Entrepreneurship as Expectations Management

By Phelan, Steven E. | New England Journal of Entrepreneurship, Spring 2005 | Go to article overview

Entrepreneurship as Expectations Management


Phelan, Steven E., New England Journal of Entrepreneurship


Entrepreneurial profits flow from differences in expectations between buyers and sellers regarding the future value of resources. This article investigates whether differences in expectations can be influenced by an entrepreneur to produce greater profits. It is argued that there are several points in the entrepreneurial process where such interventions can occur and that the use of these techniques should be associated with superior wealth creation. The article also explores the ethical implications of influencing stakeholders in this way.

It is no secret in Silicon Valley that Messrs. Gates, Alien, and Ballmer of Microsoft owe their fortunes to a brilliant ruse. Back in 1980, they managed to convince IBM to purchase an operating system from Microsoft that would allegedly run on IBM's soon-to-be-released personal computer. Sadly, at the time, Microsoft did not own such an operating system, nor was the company capable of developing one in the required timeframe. Instead, Microsoft proceeded to acquire the rights to a suitable operating system from Seattle Computer Systems (SCS) for the paltry sum of $50,000, no doubt by keeping the identity of the ultimate customer tightly concealed. The PBS documentary, Triumph of the Nerds, described it as "...the deal of the century if not the millennium... it was certainly the deal that made Bill Gates and Paul Alien multibillionaires."

While Microsoft's success will continue to inspire entrepreneurial ambitions well into the 21st century, it is debatable whether the dominant explanation for wealth generation in strategic management, namely the resource-based perspective (Wernerfelt 1984; Barney 1991), is capable of capturing the nuances of Gates' strategy. Microsoft obviously possessed unique information and negotiation skills that IBM and SCS did not. Nevertheless, it was the way Microsoft shaped and molded the expectations of IBM and SCS that was the salient feature in the case.

Since the publication of Barney's (1986) seminal article on strategic factor markets, strategists have been aware of the important role played by expectations in profit generation. Paradoxically, while they have acknowledged the importance of expectations, strategists have given scant attention to how expectations may be strategically manipulated to extract greater profits. Few people would dispute the influence of advertisers, politicians, the media, and other "spin doctors" in shaping public opinion, attitudes, and behavior, yet the ability to shape expectations is also of fundamental importance to entrepreneurs. If we believe that expectations can be molded, manipulated, and manufactured, then the formal study of expectations management may provide fertile ground for understanding, and prescribing strategies for, entrepreneurial wealth creation.

The first section of this article examines the role of expectations in wealth creation.The second section defines expectation management, while the third section introduces a model of resource management, which makes the links to expectations management explicit and identifies targets for managerial action. In the fourth part of the article, strategies for managing expectations are considered, drawing on various theories culled from economics, psychology, and sociology. The article concludes with a consideration of the implications of expectations management for theory and practice and examines the scope for future research.

Expectations and Wealth Creation

For several decades, economists in the Austrian tradition have argued that (entrepreneurial) profits arise from differences in expectations between buyers and sellers (Schumpeter 1934; Hayek 1945; Kirzner 1973). However, an appreciation of the role of expectations in generating entrepreneurial profits only began to filter into strategic management in the early 1980s, primarily through the writings of economists such as Rumelt (1987),Teece (1986) and Nelson and Winter (1982). …

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