Managerial economics and strategic analysis
376
PART 3: STRATEGIC IMPLEMENTATION
chapter 12
Managing Innovation and Fostering
Corporate Entrepreneurship
After reading this chapter, you should have a good understanding of the following learning objectives:
LO12.1 The importance of implementing strategies and practices that foster innovation.
LO12.2 The challenges and pitfalls of managing corporate innovation processes.
LO12.3 How corporations use new venture teams, business incubators, and product champions to create an
internal environment and culture that promote entrepreneurial development.
LO12.4 How corporate entrepreneurship achieves both financial goals and strategic goals.
LO12.5 The benefits and potential drawbacks of real options analysis in making resource deployment
decisions in corporate entrepreneurship contexts.
LO12.6 How an entrepreneurial orientation can enhance a firm’s efforts to develop promising corporate venture
initiatives.
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. Learning from Mistakes
If you ask a group of students to name a successful company, Google is likely to be one of the first firms
mentioned. It dominates online search and advertising, has developed a successful browser, and developed the
operating system that powers 75 percent of the smartphones sold in 2012. 1 Its success is evident in its stock
price, which rose from about $350 at the beginning of 2009 to near $800 a share in early 2013. But that doesn’t
mean that Google has been successful at all it has tried. One of Google’s most notable failures occurred when it
tried to venture outside the online and wireless markets. In 2006, Google decided to expand its advertising
business to radio advertising. After spending several hundred million dollars on their entrepreneurial effort in the
radio advertising market, Google pulled the plug on this business in 2009.
Google saw great potential in applying its business model to the radio advertising industry. In the traditional
radio advertising model, companies that wished to advertise their products and services contracted with an
advertising agency to develop a set of radio spots (commercials). They then bought blocks of advertising time
from radio stations.
377
Advertisers paid based on the number of listeners on each station. Google believed that they could develop a
stronger model. Their design was to purchase large blocks of advertising time from stations. They would then
sell the time in a competitive auction to companies who wished to advertise. Google believed they could sell ad
time to advertisers at a higher rate if they could identify what ads on what stations had the greatest impact for
advertisers. Thus, rather than charging based on audience size, Google would follow the model they used on
the Web and charge based on ad effectiveness. To develop the competency to measure ad effectiveness,
Google purchased dMarc, a company that developed technology to manage and measure radio ads, for $102
million.
Google’s overall vision was even broader. They also planned to enter print and TV advertising. They could
then provide a “dashboard” to marketing executives at firms that would provide information on the effectiveness
of advertising on the Web, TV, print, and radio. Google would then sell them a range of advertising space among
all four to maximize a firm’s ad expenditures.
However, Google found that their attempt to innovate the radio market bumped up against two core
challenges. First, the radio advertising model was based much more on relationships than online advertising
was. Radio stations, advertising firms, and advertising agencies had long-standing relationships that limited
Google’s ability to break into the market. In fact, few radio stations were willing to sell advertising time to Google.
Also, advertising agencies saw Google as a threat to their business model and were unwilling to buy time from
Google. Second, Google found that their ability to measure the effectiveness of radio ads was limited. Unlike
online markets, where they could measure if people clicked on ads, they found it difficult to measure whether
listeners responded to ads. They tried ads that mentioned specific websites that listeners could go to, but they
found few people accessed these sites. In the end, Google was able to sell radio time at only a fraction of what
radio stations could get from working their traditional advertising deals. This led stations to abandon Google’s
radio business.
378
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 378
Google found that they had the initiative to innovate the radio market, but they didn’t have the knowledge,
experience, or social connections needed to win in this market.
Discussion Questions
1. Why didn’t the lessons Google learned in the online advertising market apply to the radio market?
2. Radio is increasingly moving to satellite and streaming systems. Is this a new opportunity for Google, or should
they steer clear of radio altogether?
Managing change is one of the most important functions performed by strategic leaders. There are two major avenues
through which companies can expand or improve their business—innovation and corporate entrepreneurship. These two
activities go hand-in-hand because they both have similar aims. The first is strategic renewal. Innovations help an
organization stay fresh and reinvent itself as conditions in the business environment change. This is why managing
innovation is such an important strategic implementation issue. The second is the pursuit of venture opportunities.
Innovative breakthroughs, as well as new product concepts, evolving technologies, and shifting demand, create
opportunities for corporate venturing. In this chapter we will explore these topics—how change and innovation can
stimulate strategic renewal and foster corporate entrepreneurship.
LO12.1
The importance of implementing strategies and practices that foster innovation.
Managing Innovation
One of the most important sources of growth opportunities is innovation. Innovation involves using new knowledge to
transform organizational processes or create commercially viable products and services. The sources of new knowledge
may include the latest technology, the results of experiments, creative insights, or competitive information. However it
comes about, innovation occurs when new combinations of ideas and information bring about positive change.
innovation
the use of new knowledge to transform organizational processes or create commercially viable products and services.
The emphasis on newness is a key point. For example, for a patent application to have any chance of success, one of
the most important attributes it must possess is novelty. You can’t patent an idea that has been copied. This is a central
idea. In fact, the root of the word innovation is the Latin novus , which means new. Innovation involves introducing or
changing to something new. 2
Among the most important sources of new ideas is new technology. Technology creates new possibilities. Technology
provides the raw material that firms use to make innovative products and services. But technology is not the only source
of innovations. There can be innovations in human resources, firm infrastructure, marketing, service, or in many other
value-adding areas that have little to do with anything “high-tech.” Strategy Spotlight 12.1 highlights a simple but
effective innovation by Dutch Boy paints. As the Dutch Boy example suggests, innovation can take many forms.
Types of Innovation
Although innovations are not always high-tech, changes in technology can be an important source of change and growth.
When an innovation is based on a sweeping new technology, it often has a more far-reaching impact. Sometimes even a
small innovation can add value and create competitive advantages. Innovation can and should occur throughout an
organization—in every department and all aspects of the value chain.
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. One distinction that is often used when discussing innovation is between process innovation and product innovation. 3
Product innovation refers to efforts to create product designs and applications of technology to develop new products
for end users. Recall
product innovation
efforts to create product designs and applications of technology to develop new products for end users.
379
from Chapter 5 how generic strategies were typically different depending on the stage of the industry life cycle. Product
innovations tend to be more common during the earlier stages of an industry’s life cycle. Product innovations are also
commonly associated with a differentiation strategy. Firms that differentiate by providing customers with new products
or services that offer unique features or quality enhancements often engage in product innovation.
STRATEGY SPOTLIGHT 12.1
DUTCH BOY’S SIMPLE PAINT CAN INNOVATION
Sometimes a simple change can make a vast improvement in a product. Any painter knows that getting the paint
can open and pouring out paint without drips are two of the challenges of painting. Dutch Boy addressed this issue
by developing a twist and pour paint container. The all-plastic container has a large, easy-to-use twist-off top and a
handle on the side. The result was a consumer-friendly product that made painting easier and less messy. The
handle also reduces the need for a paint stirring stick since you can mix the paint by shaking the container. Even
though Dutch Boy’s innovation was simple, nontechnological, and had nothing to do with the core product, the
launch of the new packaging led to articles in 30 national consumer magazines and 60 major newspapers as well as
a story on Good Morning America. The Twist and Pour can was also named “Product of the Year” by USA Today,
Bloomberg Businessweek , and Better Homes & Gardens. It was also named a winner of the 2011 Good
Housekeeping VIP Awards, which commemorate the most innovative products from the past decade.
Sources: 11 Innovative Products from the Past Decade. 2011 The Good Housekeeping Research Institute ; and www.fallscommunications.com .
Process innovation , by contrast, is typically associated with improving the efficiency of an organizational process,
especially manufacturing systems and operations. By drawing on new technologies and an organization’s accumulated
experience ( Chapter 5 ), firms can often improve materials utilization, shorten cycle time, and increase quality. Process
innovations are more likely to occur in the later stages of an industry’s life cycle as companies seek ways to remain
viable in markets where demand has flattened out and competition is more intense. As a result, process innovations are
often associated with overall cost leader strategies, because the aim of many process improvements is to lower the costs
of operations.
process innovation
efforts to improve the efficiency of organizational processes, especially manufacturing systems and operations.
Another way to view the impact of an innovation is in terms of its degree of innovativeness, which falls somewhere on
a continuum that extends from incremental to radical. 4
• Radical innovations produce fundamental changes by evoking major departures from existing practices. These
breakthrough innovations usually occur because of technological change. They tend to be highly disruptive and
can transform a company or even revolutionize a whole industry. They may lead to products or processes that can
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. be patented, giving a firm a strong competitive advantage. Examples include electricity, the telephone, the
transistor, desktop computers, fiber optics, artificial intelligence, and genetically engineered drugs.
radical innovation
an innovation that fundamentally changes existing practices.
• Incremental innovations enhance existing practices or make small improvements in products and processes. They
may represent evolutionary applications within existing paradigms of earlier, more radical innovations. Because
they often sustain a company by extending or expanding its product line or manufacturing skills, incremental
innovations can be a source of competitive advantage by providing new capabilities that minimize expenses or
speed productivity. Examples include frozen food, sports drinks, steel-belted radial tires, electronic bookkeeping,
shatterproof glass, and digital thermometers.
incremental innovation
an innovation that enhances existing practices or makes small improvements in products and processes.
Some innovations are highly radical; others are only slightly incremental. But most innovations fall somewhere
between these two extremes (see Exhibit 12.1 ).
380
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 380
EXHIBIT 12.1 Continuum of Radical and Incremental Innovations
Harvard Business School Professor Clayton M. Christensen identified another useful approach to characterize types of
innovations. 5 Christensen draws a distinction between sustaining and disruptive innovations. Sustaining innovations are
those that extend sales in an existing market, usually by enabling new products or services to be sold at higher margins.
Such innovations may include either incremental or radical innovations. For example, the Internet was a breakthrough
technology that transformed retail selling. But rather than disrupting the activities of catalog companies such as Lands’
End and L.L. Bean, the Internet energized their existing business by extending their reach and making their operations
more efficient.
By contrast, disruptive innovations are those that overturn markets by providing an altogether new approach to
meeting customer needs. The features of a disruptive innovation make it somewhat counterintuitive. Disruptive
innovations:
• Are technologically simpler and less sophisticated than currently available products or services.
• Appeal to less demanding customers who are seeking more convenient, less expensive solutions.
• Take time to take effect and only become disruptive once they have taken root in a new market or low-end part of
an existing market.
Christensen cites Walmart and Southwest Airlines as two disruptive examples. Walmart started with a single store,
Southwest with a few flights. But because they both represented major departures from existing practices and tapped into
unmet needs, they steadily grew into ventures that appealed to a new category of customers and eventually overturned
the status quo. “Instead of sustaining the trajectory of improvement that has been established in a market,” says
Christensen, a disruptive innovation “disrupts it and redefines it by bringing to the market something that is simpler.” 6
Spotlight 12.2 discusses how Aereo is striving to disrupt the TV market by bringing a simpler and cheaper alternative
to cable television.
