Zuzul and Edmondson

1

AMBIGUITY SQUARED: GROWING A BUSINESS IN A NASCENT INDUSTRY

Tiona Zuzul

Amy C Edmondson

Harvard Business School

April 10, 2013

This paper explores how leaders’ efforts to legitimate a firm and a nascent industry affect the

internal development of the firm. Through a three-year, in-depth case-study of a firm in the

nascent smart cities industry, we describe how leaders’ legitimation efforts impacted the firm’s

internal development. The leaders of the firm developed a legitimation capability: routines,

practices, and processes that leveraged symbolic resources to help stakeholders understand and

appreciate the firm and its industry. Developing this capability had unintended cognitive

consequences we conceptualize as cognitive crowding, attentional constraints, and identity

commitments. Our longitudinal research reveals a downside to legitimacy-building, and

highlights the unique challenges of competing in a nascent industry.

Zuzul and Edmondson

2

Developing organizational capabilities is essential in building firms that can survive and

develop over time (Helfat and Peteraf, 2003). A capability is a firm’s ability to leverage its

resources to perform a set of tasks towards a desired result (Helfat and Peteraf, 2003);

capabilities are built on resources (Daneels, 2007), routines (Nelson and Winter, 1982; Winter,

1987, 1990), and processes (Teece, Pisano, and Shuen, 1997; Eisenhardt and Martin, 2000;

Bingham and Einsenhardt, 2011) that firm members enact in service of a goal. Scholars writing

about capabilities have argued that firms can thrive not only because of their unique industry

positions (Porter, 1980) or resource bundles (Penrose, 1959; Wernerfelt, 1984), but because their

members know, explicitly or tacitly, how to do something uniquely well (e.g. Nelson and Winter,

1982; Winter, 1987; Cohen and Levinthal, 1990; Kogut and Zander, 1992; Teece et al., 1997;

Helfat and Peteraf, 2003).

Different competitive contexts call for the development of different capabilities. In

particular, scholars have emphasized that the earliest stages of industry development, often

termed a nascent industry, present unique challenges to strategic action (Klepper, 1997; Santos

and Eisenhardt, 2009; Dobrev and Gotsopoulos, 2010). Institutional scholars writing about this

context have identified the importance of legitimacy-building activities in this context (e.g.

Aldrich and Fiol, 1994; Hill and Levenhagen, 1995; Navis and Glynn, 2010; Wry, Lounsbury,

and Glynn, 2011). Institutional research focuses on the conformity pressures of different

institutional environments, and privileges the importance of legitimacy-based challenges to

survival (see Durand, 2012 for an overview). Scholars writing in this tradition have argued that

an industry in its earliest phases of development lacks legitimacy, defined as the understanding,

endorsement, and support of external stakeholders (Hannan and Freeman, 1989; Hannan and

Carroll, 1992). Firms can only thrive if their leaders invest in activities to legitimate the industry

Zuzul and Edmondson

3

to external stakeholders (Aldrich and Fiol, 1994; Hill and Levenhagen, 1995; Navis and Glynn,

2010; Wry et al., 2011). Although they do not use the term, institutional scholars imply that

legitimation capabilities – the routines, practices, and processes firm leaders and employees

enact to convince stakeholders that their firms and industries are acceptable and desirable – are

perhaps the most important element of success in a nascent context (Aldrich and Fiol, 1994;

Navis and Glynn, 2010; Wry et al., 2011).

The aim of this research is to understand whether and how legitimation capabilities

impact the development of other capabilities firms need to survive and thrive in nascent

industries. Through a three-year, in-depth case-study of SusTech, a (disguised) firm in the

nascent smart cities industry, we describe how leaders’ legitimation efforts negatively impacted

the firm’s internal development through unanticipated cognitive effects. A number of strategy

scholars have argued that capabilities can sometimes constrain a firm’s growth and survival

through unintended cognitive channels (e.g. Leonard-Barton, 1992; Tripsas and Gavetti, 2000;

Tripsas, 2009). We demonstrate that certain capabilities can simultaneously benefit and hinder

firms; as SusTech leaders developed their legitimation capability, they constrained the firm’s

ability to respond to changes in its environment. Our longitudinal research reveals a downside to

legitimacy-building, and highlights the unique challenges of competing in a nascent industry.

THEORETICAL BACKGROUND

Strategy scholars have argued that building a capability can have unintended, negative

consequences on a firm’s development and survival (Nelson and Winter, 1982; Tushman and

Anderson, 1986; Levinthal and March, 1993; Benner and Tushman, 2003; Durand and Vergne,

2011). The core capabilities that underlie a firm’s advantage (Prahalad and Hamel, 1990) can

turn into rigidities that prevent it from pursuing projects that fall beyond the scope of that core

Zuzul and Edmondson

4

(Levitt and March, 1988; Leonard-Barton, 1992). The tightly linked, complex sets of capabilities

that can prevent imitation are often resistant to change and evolution, and can become

maladaptive in dynamic environments (Levinthal, 1997; Rivkin, 2000). Some of these barriers

are cognitive: the development of particular capabilities can affect managers and employees’

beliefs about the nature of the firm and its industry, such that they ignore or reject changes or

opportunities incongruent with these beliefs (Tripsas and Gavetti, 2000; Kaplan, Murray, and

Henderson, 2003; Kaplan and Tripsas, 2008; Tripsas, 2009).

Existing research has not explored the interaction between capability development,

cognition, and firm performance in nascent industry contexts. A nascent industry emerges when

small numbers of firms begin to develop category-defying products and services based on new

technologies or new ideas about consumer demands (Williamson, 1975; Henderson and Clark,

1990; Klepper and Graddy, 1990; Klepper, 1997). Nascent industries are characterized by

ambiguity, which Weick (1995) defined as “an on-going stream that supports several different

meanings at the same time” (p. 99). In ambiguous situations, reality is unknown; many causal

explanations and connections are plausible.

In the unformed competitive space of a nascent industry, ambiguity takes on two forms.

First, institutional scholars have argued that stakeholders do not understand a nascent industry’s

meaning, boundaries, and desirability (Aldrich and Fiol, 1994; Hill and Levenhagen, 1995;

Lounsbury and Glyn, 2001; Navis and Glynn, 2010; Wry et al., 2011). That is, the industry lacks

legitimacy, or endorsement by and support of external stakeholders (Hannan and Freeman, 1989;

Hannan and Carroll, 1992). Prospective partners, customers, and shareholders might not

understand the need for the industry, and whether or how it will develop. In his analysis of the

nascent automobile industry, for instance, Rao (1994) argued that stakeholders disagreed on how

Zuzul and Edmondson

5

automobiles should look and perform, and how important they would become: “the only point of

agreement about the automobile was that it could not be powered by animals” (p. 33).

Second, in a nascent industry, markets, customers, competitors, and business models are

not yet understood (Aldrich and Fiol, 1994; Santos and Eisenhardt, 2009; Benner and Tripsas,

2012), and different firms hold multiple interpretations about how, and for whom, to deliver

value (Kaplan and Tripsas, 2008; Benner and Tripsas, 2012). Firms must therefore grapple with

shifting industry boundaries and compete against varying conceptions of value (Benner and

Tripsas, 2012). They do this by experimenting with alternative strategies, technologies, and

products, until the industry begins converge on a single dominant design and a shared

understanding of the competitive context (Utterback and Abernathy, 1975; Clark, 1985;

Anderson and Tushman, 1990; Klepper, 1997; Kaplan and Tripsas, 2008).

These two challenges present different imperatives for strategic action. On the one hand,

leaders in nascent industries might need to employ symbolic strategies to legitimate their firms

and industries (Dobrev and Gotsopoulos, 2010; Zimmerman and Zeits, 2010; Navis and Glynn,

2010; David, Sine, and Haveman, 2012). This might call for the development of capabilities that

help stakeholders understand and appreciate the industry; as Aldrich and Fiol (1994) wrote in a

conceptual paper, practices and processes that allow leaders to “build a reputation of the new

industry as a reality, as something that naturally should be taken for granted by others” (p. 657).

On the other hand, leaders may also need to develop an ability to adapt and change course, given

the ambiguity of a nascent industry context. This might call for the development of dynamic

capabilities (Teece et al., 1997; Helfat and Peteraf, 2003) that allow leaders to act quickly to

develop models they test and change in learning loops that have been labeled continuous change

Zuzul and Edmondson

6

(Brown and Eisenhardt, 1997), opportunistic adaptation (Bhide, 2000), continuous morphing

(Rindova and Kotha, 2001), or discovery-driven planning (McGrath, 2010).

Existing research has focused primarily on the first imperative by exploring how leaders

can legitimate their firms and nascent industries. Navis and Glynn (2011), for instance, explored

the process by which the leaders of XM and Sirrius attempted to legitimate the nascent satellite

radio market through sensegiving efforts (Navis and Glynn, 2010). Santos and Eisenhardt (2009)

argued that the most successful firms are those that engage in sensegiving efforts that privilege

their own position in the nascent industry; that is, those that legitimate both the firm and the

industry by “defining a distinct identity for both…so that the two become synonymous” (p. 649).

This research emphasizes the role of symbolic actions, including the crafting and dissemination

of stories that balance uniqueness and embeddedness in existing models (Lounsbury and Glynn,

2001; Martens, Jennings, and Jennings, 2007; Santos and Eisenhardt, 2009; Navis and Glynn,

2010), and the use of analogies, templates, and metaphors (Hill and Levenhagen, 1995; Santos

and Eisenhardt, 2009; Cornelissen and Clarke, 2010). An implication is that leaders in nascent

industries should develop capabilities that allow them to successfully manipulate symbols to

legitimate their firms and industries, a form of cultural entrepreneurship (Wry et al., 2011).

