The Tale of Arbitrage: Professor Sergey Anokhin on Strategic Orientations

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It is only recently that we started obsessively equating entrepreneurs with innovators. Entrepreneurship, however, is not limited to commercializing one’s innovative ideas. There are perfectly legitimate ways to profit by buying low and selling high, or by imitating what other innovators have introduced to the market, and the majority of entrepreneurs actually choose to pursue these less glamorous by far less risky opportunities. These opportunities are called arbitrage. The scholarly community, however, predominantly tries to explain the entrepreneurial success with two strategic orientations that are believed to be critically important for competitive advantage – entrepreneurial orientation, which deals with innovations, and market orientation, which is concerned with closely following the emerging market trends. Are these scholars right? Does arbitrage not matter anymore? Or is it still a powerful predictor of entrepreneurial success?

Professor Sergey Anokhin on Strategic Orientations

Arbitrage orientation

If strategic choices that firms make are dictated by the kind of strategic orientations they possess, then it is logical to expect that many – if not the majority of – firms are governed by arbitrage orientation, says Sergey Anokhin, and Entrepreneurship Professor at Kent State University. This orientation should be concerned with being alert to innovations introduced by others, scanning the markets in search of inefficiencies and pricing disequilibria, and seeking legal means to protect against intellectual property violations lawsuits. If such an orientation truly exists, it should explain firm performance over and above what other orientations are responsible for. That is, it should have an impact on firm performance even after accounting for entrepreneurial and market orientations. An international research group led by Professor Anokhin set to investigate if this is the case and conducted a large-scale study to uncover the influence of this poorly understood form of strategic orientation.

The study

The group surveyed a large number of firms across many industries in four U.S. states in the Midwest. The study had three major goals. First, it was important to confirm the existence of arbitrage orientation as such. Second, it was critical to see if it adds anything to our understanding of key business success factors. Third, it was desirable to get a finer-grained picture and identify the types of firms that stand to gain the most from developing arbitrage orientation.

The findings

All three goals were achieved, reports Professor Anokhin. The group was able to come up with a research instrument that reliably captures arbitrage orientation, and it is clearly distinct from other strategic orientations recognized by management scholars. Arbitrage orientation emerged as a powerful predictor of firm performance over and above what other orientations could explain, and its impact is as strong as that of entrepreneurial orientation. Moreover, two groups of firms are particularly well-positioned to benefit from arbitrage orientation – smaller firms and older firms.

Why should we care?

The importance of the study, says Dr. Anokhin, is that it restores entrepreneurial arbitrage, the relatively safe pursuit of low-risk opportunities, to the set of strategic choices that entrepreneurs may consider when planning their future. The study shows that arbitrage orientation is as important as the much-touted entrepreneurial orientation, and for smaller and older firms its importance is even higher. It brings back this alternative strategy to the list of options available to the firm and legitimizes what many entrepreneurs choose intuitively. Arbitrage orientation cannot replace entrepreneurial orientation or market orientation. Rather, it merely enriches the set of strategic options that firm management could consider to ensure above-average returns.

Oritentation

To find out more, read Sergey Anokhin, Romanova Stettler, T., Al Asady, A., & Morgan, T. (2017). Arbitrage Orientation and Firm Performance: An Exploratory Study. In Academy of Management Proceedings (Vol. 2017, No. 1, p. 13249). Briarcliff Manor, NY 10510: Academy of Management.

About the author: Sergey Anokhin- Professor Department of marketing and entrepreneurship from Kent State University Professor Anokhin’s research interests include entrepreneurship and innovation management in a variety of contexts. His work has been published in the Journal of International Business Studies, Journal of Business Venturing, Journal of Management Studies, Organizational Research Methods, Small Business Economics, British Journal of Management, Journal of Small Business Management, Regional Studies, Entrepreneurship & Regional Development and other journals and edited volumes. His teaching portfolio includes doctoral, MBA and undergraduate courses in strategy, global management, and entrepreneurship delivered in traditional, online, and blended formats.

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