Innovation is a force in both the external environment (technology, competition) and also a factor affecting a firm’s
internal choices (generic strategy, value-adding activities). 7 Nevertheless, innovation can be quite difficult for some firms
to manage, especially those that have become comfortable with the status quo.
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 381
STRATEGY SPOTLIGHT 12.2
AEREO AIMS TO RECONFIGURE THE TV INDUSTRY
Over the last few decades, the network TV industry has had a fairly stable business model. While the broadcast
networks transmit their signals over the air, few customers use antennas to capture these signals. Instead, they get
their TV programming from cable and satellite TV service providers. The cable and satellite service providers pay
the TV networks—NBC, ABC, CBS, Fox, and Univision—for the right to broadcast their content to customers. These
cable and satellite service providers then charge customers for these channels as part of larger bundles of
broadcast and cable channels that they provide.
Barry Diller, the founder of the Fox network, aims to upset this business model with his start-up firm, Aereo. His
firm uses Internet and cloud computing technology to provide local TV service to subscribing customers. For $12 a
month, Aereo will stream the local broadcast signals to customers to watch at home or on their PCs or tablet
computers. Customers can choose to watch the shows live or later.
However, it is a violation of copyright laws for a firm to rebroadcast TV signals without the TV networks’
permission. Since Aereo doesn’t pay the TV networks for the signals, the networks have refused to grant this
permission. How does Aereo get around this issue? It argues it doesn’t rebroadcast the signal. Instead, it puts up a
mini-TV antenna that’s the size of a dime for every customer and saves a unique copy of the TV broadcast for each
subscribing customer—a recording that customers retrieve from the cloud when they want to watch the shows.
Since copyright law allows each user to make a personal copy of broadcast media, Aereo argues that its service is
legal. Each subscribing customer is simply saving her copy remotely using her own personal antenna and cloud
computing account.
The TV networks are challenging this logic. This firm has the potential to dramatically disrupt the economic
structure of the TV industry since Aereo cuts out the per-customer fees that cable and satellite providers pay. Cable
and satellite firms could also see their business decline because Aereo offers much of what they offer at a lower
cost. To blunt this, the major TV networks have challenged Aereo in court, arguing that they are violating copyright
laws since Aereo, not the end customer, is recording and storing the shows. In essence, according to the networks,
Aereo is rebroadcasting the signal over the web to customers in violation of the law. In the initial federal court
decision in 2012, Aereo won. However, the TV networks have appealed and are waiting to hear the decision from
the Southern District Court of New York.
While the court case plays out, Aereo is off and running and building its business. In its initial market of New York
City, Aereo set up over ten thousand mini-antennas in a converted warehouse in Brooklyn and has signed up
several thousand customers for its service. Aereo has raised $63 million in venture capital and plans to roll out
service to 22 additional cities, starting in the spring of 2013.
Sources: Stewart, C. & Marr. M. 2012. High noon for Diller’s Aereo. wsj.com , May 24: np; Poltrack, A. 2012. The Aereo internet TV battle: What’s happening
and why it matters. digitaltrends.com , December 16: np; and Kafka, P. 2013. Aereo raises $38 million to take its cord-cutting service to 22 more cities.
allthingsd.com , January 8: np.
LO12.2
The challenges and pitfalls of managing corporate innovation processes.
Challenges of Innovation
Innovation is essential to sustaining competitive advantages. Recall from Chapter 3 that one of the four elements of the
Balanced Scorecard is the innovation and learning perspective. The extent and success of a company’s innovation efforts
are indicators of its overall performance. As management guru Peter Drucker warned, “An established company which,
in an age demanding innovation, is not capable of innovation is doomed to decline and extinction.” 8 In today’s
competitive environment, most firms have only one choice: “Innovate or die.”
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. As with change, however, firms are often resistant to innovation. Only those companies that actively pursue
innovation, even though it is often difficult and uncertain, will get a payoff from their innovation efforts. But managing
innovation is challenging. 9 As former Pfizer chairman and CEO William Steere puts it: “In some ways, managing
innovation is analogous to breaking in a spirited horse. You are never sure of success until you achieve your goal. In the
meantime, everyone takes a few lumps.” 10
What is it that makes innovation so difficult? The uncertainty about outcomes is one factor. Companies are often
reluctant to invest time and resources into activities with an unknown future. Another factor is that the innovation process
involves so many choices. These choices present five dilemmas that companies must wrestle with when pursuing
innovation. 11
382
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 382
• Seeds versus Weeds. Most companies have an abundance of innovative ideas. They must decide which of these is
most likely to bear fruit—the “Seeds”—and which should be cast aside—the “Weeds.” This is complicated by the
fact that some innovation projects require a considerable level of investment before a firm can fully evaluate
whether they are worth pursuing. Firms need a mechanism with which they can choose among various innovation
projects.
• Experience versus Initiative. Companies must decide who will lead an innovation project. Senior managers may
have experience and credibility but tend to be more risk averse. Midlevel employees, who may be the innovators
themselves, may have more enthusiasm because they can see firsthand how an innovation would address specific
problems. Firms need to support and reward organizational members who bring new ideas to light.
• Internal versus External Staffing. Innovation projects need competent staffs to succeed. People drawn from inside
the company may have greater social capital and know the organization’s culture and routines. But this knowledge
may actually inhibit them from thinking outside the box. Staffing innovation projects with external personnel
requires that project managers justify the hiring and spend time recruiting, training, and relationship building.
Firms need to streamline and support the process of staffing innovation efforts.
• Building Capabilities versus Collaborating. Innovation projects often require new sets of skills. Firms can seek
help from other departments and/or partner with other companies that bring resources and experience as well as
share costs of development. However, such arrangements can create dependencies and inhibit internal skills
development. Further, struggles over who contributed the most or how the benefits of the project are to be
allocated may arise. Firms need a mechanism for forging links with outside parties to the innovation process.
• Incremental versus Preemptive Launch. Companies must manage the timing and scale of new innovation projects.
An incremental launch is less risky because it requires fewer resources and serves as a market test. But a launch
that is too tentative can undermine the project’s credibility. It also opens the door for a competitive response. A
large-scale launch requires more resources, but it can effectively preempt a competitive response. Firms need to
make funding and management arrangements that allow for projects to hit the ground running and be responsive to
market feedback.
These dilemmas highlight why the innovation process can be daunting even for highly successful firms. Strategy
Spotlight 12.3 discusses how Procter & Gamble has been struggling with these challenges to improve its innovativeness.
Next, we consider five steps that firms can take to improve the innovation process within the firm. 12
Cultivating Innovation Skills
Some firms, such as Apple, Google, and Amazon, regularly produce innovative products and services, while other firms
struggle to generate new, marketable products. What separates these innovative firms from the rest of the pack? Jeff
Dyer, Hal Gregersen, and Clayton Christensen argue it is the Innovative DNA of the leaders of these firms. 13 The leaders
of these firms have exhibited “discovery skills” that allow them to see the potential in innovations and to move the
organization forward in leveraging the value of those innovations. 14 These leaders spend 50 percent more time on these
discovery activities than the leaders of less innovative firms. To improve their innovative processes, firms need to
cultivate the innovation skills of their managers.
The key attribute that firms need to develop in their managers in order to improve their innovative potential is creative
intelligence. Creative intelligence is driven by a core skill
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 383
of associating—the ability to see patterns in data and integrating different questions, information, and insights—and four
patterns of action: questioning, observing, experimenting, and networking. As managers practice the four patterns of
action, they will begin to develop the skill of association. Dyer and his colleagues offer the following illustration to
demonstrate that individuals using these skills are going to develop more-creative, higher-potential innovations.
STRATEGY SPOTLIGHT 12.3
PROCTER & GAMBLE STRIVES TO REMAIN INNOVATIVE
From the development of Ivory Soap in 1879; to Crisco Oil, the first all-vegetable shortening, in 1911; to Crest, the
first fluoridated toothpaste in 1955; to the stackable Pringles chips in 1968; to the Swiffer mop in 1998, Procter &
Gamble (P&G) has long been known as a successful innovative firm. It led the market with these products and used
these innovative products to build up its position as a differentiated consumer products firm. By all measures, P&G
is a very successful company and was honored as the Fifth Most Admired Company by Fortune magazine in 2012.
Still, P&G has found it challenging to remain innovative. The last major innovative blockbuster product P&G
launched was Crest Whitestrips, and this product was introduced in 2001. Instead, in recent years, their new
products have been extensions of current products, such as adding whitening flecks to Crest toothpaste, or
derivatives of current products, such as taking the antihistamine in Nyquil and using it as a sleeping aid, labeled
ZzzQuil. With ZzzQuil, P&G is not an innovator in this market, since there were a number of earlier entrants in the
sleep market, such as Johnson & Johnson with its Tylenol PM product. One portfolio manager at a mutual fund
manager derided the ZzzQuil product, saying, “It’s a sign of what passes for innovation at P&G. It’s not enough. It’s
incremental, derivative.”
The factors leading to P&G’s struggles to remain innovative should not be surprising. They largely grow out of the
success the firm has had. First, with its wide range of products, P&G has a wide range of potential new product
extensions and derivatives from which to choose. Though these are unlikely to be blockbusters, they look much
safer than truly new innovative ideas. Second, while lower-level managers at P&G may be excited about new,
innovative ideas, the division heads of P&G units, who are responsible for developing new products, are likely to shy
away from big-bet product launches. These unit heads are also responsible for and rewarded on current division
performance, a metric that will be negatively affected by the large costs associated with developing and marketing
truly innovative new products. Third, due to its large size, P&G moved R&D responsibilities down to the divisions.
While this enhances the divisions’ abilities to quickly launch incrementally new products, it doesn’t facilitate the
collaboration across units often needed to develop boldly new products.
P&G is trying to address these issues by centralizing 20 to 30 percent of its research efforts within a new
corporate-level business creation and innovation unit. Having a corporate effort at innovation separates the budget
for product development from divisional profit numbers, enhancing the firm’s willingness to invest in long-term
product development efforts. Also, the corporate unit will be able to foster collaboration between units to develop
blockbuster products.
Sources: Coleman-Lochner, L. & Hymowitz, C. 2012. At P&G, the innovation well runs dry. Bloomberg Businessweek , September 10: 24–26; and Bussey, J.