Dobrev and Gotsopoulos (2010) recently argued that legitimation capabilities might

interfere with a firm’s attempts to respond and adapt to a dynamic environment. Existing

research, however, has not explored the unintended, internal effects of legitimation capabilities.

Institutional scholars have focused on legitimation as an essential outcome. Meanwhile, most of

the strategy literature on negative consequences of capabilities has focused on firms in

established industries (e.g. Tripsas and Gavetti, 2000; Tripsas, 2009). Strategy scholars focused

on nascent industries have largely ignored legitimacy questions and explored whether firms

Zuzul and Edmondson

7

enter, when they enter, and whether they survive (e.g. Mitchell, 1989; Mitchell, 1991; Klepper

and Simons, 2000; Dowell and Swaminathan, 2006). As a result, although strategy scholars have

identified nascent industries as a unique context characterized by tremendous ambiguity (e.g.

Benner and Tripsas, 2012), we lack understanding of the potential effects of legitimation

capabilities on the internal development of firms in this setting.

The case-study described below suggests that activities aimed at legitimating a nascent

industry can negatively impact the development of other a firm. The leaders of SusTech, an early

entrant in the nascent smart cities industry, developed a legitimation capability: routines,

practices, and processes that leveraged resources to help stakeholders understand and appreciate

the firm and its industry. Developing this capability had unintended cognitive consequences we

conceptualize as cognitive crowding, attentional constraints, and identity commitments.

Executives and employees became resistant to negative feedback; they began to narrow attention

on externally- rather than internally-oriented activities; they formed deep identity attachments to

a particular course of action. The three cognitive consequences constrained the firm’s learning

and ability to shift in response to its ambiguous environment.

The SusTech case provides rich insight into the challenges inherent in a nascent industry,

and begins to deepen our understanding of this context. By exploring how a firm’s attempts to

respond to its institutional environment affect its internal development, we respond to recent

calls for research that integrates institutional and strategic perspectives (Durand, 2012). In doing

so, we explore a fundamental strategic trade-off firms across contexts must consider: should they

commit to particular strategic choices to shape their environments (e.g. Ghemawat, 1991), or

should they remain flexible to adapt to the shifting demands of the environment (e.g. Brown and

Eisenhardt, 1997)? Our research suggests this trade-off is particularly salient in the ambiguous

Zuzul and Edmondson

8

setting of a nascent industry. Finally, we argue that understanding managerial cognition is

essential to explaining why an apparently beneficial capability can have unintended, negative

effects. While prior research in this tradition has emphasized that capabilities can become

maladaptive as an environment changes (e.g. Leonard-Barton, 1992; Tripsas and Gavetti, 2000;

Tripsas, 2009), we suggest that certain capabilities can simultaneously benefit and hinder firms

through their unintended cognitive effects.

METHOD

We used a longitudinal, in-depth qualitative research design to generate new theory, consistent

with the paucity of literature on the internal impact of legitimation activities (Edmondson and

McManus, 2007). We view SusTech as a revelatory case (Yin, 2003): by observing and tracking

the firm’s development in real-time over a period of three years, we were able to appreciate both

the anticipated and unanticipated longitudinal effects of decisions and activities. Gibbert,

Ruigrok, and Wicki (2008) constructed a guide to evaluate the rigor of case study research. We

follow Arino and Ring (2010) in presenting an overview of how our study accounts for all of

these procedures in Appendix 1.

We chose this design to build deep understanding of an unfolding process. We were able

to do this because SusTech provided significant, and usually difficult to obtain, access to data

over time. We collected qualitative data from a number of sources, including observations,

interviews, and archival document review, allowing us to leverage the strength of each and

triangulate insights from a single site over time. As Siggelkow (2007) argued, such “rich

longitudinal research is needed to provide the details of how…[dynamic] processes actually play

out” over time (p. 22). Our unique access allowed us to explore the unanticipated, often counter-

intuitive effects of firm decisions and actions in a nascent industry.

Zuzul and Edmondson

9

Our design is consistent with current ideas about building theory through single-case

research (Eisenhardt, 1989; Eisenhardt and Graebner, 2007). Our focus is on a previously-

unexplored process (the effects of legitimation activities) that calls for deep engagement with the

phenomenon in question. We argue that our in-depth study can provide what Siggelkow

describes as a “very powerful example” from a single organization (p. 20). We chose this design

rather than a multiple-site comparison to develop understanding of this process before attempting

to explain possible variation across sites. As a result, we do not attempt to generalize our

findings to all firms in nascent industries. Instead, our study reveals the potentially negative

effects of legitimacy-building that managers, entrepreneurs, and scholars should consider when

building or studying a firm in a nascent industry. Future research can attempt to extend, modify,

or test our findings on a larger sample of firms.

Research setting: The smart cities industry

We studied a firm in the nascent smart cities industry. When we began our research in late 2009,

several new and existing technology companies had announced efforts to make new and existing

cities more “intelligent.” These companies planned to develop and deploy internet and

information technology (IT) to improve the operational efficiency, environmental sustainability,

and quality of life in the world’s cities (Lindsay, 2010; The Economist, 2010).

To learn more about smart city developments, we gathered primary and secondary data

on these initiatives. We conducted over a dozen interviews with relevant players and observers,

including architects and engineers, leaders of several technology companies, and governmental

officials working on smart city projects around the world. We gathered reports on smart cities

from companies and think-tanks including McKinsey Consulting, IBM, Cisco, HP, Oracle, and

Forrester. We tracked publications about smart cities, which appeared in sources including The

Zuzul and Edmondson

10

Economist, the Financial Times, and Fast Company. This background research revealed that,

from 2009 until 2012, stakeholders were beginning to conceptualize the smart cities– or,

alternatively, ‘sustainable cities’ or ‘eco-cities’– as a nascent industry.

Our research suggested that the industry began to develop in response to two broad social

trends that pointed to cities as a domain for government and business innovation. First, the

world is rapidly urbanizing. The United Nations’ 2007 urbanization report, for example,

projected that 70% of the world’s population would reside in cities by 2050. At the same time, a

burgeoning public dialogue on climate change and environmental risks gave rise to interest in

sustainable development. These simultaneous trends led some global technology companies to

recognize the opportunity to develop technological solutions that could make new and existing

cities more sustainable. Some smaller companies developed specific technologies, for example,

for managing traffic flows on city streets or for reducing energy consumption through sensors

and automation systems. Larger companies tended to develop integrated solutions that could be

deployed in entire cities. In the latter category, the most well-known included IBM’s Smarter

Cities and Cisco’s Smart + Connected Communities. Several announced or began the

development of new neighborhoods or cities, connected by smart networks that would deliver

and optimize technologically-driven applications. According to a Cisco (2010) report, the aim

was to “transform physical communities;” a smart cities approach encapsulated “a new way of

thinking about how communities are designed, built, managed, and renewed to achieve social,

economic, and environmental sustainability.”

The company

We conducted an inductive, 36-month study of SusTech, a growing (disguised) firm based in

Europe in the smart cities industry. We were introduced to SusTech in late 2009 by a colleague

Zuzul and Edmondson

11

who met John Natley (a pseudonym), the CEO and co-founder. Given our interest in nascent

industries in general and smart cities in particular, SusTech provided a perfect opportunity for

grounded research. We were introduced to SusTech’s employees and partners as researches

tracking the development of the firm.

We began our research at SusTech in December 2009. SusTech began operations in early

2008. The firm was founded by two former IT executives who identified an opportunity to apply

technology to transform the built environment. Several years earlier, the pair had worked

together on a large real-estate development project. Coming from the rapidly shifting technology

industry, they were struck by the observation that the construction industry hadn’t experienced

major innovation in decades. The two began to form an idea for a firm dedicated to

“transforming,” Natley recalled, “the way the world constructs.” They would apply information

technology to the challenge of building intelligent urban structures efficiently.

The founders hoped to accomplish this through the development of a state-of-the-art

urban demonstration project, dubbed SusTech City. SusTech City would serve as a showcase or

prototype demonstrating sustainable, intelligent technological solutions. They believed solutions

developed and tested there – including an “operating system” conceptualized as a smart grid

using sensors to gather and use data about the environment to manage buildings efficiently –

could be deployed in existing and new cities in the future.

When we began our research in 2009, SusTech employed a small team focused on

developing SusTech City. Natley had worked with a local governmental leader who guaranteed

access to a tract of unused land to house the project. By 2009, SusTech had grown to twelve full-

time employees who worked in a small hotel space near a large city and were paid only in stock.

By the end of our research in October 2012, SusTech had grown to 50 employees before

Zuzul and Edmondson

12

shrinking again to 25; the company had faced a constant stream of opportunities and challenges,

from unanticipated projects in new bases to failed attempts at securing funding, excited bouts of

hiring to disappointing sequences of layoffs. Although the company had attracted a large number

of well-known corporate partners to participate in the development of SusTech City (including

real-estate developers and established technology companies), executives were often distraught

by what they perceived as the slow pace of progress on the project.

