Opportunity exploitation refers to building efficient, full-scale operations for products or services created by, or derived from, a business opportunity. For most entrepreneurs, opportunity exploitation is a necessary step to generate revenues and thus create a successful business (Block and MacMillan, 1985 and Schoonhoven et al., 1990). The venturing process, however, starts with an exploration of that business opportunity. During the exploration period, entrepreneurs attempt to reduce their ignorance about technology and market through knowledge accumulation arising from experimentation and search such as market research on customer demand and further development and testing of technologies (March, 1991 and Rice, 2002). A conceptualization of the entrepreneurial process through a simple sequence of exploration-then-exploitation is consistent with theoretical (Aldrich, 1999 and Bhave, 1994) and practical (Block and MacMillan, 1985) perspectives, which view the entrepreneurial process as sequential milestones. Opportunity exploration encompasses activities from multiple milestones including concept and product testing, completion of prototype, completion of initial plant tests, and market testing (Block and MacMillan, 1985). Exploitation is, in turn, associated with the production startup milestone (Block and MacMillan, 1985) or, said differently, full-scale operation, which requires full commitment of the new venture's resources in building efficient production and business systems (Choi and Shepherd, 2004).
Although it is unlikely that the entrepreneur would stop all exploration activities after a shift of attention to exploitation, this shift is likely to be substantial and to require irreversible commitments. By rushing exploitation, entrepreneurs can realize first mover advantages (Lieberman and Montgomery, 1988). But by delaying exploitation (and continuing exploration) they can accumulate knowledge and, as a result, reduce their ignorance. Ignorance reduction allows for product refinement, reductions in production costs, and a better understanding of the market (Baumol, 1993 and Meyer and Utterback, 1995). When, then, should entrepreneurs expedite the exploitation of their business opportunity and when should this process be delayed?
The entry strategy and innovation literature still, to date, provides an incomplete picture of the exploitation decision in the entrepreneurial process. Prior studies in entry strategy have often ignored the influence of entry on firm survival, which can lead to an unnecessarily hasty and sub-optimal decision to enter a market (Schnaars, 1994).3 Models in the economic-R&D literature focus on firms' rates of investment rather than on an assessment of an innovation's viability (Reinganum, 1989). Also, most of this literature does not explicitly capture the performance tradeoffs between profit potential and survival (Schoemaker and Amit, 1994) which appear highly relevant in entrepreneurial contexts.
Following the entrepreneurship research tradition emphasizing the role of knowledge in the entrepreneurial process (Hayek, 1945, Shane, 2000 and Venkataraman, 1997), we develop an analytical model of opportunity exploitation. The mechanism of opportunity exploitation is built on the tradeoff between performance measures (specifically, profit potential, likelihood of downside loss, and exploration cost), which is governed by an entrepreneur's knowledge accumulation – thus ignorance reduction – and her/his knowledge management orientation (tacit versus explicit). We introduce the notion of an ignorance threshold, which refers to a lower bound on the level of ignorance. Once an entrepreneur's level of ignorance has reached this lower bound, the entrepreneur should stop exploring and begin exploiting as performance tradeoffs have been optimized. As business opportunities differ in their degrees of novelty ( Amason et al., 2006), 4 we also conduct sensitivity analysis on the ignorance threshold to further investigate the effectiveness of a variety of strategies to manage knowledge.
Our dynamic optimal-stopping model contributes to the entrepreneurship literature in several ways. First, this study offers a decision process in which entrepreneurs acquire and manage knowledge to reduce ignorance and optimize performance in their business opportunity exploitation. The notion of an ignorance threshold associated with the optimal time for opportunity exploitation (a largely irreversible commitment) complements the real options approach in entrepreneurship. Second, this study shows that the exploitation timing should vary depending on the degree of novelty of the opportunity, as the timing is determined by a tradeoff between the need to increase legitimacy (lower degrees of novelty) and the necessity to prevent competition (higher degrees of novelty). Third, this study advances our understanding of new ventures' entry strategies by suggesting that, even for opportunities with the same degree of novelty, exploitation timings should vary depending on the knowledge management orientation of their entrepreneurs and the competitors' ability to learn about these opportunities.
We begin with an investigation of the driving forces of opportunity exploitation and the corresponding measures of performance. This investigation sets up our general model, from which theoretical insights are translated into propositions and implications for entrepreneurs and entrepreneurship scholars.