2012. The innovator’s enigma. wsj.com , October 4: np.
Imagine that you have an identical twin, endowed with the same brains and natural talents that you have. You’re both given one
week to come up with a creative new business-venture idea. During that week, you come up with ideas alone in your room. In
contrast, your twin (1) talks with 10 people—including an engineer, a musician, a stay-at-home dad, and a designer—about the
venture, (2) visits three innovative start-ups to observe what they do, (3) samples five “new to the market” products, (4) shows a
prototype he’s built to five people, and (5) asks the questions “What if I tried this?” and “Why do you do that?” at least 10 times
each day during these networking, observing, and experimenting activities. Who do you bet will come up with the more
innovative (and doable) ideas?
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. The point is that by questioning, observing, experimenting, and networking as part of the innovative process,
managers will both make better innovation decisions now but, more importantly, start to build the innovative DNA
needed to be more successful innovators in the future. As they get into the practice of these habits, decision makers will
see opportunities and be more creative as they associate information from different parts of their life,
384
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 384
different people they come in contact with, and different parts of their organizations. The ability to innovate is not hard-
wired into our brains at birth. Research suggests that only one-third of our ability to think creatively is genetic. The other
two-thirds is developed over time. Neuroscience research indicates that the brain is “plastic,” meaning it changes over
time due to experiences. As managers build up the ability to ask creative questions, develop a wealth of experiences from
diverse settings, and link together insights from different arenas of their lives, their brains will follow suit and will build
the ability to easily see situations creatively and draw upon a wide range of experiences and knowledge to identify
creative solutions. The five traits of the effective innovator are described and examples of each trait are presented in
Exhibit 12.2 .
Defining the Scope of Innovation
Firms must have a means to focus their innovation efforts. By defining the “strategic envelope”—the scope of a firm’s
innovation efforts—firms ensure that their innovation efforts are not wasted on projects that are outside the firm’s
domain of interest. Strategic
EXHIBIT 12.2 The Innovator’s DNA
Trait Description Example
Associating Innovators have the ability to connect seemingly
unrelated questions, problems, and ideas from
different fields. This allows them to creatively see
opportunities that others miss.
Pierre Omidyar saw the opportunity that led to eBay
when he linked three items: (1) a personal fascination
with creating more efficient markets, (2) his fiancee’s
desire to locate hard to find collectible Pez
dispensers, and (3) the ineffectiveness of local
classified ads in locating such items.
Questioning Innovators constantly ask questions that challenge
common wisdom. Rather than accept the status
quo, they ask “Why not?” or “What if?” This gets
others around them to challenge the assumptions
that limit the possible range of actions the firm can
take.
After witnessing the emergence of eBay and
Amazon, Marc Benioff questioned why computer
software was still sold in boxes rather than leased
with a subscription and downloaded through the
Internet. This was the genesis of Salesforce.com , a
firm with over $2.2 billion in sales in 2012.
Observing Discovery-driven executives produce innovative
business ideas by observing regular behavior of
individuals, especially customers and potential
customers. Such observations often identify
challenges customers face and previously
unidentified opportunities.
From watching his wife struggle to keep track of the
family’s finances, Intuit founder Scott Cook identified
the need for easy-to-use financial software that
provided a single place for managing bills, bank
accounts, and investments.
Experimenting Thomas Edison once said, “I haven’t failed. I’ve
simply found 10,000 ways that do not work.”
Innovators regularly experiment with new
possibilities, accepting that many of their ideas will
fail. Experimentation can include new jobs, living in
different countries, and new ideas for their
businesses.
Founders Larry Page and Sergey Brin provide time
and resources for Google employees to experiment.
Some, such as the Android cell phone platform, have
been big winners. Others, such as the Orkut and
Buzz social networking systems, have failed. But
Google will continue to experiment with new products
and services.
Networking Innovators develop broad personal networks. They
use this diverse set of individuals to find and test
radical ideas. This can be done by developing a
diverse set of friends. It can also be done by
attending idea conferences where individuals from
a broad set of backgrounds come together to share
their perspectives and ideas, such as the
Michael Lazaridis got the idea for a wireless, email
device that led him to found Research in Motion, now
called Blackberry, from a conference he attended. At
the conference, a speaker was discussing a wireless
system Coca-Cola was using that allowed vending
machines to send a signal when they needed refilling.
Lazaridis saw the opportunity to use the same
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. Technology, Entertainment, and Design (TED)
Conference or the Aspen Ideas Festival.
concept with email communications, and the idea for
the Blackberry was hatched.
Source: Reprinted by permission of Harvard Business Review. Exhibit from “The Innovator’s DNA,” by J. H. Dyer, H. G. Gregerson and C. M. Christensen.
Copyright 2009 by The Harvard Business School Publishing Corporation; all rights reserved.
385
enveloping defines the range of acceptable projects. A strategic envelope creates a firm-specific view of innovation that
defines how a firm can create new knowledge and learn from an innovation initiative even if the project fails. It also
gives direction to a firm’s innovation efforts, which helps separate seeds from weeds and builds internal capabilities.
strategic envelope
a firm-specific view of innovation that defines how a firm can create new knowledge and learn from an innovation
initiative even if the project fails.
One way to determine which projects to work on is to focus on a common technology. Then, innovation efforts across
the firm can aim at developing skills and expertise in a given technical area. Another potential focus is on a market
theme. Consider how DuPont responded to a growing concern for environmentally sensitive products:
In the early 1990s, DuPont sought to use its knowledge of plastics to identify products to meet a growing market demand for
biodegradable products. It conducted numerous experiments with a biodegradable polyester resin it named Biomax. By trying
different applications and formulations demanded by potential customers, the company was finally able to create a product that
could be produced economically and had market appeal. DuPont has continued to extend the Biomax brand and now produces a
large line of environmentally sensitive plastics. 15
Companies must be clear not only about the kinds of innovation they are looking for but also the expected results.
Each company needs to develop a set of questions to ask itself about its innovation efforts:
• How much will the innovation initiative cost?
• How likely is it to actually become commercially viable?
• How much value will it add; that is, what will it be worth if it works?
• What will be learned if it does not pan out?
However a firm envisions its innovation goals, it needs to develop a systematic approach to evaluating its results and
learning from its innovation initiatives. Viewing innovation from this perspective helps firms manage the process. 16
Managing the Pace of Innovation
Along with clarifying the scope of an innovation by defining a strategic envelope, firms also need to regulate the pace of
innovation. How long will it take for an innovation initiative to realistically come to fruition? The project time line of an
incremental innovation may be 6 months to 2 years, whereas a more radical innovation is typically long term—10 years
or more. 17 Radical innovations often begin with a long period of exploration in which experimentation makes strict
timelines unrealistic. In contrast, firms that are innovating incrementally in order to exploit a window of opportunity may
use a milestone approach that is more stringently driven by goals and deadlines. This kind of sensitivity to realistic time
frames helps companies separate dilemmas temporally so they are easier to manage.
Time pacing can also be a source of competitive advantage because it helps a company manage transitions and
develop an internal rhythm. 18 Time pacing does not mean the company ignores the demands of market timing; instead,
companies have a sense of their own internal clock in a way that allows them to thwart competitors by controlling the
innovation process. With time pacing, the firm works to develop an internal rhythm that matches the buying practices of
customers. For example, for years, Intel worked to develop new microprocessor chips every 18 months. They would have
three chips in process at any point in time—one they were producing and selling, one they were currently developing,
and one that was just on the drawing board. This pacing also matched the market, because most corporate customers
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. bought new computers about every three years. Thus, customers were then two generations behind in their computing
technology, leading them to feel the need to upgrade at the three-year point. In the post-PC era, Apple has developed a
similar but faster internal cycle, allowing them to launch a new generation of the iPad on an annual basis.
386
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 386
This doesn’t mean the aim is always to be faster when innovating. Some projects can’t be rushed. Companies that
hurry up their research efforts or go to market before they are ready can damage their ability to innovate—and their
reputation. Thus, managing the pace of innovation can be an important factor in long-term success.
Staffing to Capture Value from Innovation
People are central to the processes of identifying, developing, and commercializing innovations effectively. They need
broad sets of skills as well as experience—experience working with teams and experience working on successful
innovation projects. To capture value from innovation activities, companies must provide strategic decision makers with
staff members who make it possible.
This insight led strategy experts Rita Gunther McGrath and Thomas Keil to research the types of human resource
management practices that effective firms use to capture value from their innovation efforts. 19 Four practices are
especially important:
• Create innovation teams with experienced players who know what it is like to deal with uncertainty and can help
new staff members learn venture management skills.
• Require that employees seeking to advance their career with the organization serve in the new venture group as part
of their career climb.
• Once people have experience with the new venture group, transfer them to mainstream management positions
where they can use their skills and knowledge to revitalize the company’s core business.
• Separate the performance of individuals from the performance of the innovation. Otherwise, strong players may
feel stigmatized if the innovation effort they worked on fails.
There are other staffing practices that may sound as if they would benefit a firm’s innovation activities but may, in
fact, be counterproductive:
• Creating a staff that consists only of strong players whose primary experience is related to the company’s core
business. This provides too few people to deal with the uncertainty of innovation projects and may cause good
ideas to be dismissed because they do not appear to fit with the core business.
• Creating a staff that consists only of volunteers who want to work on projects they find interesting. Such players
are often overzealous about new technologies or overly attached to product concepts, which can lead to poor
decisions about which projects to pursue or drop.
• Creating a climate where innovation team members are considered second-class citizens. In companies where
achievements are rewarded, the brightest and most ambitious players may avoid innovation projects with uncertain
outcomes.
Unless an organization can align its key players into effective new venture teams, it is unlikely to create any
differentiating advantages from its innovation efforts. 20 An enlightened approach to staffing a company’s innovation
efforts provides one of the best ways to ensure that the challenges of innovation will be effectively met. Strategy
Spotlight 12.4 describes the approach Air Products and Chemicals Inc. is using to enhance its innovation efforts.
Collaborating with Innovation Partners
It is rare for any one organization to have all the information it needs to carry an innovation from concept to
commercialization. Even a company that is highly competent with its current operations usually needs new capabilities to
achieve new results. Innovation partners provide the skills and insights that are needed to make innovation projects
succeed. 21
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. Innovation partners may come from many sources, including research universities and the federal government. Each
year the federal government issues requests for proposals (RFPs) asking private companies for assistance in improving
services or finding solutions
387
to public problems. Universities are another type of innovation partner. Chip-maker Intel, for example, has benefited
from underwriting substantial amounts of university research. Rather than hand universities a blank check, Intel bargains
for rights to patents that emerge from Intel-sponsored research. The university retains ownership of the patent, but Intel
gets royalty-free use of it. 22
STRATEGY SPOTLIGHT 12.4
STAFFING FOR INNOVATION SUCCESS AT AIR PRODUCTS
When it comes to implementing its innovation efforts, Air Products and Chemicals, Inc. (APCI) recognizes the
importance of staffing for achieving success. Air Products is a global manufacturer of industrial gases, chemicals,
and related equipment. Headquartered in Allentown, Pennsylvania, Air Products has annual sales of $10 billion,
manufacturing facilities in over 30 countries, and 22,000 employees worldwide. The company has a strong
reputation for effectively embedding innovation into its culture through its unique employee engagement processes.