By the end of 2011, the team had developed a conceptual master-plan, but had not yet

begun building the City. Meanwhile, a growing technology team had developed a ‘lite’ version

of its operating system that could be demonstrated in smaller-scale implementations. The

company began sending out this demonstration technology to its corporate partners in early

2012. Nonetheless, executives and employees still hoped to continue the eventual development

of the stalled SusTech City.

Data sources

We gathered data through several complimentary sources to triangulate our findings.

Beginning in 2009, the authors and two research assistants visited SusTech 11 times, usually but

not always in pairs, with visits ranging from five days to fifteen days. The authors spent about 50

full days in the field, taking extensive field notes during each visit. These included detailed notes

on what was said, descriptions of how members interacted, and ongoing personal reflections on

unfolding events. We transcribed each set of notes within two days of their initial notation. As

observers, we could track company developments in real-time. Our frequent interactions with

members allowed us to build the trust necessary to investigate a sensitive, social phenomenon. At

the same time, we did not participate in operations or voice our opinions during meetings or

conversations to avoid influencing the process we were studying.

Zuzul and Edmondson

13

Observation at SusTech took several forms. While on site, we shadowed selected

employees; we attended relevant meetings, including meetings between company members and

representatives from potential partner companies, investors and the government, meetings of the

executive team, and various other planning and strategy meetings. While away from the site, the

primary author called in on a number of firm-wide operations meetings and board meetings.

Overall, we observed 39 meetings, each ranging from 45 minutes to 3.5 hours. We took detailed

field notes during the meetings.

SusTech’s original site provided extensive opportunities for observation of company

operations, culture, and interactions. Employees worked in a spacious restaurant in a small hotel.

Because the restaurant only served breakfast, the room was available for work and coffee

throughout the rest of the day. With laptop computers set up around the periphery of the

communal work space, informal encounters occurred in an unscheduled manner throughout the

day, and SusTech employees constantly engaged with one another and with us. Being in the field

entailed spending eighteen-hour days with members, engaging in activities from morning runs, to

trips outside of the hotel for lunch, and dinner and drinks late into the evening. In these settings,

we conducted informal interviews, taking limited notes and then writing down notable

conversations as soon as possible. We also attended a number of events where leaders presented

the firm and its business model. Our data include notes from 10 of these presentations.

In addition to our frequent informal interviews, we formally interviewed SusTech’s

founders, leaders, employees, and executives at partner companies at regular intervals over 36

months. These semi-structured formal interviews ranged from 60 minutes to three hours, and

were tape-recorded and transcribed. The interviews focused on the company’s development; we

questioned participants on their work, the challenges they faced, and the opportunities they

Zuzul and Edmondson

14

foresaw. In total, we conducted 72 formal interviews with 38 individuals. By interviewing the

same individuals over a prolonged period, we began to develop a thick description of the firm’s

decisions and activities from the point of view of its members, allowing us to triangulate our

observational data. We also interviewed three former employees after they had left the company.

We gathered many internal documents from SusTech, including successive business

plans and presentations made to investors and the government. These data allowed us to track

changes in SusTech’s business model and strategy. We were copied on many emails exchanged

between the executive team, providing us with another way to track the firm’s development. Our

data includes 105 emails between SusTech’s employees and executive team. Table 1

summarizes our data sources.

---- Insert Table 1 About Here ----

Data analysis

Our research process was inductive. We entered the field hoping to discover the strategic

processes that unfold in a nascent industry. Our iteration between data collection and data

analysis (Glaser and Strauss, 1967) resulted in surprises that shaped our unfolding contribution.

First, as noted, we began our research without a pre-determined question. Following an initial

round of interviews and observations, we worked on a case study on SusTech to describe the

firm’s founding, time-line, evolving strategy, culture, and future perspectives. This descriptive

case provided a foundation that allowed us to begin analyzing SusTech’s evolution.

As our research at SusTech unfolded, we engaged in cycles of open coding, where we

analyzed the data for notable themes and patterns, both by thoroughly reading our notes and

interview transcripts, and through the use of QSR NVivo, the qualitative data analysis software.

We wrote a number of memos and papers tracking themes in the company’s growth, and

Zuzul and Edmondson

15

engaged in countless discussions about our codes and the company’s progress. We began to

recognize that SusTech executives dedicated much of their time to spreading their vision for the

firm and the industry through press releases, speeches, and publications. We also identified the

unintended, negative consequences of these efforts. At this point, we began to iterate between the

data and the literature on nascent industries by comparing our unfolding findings to suggestions

from prior literature (Eisenhardt, 1989). We recognized that these activities were very similar to

legitimation efforts described in prior literature. However, the literature had not explored the

potentially negative impact of these activities. This comparison of the literature with our data led

to the refinement of our research question, and we focused data collection and coding on

exploring the internal impact of legitimation activities, until we felt we had fully captured the

complex relationship between legitimation activities and cognitive effects.

LEGITIMATING A FIRM AND ITS NASCENT INDUSTRY

SusTech’s value proposition consisted of developing and delivering technologies that could be

integrated into urban spaces to make them more connected and sustainable, beginning with the

prototype implementation of SusTech City. Executives saw themselves as helping create the

nascent smart cities industry. “If we succeed,” an executive predicted in an interview, “we will

become part of a new cluster of economic development – smart cities.” An executive who had

previously worked on the development of a small, energy-efficient urban automobile explained

how the two efforts were alike:

At the time, the niche didn’t exist. There was no market…. And this is what we’re trying

to do with SusTech…. We are sending everybody on a journey on what a smart city

could be. And nobody knows what a smart city is.

SusTech executives – particularly its co-founder and CEO, John Natley – worked to

develop a legitimation capability: routines, practices, and processes that leveraged resources to

Zuzul and Edmondson

16

legitimate the firm’s value proposition and nascent industry. Executives believed this capability

was necessary to thrive in the nascent industry. One executive explained:

You can compare this to the early days of computers. In the early days, the

competition…was around getting everyone to accept the idea of the personal computer as

a platform. And that’s the stage where we are, with smart cities…. This is a new industry.

That’s something that takes a lot of energy, to communicate that – to any type of

audience, whether its investors, corporations you want to partner with, governments,

banks. It takes some time to get it across.

The legitimation capability comprised three sets of practices and processes. First,

executives drew on symbolic resources (a problematized version of the present, an analogy-

driven vision of the future, and the firm’s proposed solutions) to craft and refine a story about the

firm and its industry. They leveraged this story through two kinds of activities. They developed

practices and processes aimed at disseminating the story through speeches and presentations,

press releases and interviews, and other public actions to generate support from large technology

companies, construction companies, government groups, and the public. They also drew on the

story in building a partnering process aimed at developing affiliations with prominent

individuals, corporate partners, and institutions. Together, these activities helped legitimate the

firm and its industry, and helped attract employees and partners.

Crafting a symbolic story

SusTech executives invested in developing an internally consistent story about the firm and the

smart cities industry. Institutional scholars have argued that stories that draw on symbols can

help leaders and entrepreneurs explain, rationalize, and legitimate their firms (Louinsbury and

Glynn, 2001; Martens et al., 2007) and their nascent industries (Navis and Glynn, 2010). Our

data indicate Natley and SusTech executives deliberately crafted SusTech’s story in ways that

sought to legitimate both the firm and the smart cities industry. While helping prepare a

presentation deck for investors in mid-2010, for instance, Natley told two employees the “story”

Zuzul and Edmondson

17

he wanted the deck to communicate: “This is a big idea. It’s like sitting here thinking, I want a

PC on every desk. That’s my city….We will make buildings more efficient in the same way that

computers [made work more efficient].” Executives thought about ways to refine and re-work

the story; for instance, in a 2010 email to the executive team, SusTech’s co-founder noted:

Our story rambles and embraces far too much at this stage… Help me in getting our story

succinct. I think each of us should try and get the story down to one page as we

individually understand it… and then each of us will have a great elevator pitch.

In crafting SusTech’s story, Natley and fellow executives leveraged symbols by

problematizing the present, presenting an analogy-based vision for the future, and emphasizing

the firm’s solutions. Institutional entrepreneurs and activists sometimes use accounts that

emphasize inconsistencies between social ideals and the status quo to motivate and explain their

ventures (Snow, Rochford, Worden, and Benford, 1986; Rao, Monin, and Durand, 2003; David

et al., 2012). When relaying SusTech’s story, Natley and other executives would begin by

problematizing the present: noting that the world is increasingly urbanizing, and the construction

industry is not producing solutions that can meet the demands of an urban population at risk of

depleting the world’s natural resources. Speaking in front of a crowd of hundreds at a major

school of architecture in the United States, Natley stressed that a “huge cognitive shift” was

needed – a new way of thinking about cities.

SusTech’s story presented the smart cities industry as the answer to this problematic

present. Institutional scholars have demonstrated that leaders can mobilize external support and

drive legitimacy by providing strong theoretical rationales for the adoption of their practices

(Rao et al., 2003). SusTech’s story rationalized the smart cities industry by stressing that it

would transform the problematic present in a profound way through the application of IT. “We

founded SusTech because we started thinking about this problem and how to change it,” Natley

Zuzul and Edmondson

18

told an investor in early 2010. Institutional scholars have stressed the power of analogies and

metaphors in helping leaders and entrepreneurs build support for their companies and visions

(e.g. Hill and Levenhagen, 1995; Cornelissen and Clarke, 2010; Gavetti, 2012). SusTech’s story

drew on analogies between smart cities and other technologically-driven new industries. In a

2012 press speech, Natley displayed his iPhone and explained that a city could be thought of as a

platform where different companies build applications that make it intelligent and sustainable.

