exploring the potential of a new business opportunity, however, are not sufficient to obtain entrepreneurial rents; subsequent exploitation must be taken ( Shane and Venkataraman, 2000 ). Successful entrepreneurs seem to shift from exploration (a focus on activities and/or investments to reduce technological and market uncertainties surrounding the potential opportunity) to exploitation (activities and/or investments committed to building efficient business operational systems to generate profits) at the most appropriate time. For example, http://Boo.com , a UK‐based on‐line fashion retailer, incurred large losses from what appears to be a hasty decision to pursue full‐scale operations. Value America, one of the pioneers of on‐line retailing, also appears to have suffered problems associated with premature exploitation by beginning full‐scale operations based on an incomplete business model. Baumol (1993) suggests that the timing of a major innovative step involves a tradeoff; by rushing a novel item to market an innovator can realize benefits earlier, but by delaying its introduction the innovator can benefit from further development and cost reductions in production. We argue that there exists a similar trade‐off for an entrepreneur in deciding when to shift focus from exploring a new opportunity to its exploitation. ... log in or subscribe to read full text

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