Ron Pierantozzi, a 30-year veteran of the company and its director of innovation and new product development,
says, “Innovation is about discipline…. It requires a different type of training, different tools and new approaches to
experimentation.” To enact this philosophy, Pierantozzi begins with his people. He recruits people with diverse
backgrounds and a wide range of expertise including engineers, entrepreneurs, and government officials. It is made
clear to those on his innovation teams that they will return to mainstream operations after four years—a fact that
most consider a plus since working in the innovation unit usually provides a career boost. He also assures players
that there is no stigma associated with a failed venture because experimentation is highly valued.
Innovation teams are created to manage the company’s intellectual assets and determine which technologies
have the most potential value. A key benefit of this approach has been to more effectively leverage its human
resources to achieve innovative outcomes without increasing its R&D expenses. These efforts resulted in an
innovation award from APQC (formerly known as the American Productivity and Quality Center) which recognizes
companies for exemplary practices that increase productivity.
Sources: Chesbrough, H. 2007. Why Bad Things Happen to Good Technology. The Wall Street Journal: April 28–29, R11; Leavitt, P. 2005. Delivering the
Difference: Business Process Management at APCI. APQC, www.apqc.com ; McGrath, R. G. & Keil, T. 2007. The Value Captor’s Process: Getting the Most
Out of Your New Business Ventures. Harvard Business Review , May: 128–136; and www.apci.com .
Strategic partnering requires firms to identify their strengths and weaknesses and make choices about which
capabilities to leverage, which need further development, and which are outside the firm’s current or projected scope of
operations.
To choose partners, firms need to ask what competencies they are looking for and what the innovation partner will
contribute. 23 These might include knowledge of markets, technology expertise, or contacts with key players in an
industry. Innovation partnerships also typically need to specify how the rewards of the innovation will be shared and who
will own the intellectual property that is developed. 24 Strategy Spotlight 12.5 discusses how Coke and Deka found that
they each had only some of the resources needed to take on a bold global initiative, but together they had all the
resources needed.
Innovation efforts that involve multiple partners and the speed and ease with which partners can network and
collaborate are changing the way innovation is conducted. 25 Strategy Spotlight 12.6 outlines how IBM is using
crowdsourcing technologies to foster collaboration between employees, customers, suppliers, and other stakeholders to
enhance its innovation efforts.
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. Corporate Entrepreneurship
Corporate entrepreneurship (CE) has two primary aims: the pursuit of new venture opportunities and strategic
renewal. 26 The innovation process keeps firms alert by exposing them to new technologies, making them aware of
marketplace trends, and helping them evaluate new possibilities. CE uses the fruits of the innovation process to help
firms
corporate entrepreneurship
the creation of new value for a corporation, through investments that create either new sources of competitive advantage
or renewal of the value proposition.
388
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 388
build new sources of competitive advantage and renew their value propositions. Just as the innovation process helps
firms to make positive improvements, corporate entrepreneurship helps firms identify opportunities and launch new
ventures.
STRATEGY
SPOTLIGHT
12.5 ENVIRONMENTAL
SUSTAINABILITY
COKE AND DEKA: PARTNERS TO SOLVE THE NEED FOR CLEAN WATER
Coca-Cola and DEKA each have an innovative vision. Apart, they are unlikely to reach their visions. Together, they
just may make it happen. Coca-Cola set a goal of replenishing 100 percent of the water used in the production of its
beverages by the year 2020. To get there, they have worked to improve the water efficiency of their plants and
invested in a number of water projects. This has gotten them 35 percent of the way to their goal, but they need to
find ways to add fresh water into the equation. DEKA Research has a vision to provide clean drinking water to areas
of the developing world where clean water is a scarce commodity, but they don’t have the financial resources to
make it happen.
While we take drinking water for granted in the developed world, 20 percent of the world’s population does not
have access to clean water. Governments and nongovernmental organizations (NGOs) have invested billions of
dollars in major public water projects to take available water from rivers, lakes, and oceans and treat it to provide
drinkable water. But this effort still hasn’t met the need of many. DEKA Research has an innovative solution to this
issue, a water purification system called the Slingshot that is simple, portable, and affordable. Rather than relying on
major, multimillion dollar water projects, this is a low-cost system (about $2,000 each) that can produce 250 gallons
of drinkable water each day, enough for about 300 people, using less electricity than needed to run a blow dryer.
The Slingshot is about the size of a dormitory refrigerator and its technology borrows from a desalination process
used to generate drinking water on naval ships. Using a vapor compression distillation process, the system heats
water through multiple cycles. This process removes minerals, heavy metals, and other contaminants by
evaporating the water away from the contaminants. It also kills bacteria and viruses through pasteurization of the
water. Still, DEKA faced a major challenge bringing this technology to market. DEKA needed millions of dollars to
build a manufacturing facility to produce the Slingshots.
That is where Coke enters the picture. Coke’s CEO, Muhtar Kent, has pledged to become water neutral as a firm.
“Water is the lifeblood of our business, and our commitment is to ensure we’re doing our part to replenish the water
we use and give it back to communities around the world,” Kent said. Coke sees DEKA as a great partner to reach
their target. Coke has the financial resources to make it happen, but they didn’t have the technology to generate
water in the way that DEKA does. Coke has pledged “tens of millions of dollars” to help DEKA build their plant and
to begin to produce Slingshots. In addition to their financial investment, Coke also has the operational resources to
deliver the Slingshots to areas around the world that have no other access to fresh water. They have already begun
field testing the machines in rural areas in South Africa, Mexico, and Paraguay. They hope to ramp up mass
production of the machines by the middle of 2013. Combined, these two firms appear to have all the resources
needed to make the Slingshot an innovative and valuable solution in the quest for clean water.
Sources: Copeland, M. V. 2010. Dean Kamen (Still) wants to save the world. Fortune , May 3: 61–62; Nasr, S. L. 2009. How the Slingshot water purifier works.
HowStuffWorks.com , July 27: np; Solomon, D. 2012. Dean Kaman’s Slingshot heard ‘round the world. unionleader.com , October 7: np; and Geller, M. 2012.
Coke, Segway inventor team up on clean water project. reuters.com , September 25: np.
Corporate new venture creation was labeled “intrapreneuring” by Gifford Pinchot because it refers to building
entrepreneurial businesses within existing corporations. 27 However, to engage in corporate entrepreneurship that yields
above-average returns and contributes to sustainable advantages, it must be done effectively. In this section we will
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. examine the sources of entrepreneurial activity within established firms and the methods large corporations use to
stimulate entrepreneurial behavior.
In a typical corporation, what determines how entrepreneurial projects will be pursued? That depends on many
factors, including:
• Corporate culture.
• Leadership.
• Structural features that guide and constrain action.
• Organizational systems that foster learning and manage rewards.
389
STRATEGY
SPOTLIGHT
12.6
CROWDSOURCING
IBM’S INNOVATION JAM
IBM is one of the best known corporations in the world, but their CEO, Samuel Palmisano, saw a major challenge
for the firm. Though IBM had great ability to do basic scientific research and owned the rights to over 40,000
patents, they had struggled to translate their patented knowledge into marketable products. Also, they had built a
reputation with investors as a firm with incremental product development, not the reputation needed in dynamic
technological markets. Palmisano saw crowdsourcing as a means to move IBM forward in a bold way.
In 2006, IBM hosted an Innovation Jam, an open event that involved 150,000 IBM employees, family members,
business partners, clients, and university researchers. The jam took place over two 72-hour sessions. Participants
from over 100 countries jammed for 24 hours a day over three days. The discussions were organized around 25
technologies in six broad categories. While the jam discussions were rich in content, it was a challenge for IBM to
pull meaningful data from them. The 24-hour format meant that no single moderator could follow any discussion,
and the volume of posts to the discussion threads left IBM with a huge amount of data to wade through. The
discussions yielded 46,000 potential business ideas. To make sense of the data, IBM organized the discussion
threads using sophisticated text analysis software and had a team of 50 managers read through the organized data.
Using data from the first session, the managers identified 31 “big ideas.” They further explored these 31 ideas in the
second jam session. IBM then used another set of 50 global managers to review the discussions from the jam.
Teams of managers focused on related groups of ideas, such as health care and the environment.
IBM’s managers saw the jam as serving three purposes. First, it gave individuals both inside and outside IBM
who already had big ideas a forum in which to share their vision with top managers. Second, it gave individuals with
smaller ideas a venue to link up with others with related ideas, resulting in larger major initiatives. For example,
individuals who had ideas about better local weather forecasting, sensing devices for water utilities, and long-term
climate forecasting came together to create “Predictive Water Management,” a comprehensive solution for water
authorities to manage their resources, a business solution no one at IBM had thought of before the jam. Third, the
global structure of the jam allowed IBM, early on, to see how employees, partners, and customers from different
regions had different goals and concerns about possible new businesses. For example, what customers wanted
from systems to manage health care records varied greatly across regions.
Based on the jam sessions, IBM launched 10 new businesses using $100 million in funding. One, the Intelligent
Transportation System, a system that gathers, manages, and disseminates real-time information about metropolitan
transportation systems to optimize traffic flow, has been sold to transportation authorities in Sweden, the UK,
Singapore, Dubai, and Australia. Another, Intelligent Utility Networks, became a core product in IBM’s public utility
business. A third, Big Green, became part of the largest initiative in IBM’s history, a billion-dollar project on better
managing energy and other resources.
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. Sources: Bjelland, O. M. & Wood, R. C. 2008. An Inside View of IBM’s Innovation Jam. Sloan Management Review. Fall: 32–40; Hempel, J. 2006. Big Blue
Brainstorm. BusinessWeek , August 7: 70; Takahashi, D. 2008. IBM’s Innovation Jam 2008 Shows How Far Crowdsourcing Has Come. Businessweek.com ,
October 9: np.
All of the factors that influence the strategy implementation process will also shape how corporations engage in
internal venturing.
Other factors will also affect how entrepreneurial ventures will be pursued.
• The use of teams in strategic decision making.
• Whether the company is product or service oriented.
• Whether its innovation efforts are aimed at product or process improvements.
• The extent to which it is high-tech or low-tech.
Because these factors are different in every organization, some companies may be more involved than others in
identifying and developing new venture opportunities. 28 These factors will also influence the nature of the CE process.
Successful CE typically requires firms to reach beyond their current operations and markets in the pursuit of new
opportunities. It is often the breakthrough opportunities that provide the greatest returns. Such strategies are not without
risks, however. In the sections that follow, we will address some of the strategic choice and implementation issues that
influence the success or failure of CE activities.