The potential for smart cities was as broad as the possibilities for the iPhone had proven to be:

“Apple wasn’t thinking about healthcare when they designed the iPhone,” he stated, “but now

there are 1 million health care applications for it. We can apply this approach to urban

environments” to solve the problems of urbanization.

SusTech’s story also positioned SusTech as a leader in the smart city space. Telling the

story, executives often emphasized the vital role that solutions the company had not yet finished

developing would play in shaping the smart city market. During the aforementioned speech,

Natley emphasized that the firm’s (still undeveloped) operating system will “support shifting

urban lifestyles,” redefining “the meaning of cities.” Executives also emphasized the future

impact of SusTech City, envisioned as one of the first smart cities in the world. “Nobody has

built a smart city yet,” an executive told us in an interview. “We will be the first ones.” An

executive described this as a deliberate strategy: “We need to freeze the market – and that means

telling them we have the solution even if it will take us years.”

Disseminating the symbolic story

SusTech’s story became a symbolic resource executives could draw on in order to legitimate the

smart cities industry and SusTech’s value proposition. Executives invested time and effort in

developing and refining practices and processes aimed at disseminating the story. Institutional

Zuzul and Edmondson

19

scholars have demonstrated that favorable media coverage is critical in developing legitimacy for

new organizational forms and practices (Rao et al., 2003). Natley and other executives spent

much of their time on external communications and with the press, hoping to generate favorable

media coverage. Executives spent time with investors and potential partners; Natley gave

speeches and presentations at conferences and numerous events, and granted frequent interviews

to the press.

During these events, executives relayed SusTech’s symbolic story. We witnessed Natley

problematize the present, present his vision for the future, and emphasize SusTech’s future

solutions during (among other instances) a speech to dozens of business school students in 2010,

a presentation at a business-to-business event hosted by a global technology company in 2011,

and a press event announcing several critical partnerships in 2012. During a press event in 2010,

for instance, Natley spoke about problems in the way cities are built and managed, and stressed

that the company’s vision for SusTech City could transform this present: “What we are doing

with SusTech City is about more than just the city. It’s about innovation and technology; it’s a

vision that can create innovative cities to solve problems of present.” In an interview in mid-

2012, Natley described some of these efforts:

We’ve had quite a lot of press, which is a good thing…. We’re holding an event [on

smart cities], and I think we’ll be oversubscribed on that…. When people are willing to

spend money to come to your event, it’s quite a good sign. It’s interesting – in the last

few weeks, I’ve had 8 or 10 speaking engagements where they paid us to present, paid for

our travel. That’s generally a good sign that you’re at least somewhat credible.

Affiliating with prominent partners

SusTech executives also spent significant time and effort developing a partnering process in

order to affiliate with well-known individuals and established companies. Scholars have argued

that affiliating with prominent third parties can imbue firms and even industries with legitimacy

Zuzul and Edmondson

20

(e.g. Stuart, Hoang, and Hybels, 1999; Khaire, 2009; Navis and Glynn, 2010). Natley and

SusTech executives frequently talked to executives at major firms in an attempt to attract

prominent advisors and corporate partners. Nearly all of SusTech’s operations meetings began

with an update on partnerships, and many employees worked on developing what they termed a

“partnering process;” a process for contacting, attracting, and managing partner relationships

effectively. Executives acknowledged that the purpose of many of these affiliations was

legitimating the firm and industry. The company website prominently displayed the names of

corporate partners and individual advisors. Our partners can bring us “validation and credibility,”

one executive stated during an internal operations meeting. Similarly, in a 2010 board meeting,

an executive spoke of the importance of SusTech’s recent partnership with TechCo, a globally-

known technology company: “We are in a great position, especially with the TechCo deal.

Everyone will sit up if TechCo is in.” Corporate partners even acknowledged the legitimating

impact of these efforts. For instance, one executive at a renowned real-estate development

company told us, “We know SusTech has leveraged the association with us very highly…. They

were able to go out to the market and say they were in cahoots with us and they were looking to

make sustainable cities work with us.”

In affiliating with potential individual and corporate partners, executives drew on

SusTech’s symbolic story. As observers, we saw Natley relay this story dozens of times in

meetings with potential partners. During a 2010 meeting with a major utility provider SusTech

aimed to partner with, for instance, Natley spoke about the problems of urbanization and

construction, and stressed that “SusTech has developed a process for physical spaces that

implements technology early in design,” and “built IP” that could revolutionize the way cities are

made. “The project is exciting and meaningful,” he added. A business leader who agreed to

Zuzul and Edmondson

21

become an advisor, and who persuaded his company to become a corporate partner explained

how Natley and executives approached him with this story: “They gave me the, “If we don't do

this, we’re all f-ed,” speech…. You’ve heard that. Well, [Natley] means it. And he’s right—we

are all f-ed if nobody is doing anything about this.”

The impact of SusTech’s legitimation capability

We conceptualize these sets of practices and processes as SusTech’s legitimation capability.

Natley and SusTech’s executives successfully drew on symbols to craft a story that became a

resource they could leverage and manipulate. Their dissemination efforts resulted in a number of

articles in highly-respected publications, and led to outcomes as Natley and SusTech being

featured in a documentary film on smart cities. Their affiliation efforts resulted in relationships

with a large number of well-known individuals and companies. Table 2 summarizes SusTech’s

legitimation capability.

---- Insert Table 2 About Here ----

Taken together, this capability helped legitimate the firm’s value proposition and the

industry. Legitimation was important for a number of reasons. First, the firm managed to attract a

number of employees, highly motivated by SusTech’s story and its media prominence and high-

status partnerships. A former employee told us that he joined the company because he was

excited by the idea of the smart city industry, and saw SusTech as a vehicle for the idea:

The idea is absolutely compelling…. And that’s why everybody goes there and gets

involved: the idea is compelling; it’s solving a big problem. It could be a good way of

going forward for…cities in the future. That’s why I joined; that’s why everyone joined.

The Chairman of SusTech’s board told us that employees were motivated because “there’s a

sense of excitement that we’re at the beginning of a transformation in the way we see and build

Zuzul and Edmondson

22

urban communities.” An employee described how SusTech’s legitimation efforts, including its

story, participation in events, and high-status affiliations attracted her to the company:

I met with John the day we won the business plan competition…. He was the head of the

finals of one of the most important business plan competitions in Europe…. And he was

interested in hiring me…. When I looked at the website, I thought this company was

incredible…. The project itself made complete sense. It was going in the right direction,

trying to improve cities, trying to improve the social and environmental side of cities. It

was something that was doing good for the world…. [Meeting SusTech’s prominent

advisors] made me believe in the project even more…. [I thought] if all those

experienced people are working there, it must be something incredible.

Second, the firm managed to attract an even larger number of corporate partners. Like

SusTech’s employees, these partners were motivated by the perceived inevitability of SusTech’s

vision, as relayed through its story. Partners were also attracted by the company’s existing

affiliations, which signaled competence and quality. Natley and fellow executives emphasized

their affiliations in meetings, presentations, and interviews. For instance, Natley began a meeting

with a major national utilities company by stating: “I’m telling you this confidentially, but

TechCo has agreed to become a major partner significantly invested” in SusTech’s success. The

head of an established real-estate development firm emphasized how SusTech’s story and

affiliations convinced him to work with the company:

One of my great passions is flying. It’s a bit like the Wright Brothers here. We wanted

to fly, but we didn't have the mechanism. We worked and worked away, and then…[with

the Wright brothers] the world changed. My world changed when I met John, because I

suddenly realized that there was somebody who was like-minded and who had the

technology and the contacts, through TechCo, ExecCo, and all those other partners to

actually do it.

Finally, this capability reduced ambiguity about the nascent smart city industry, as

stakeholders began to believe the firm’s story of the industry’s inevitable emergence. An

executive at a global engineering firm reasoned:

Zuzul and Edmondson

23

It will be a challenge, but someone, somewhere is going to build a smart city. It will

happen. Being the first team to do it will be pretty huge, and there’s no reason that John

and SusTech couldn't be at the forefront.

During a staff meeting in late 2012, the Chairman of SusTech’s Board of Directors

highlighted the importance of its legitimation capability. “We helped to create the smart cities

industry,” he told the team; “we have carved out a niche that is bigger than us.” In an interview,

he described the impact of this capability:

People are now beginning to realize they can’t just talk about smart cities and [then] build

un-smart cities…. It’s becoming an accepted norm that the next generation of

construction and urban development needs to incorporate technology.

During a strategy meeting in late 2012, Natley emphasized how the ability to leverage the

legitimation capability had turned SusTech into a cognitive referent (Santos and Eisenhardt,

2009) in the market:

We’ve become synonymous with smart cities. I get calls from journalists and analysts all

the time. Whenever there is a key article in the smart cities space, we always get called.

Without a question, we are one of the first companies in the world that people call when

they want to learn about smart cities.

THE COGNITIVE EFFECTS OF LEGITIMATION

Our analysis revealed that SusTech’s legitimation capability also had three unanticipated

cognitive effects. First, SusTech’s internally consistent, frequently disseminated story led to

employee over-confidence; employees began to dismiss negative feedback as skepticism about

or ignorance of the nascent industry. Second, executives and employees increasingly focused

their attention on externally-oriented activities (disseminating the story and affiliations), to the

detriment of internal development. Taken together, legitimation led to premature identity

commitments, as employees formed attachments to courses of action with unproven value.

