Where to begin: Understating how companies find new projects, by Nel Dutt

How do companies find projects in new niches?  Incumbent firms often find themselves in situations where they have been successful in their core business but are looking to expand in a new direction; how do they decide on a new business?  Entrepreneurial ventures may also find themselves in this situation as they must choose a specific market niche for their product; how do they decide which niche?  Although decision-making about areas in which a focal firm has experience may be straightforward, decisions about new projects are difficult.  Firms must balance knowledge gained from prior projects, with preferences of their top managers.

Business scholars have done a lot of research developing decision models to explain how firms choose in the case of measurable ambiguity or uncertainty.  However, understanding how firms choose new ventures, where there is a large amount of uncertainty, is less understood.  This is the focus of my dissertation, where I examine decision-making by utilities companies about a new industry niche – renewable electricity.

The utilities industry in USA is currently going through an interesting transition where incumbent firms, traditionally considered stable and profitable, are being mandated by the government to invest in a new and costly industry –renewable electricity.  Many companies have no experience with renewables; and none know which technology will be the most financially viable.  As a result, in the process of choosing a renewable source of electricity, we see different firms evaluating different technologies.  For example, some companies in the northeast are considering a variety of renewable electricity sources, while those in the southwest are mostly focused on wind energy.  These differences arise from differences in prior experience and attention to different renewable electricity sources by top managers.  

But what does this all mean for a business practitioner?  My research shows that firms with a greater amount of experience tend to only examine renewable electricity sources with which they have some experience.  While this may be a safe strategy in a stable industry, these firms risk missing out on a new but relevant renewable electricity source, by having a narrow scope.  Secondly, my research highlights the importance of always having top managers thinking about the future of their industry.  Even in a setting as stable as electricity, top managers that have been thinking about renewable electricity sources, have an easier time identifying pros and cons of new renewable sources of electricity.  Thus, while investing in a strategic planning unit might seem unnecessary for a successful firm in a stable industry, it carries a great deal of value when something changes.  In short, firms should consider the propensity for change in their industry before evaluating new ventures too narrowly; and acknowledge the role that top managers play in steering the direction of future change.  Building upon these results,  my future work also in the utilities industry examines the impact of lobbyists on shaping the kinds of information firms receive, and asks how and if they have an impact on firms’ chosen renewable electricity source. 

Nel Dutt

PhD Candidate in Strategy
Duke University, Fuqua School of Business