390
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 390
Two distinct approaches to corporate venturing are found among firms that pursue entrepreneurial aims. The first is
focused corporate venturing, in which CE activities are isolated from a firm’s existing operations and worked on by
independent work units. The second approach is dispersed , in which all parts of the organization and every organization
member are engaged in intrapreneurial activities.
LO12.3
How corporations use new venture teams, business incubators, and product champions to create an internal
environment and culture that promote entrepreneurial development.
Focused Approaches to Corporate Entrepreneurship
focused approaches to corporate entrepreneurship
corporate entrepreneurship in which the venturing entity is seperated from the other ongoing operations of the firm.
Firms using a focused approach typically separate the corporate venturing activity from the other ongoing operations of
the firm. CE is usually the domain of autonomous work groups that pursue entrepreneurial aims independent of the rest
of the firm. The advantage of this approach is that it frees entrepreneurial team members to think and act without the
constraints imposed by existing organizational norms and routines. This independence is often necessary for the kind of
open-minded creativity that leads to strategic breakthroughs. The disadvantage is that, because of their isolation from the
corporate mainstream, the work groups that concentrate on internal ventures may fail to obtain the resources or support
needed to carry an entrepreneurial project through to completion. Two forms—new venture groups (NVGs) and business
incubators—are among the most common types of focused approaches.
New Venture Groups (NVGs) Corporations often form NVGs whose goal is to identify, evaluate, and cultivate venture
opportunities. These groups typically function as semi-autonomous units with little formal structure. The new venture
group may simply be a committee that reports to the president on potential new ventures. Or it may be organized as a
corporate division with its own staff and budget. The aims of the NVG may be open-ended in terms of what ventures it
may consider. Alternatively, some corporations use them to promote concentrated effort on a specific problem. In both
cases, they usually have a substantial amount of freedom to take risks and a supply of resources to do it with. 29
new venture group
a group of individuals, or a division within a corporation, that identifies, evaluates, and cultivates venture opportunities.
NVGs usually have a larger mandate than a typical R&D department. Their involvement extends beyond innovation
and experimentation to coordinating with other corporate divisions, identifying potential venture partners, gathering
resources, and actually launching the venture. Strategy Spotlight 12.7 shows how WD-40 has used an NVG to improve
its CE efforts.
Business Incubators The term incubator was originally used to describe a device in which eggs are hatched. Business
incubators are designed to “hatch” new businesses. They are a type of corporate NVG with a somewhat more
specialized purpose—to support and nurture fledgling entrepreneurial ventures until they can thrive on their own as
standalone businesses. Corporations use incubators as a way to grow businesses identified by the NVG. Although they
often receive support from many parts of the corporation, they still operate independently until they are strong enough to
go it alone. Depending on the type of business, they are either integrated into an existing corporate division or continue to
operate as a subsidiary of the parent firm.
business incubator
a corporate new venture group that supports and nurtures fledgling entrepreneurial ventures until they can thrive on their
own as stand-alone businesses.
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. Incubators typically provide some or all of the following five functions. 30
• Funding. Includes capital investments as well as in-kind investments and loans.
• Physical space. Incubators in which several start-ups share space often provide fertile ground for new ideas and
collaboration.
• Business services. Along with office space, young ventures need basic services and infrastructure; may include
anything from phone systems and computer networks to public relations and personnel management.
391
STRATEGY SPOTLIGHT 12.7
USING TEAM TOMORROW TO GROW WD-40
When a hinge squeaks, most people reach for a can of WD-40. The iconic lubricant in the blue cans has been
around for over 50 years and commands a 70 percent market share in the spray lubricant business. Garry Ridge,
the CEO of WD-40, quips that “more people use WD-40 every day than use dental floss.” Still, Ridge wanted the
firm to look forward, searching for growth opportunities. Historically, WD-40’s marketing team was responsible for
new product development, but this typically involved minor product changes or new packaging for existing products.
Knowing the incremental focus of the current structure and wanting to get WD-40 focused on bolder new product
opportunities, Ridge created a multifunctional team, dubbed Team Tomorrow, to manage its global CE efforts. This
team includes members from marketing, research, supply chain, purchasing, and distribution. To head the team,
Ridge tapped an experienced executive, Graham Milner, who thought globally and had a marketing background.
There was some resistance from the marketing staff, because they lost power in the new product-development
process. Ridge overcame this in a number of ways. He was active in forming the team, got involved during times of
conflict between Team Tomorrow and other groups in the organization, and carried around an early prototype of the
team’s first product, the No Mess Pen, to show how interested he was in the new product. His involvement signaled
the importance of the team to WD-40. By placing a marketing executive in charge of Team Tomorrow, he signaled
the importance of marketing to the organization. Milner and the other team leader, Stephanie Barry, worked
collaboratively with the head of marketing, instituted an open-door policy, and shared information with marketing.
Collectively, these actions broke down resistance to Team Tomorrow.
Ridge also gave the team a bold goal. He charged the team to create new products that would generate $100
million in sales per year from products developed and launched within the previous three years. As of 2010, the
team had created products that generate $165 million in sales. Ridge also sees a large change in the rest of the firm
as a result of this effort. He sees the firm’s employees as being members of a “tribe” and the organization as a
“living learning laboratory.”
Sources: Ferrarini, E. 2010. WD-40 Company CEO Talks about Rebuilding an Innovative Brand and Taking It Global. Enterprise Leadership , February 27: np;
Bounds, G. 2006. WD-40 CEO Repackages a Core Product. Pittsburgh Post Gazette , May 23: np; Govindarajan, V. & Trimble, D. 2010. Stop the Innovation
Wars. Harvard Business Review , July–August: 76–83; www.intheboardroom.com .
• Mentoring. Senior executives and skilled technical personnel often provide coaching and experience-based advice.
• Networking. Contact with other parts of the firm and external resources such as suppliers, industry experts, and
potential customers facilitates problem solving and knowledge sharing.
Because Microsoft has struggled to reinvigorate its entrepreneurial capabilities, the company has created a business
incubator to enhance corporate entrepreneurship efforts.
To encourage entrepreneurship, corporations sometimes need to do more than create independent work groups or
venture incubators to generate new enterprises. In some firms, the entrepreneurial spirit is spread throughout the
organization.
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. Dispersed Approaches to Corporate Entrepreneurship
dispersed approaches to corporate entrepreneurship
corporate entrepreunership in which a dedication to the principles and policies of entrepreunership is spread throughout
the organization.
The second type of CE is dispersed. For some companies, a dedication to the principles and practices of entrepreneurship
is spread throughout the organization. One advantage of this approach is that organizational members don’t have to be
reminded to think entrepreneurially or be willing to change. The ability to change is considered to be a core capability.
This leads to a second advantage: Because of the firm’s entrepreneurial reputation, stakeholders such as vendors,
customers, or alliance partners can bring new ideas or venture opportunities to anyone in the organization and expect
them to be well-received. Such opportunities make it possible for the firm to stay ahead of the competition. However,
there are disadvantages as well. Firms that are overzealous about CE sometimes feel they must change for the sake of
change, causing them to lose vital competencies or spend heavily on
392
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 392
R&D and innovation to the detriment of the bottom line. Three related aspects of dispersed entrepreneurship include
entrepreneurial cultures that have an overarching commitment to CE activities, resource allotments to support
entrepreneurial actions, and the use of product champions in promoting entrepreneurial behaviors.
Entrepreneurial Culture In some large corporations, the corporate culture embodies the spirit of entrepreneurship. A
culture of entrepreneurship is one in which the search for venture opportunities permeates every part of the organization.
The key to creating value successfully is viewing every value-chain activity as a source of competitive advantage. The
effect of CE on a firm’s strategic success is strongest when it animates all parts of an organization. It is found in
companies where the strategic leaders and the culture together generate a strong impetus to innovate, take risks, and seek
out new venture opportunities. 31
entrepreneurial culture
corporate culture in which change and renewal are a constant focus of attention.
In companies with an entrepreneurial culture, everyone in the organization is attuned to opportunities to help create
new businesses. Many such firms use a top-down approach to stimulate entrepreneurial activity. The top leaders of the
organization support programs and incentives that foster a climate of entrepreneurship. Many of the best ideas for new
corporate ventures, however, come from the bottom up. Catherine Winder, president of Rainmaker Entertainment,
discussed how she welcomes any employee to generate and pitch innovative ideas this way 32:
We have an open-door policy for anyone in the company to pitch ideas … to describe their ideas in 15 to 30 seconds. If we like
the core idea, we’ll work with them. If you can be concise and come up with your idea in a really clear way, it means you’re on
to something.
An entrepreneurial culture is one in which change and renewal are on everybody’s mind. Amazon, 3M, Intel, and
Cisco are among the corporations best known for their corporate venturing activities. Many fast-growing young
corporations also attribute much of their success to an entrepreneurial culture. But other successful firms struggle in their
efforts to remain entrepreneurial. For example, Sony was very successful in their corporate venturing efforts for many
years, but more recently they have had great difficulty maintaining their position as an entrepreneurial leader in consumer
electronics and computers.
Resource Allotments CE requires the willingness of the firm to invest in the generation and execution of innovative
ideas. On the generation side, employees are much more likely to develop these ideas if they have the time to do so. For
decades, 3M allowed its engineers free time, up to 15 percent of their work schedule, to work on developing new
products. 33 Google has followed a similar path with its 70-20-10 rule. Google expects its employees to spend 70 percent
of their time on the company’s core, existing product lines. Employees can spend 20 percent of their time on related
product spheres in which the company can look to extend its product line. The remaining 10 percent of the time is open.
This is time the employees can use to think up bold new ideas. According to Larry Page, Google’s CEO, this last 10
percent is “important to let people really be creative and think outside the box.” In addition to time, firms can foster CE
by providing monetary investment to fund entrepreneurial ideas. Johnson & Johnson (J&J) uses its Internal Ventures
Group to support entrepreneurial ideas developed inside the firm. Entrepreneurs within J&J submit proposals to the
group. The review board decides which proposals to fund and then solicits further investments from J&J’s operating
divisions. Nike’s Sustainable Business and Innovation Lab and Google’s Ventures Group have a similar charter to review
and fund promising corporate entrepreneurship activities. The availability of these time and financing sources can
enhance the likelihood of successful entrepreneurial activities within the firm.
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 393
Product Champions CE does not always involve making large investments in start-ups or establishing incubators to
spawn new divisions. Often, innovative ideas emerge in the normal course of business and are brought forth and become
part of the way of doing business. Entrepreneurial champions are often needed to take charge of internally generated
ventures. Product (or project) champions are those individuals working within a corporation who bring entrepreneurial
ideas forward, identify what kind of market exists for the product or service, find resources to support the venture, and
promote the venture concept to upper management. 34
product champion
an individual working within a corporation who brings entrepreneurial ideas forward, identifies what kind of market exists
for the product or service, finds resources to support the venture, and promotes the venture concept to upper
management.