Cognitive crowding

Zuzul and Edmondson

24

Prior research has indicated that an individual’s perceived ability to influence an environment

can engender an illusion of control and over-confidence, and that both can lead to over-

estimations of success and the rejection of negative information (Langer, 1975; Schwenk,1984;

Bourgeois, 1985; Hayward and Hambrick, 1997; Durand, 2003). The certain tone and frequent

dissemination of its story made SusTech’s development of the smart cities industry seem

inevitable, something institutional scholars have described as critical in building legitimacy (e.g.

Aldrich and Fiol, 1994). This led executives and employees to become convinced of SusTech’s

ability to influence the industry, despite problems the company occasionally faced. The

perceived inevitability of the firm’s success in driving smart cities forward was also evident in

this interview exchange with an executive:

Executive: This doesn't happen overnight, but ultimately we’re going to make such huge

savings in reducing waste and being able to trim down the amount of specialist areas that

we need.… Development is going to be cheaper and so much more efficient….

Maintenance is going to be cheaper and more efficient. It’s all obvious stuff, really.

We’ll get there. We’ll get there in the end.

Second Author: So you’re optimistic?

Executive: Oh, yeah….I think you’ll see, in 12 months’ time, we’re going to change the

face of the way people think about this stuff.

The certainty that they were helping shape the development of the smart cities industry

and the future gave rise to feelings of control and confidence (Langer, 1975). In 2011, the firm

faced financing issues; it had failed to raise funds, and many employees had not been paid.

Asked about this challenge, and how the firm intended to secure financing, an executive stated:

Well, I guess if [we] really knew the answer to that question right now, we’d all be

feeling a little bit more comfortable. But the one thing we’re convinced of is that it will

flow and when it does it will be great.

As a result, employees and executives began to dismiss negative feedback as a lack of

understanding of the company and the smart cities industry. During an internal meeting, for

instance, the Chairman of SusTech’s Board told executives that financing and partnerships were

Zuzul and Edmondson

25

often difficult to come by not because of SusTech’s shortcomings, but because “sometimes the

scale of project scares people.” Rather than working to incorporate and address feedback by

adapting their models, executives and employees typically responded by reasoning that they

needed to work harder to prove their concept – that is, to focus even more fervently on

legitimation.

For instance, employees received periodic feedback that funding SusTech City would be

difficult, and typically dismissed it. A SusTech manager explained her experience presenting the

project to a bank:

They told me, this is absolutely impossible. There is no project in the world that can grow

so fast, that can reach that size….Of course, at the time I was so convinced that my

reaction was that I will work twice as much to prove them wrong…. They must be

wrong. We are so new that they just don't understand.

Similarly, a potential hire, an expert from the real-estate industry, told SusTech’s executives over

breakfast in 2010 that SusTech City was not viable from a real-estate perspective. Reflecting on

this statement, an executive told the others the problem was “a cultural issue” because the

potential hire came from the real-estate industry couldn’t appreciate the company’s proposition.

“How can we help her understand?” he mused.

Attentional constraints

Scholars have argued that executives and managers can only dedicate attention to part of their

environment at any given time, and that attention can become path-dependent (Ocasio, 1997). By

focusing their time and attention on disseminating SusTech’s story and affiliating with prominent

individuals and corporate partners, SusTech executives often left their internal development

unattended. In interviews, a number of employees echoed one who said Natley in particular and

the executive team more generally focused their attention on “explaining our vision to the

outside world.” In 2012, Natley explained his priorities in a similar way:

Zuzul and Edmondson

26

The …years up to last year – 2011 – were about working with the analyst community

and press to start to communicate our vision much more aggressively, get feedback by

getting out there and talking to the market, and feeding that into our messaging.

While this focus was critical in developing a legitimation capability, it led executives to

neglect the internal development of the firm. Executives’ narrow focus led them to view the

firm’s resources and employees through a legitimation lens. The company hired a number of

well-known executives and advisors, and emphasized these affiliations in its legitimation efforts.

During a meeting with a prospective partner in 2010, for instance, Natley emphasized that the

company had “just hired full-time [an extremely well-known entrepreneur’s] chief architect and

chief engineer.” While the hiring of senior executives brought media attention to SusTech, these

individuals rarely worked on developing its technology. Reflecting on the company’s progress in

2012, its COO explained:

Even the tech people who were hired were famous. We hired people that had a good

resume to show outsiders, ‘Look at who we have involved behind us.’ But they were

people in their 40s and 50s who [did not] sit and code. It was great to show that we’ve got

a world class organization…[but it wasn’t able] to deliver technology [quickly].

A former young employee explained how this hiring impacted the company internally:

The composition of the team was unbalanced. All we had were senior people…. We were

the only juniors. For a young company, you need a lot of doers to have something

tangible….All the managers were just discussing the technology when they should have

been getting their hands dirty and just building it.

Moreover, executives’ narrow focus of attention led them to dedicate employees largely

to the development of externally-oriented legitimation efforts. During a 2010 prioritization

meeting, SusTech executives decided to allot nearly half of their employees to building

partnering capabilities and communication. This focus left SusTech employees with little time to

develop the firm’s technology. “We have too many partners to take care of,” a senior executive

stated. SusTech’s Chief Technology Officer described a young engineer who had initially come

Zuzul and Edmondson

27

in to work on technology development: “I would have been happy to have him as part of the

corporate technology team, but [another executive] managed to persuade him that his future was

in partner management.”

This narrow focus of attention and resulting pattern of hiring and employee deployment

helped build legitimacy for the firm and smart cities industry. Media reports on SusTech’s efforts

stressed the company’s senior hires and renowned partners, emphasizing that the involvement of

this broad spectrum of experts indicated that, in the words of one report, “cities…will make the

world smart.” But executives’ narrow focus of attention meant the firm was constrained in its

ability to develop internal technological capabilities.

Identity commitments

Institutional scholars have argued that legitimation requires commitment to a consistent story

(Aldrich and Fiol, 1994). However, psychological research on self-perception has suggested that

public commitments can profoundly shape individuals’ sense of selves and their attachments

(Bem, 1967), and strategy scholars have suggested that a sense of identity can constrain future

action (Tripsas and Gavetti, 2000; Tripsas, 2009). SusTech’s legitimation activities led

executives and employees to form what we term identity commitments. Because they committed

to particular courses of action privately and publically, they began to internalize these

commitments as part of the firm’s identity.

Specifically, SusTech’s story emphasized the importance of its reference project,

SusTech City. SusTech City is our “critical project,” Natley told us as early as 2009. “It’s our

attempt to demonstrate an example of what is possible in controlled conditions….and completely

optimal circumstances.” SusTech executives publically committed to SusTech City through their

Zuzul and Edmondson

28

press activities and partnership pitches; the project featured prominently in the company’s story,

and was widely reported on in media coverage of the smart cities industry.

As a result, employees and executives began to view the company’s identity – and

indeed, their own identity – as inextricably linked to the development of the project. “Our goal,”

an employee told us in 2011, “is to completely change the way cities are built and made.”

SusTech City, he continued, can “change the way we think about cities.” An executive explained

what excited her about SusTech City: “Usually people who create legacies don’t get to see them.

We could see this happen in a few years.” In response to a question on what excited him most

about working for the company, an employee stated: “SusTech City. The richness of it. There are

so many facets to it, everything from the technology to the socio-economic aspects, economic

development, anthropology…a fascinating thing.” Another explained the importance he

attributed to the City project in very personal terms: “I have three boys. I want them to be proud.

I want them to feel that I’ve left something for this new generation.”

These strong identity commitments led executives and employees to reject courses of

action that threatened the development of SusTech City. As SusTech employees worked on

developing the company’s technologies, they began to pursue other opportunities for their

commercialization. However, most rejected the idea of abandoning SusTech City at the expense

of other, potentially more profitable, opportunities. Speaking to employees about a new

opportunity the company could pursue during an operations meeting in 2010, Natley emphasized

that “we have to be careful not to get de-railed while still working on delivering SusTech City.”

Even as the project’s success became increasingly questionable, employees continued to defend

it. In an interview in 2012, an executive stated:

We are seeing the time-line for SusTech City slip…. It might get started a year or two

from today. We would like to break ground this year, but we’re probably looking at next

Zuzul and Edmondson

29

year. It’s not dependent on us. It’s more dependent on…economic problems in region.

We need to be realistic about the opportunity. Having said that, we are not going to stop

fighting for it…We’re inundated with questions – John and I – internally [about why we

are pursuing the project]….But it makes all the sense in the world.

Natley and other executives acknowledged that this was due to the identity commitments

executives and employees had formed around the project. “This project is larger than us at this

point,” Natley stated in response to a question on whether the company might dedicate its

resources to the development of other opportunities rather than SusTech City. “The problem

would be abandoning some people and the emotional commitments we have made – so we

wouldn’t be able to do it.” A late hire, an engineer focused on developing SusTech’s technology,

explained that although he felt the firm had possibilities to apply its technologies beyond

SusTech City, many others did not feel that way. “There’s definitely fall-back points for

technology. For people’s aspirations, maybe not.”

Impact of cognitive effects on internal capability development

Together, these three effects constricted learning and constrained the SusTech’s ability to

respond to shifts in the industry. Scholars have argued that, given the ambiguity of a nascent

industry, firms and entrepreneurs need to build capabilities that allow them to respond quickly to

environmental changes (Dobrev and Gostopolis, 2010). During the course of our research, we

noted that the smart cities industry began to shift away from cities-from-scratch to technological

solutions for retrofits. An Economist article in late 2012 noted that:

Originally, “smart cities” was mainly a label for ambitious projects to build a shiny new

metropolis on green fields—or in the desert…. Whereas these top-down projects are

struggling, some existing cities are getting smarter from the bottom up.

