ARAB OPEN UNIVERSITY- FACULTY OF BUSINESS – OPEN UNIVERSITY COURSE

B205A

B205A
EXPLORING INNOVATION & ENTREPRENEURSHIP
B205A/BLOCK 02
DEVELOPING OPPORTUNITIES WEEK 03
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SECTION 2.3 BUILDING LEGITIMACY IN NEW VENTURES
Introduction
This reading looks at the work of Monica Zimmerman and Gerald Zeitz’s (2002),
‘Beyond survival: achieving new venture growth by building legitimacy’.
 The focus will be on the meaning of legitimacy for entrepreneurial ventures
and why this is important.
 Building legitimacy is linked to the ability to acquire resources.
 Hence Legitimacy is identified as an important mean of growing a new venture.
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Introduction
• Legitimacy is described as a judgement by relevant stakeholders that a new venture meets
expectations of appropriate and acceptable behavior and performance.
• It means that stakeholders believe that legitimacy is organized and operates according to the
relevant rules, expectations and norms of the society, sectors and markets in which it operates.
• Legitimacy is not an absolute – rather it is a subjective judgement that will vary across
different stakeholders and across different societies and sectors.
• Overall, it comes down to a belief or feeling by the relevant stakeholder that the venture is
competent, efficient, effective and/or needed.
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SECTION 2.3 BUILDING LEGITIMACY IN NEW VENTURES
Introduction
Legitimacy is viewed as a resource which is as important for new ventures as the other
resources such as capital, technology, personnel, customer goodwill and networks.
It is believed to be important for securing other resources.
For example:
investors are more likely to provide finance if they believe that a company is legitimate,
employees are likely to be attracted to the venture if they believe they will be treated
fairly,
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Introduction
customers would be more likely to place orders for goods if they believe that these orders
will be fulfilled, and
experienced individuals would be willing to serve on an executive board for a new
venture if they believed it was going to operate according to local laws and regulations.
 The ability to acquire resources is an important part of a new venture surviving or
growing.
 Hence there is a close relationship between legitimacy, resource acquisition and
growth.
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• Introduction

Legitimacy increases the ability to obtain resources; conversely increased resources

leads to increased legitimacy.
Increased resources allow growth; conversely growth allows acquisition of additional
resources.
• The link between legitimacy and growth has been shown to be in one direction,
• Whereas larger firms (i.e. growth) are assumed to be more legitimate, legitimacy
does not lead directly to growth, rather it acts indirectly through improved resource
acquisition.
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 Zimmerman and Zeitz’s Identified four Types of Legitimacy

1. Regulatory
• Legitimacy arises from conforming to rules, regulations or standards. In many cases adherence to such rules
or standards will require oversight or scrutiny by appropriate experts and will result in a particular status,
benefits or certification.
• This status or certification can then be promoted to customers, suppliers and other stakeholders to
demonstrate legitimacy.
• For example, small firms in the UK that register as limited companies must provide accounts that have been
prepared according to accounting standards and file these with Companies House.
• In addition to the significant benefit of limited liability, adding ‘Ltd’ after a company name often suggests
greater legitimacy to stakeholders.
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 Zimmerman and Zeitz’s Identified four Types of Legitimacy

II. Normative
Legitimacy arises from meeting the expectations of behavior and values of the society in which the venture
operates.
 Examples include: generating an appropriate level of profit, treating employees and customers fairly and
minimizing environmental impacts.
A major source of normative legitimacy is through ‘endorsements’, which mean a favorable opinion given
about the venture by other organizations or individuals.
It is good to secure endorsements from individuals and organizations that can demonstrate legitimacy and a
high public profile, though something as simple as positive online reviews from customers can have a major
impact.
Conversely, an endorsement from someone with a poor reputation may well do more harm than good.
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 Zimmerman and Zeitz’s Identified four Types of Legitimacy

II. Normative
Endorsements can also take the form of actions, such as:
 securing finance from a high-profile investor,
 adoption of a product by a major customer.

Networks are also seen to confer normative legitimacy. As in the case of endorsements, being networked
to individuals and organizations that have high legitimacy and profile is most beneficial as their
legitimacy can spillover to the venture.
The formation of corporate or advisory boards can be an effective way of increasing legitimacy by
formalizing links to executives from relevant organizations or community leaders.
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 Zimmerman and Zeitz’s Identified four Types of Legitimacy

III. Cognitive
• Legitimacy arises when the actions of the people running a venture appear to make sense, or can be
explained in a coherent way to its key stakeholders.
• It is perhaps easier to consider the alternative – and how a commercial or social venture could be
undermined if those involved were unable to understand its purpose, or the way it was operating.
• This is likely to pose particular challenges for organizations promoting radical innovations because
the associated technologies and ideas are typically unfamiliar, complex and therefore more difficult
to understand.
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 Zimmerman and Zeitz’s Identified four Types of Legitimacy