When lower-level employees identify a product idea or novel solution, they will take it to their supervisor or someone
in authority. A new idea that is generated in a technology lab may be introduced to others by its inventor. If the idea has
merit, it gains support and builds momentum across the organization. 35 Even though the corporation may not be looking
for new ideas or have a program for cultivating internal ventures, the independent behaviors of a few organizational
members can have important strategic consequences.
No matter how an entrepreneurial idea comes to light, however, a new venture concept must pass through two critical
stages or it may never get off the ground:
1. Project definition. An opportunity has to be justified in terms of its attractiveness in the marketplace and how well
it fits with the corporation’s other strategic objectives.
2. Project impetus. For a project to gain impetus, its strategic and economic impact must be supported by senior
managers who have experience with similar projects. It then becomes an embryonic business with its own
organization and budget.
For a project to advance through these stages of definition and impetus, a product champion is often needed to
generate support and encouragement. Champions are especially important during the time after a new project has been
defined but before it gains momentum. They form a link between the definition and impetus stages of internal
development, which they do by procuring resources and stimulating interest for the product among potential customers. 36
Often, they must work quietly and alone. Consider the example of Ken Kutaragi, the Sony engineer who championed the
PlayStation.
Even though Sony had made the processor that powered the first Nintendo video games, no one at Sony in the mid-1980s saw
any future in such products. “It was a kind of snobbery,” Kutaragi recalled. “For Sony people, the Nintendo product would have
been very embarrassing to make because it was only a toy.” But Kutaragi was convinced he could make a better product. He
began working secretly on a video game. Kutaragi said, “I realized that if it was visible, it would be killed.” He quietly began
enlisting the support of senior executives, such as the head of R&D. He made a case that Sony could use his project to develop
capabilities in digital technologies that would be important in the future. It was not until 1994, after years of “underground”
development and quiet building of support, that Sony introduced the PlayStation. By the year 2000, Sony had sold 55 million of
them, and Kutaragi became CEO of Sony Computer Entertainment. By 2005, Kutagari was Sony’s Chief Operating Officer, and
was supervising efforts to launch PS3, the next generation version of the market-leading PlayStation video game console. 37
Product champions play an important entrepreneurial role in a corporate setting by encouraging others to take a chance
on promising new ideas. 38
Measuring the Success of Corporate Entrepreneurship Activities
At this point in the discussion, it is reasonable to ask whether CE is successful. Corporate venturing, like the innovation
process, usually requires a tremendous effort. Is it worth it? We consider factors that corporations need to take into
consideration when evaluating the success of CE programs. We also examine techniques that companies can use to limit
the expense of venturing or to cut their losses when CE initiatives appear doomed.
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 394
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 394
LO12.4
How corporate entrepreneurship achieves both financial goals and strategic goals.
Comparing Strategic and Financial CE Goals Not all corporate venturing efforts are financially rewarding. In terms of
financial performance, slightly more than 50 percent of corporate venturing efforts reach profitability (measured by ROI)
within six years of their launch. 39 If this were the only criterion for success, it would seem to be a rather poor return. On
the one hand, these results should be expected, because CE is riskier than other investments such as expanding ongoing
operations. On the other hand, corporations expect a higher return from corporate venturing projects than from normal
operations. Thus, in terms of the risk–return trade-off, it seems that CE often falls short of expectations. 40
There are several other important criteria, however, for judging the success of a corporate venture initiative. Most CE
programs have strategic goals. 41 The strategic reasons for undertaking a corporate venture include strengthening
competitive position, entering into new markets, expanding capabilities by learning and acquiring new knowledge, and
building the corporation’s base of resources and experience. Three questions should be used to assess the effectiveness of
a corporation’s venturing initiatives: 42
1. Are the products or services offered by the venture accepted in the marketplace? Is the venture considered to be a
market success? If so, the financial returns are likely to be satisfactory. The venture may also open doors into other
markets and suggest avenues for other venture projects.
2. Are the contributions of the venture to the corporation’s internal competencies and experience valuable? Does the
venture add to the worth of the firm internally? If so, strategic goals such as leveraging existing assets, building
new knowledge, and enhancing firm capabilities are likely to be met. 43
3. Is the venture able to sustain its basis of competitive advantage? Does the value proposition offered by the venture
insulate it from competitive attack? If so, it is likely to place the corporation in a stronger position relative to
competitors and provide a base from which to build other advantages.
These criteria include both strategic and financial goals of CE. Another way to evaluate a corporate venture is in terms
of the four criteria from the Balanced Scorecard ( Chapter 3 ). In a successful venture, not only are financial and market
acceptance (customer) goals met but so are the internal business and innovation and learning goals. Thus, when assessing
the success of corporate venturing, it is important to look beyond simple financial returns and consider a well-rounded set
of criteria. 44
Exit Champions Although a culture of championing venture projects is advantageous for stimulating an ongoing stream
of entrepreneurial initiatives, many—in fact, most—of the ideas will not work out. At some point in the process, a
majority of initiatives will be abandoned. Sometimes, however, companies wait too long to terminate a new venture and
do so only after large sums of resources are used up or, worse, result in a marketplace failure. Motorola’s costly global
satellite telecom project known as Iridium provides a useful illustration. Even though problems with the project existed
during the lengthy development process, Motorola refused to pull the plug. Only after investing $5 billion and years of
effort was the project abandoned. 45
One way to avoid these costly and discouraging defeats is to support a key role in the CE process: exit champions . In
contrast to product champions and other entrepreneurial enthusiasts within the corporation, exit champions are willing to
question the viability of a venture project. 46 By demanding hard evidence and challenging the belief system that is
carrying an idea forward, exit champions hold the line on ventures that appear shaky.
exit champion
an individual working within a corporation who is willing to question the viability of a venture project by demanding hard
evidence of venture success and challenging the belief system that carries a venture forward.
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 395
Both product champions and exit champions must be willing to energetically stand up for what they believe. Both put
their reputations on the line. But they also differ in important ways. 47 Product champions deal in uncertainty and
ambiguity. Exit champions reduce ambiguity by gathering hard data and developing a strong case for why a project
should be killed. Product champions are often thought to be willing to violate procedures and operate outside normal
channels. Exit champions often have to reinstate procedures and re-assert the decision-making criteria that are supposed
to guide venture decisions. Whereas product champions often emerge as heroes, exit champions run the risk of losing
status by opposing popular projects.
The role of exit champion may seem unappealing. But it is one that could save a corporation both financially and in
terms of its reputation in the marketplace. It is especially important because one measure of the success of a firm’s CE
efforts is the extent to which it knows when to cut its losses and move on.
LO12.5
The benefits and potential drawbacks of real options analysis in making resource deployment decisions in corporate
entrepreneurship contexts.
Real Options Analysis: A Useful Tool
One way firms can minimize failure and avoid losses from pursuing faulty ideas is to apply the logic of real options. Real
options analysis (ROA) is an investment analysis tool from the field of finance. It has been slowly, but increasingly,
adopted by consultants and executives to support strategic decision making in firms. What does ROA consist of and how
can it be appropriately applied to the investments required to initiate strategic decisions? To understand real options it is
first necessary to have a basic understanding of what options are.
real options analysis
an investment analysis tool that looks at an investment or activity as a series of sequential steps, and for each step the
investor has the option of (a) investing additional funds to grow or accelerate, (b) delaying, (c) shrinking the scale of, or
(d) abandoning the activity.
Options exist when the owner of the option has the right but not the obligation to engage in certain types of
transactions. The most common are stock options. A stock option grants the holder the right to buy (call option) or sell
(put option) shares of the stock at a fixed price (strike price) at some time in the future. 48 The investment to be made
immediately is small, whereas the investment to be made in the future is generally larger. An option to buy a rapidly
rising stock currently priced at $50 might cost as little as $.50. 49 Owners of such a stock option have limited their losses
to $.50 per share, while the upside potential is unlimited. This aspect of options is attractive, because options offer the
prospect of high gains with relatively small up-front investments that represent limited losses.
The phrase “real options” applies to situations where options theory and valuation techniques are applied to real assets
or physical things as opposed to financial assets. Applied to entrepreneurship, real options suggest a path that companies
can use to manage the uncertainty associated with launching new ventures. Some of the most common applications of
real options are with property and insurance. A real estate option grants the holder the right to buy or sell a piece of
property at an established price some time in the future. The actual market price of the property may rise above the
established (or strike) price—or the market value may sink below the strike price. If the price of the property goes up, the
owner of the option is likely to buy it. If the market value of the property drops below the strike price, the option holder
is unlikely to execute the purchase. In the latter circumstance, the option holder has limited his or her loss to the cost of
the option, but during the life of the option retains the right to participate in whatever the upside potential might be.
Applications of Real Options Analysis to Strategic Decisions
The concept of options can also be applied to strategic decisions where management has flexibility. Situations arise
where management must decide whether to invest additional funds to grow or accelerate the activity, perhaps delay in
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. order to learn more, shrink the scale of the activity, or even abandon it. Decisions to invest in new ventures or other
business activities such as R&D, motion pictures, exploration and production
396
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 396
of oil wells, and the opening and closing of copper mines often have this flexibility. 50 Important issues to note are:
• ROA is appropriate to use when investments can be staged; a smaller investment up front can be followed by
subsequent investments. Real options can be applied to an investment decision that gives the company the right,
but not the obligation, to make follow-on investments.
• Strategic decision makers have “tollgates,” or key points at which they can decide whether to continue, delay, or
abandon the project. Executives have flexibility. There are opportunities to make other go or no-go decisions
associated with each phase.
• It is expected that there will be increased knowledge about outcomes at the time of the next investment and that
additional knowledge will help inform the decision makers about whether to make additional investments (i.e.,
whether the option is in the money or out of the money).
Many strategic decisions have the characteristic of containing a series of options. The phenomenon is called
“embedded options,” a series of investments in which at each stage of the investment there is a go/no–go decision.
Consider the real options logic that Johnson Controls, a maker of car seats, instrument panels, and interior control
systems uses to advance or eliminate entrepreneurial ideas. 51 Johnson options each new innovative idea by making a
small investment in it. To decide whether to exercise an option, the idea must continue to prove itself at each stage of
development. Here’s how Jim Geschke, vice president and general manager of electronics integration at Johnson,
describes the process:
Think of Johnson as an innovation machine. The front end has a robust series of gates that each idea must pass through. Early
on, we’ll have many ideas and spend a little money on each of them. As they get more fleshed out, the ideas go through a gate
where a go or no-go decision is made. A lot of ideas get filtered out, so there are far fewer items, and the spending on each goes
up…. Several months later each idea will face another gate. If it passes, that means it’s a serious idea that we are going to
develop. Then the spending goes way up, and the number of ideas goes way down. By the time you reach the final gate, you
need to have a credible business case in order to be accepted. At a certain point in the development process, we take our idea to
customers and ask them what they think. Sometimes they say, “That’s a terrible idea. Forget it.” Other times they say, “That’s
fabulous. I want a million of them.”