Companies that were thriving in this environment, a number of articles argued, were those that

provided technological solutions that could benefit existing cities rather than top-down projects

like SusTech City.

Zuzul and Edmondson

30

Although SusTech began to shift its emphasis towards technology development at the

very end of our research, observers and executives noted that its response to changes was slow.

Beginning in early 2010, executives and employees had begun receiving feedback that the

development of SusTech City was unlikely, including from banks and real-estate experts, as

described above. But executives began to acknowledge this difficulty with a significant lag, only

in mid-2011. Even then, they hesitated to abandon plans for SusTech City in favor of

technological development, noting only that the time-line for the City might not be as ambitious

as they had previously imagined. In mid-2011, an executive told us:

Trying to be realistic, I would say [sighs] – the market has moved. The ability to get a

hold of the money [for a large-scale project] is really the limiting factor at the moment…

If what I’m hearing is correct, it’s likely that by – I’m going to say Christmas – we could

start developing the project.

By the end of our research in late 2012, Natley emphasized in an operations meeting that the firm

was pursuing other opportunities to embed its technology – but that the development of SusTech

City remained important.

Our research suggests SusTech’s focus on developing a legitimation capability resulted in

cognitive effects that prevented the company from developing the ability to respond quickly to

shifts in the environment. Cognitive crowding led executives and employees to ignore or reject

information and negative feedback from outside sources. Excessive attention on legitimation

meant employees were not focused on building technologies or internal capabilities. Even when

it became clear that the industry was changing course, the firm’s identity commitments resulted

in an inability to shift away from SusTech City. In 2012, SusTech’s COO reflected that

SusTech’s legitimation efforts resulted in what he termed as his biggest disappointments in the

firm’s development. “The company is a great name and marketing-wise has done tremendously,

but it hasn’t been balanced internally.” He described the company’s focus in colorful language:

Zuzul and Edmondson

31

SusTech went ass-backwards. I guess I can say that – it’s a technical term….Instead of

hiring techs, building technology, growing from that, it went straight to marketing, and

sold a vision…. It helped the company be famous in many ways, but there’s a balance,

and we didn’t react fast enough to the balance.

Another executive echoed this in stating: “One of the things the company has generally

struggled with for a while has been talking about itself and how fantastic it is, rather than

focusing on what we are doing to do.” Figure 1 illustrates these cognitive effects, their impact,

and their relationship to SusTech’s legitimation capability.

---- Insert Figure 1 About Here ----

Shortly before leaving the firm, SusTech’s COO reflected that perhaps the key to success

in a nascent industry is attention to both legitimation and internal development:

I met a company the other day that does exactly what we do from a technological

standpoint. They’ve been around for 20 years. They have zero partnerships with any

vendor…they’re barely profitable, they’ve almost gone bankrupt a few times…because

they never spent enough time convincing people that this is the right way to go forward.

They never tried to do the marketing aspect. [Pause]. Maybe there’s a middle ground.

DISCUSSION

Leaders and entrepreneurs in nascent industries play a particularly vital role in shaping the

future. The activities of such pioneers can exert a powerful influence for years into the future.

Their successes become models to emulate; their failures tripwires to avoid. By exploring the

development of a firm in a nascent industry, our study poignantly illustrates the trade-offs and

challenges inherent in this ambiguous context.

Our study makes several contributions to the literature. Of course, a single case study

presents limitations. The goal of our study, given the paucity of literature on the topic, was to

generate rather than test theory. Our ideas are necessarily tentative, and further research on a

larger sample of firms in nascent industries is needed to test, refine, or refute our contribution.

Zuzul and Edmondson

32

First, we propose the idea of a legitimation capability: routines, processes, and practices

that allow leaders to leverage resources to legitimate their firms and industries. Although prior

studies have illustrated actions that firms and leaders can undertake in service of legitimation –

including the crafting of stories that balance uniqueness and embeddedness in existing models

(Lounsbury and Glynn, 2001; Hargadon and Douglas, 2001; Martens et al., 2007), the use of

analogies and metaphors (Hill and Levenhagen, 1995; Cornelissen and Clarke, 2010), building

trust through displaying socially valued characteristics (Huy and Zott, 2010), and affiliating with

prominent third parties (Stuart et al., 1999; Khaire, 2009) – these activities have not been

conceptualized as a cohesive legitimation capability. We describe how SusTech’s legitimation

capability consisted of three elements: the crafting of a symbolic story, the dissemination of that

story, and affiliations with prominent individuals and corporate partners.

We also illustrate how a legitimation capability can interfere with a firm’s ability to learn

and adapt to an ambiguous environment. Classic research on cognition and strategy has

demonstrated that capabilities developed to suit a particular environment can have a negative

impact on a firm’s development through unanticipated cognitive channels (e.g. Leonard-Barton,

1992; Tripsas and Gavetti, 2000; Tripsas, 2009). Our study illustrates how a firm’s legitimation

capability, critical in building understanding of and support for the firm and its nascent industry,

can also constrain its ability to learn, adapt, and shift course. While existing research has shown

that capabilities can become maladaptive over time (e.g. Leonard-Baron, 1992), our findings

support the idea that certain capabilities have simultaneous positive and negative effects.

This trade-off has not been acknowledged by prior literature. On the one hand,

institutional scholars have argued that leaders in nascent industries might need to employ

strategies to legitimate their industry and their firms (Lounsbury and Glynn, 2001; Navis and

Zuzul and Edmondson

33

Glynn, 2010; Zimmerman and Zeits, 2010; David et al., 2012). But by focusing on legitimation

as the sole outcome, these studies have not appreciated the consequences of these strategies on

firm development. On the other hand, both popular and scholarly accounts have emphasized that

developing and sustaining viable business can depend on experimentation and iteration, through

fast responses to feedback from the environment (e.g. Rindova and Kotha, 2001; Brown and

Eisenhardt, 1997; Edmondson, 2011). This approach often requires improvising (Hmieleski and

Corbett, 2008), acceptance of failure (Edmondson, 2011) and trial-and-error learning

(Chesbrough, 2010). Our research indicates that a company’s legitimation capability can

threaten or block its ability to learn and adapt through three related cognitive effects: cognitive

crowding, attentional constraints, and identity commitments.

Our third contribution is to theorize the challenge of a nascent industry context, where

leaders and entrepreneurs have to simultaneously legitimate their firms and industries and learn

from feedback to respond to industry shifts. This challenge speaks to a fundamental strategic

trade-off all firms must make: the choice between committing to particular courses of action in

order to shape the environment (e.g. Ghemawat, 1991), and developing the ability to

dynamically respond to changes in the environment (e.g. Brown and Eisenhardt, 1997). We

argue that this trade-off is most salient in the ambiguous environment of a nascent industry,

where leaders must both commit to a symbolic story that legitimates the firm and industry, and

adapt to frequent shifts in the industry. Leaders and entrepreneurs in a nascent context must

therefore become cultural managers (Lounsbury and Glynn, 2001; Zott and Huy, 2007) who

legitimate new industries in favorable ways and opportunistic entrepreneurs able to shift in

response to environmental feedback. The simultaneity of these two goals intensifies the

challenge – hence our notion of ambiguity-squared.

Zuzul and Edmondson

34

Finally, our research suggests that, to succeed in a nascent industry, firms may need to

invest in two types of capabilities, perhaps led by different individuals. Seminal work on

innovation suggests that organizations divide distinct activities in separate but coordinated

centers focused on, for instance, exploration versus exploitation (March, 1991), or for sustaining

versus disruptive innovations (Christensen and Raynor, 2003). Our research suggests that leaders

and entrepreneurs in nascent industries may need to engage different people to legitimate their

industries and drive internal learning and development.

On the one hand, leaders who invest in internal development and do not engage in

building legitimacy may develop technologies that, although financially and technologically

plausible, are not perceived by enough customers as desirable. For instance, a number of

companies developed solar hot water heaters in the early 1930s, but their products lost a battle to

gas heaters because they were not embedded in existing systems, nor were they defended with a

grand vision (Madrigal, 2011). This small failure helped produce a large failure – the stunting of

the development of a viable solar energy industry for decades (Madrigal, 2011). On the other

hand, history is sprinkled with visionaries who invested in building and promoting a vision for

their firms and new industries but who could not sustain viable enterprises, such that the world

failed to gain fully from their powerful insights. Buckminster Fuller, the futurist designer and

inventor, provides an apt example. Writing and speaking as early as the 1930s about energy

efficient, affordable, and sustainable solutions for construction and housing, his attempts to

industrialize fell short (Fuller, 1938; Bergdoll and Christensen, 2008). More than half a century

would pass before similar thinking would take shape again in the popular imagination, led by

more established enterprises (Bergdoll and Christensen, 2008).

Zuzul and Edmondson

35

At the same time, the interactive nature of these capabilities suggests these activities must

be coordinated and collaborative in nature. The leaders both who take steps to encourage and

promote a new industry and focus sufficiently on internal development – visionaries like Thomas

Edison, who both developed and championed a new system of electric lighting (Hargadon and

Douglas, 2001) –give birth to the industries of the future. We hope that our findings can inform

future studies and theories to benefit entrepreneurs, firms, and the development of nascent

industries.