III. Cognitive
• There are a number of ways to build this type of legitimacy, for example,:
Businesses can adopt management methods and business models that give a sense of
rational and logical thinking.
Businesses might also ensure that management team is able to explain and justify the
organization's strategy using appropriate language and sources of evidence.
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 Zimmerman and Zeitz’s Identified four Types of Legitimacy

IV. Industry
Certain industries and industry sectors tend to have more legitimacy than others.
 For example, emergency medical care and primary school education tend to have more legitimacy
than pharmaceuticals and estate agency.
 These broader ideas about legitimacy can be conferred on all of the organizations operating in
those industries. Some of this may arise from regulatory or normative elements of those industries.
 For example, particular rules, regulations or behaviors may give rise to higher (or lower) levels of
legitimacy.
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 Zimmerman and Zeitz’s Identified four Types of Legitimacy

IV. Industry

• In other cases, views of the legitimacy may be influenced by the actions of

particular individuals and organizations in that industry.
For example, the banking sector has suffered a significant reduction in legitimacy
since the financial crisis of 2008, which affected many countries around the world.
In the UK this has been compounded by further scandals including the mis-selling
of insurance products and the manipulation of LIBOR, a key interest rate used
within the sector.
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Zimmerman and Zeitz’s Identified four Types of Legitimacy
IV. Industry
• The authors stress that organizations do not need to be only the passive
recipients of legitimacy.
• They can also develop strategies to increase their legitimacy, and then act
on those strategies.
• Four potential approaches can be identified.
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Strategy Description Example

New ventures that wish to launch themselves onto their

Involves ‘following the rules’ – the new venture does not challenge local stock market through an IPO (Initial Public
Conformance
or change expectations, rules or regulations. Offering) take care to follow all of the rules that apply
in their particular country.

Involves selecting an industry, customer segment, geography or other New ventures often locate in geographical clusters (e.g.
Selection
environment that is favorable to their strengths or objectives. Silicon Valley in the US and Silicon Allee in Germany).

New ventures that emerged during the dotcom boom

Involves introducing a change to prior practice that better reflects the
Manipulation changed the prior practice that firms involved in IPOs
realities of present-day operations.
should generate a profit at the time of the offering.

The influx of new ventures in in the field of online

Involves creation of a new social context with associated rules,
Creation retailing has changed what customers expect from
expectations and beliefs.
retailers (e.g. extensive choice and rapid delivery).
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Creating New Ventures

 New ventures will usually have low levels of legitimacy than their more
established counterparts, so a key challenge is to quickly build legitimacy.
 They will also often have low levels of resources and hence the challenge
is to find relatively low-cost means to achieve this goal.
 They therefore need to select from the four strategies identified in order to
build one or more of the four types of legitimacy described above.
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 Creating New Ventures

In order to build legitimacy it is often necessary to conform to existing patterns of how
things are done. However, new ventures almost always involve some degree of doing
something new.
 This may be some form of radical innovation or it may be more evolutionary innovation.
 So, how is it possible to both “do something new and follow expectations?”
It is possible to reconcile these two if it is recognized that one of the expectations of
entrepreneurs is that they will be doing new things – so a degree of change or challenge is
expected.
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 Creating New Ventures

What that change or challenge is will be important.

A challenge to existing products or services might be expected, or even
required.
However, a venture that is based on challenging national laws, accepted
business practice or strongly held local social conventions will find it harder
to gain legitimacy.
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 Creating New Ventures

 The authors raise the issue of a legitimacy threshold.

 They suggest that new ventures need to establish a certain level of
legitimacy in order to survive.
 If they do not reach this level, they are likely to fail.
 With low levels of legitimacy, it will be hard to access resources and grow.
 Conversely, ventures that exceed the threshold level are likely to be able to
access resources and grow, which in turn increases their legitimacy further
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Creating New Ventures

• It is impossible to measure legitimacy directly and hence establish what
this threshold level is.
• Also, it is likely to vary over time and across industries.
• However, the idea of a threshold reinforces the idea that it is important for
new ventures to actively build legitimacy and to do this quickly.
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Conclusion
• Zimmerman and Zeitz’s (2002) paper suggests that new ventures should focus on
building legitimacy as it is linked to resource acquisition and hence venture growth.
• Four strategies to build legitimacy are identified (Regulatory, Normative, Cognitive, &
Industry), but ventures may combine one or more of these strategies.
• Whilst there appears to be an inherent contradiction in the conforming to expectations
associated with building legitimacy and innovation associated with entrepreneurial
ventures, this can be addressed by considering the nature of the innovation proposed.
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References
• Zimmerman, M. and Zeitz, G. (2002) ‘Beyond survival: achieving new
venture growth by building legitimacy’, Academy of Management Review,
vol. 27, no. 3, pp. 414–31.