This process of evaluating ideas by separating winning ideas from losing ones in a way that keeps investments low has
helped Johnson Controls grow its revenues to over $42 billion a year. Using real options logic to advance the
development process is a key way that firms reduce uncertainty and minimize innovation-related failures. 52 Real options
logic can also be used with other types of strategic decisions. Strategy Spotlight 12.8 discusses how Intel uses real
options logic in making capacity expansion decisions.
Potential Pitfalls of Real Options Analysis
Despite the many benefits that can be gained from using ROA, managers must be aware of its potential limitations or
pitfalls. Below we will address three major issues. 53
Agency Theory and the Back-Solver Dilemma Let’s assume that companies adopting a real-options perspective invest
heavily in training and that their people understand how to effectively estimate variance—the amount of dispersion or
range that is estimated for potential outcomes. Such training can help them use ROA. However, it does not solve another
inherent problem: managers may have an incentive and the know-how to “game the system.” Most electronic
spreadsheets permit users to simply back-solve any formula; that is, you can type in the answer you want and ask what
values are needed in a formula to get that answer. If managers know that a certain option value must be met in order for
the
back-solver dilemma
problem with investment decisions in which managers scheme to have a project meet investment approval criteria, even
though the investment may not enhance firm value.
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 397
proposal to get approved, they can back-solve the model to find a variance estimate needed to arrive at the answer that
upper management desires.
STRATEGY SPOTLIGHT 12.8
SAVING MILLIONS WITH REAL OPTIONS AT INTEL
The semiconductor business is complex and dynamic. This makes it a difficult one to manage. On the one hand,
both the technology in the chips and the consumer demand for chips are highly volatile. This makes planning for the
future as far as chip designs and the production plants needed difficult. On the other hand, it is incredibly expensive
to build new chip plants, about $5 billion each, and chip manufacturing equipment needs to be ordered well ahead
of when it is needed. The lead time for ordering new equipment can be up to three years. This creates a great
challenge. Firms have to decide how much and what type of equipment to purchase long before they have a good
handle on what the demand for semiconductor chips will be. Guessing wrong leaves the firm with too much or too
little capacity.
Intel has figured out a way to limit the risk it faces by using option contracts. Intel pays an up-front fee for the right
to purchase key pieces of equipment at a specific future date. At that point, Intel either purchases the equipment or
releases the supplier from the contract. In these cases, the supplier is then free to sell the equipment to someone
else. This all seems fairly simple. A number of commodities, such as wheat and sugar, have robust option markets.
The challenge isn’t in setting up the contracts. It is in pricing those contracts. Unlike wheat and sugar, where a large
number of suppliers and buyers results in an efficient market that sets the prices of standard commodity products,
there are few buyers and suppliers of chip manufacturing equipment. Further, the equipment is not a standard
commodity. As a result, prices for equipment options are the outcome of difficult negotiations.
Karl Kempf, a mathematician with Intel, has figured out how to make this process smoother. Along with a group
of mathematicians at Stanford, Kempf has developed a computing logic for calculating the price of options. He and
his colleagues create a forecasting model for potential demand. They calculate the likelihood of a range of potential
demand levels. They also set up a computer simulation of a production plant. They then use the possible demand
levels to predict how many pieces of production equipment they will need in the plant to meet the demand. They run
this over and over again, thousands of times, to generate predictions about the likelihood they will need to purchase
a specific piece of equipment. They use this information to identify what equipment they definitely need to order.
Where there is significant uncertainty about the need for equipment, they use the simulation results to identify the
specific equipment for which they need option contracts and the value of those options to Intel. This helps with the
pricing.
Intel estimates that since 2008, the use of options in equipment purchases has saved the firm in excess of $125
million and provided the firm with at least $2 billion in revenue upside for expansions they could have quickly made
using optioned equipment.
Sources: Kempf, K., Erhun, F., Hertzler, E., Rosenberg, T., & Peng, C. 2013. Optimizing capital investment decisions at Intel Corporation, Interfaces , 43(1): 62
–78; and King, I. 2012. A chipmaker’s model mathematician. Bloomberg Businessweek , June 4: 35.
Agency problems are typically inherent in investment decisions. They may occur when the managers of a firm are
separated from its owners—when managers act as “agents” rather than “principals” (owners). A manager may have
something to gain by not acting in the owner’s best interests, or the interests of managers and owners are not co-aligned.
Agency theory suggests that as managerial and owner interests diverge, managers will follow the path of their own self-
interests. Sometimes this is to secure better compensation: Managers who propose projects may believe that if their
projects are approved, they stand a much better chance of getting promoted. So while managers have an incentive to
propose projects that should be successful, they also have an incentive to propose projects that might be successful. And
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. because of the subjectivity involved in formally modeling a real option, managers may have an incentive to choose
variance values that increase the likelihood of approval.
Managerial Conceit: Overconfidence and the Illusion of Control Often, poor decisions are the result of such traps as
biases, blind spots, and other human frailties. Much of this literature falls under the concept of managerial conceit .54
managerial conceit
biases, blind spots, and other human frailties that lead to poor managerial decisions.
First, managerial conceit occurs when decision makers who have made successful choices in the past come to believe
that they possess superior expertise for managing uncertainty. They believe that their abilities can reduce the risks
inherent in decision
398
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 398
making to a much greater extent than they actually can. Such managers are more likely to shift away from analysis to
trusting their own judgment. In the case of real options, they can simply declare that any given decision is a real option
and proceed as before. If asked to formally model their decision, they are more likely to employ variance estimates that
support their viewpoint.
Second, employing the real-options perspective can encourage decision makers toward a bias for action. Such a bias
may lead to carelessness. Managerial conceit is as much a problem (if not more so) for small decisions as for big ones.
Why? The cost to write the first stage of an option is much smaller than the cost of full commitment, and managers pay
less attention to small decisions than to large ones. Because real options are designed to minimize potential losses while
preserving potential gains, any problems that arise are likely to be smaller at first, causing less concern for the manager.
Managerial conceit could suggest that managers will assume that those problems are the easiest to solve and control—a
concern referred to as the illusion of control. Managers may fail to respond appropriately because they overlook the
problem or believe that since it is small, they can easily resolve it. Thus, managers may approach each real-option
decision with less care and diligence than if they had made a full commitment to a larger investment.
Managerial Conceit: Irrational Escalation of Commitment A strength of a real options perspective is also one of its
Achilles heels. Both real options and decisions involving escalation of commitment require specific environments with
sequential decisions. 55 As the escalation-of-commitment literature indicates, simply separating a decision into multiple
parts does not guarantee that decisions made will turn out well. This condition is potentially present whenever the
exercise decision retains some uncertainty, which most still do. The decision to abandon also has strong psychological
factors associated with it that affect the ability of managers to make correct exercise decisions. 56
escalation of commitment
the tendency for managers to irrationally stick with an investment, even one that is broken down into a sequential series
of decisions, when investment criteria are not be met.
An option to exit requires reversing an initial decision made by someone in the organization. Organizations typically
encourage managers to “own their decisions” in order to motivate them. As managers invest themselves in their decision,
it proves harder for them to lose face by reversing course. For managers making the decision, it feels as if they made the
wrong decision in the first place, even if it was initially a good decision. The more specific the manager’s human capital
becomes, the harder it is to transfer it to other organizations. Hence, there is a greater likelihood that managers will stick
around and try to make an existing decision work. They are more likely to continue an existing project even if it should
perhaps be ended. 57
Despite the potential pitfalls of a real options approach, many of the strategic decisions that product champions and
top managers must make are enhanced when decision makers have an entrepreneurial mind-set.
LO12.6
How an entrepreneurial orientation can enhance a firm’s efforts to develop promising corporate venture initiatives.
Entrepreneurial Orientation
Firms that want to engage in successful CE need to have an entrepreneurial orientation (EO). 58 EO refers to the strategy-
making practices that businesses use in identifying and launching corporate ventures. It represents a frame of mind and a
perspective toward entrepreneurship that is reflected in a firm’s ongoing processes and corporate culture. 59
An EO has five dimensions that permeate the decision-making styles and practices of the firm’s members: autonomy,
innovativeness, proactiveness, competitive aggressiveness, and risk taking. These factors work together to enhance a
firm’s entrepreneurial performance. But even those firms that are strong in only a few aspects of EO can be very
successful. 60 Exhibit 12.3 summarizes the dimensions of entrepreneurial orientation . Below, we discuss the five
dimensions of EO and how they have been used to enhance internal venture development.
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. entrepreneurial orientation
the practices that businesses us in identifying and launching corporate ventures.
399
EXHIBIT 12.3 Dimensions of Entrepreneurial Orientation
Dimension Definition
Autonomy Independent action by an individual or team aimed at bringing forth a business concept or vision
and carrying it through to completion.
Innovativeness A willingness to introduce novelty through experimentation and creative processes aimed at
developing new products and services as well as new processes.
Proactiveness A forward-looking perspective characteristic of a market-place leader that has the foresight to seize
opportunities in anticipation of future demand.
Competitive
aggressiveness
An intense effort to outperform industry rivals characterized by a combative posture or an
aggressive response aimed at improving position or overcoming a threat in a competitive
marketplace.
Risk taking Making decisions and taking action without certain knowledge of probable outcomes; some
undertakings may also involve making substantial resource commitments in the process of
venturing forward.
Sources: Dess, G. G. & Lumpkin, G. T. 2005. The Role of Entrepreneurial Orientation in Stimulating Effective Corporate Entrepreneurship. Academy of
Management Executive , 19(1): 147–156; Covin, J. G. & Slevin, D. P. 1991. A Conceptual Model of Entrepreneurship as Firm Behavior. Entrepreneurship
Theory & Practice , Fall: 7–25; Lumpkin, G. T. and Dess, G. G. 1996. Clarifying the Entrepreneurial Orientation Construct and Linking It to Performance.
Academy of Management Review , 21: 135–172; Miller, D. 1983. The Correlates of Entrepreneurship in Three Types of Firms. Management Science , 29: 770
–791.
Autonomy
Autonomy refers to a willingness to act independently in order to carry forward an entrepreneurial vision or opportunity.
It applies to both individuals and teams that operate outside an organization’s existing norms and strategies. In the
context of corporate entrepreneurship, autonomous work units are often used to leverage existing strengths in new arenas,
identify opportunities that are beyond the organization’s current capabilities, and encourage development of new
ventures or improved business practices. 61
autonomy
independent action by an individual or team aimed at bringing forth a business concept or vision and carrying it through
to completion.