Zuzul and Edmondson

36

REFERENCES

Ariño A, Ring PS. 2010. The role of fairness in alliance formation. Strategic Management

Journal 31: 1054–1087.

Aldrich HE, Fiol CM. 1994. Fools rush in? The institutional context of industry creation. The

Academy of Management Review, 19: 645–670.

Anderson PC, Tushman M. 1990. Technological discontinuities and dominant designs: A

cyclical model of technological change. Administrative Science Quarterly, 35: 604-633.

Bem DJ. 1967. Self-perception: An alternative interpretation of cognitive dissonance

phenomena. Psychological Review, 74: 183-200.

Benner MJ, Tripsas M. 2012. The influence of prior industry affiliation on framing in nascent

industries: The evolution of digital cameras. Strategic Management Journal, 33: 277-302.

Bergdoll B, Christensen C. 2008. Home Delivery: Fabricating the Modern Dwelling. Birkhäuser:

Singapore.

Bhide A. 2000. The Origin and Evolution of New Businesses. Oxford University Press: Oxford,

UK.

Bingham CB, Eisenhardt KM. 2011. Rational heuristics: The ‘simple rules’ that strategists learn

from process experience. Strategic Management Journal, 32: 1437–1464.

Bourgeois LJ. 1985. Strategic goals, perceived uncertainty, and economic performance in

volatile environments. Academy of Management Journal 28: 548–573.

Brown SL, Eisenhardt KM. 1997. The art of continuous change: Linking complexity theory and

time-paced evolution in relentlessly shifting organizations. Administrative Science

Quarterly 42: 1-34.

Chesbrough H. 2010. Business model innovation: Opportunities and barriers. Long Range

Planning, 43: 354–363.

Christensen CM, Raynor ME. 2003. The Innovator's Solution: Creating and Sustaining

Successful Growth. Harvard Business School Press: Boston, MA.

Clark KB. 1985. The interaction of design hierarchies and market concepts in technological

evolution. Research Policy, 14: 235-251.

Cohen WM, Levinthal DA. 1990. Absorptive capacity: A new perspective on learning and

innovation. Administrative Science Quarterly, 35: 128-152.

Cornelissen JP, Clarke JS. 2010. Imagining and rationalizing opportunities :Inductive reasoning

and the creation and justification of new ventures. Academy of Management Review, 35:

539–557.

Dobrev SD, Gotsopoulos A. 2010. Legitimacy vacuum, structural imprinting, and the first mover

disadvantage. The Academy of Management Journal, 53: 1153–1174.

Dowell G, Swaminathan A. 2006. Entry timing, exploration, and firm survival in the early U.S.

bicycle industry. Strategic Management Journal, 27: 1159-1182.

Durand, R. 2003. Predicting a firm's forecasting ability: the roles of organizational illusion of

control and organizational attention. Strategic Management Journal 24: 821–838.

Durand R. 2012. Advancing strategy and organization research in concert: Towards an integrated

model? Strategic Organization, 10: 297–303.

Durand R, Vergne JP. 2011. The path of most persistence: An evolutionary perspective on path

dependence and dynamic capabilities. Organization Studies, 32: 365-382.

Edmondson AC. 2011. Strategies for learning from failure. Harvard Business Review, 89.

Edmondson AC, Bohmer RM, Pisano GP. 2001. Disrupted routines: team learning and new

technology adaptation. Administrative Science Quarterly 46: 685–716.

Zuzul and Edmondson

37

Edmondson AC, McManus S. 2007. Methodological fit in management field research. Academy

of Management Review, 32: 1155-1179.

Eisenhardt KM. 1989. Building theories from case study research. Academy of Management

Review, 14: 532–550.

Eisenhardt KM, Graebner ME. 2007. Theory building from cases: Opportunities and challenges.

Academy of Management Journal, 50: 25–32.

Eisenhardt KM, Martin JA. 2000. Dynamic capabilities: What are they? Strategic Management

Journal 21: 1105–1121

Fuller RB. 1938. Nine Chains to the Moon: An Adventure Story of Thought. Lippincott:

Philadelphia, PA.

Gavetti G. 2012. Toward a behavioral theory of strategy. Organization Science, 23: 267-285.

Gavetti G, Rivkin JW. 2007. On the origin of strategy: Action and cognition over time.

Organization Science, 18: 420-439.

Ghemawat P. 1991. Commitment. Free Press.

Gibbert M, Ruigrok W, Wicki B. 2008. What passes as a rigorous case study? Strategic

Management Journal 29: 1465–1474.

Glaser B, Strauss A. 1967. The Discovery of Grounded Theory: Strategies for Qualitative

Research. Aldine Publishing Company: Chicago, IL.

Hannan MT, Carroll GR. 1992. Dynamics of Organizational Populations: Density, Competition,

and Legitimation. Oxford University Press: New York, NY.

Hannan MT, Freeman J. 1989. Organizational Ecology. Harvard University Press: Boston, MA.

Hargadon AB, Douglas Y. 2001. When innovations meet institutions : Edison and the design of

the electric light. Administrative Science Quarterly, 46: 476–501.

Helfat CE, Peteraf M. 2003. The dynamic resource-based view: Capability lifecycles. Strategic

Management Journal, 24: 997-1010.

Henderson R, Clark K. 1990. Architectural innovation: The reconfiguration of existing product

technologies and the failure of established firms. Administrative Science Quarterly, 35:

9-30.

Hayward ML, Hambrick DC. 1997. Explaining premium paid for large acquisitions: evidence of

CEO hubris. Administrative Science Quarterly 42(1): 103–127.

Hill RC, Levenhagen, M. 1995. Metaphors and mental models: Sensemaking and sensegiving in

innovative and entrepreneurial activities. Journal of Management, 21: 1057–1074.

Huy QN, Zott C. 2010. Affective sensegiving , Trust-building and resource mobilization in start-

up organizations. IESE Business School Working Paper.

Kaplan S. 2008. Cognition, capabilities and incentives: Assessing firm response to the fibre-optic

revolution. Academy of Management Journal, 51: 672-695.

Kaplan S, Murray F, Henderson R. 2003. Discontinuities and senior management: Assessing the

role of recognition in pharmaceutical firm response to biotechnology. Industrial and

Corporate Change, 12: 203-233.

Kaplan S, Tripsas M. 2008. Thinking about technology: Applying a cognitive lens to technical

change. Research Policy, 37: 790-805.

Khaire M. 2009. Young and no money? Never mind: The material impact of social resources on

new venture growth. Organization Science, 21: 168–185.

Klepper S. 1997. Industry life cycles. Indust. and Corp. Change, 6: 145-181.

Klepper S, Graddy E. 1990.The evolution of new industries and the determinants of market

structure. The RAND Journal of Economics, 21: 27–44.

Zuzul and Edmondson

38

Klepper S, Simons KL. 2000. Dominance by birthright: Entry of prior radio producers and

competitive ramifications in the U.S. television receiver industry. Strategic Management

Journal 21: 997-1016.

Kogut B, Zander U. 1992. Knowledge of the firm: Combinative capabilities and the replication

of technology. Organization Science 3: 383–397.

Langer EJ. 1975. The illusion of control. Journal of Personality and Personal Psychology 32:

311–328.

Leonard-Barton D. 1992. Core capabilities and core rigidities: A paradox in managing new

product development. Strategic Management Journal, 13: 111–125.

Levinthal DA. 1997. Adaptation on rugged landscapes. Management Science, 43: 934-950.

Levinthal DA, March JG. 1993. The myopia of learning. Strategic Management Journal, 14: 95-

112.

Levitt B, March JG. 1988. Organizational learning. Annual Review of Sociology, 14: 319-340.

Lindsay. G. 2010. Cisco's big bet on New Songdo: Creating cities from scratch. Fast Company.

Lounsbury M, Glynn MA. 2001. Cultural entrepreneurship: stories, legitimacy, and the

acquisition of resources. Strategic Management Journal, 22: 545–564.

Madrigal A. 2010. Powering the Dream: The History and Promise of Green Technology. Da

Capo Press: Cambridge, MA.

March JG. 1991. Exploration and exploitation in organizational learning. Organization Science,

2: 71-87.

Martens ML, Jennings JE, Jennings PD. 2007. Do the stories they tell get them the money they

need? The role of entrepreneurial narratives in resource acquisition. Academy of

Management Journal, 50: 1107–1132.

McGrath, RG. 2010. Business models: A Discovery driven approach. Long Range Planning, 43:

247-261

Mitchell W. 1989. Whether and when? Probability and timing of incumbents' entry into

emerging industrial subfields. Administrative Science Quarterly 34: 208-230.

Mitchell W. 1991. Dual clocks: Entry order influences on incumbent and newcomer market

share and survival when specialized assets retain their value. Strategic Management

Journal 12: 85-100.

Navis C, Glynn MA. 2010. How new market categories emerge: Temporal dynamics of

legitimacy, identity, and entrepreneurship in Satellite Radio. Administrative Science

Quarterly, 55: 439-471.

Nelson RR, Winter SG. 1982. An Evolutionary Theory of Economic Change. Harvard University

Press: Cambridge, MA.

Ocasio W. 1997. Towards an attention-based view of the firm. Strategic Management Journal,

18: 187–206.

Penrose E. 1995. The Theory of the Growth of the Firm (3rd edn). Oxford University Press:

Oxford, UK.

Porter M. 1985. Competitive Advantage: Creating and Sustaining Superior Performance. Free

Press: New York, NY.

Prahalad CK, Hamel G. 1990. The core competence of the corporation. Harvard Business

Review, 68: 79-91

Rao H. 1994. The Social construction of reputation: Certification contests, legitimation, and the

survival of organizations in the American automobile industry. Strategic Management

Journal, 15: 29-44.

Zuzul and Edmondson

39

Rao H, Monin P, Durand R. 2003. Institutional change in Toque Ville: Nouvelle cuisine as an

identity movement in French gastronomy. American Journal of Sociology, 108: 795-843.

Rindova VP, Kotha S. 2001. 'Continuous morphing’: Competing through dynamic capabilities,

form, and function. Academy of Management Journal, 1263–1280.

Rivkin, J. 2000. Imitation of complex strategies. Management Science. 46: 824-844.

Santos F, Eisenhardt K. 2009. Constructing markets and shaping boundaries: Enterpreneurial

power in nascent fields. Academy of Management Journal, 54: 643-671.

Schwenk CR. 1984. Cognitive simplification processes in strategic decision-making. Strategic

Management Journal 5(2): 111–128.

Siggelkow N. 2007. Persuasion with case studies. Academy of Management Journal 50: 20-24.

Snow DA, Burke Rochford Jr. E, Worden SK, Benford RD. 1986. Frame alignment processes,

micromobilization, and movement participation. American Sociological Review 51: 464-

481.

Stuart TE, Hoang H, Hybels RC. 1999. Interorganizational endorsements and the performance of

entrepreneurial ventures. Administrative Science Quarterly, 44: 315.

Teece DJ, Pisano G, Shuen A. 1997. Dynamic capabilities and strategic management. Strategic

Management Journal 18: 509–533.

Tushman ML, Anderson P. 1986. Technological discontinuties and organizational environments.

Administrative Science Quarterly, 31: 439-65.

Tripsas M. 2009. Technology, identity, and inertia: Through the lens of ‘The Digital

Photography Company.’ Organization Science, 20: 441-460.

Tripsas M, Gavetti G. 2000. Capabilities, cognition, and inertia: Evidence from digital imaging.

Strategic Management Journal 21: 1147-1161.

The Economist. 2010. Living on a platform.

The Economist. 2012. Mining the urban data. The World in 2013 Edition.

Utterback JM, Abernathy WJ. 1975. A Dynamic model of process and product innovation. The

International Journal of Management Science, 3: 639–656.

Weick K. 1995. Sensemaking in Organizations. Sage Thousand Oaks, CA.

Wernerfelt B. 1984. A resource-based view of the firm. Strategic Management Journal 5: 171–

180.

Williamson O. 1975. Markets and Hierarchies: Analysis and Antitrust Implications. Free press:

New York, NY.

Winter SG. 1987. Knowledge and competence as strategic assets. In The Competitive Challenge:

Strategies for Industrial Innovation and Renewal, Teece DJ (ed). Ballinger: Cambridge,

MA; 159–184.

Winter SG. 1990. Survival, selection, and inheritance in evolutionary theories of organization. In

Organizational Evolution: New Directions, Singh JV (ed). Sage: Newbury Park, CA;

269–297.

Wry T, Lounsbury M, Glynn, MA. 2011. Legitimating nascent collective identities: coordinating

cultural entrepreneurship. Organization Science, 22: 449–463.

Yin RK. 2003. Case Study Research: Design and Methods. Sage: Newbury Park, CA.

Zimmerman M, Zeits G. 2002. Beyond survival: Achieving new venture growth by building

legitimacy. Academy of Management Review, 27: 414–431.

Zott C, Huy QN. 2007. How entrepreneurs use symbolic management to acquire resources.

Administrative Science Quarterly, 52: 70–105.

Zuzul and Edmondson

40

TABLES AND FIGURES

Table 1: Data Sources

Formal Interviews

Founders and Employees 57

Partners 15

Total 72

Observation

Site Visits 11

Meetings 39

Presentations 10

Approximate Hours in

Field

800+

Other

Official Documents 100+ pages

Email Access 44 pages

Table 2: SusTech’s legitimation capability

Resource Practices/Processes Outcome

Crafting a

symbolic

story

Problematized present

Analogy-driven vision of

future

Vision for SusTech’s

solutions

Symbols manipulated to

create and refine a

symbolic story.

Story became

resource in

developing further

legitimation

activities.

Disseminating

the symbolic

story

Symbolic story

Executive time and

attention

Giving speeches and

presentations; holding

press events; granting

interviews and spending

time with press members.

SusTech frequently

mentioned in press

and analyst reports on

smart cities; Natley

and executives

invited to present and

speak at prominent

events.

Affiliating

with

prominent

individuals

and corporate

partners

Symbolic story

Executive and employee

time and attention

Developing a “partnering

process;” meeting

frequently with potential

partners; emphasizing

affiliations in other

activities.

SusTech attracted a

number of prominent

individual and

corporate partners.

Zuzul and Edmondson

41

Figure 1. Cognitive impact of SusTech’s legitimation capability.

Crafting a

symbolic story

Disseminating the

symbolic story

Affiliating with

prominent

individuals and

corporate partners

Cognitive Crowding

Sense of control, inevitability of success

“It sounds very arrogant, but the main competition is

the noise in the marketplace…. I have no doubt that

there will be others who try to copy our model as it

becomes more well-known” – Executive interview,

2011

Rejection of negative feedback

Author: Why did the bank refuse to finance you?

Executive: “The vision is so overwhelming that it

scares people of.” – Executive interview, 2010

Attentional constraints

Attention to legitimation activities at expense of

internal development

Natley flew to another country to give a public speech.

B (an employee) had been working on business plan

for company. T (an executive) told him “the future of

the company is in your hands.” Finished slides, sent to

Natley – but Natley didn’t look over them while at

event, and couldn’t get in touch with him because at

event. – Excerpt from memo on field notes, 2010

Identity commitments

Commitment to decisions

During lunch, Chairman of Board confides that the

development of SusTech City seems increasingly

unlikely…. The next day, I have breakfast with R., an

executive. She tells me the firm will “never abandon”

SusTech City. “Natley would die to make it happen.” –

Excerpt from memo on field notes, 2012

Lack of learning from external

feedback

“When engaging with some big

companies, it’s taken a while to remove a

bit of arrogance. It’s like kids. It’s quite

charming when a 3-year old says, I

wanna do this, I want it, I want it. When

they’re still saying it and they’re 18,

there’s a problem…. It’s very easy to go

into broadcast mode and say, this is my

vision, this is how we should be doing

stuff. Sometimes it’s quite good to listen

to others….” – Board Member interview,

2012

Lack of technological and internal

development

“The company is a great name and

marketing-wise has done tremendously,

but it isn’t balanced it internally, yet, in

execution and operations.” – Executive

interview, 2012

Lack of ability to shift course

“John had a big vision for SusTech City…. He

decided to not do anything until that big vision is

baked and ready and good to launch…. He had

ready-made vertical solutions [with the

technology]…. He said, “No, I’m not going to

release them because that’s going to dilute my

vision and I’m going to wait until I build

everything.” Great, how do you put food in

people’s mouth in the meantime, right?” –

Executive interview, 2012

Legitimation Practice/Process

Cognitive Effect Outcome

Zuzul and Edmondson

42

Appendix 1. Procedures used for ensuring validity of single-case research (adapted from Arino and Ring (2010))

Validity test1 Suggested procedures Implementation in design of study

Construct validity: “establishing correct

operational measures for the concepts

being studied”

Use multiple sources of evidence to

triangulate findings.

Have informants review draft case study

report.

We used multiple sources of evidence:

(1) Observations of diverse firm

activities, including internal

meetings, executive conversations,

partner presentations, press events.

(2) Informal and formal interviews

with a diverse set of respondents,

including executives, employees,

former employees, and partners.

(3) Documents and records, including

business plans and emails.

Due to the sensitivity of our findings,

SusTech members did not read a draft.

However, we discussed and presented our

findings to several informants, including a

former corporate partner and a former

board member. Both agreed with our

analysis and findings.

Internal validity: “establishing a causal

relationship, whereby certain conditions

are shown to lead to other conditions.”

Have a general analytical strategy (rely on

theory to guide the analysis OR develop a

case description).

Have a dominant analytical procedure

(search for patterns OR build explanations

OR use time-series analysis).

We constructed a case description first,

then compared it to existing theory.

We relied on pattern analysis, and searched

our notes and data for patterns. From this

search for patterns, ideas about SusTech’s

legitimation capabilities and their intended

and unintended effects emerged. We

1 Source: Arino and Ring, 2010.

Zuzul and Edmondson

43

Use analytical techniques to manipulate

the data.

connected these patterns over time, allowing us to construct causal accounts

between concepts.

We used a number of established

techniques for analyzing qualitative data,

including searching for patterns through

qualitative data analysis software;

constructing time-lines of company

development; organizing evidence by type,

time period, and respondent and searching

for patterns between and across type;

creating tables summarizing data on

important categories. We reviewed these

techniques in frequent discussions with the

members of a research group focused on

qualitative research.

External validity: “establishing the domain

to which a study’s findings can be

generalized.”

Use replication logic. Since our study is a revelatory case,

replication logic does not apply.

Reliability: “demonstrate that the

operations of a study…can be repeated.”

Develop case-study database. Our database includes field notes,

transcripts of interviews, archives of

documents and emails, and memos written

by the authors.