The need for autonomy may apply to either dispersed or focused entrepreneurial efforts. Because of the emphasis on
venture projects that are being developed outside of the normal flow of business, a focused approach suggests a working
environment that is relatively autonomous. But autonomy may also be important in an organization where
entrepreneurship is part of the corporate culture. Everything from the methods of group interaction to the firm’s reward
system must make organizational members feel as if they can think freely about venture opportunities, take time to
investigate them, and act without fear of condemnation. This implies a respect for the autonomy of each individual and
an openness to the independent thinking that goes into championing a corporate venture idea. Thus, autonomy represents
a type of empowerment (see Chapter 11 ) that is directed at identifying and leveraging entrepreneurial opportunities.
Exhibit 12.4 identifies two techniques that organizations often use to promote autonomy.
Creating autonomous work units and encouraging independent action may have pitfalls that can jeopardize their
effectiveness. Autonomous teams often lack coordination. Excessive decentralization has a strong potential to create
inefficiencies, such as duplication of effort and wasting resources on projects with questionable feasibility. For example,
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. Chris Galvin, former CEO of Motorola, scrapped the skunkworks approach the company had been using to develop new
wireless phones. Fifteen teams had created 128 different phones, which led to spiraling costs and overly complex
operations. 62
For autonomous work units and independent projects to be effective, such efforts have to be measured and monitored.
This requires a delicate balance: companies must have the patience and budget to tolerate the explorations of autonomous
groups and the strength to cut back efforts that are not bearing fruit. It must be undertaken with a clear sense of
purpose—namely, to generate new sources of competitive advantage.
400
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 400
EXHIBIT 12.4 Autonomy Techniques
Autonomy
Technique Description/Purpose Example
Use skunkworks to
foster
entrepreneurial
thinking
Skunkworks are independent work units, often
physically separate from corporate
headquarters. They allow employees to get out
from under the pressures of their daily routines
to engage in creative problem solving.
Overstock.com created a skunkworks to address
the problem of returned merchandise. The
solution was a business within a business:
Overstock auctions. The unit has grown by selling
products returned to Overstock and offers fees 30
percent lower than eBay’s auction service.
Design
organizational
structures that
support independent
action
Established companies with traditional
structures often need to break out of such old
forms to compete more effectively.
Deloitte Consulting, a division of Deloitte Touche
Tohmatsu, found it difficult to compete against
young agile firms. So it broke the firm into small
autonomous units called “chip-aways” that operate
with the flexibility of a start-up. In its first year,
revenues were $40 million—10 percent higher
than its projections.
Sources: Conlin, M. 2006. Square Feet. Oh How Square! BusinessWeek , www.businessweek.com , July 3; Cross, K. 2001. Bang the Drum Quickly. Business 2.0 ,
May: 28–30; Sweeney, J. 2004. A Firm for All Reasons. Consulting Magazine , www.consultingmag.com ; and Wagner, M. 2005. Out of the Skunkworks.
Internet Retailer , January, www.internetretailer.com .
Innovativeness
Innovativeness refers to a firm’s efforts to find new opportunities and novel solutions. In the beginning of this chapter
we discussed innovation; here the focus is on innovativeness—a firm’s attitude toward innovation and willingness to
innovate. It involves creativity and experimentation that result in new products, new services, or improved technological
processes. 63 Innovativeness is one of the major components of an entrepreneurial strategy. As indicated at the beginning
of the chapter, however, the job of managing innovativeness can be very challenging.
innovativeness
a willingness to introduce novelty through experimentation and creative processes aimed at developing new products
and services as well as new processes.
Innovativeness requires that firms depart from existing technologies and practices and venture beyond the current state
of the art. Inventions and new ideas need to be nurtured even when their benefits are unclear. However, in today’s
climate of rapid change, effectively producing, assimilating, and exploiting innovations can be an important avenue for
achieving competitive advantages. Interest in global warming and other ecological concerns has led many corporations to
focus their innovativeness efforts on solving environmental problems.
As our earlier discussion of CE indicated, many corporations owe their success to an active program of innovation-
based corporate venturing. 64 Exhibit 12.5 highlights two of the methods companies can use to enhance their competitive
position through innovativeness.
Innovativeness can be a source of great progress and strong corporate growth, but there are also major pitfalls for
firms that invest in innovation. Expenditures on R&D aimed at identifying new products or processes can be a waste of
resources if the effort does not yield results. Another danger is related to the competitive climate. Even if a company
innovates a new capability or successfully applies a technological breakthrough, another company may develop a similar
innovation or find a use for it that is more profitable. Finally R&D and other innovation efforts are among the first to be
cut back during an economic downturn.
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. Even though innovativeness is an important means of internal corporate venturing, it also involves major risks,
because investments in innovations may not pay off. For strategic managers of entrepreneurial firms, successfully
developing and adopting innovations can generate competitive advantages and provide a major source of growth for the
firm.
401
EXHIBIT 12.5 Innovativeness Techniques
Innovativeness
Technique Description/Purpose Example
Foster creativity and
experimentation
Companies that support idea exploration
and allow employees to express
themselves creatively enhance innovation
outcomes.
To tap into its reserves of innovative talent, Royal
Dutch/Shell created “GameChanger” to help
employees develop promising ideas. The process
provides funding up to $600,000 for would-be
entrepreneurs to pursue innovative projects and
conduct experiments.
Invest in new
technology, R&D, and
continuous
improvement
The latest technologies often provide
sources of new competitive advantages.
To extract value from a new technology,
companies must invest in it.
Dell Computer Corporation’s OptiPlex manufacturing
system revolutionized the traditional assembly line.
Hundreds of custom-built computers can be made in
an eight-hour shift using state of the art automation
techniques that increased productivity per person by
160 percent.
Sources: Breen, B. 2004. Living in Dell Time. Fast Company , November: 88–92: Hammonds, K. H. 2002. Size Is Not a Strategy. Fast Company , August: 78
–83; Perman, S. 2001. Automate or Die. eCompanyNow.com , July; Dell, M. 1999. Direct from Dell. New York: HarperBusiness; and Watson, R. 2006. Expand
Your Innovation Horizons. Fast Company , www.fastcompany.com , May.
Proactiveness
Proactiveness refers to a firm’s efforts to seize new opportunities. Proactive organizations monitor trends, identify the
future needs of existing customers, and anticipate changes in demand or emerging problems that can lead to new venture
opportunities. Proactiveness involves not only recognizing changes but also being willing to act on those insights ahead
of the competition. 65 Strategic managers who practice proactiveness have their eye on the future in a search for new
possibilities for growth and development. Such a forward-looking perspective is important for companies that seek to be
industry leaders. Many proactive firms seek out ways not only to be future oriented but also to change the very nature of
competition in their industry.
proactiveness
a forward-looking perspective characteristic of a marketplace leader that has the foresight to seize opportunities in
anticipation of future demand.
Proactiveness puts competitors in the position of having to respond to successful initiatives. The benefit gained by
firms that are the first to enter new markets, establish brand identity, implement administrative techniques, or adopt new
operating technologies in an industry is called first mover advantage. 66
First movers usually have several advantages. First, industry pioneers, especially in new industries, often capture
unusually high profits because there are no competitors to drive prices down. Second, first movers that establish brand
recognition are usually able to retain their image and hold on to the market share gains they earned by being first.
Sometimes these benefits also accrue to other early movers in an industry, but, generally speaking, first movers have an
advantage that can be sustained until firms enter the maturity phase of an industry’s life cycle. 67
First movers are not always successful. The customers of companies that introduce novel products or embrace
breakthrough technologies may be reluctant to commit to a new way of doing things. In his book Crossing the Chasm ,
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. Geoffrey A. Moore noted that most firms seek evolution, not revolution, in their operations. This makes it difficult for a
first mover to sell promising new technologies. 68
Even with these caveats, however, companies that are first movers can enhance their competitive position. Exhibit
12.6 illustrates two methods firms can use to act proactively.
Being an industry leader does not always lead to competitive advantages. Some firms that have launched pioneering
new products or staked their reputation on new brands have
402
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 402
failed to get the hoped-for payoff. Coca-Cola and PepsiCo invested $75 million to launch sodas that would capitalize on
the low-carb diet trend. But with half the carbohydrates taken out, neither C2 , Coke’s entry, nor Pepsi Edge tasted very
good. The two new brands combined never achieved more than one percent market share. PepsiCo halted production in
2005 and Coca-Cola followed suit in 2007. 69 Such missteps are indicative of the dangers of trying to proactively
anticipate demand. Another danger for opportunity-seeking companies is that they will take their proactiveness efforts
too far. For example, Porsche has tried to extend its brand images outside of the automotive arena. While some efforts
have worked, such as Porsche-designed T-shirts and sunglasses, other efforts have failed, such as the Porsche-branded
golf clubs.
EXHIBIT 12.6 Proactiveness Techniques
Proactiveness
Technique Description/Purpose Example
Introduce new
products or
technological
capabilities ahead of
the competition.
Being a first mover provides
companies with an ability to shape the
playing field and shift competitive
advantages in their favor.
Amazon was able to define the online bookselling market
by entering the market early and defining the user
experience. They further leveraged their position as an
early mover when moving into other retailing ventures and
later into cloud computing.
Continuously seek
out new product or
service offerings.
Firms that provide new resources or
sources of supply can benefit from a
proactive stance.
Costco seized a chance to leverage its success as a
warehouse club that sells premium brands when it
introduced Costco Home Stores. The home stores are
usually located near its warehouse stores and its rapid
inventory turnover gives it a cost advantage of 15 to 25
percent over close competitors such as Bassett Furniture
and the Bombay Company.
Sources: Bryce, D. J. & Dyer, J. H. 2007. Strategies to Crack Well-Guarded Markets. Harvard Business Review , May: 84–92; Collins, J. C. & Porras, J. I. 1997.
Built to Last. New York: HarperBusiness; Robinson, D. 2005. Sony Pushes Reliability in Vaio Laptops. IT Week , www.itweek.co.uk , October 12; and
www.sony.com .
Careful monitoring and scanning of the environment, as well as extensive feasibility research, are needed for a
proactive strategy to lead to competitive advantages. Firms that do it well usually have substantial growth and internal
development to show for it. Many of them have been able to sustain the advantages of proactiveness for years.
Competitive Aggressiveness
Competitive aggressiveness refers to a firm’s efforts to outperform its industry rivals. Companies with an aggressive
orientation are willing to “do battle” with competitors. They might slash prices and sacrifice profitability to gain market
share or spend aggressively to obtain manufacturing capacity. As an avenue of firm development and growth,
competitive aggressiveness may involve being very assertive in leveraging the results of other entrepreneurial activities
such as innovativeness or proactiveness.
competitive aggressiveness
an intense effort to outperform industry rivals characterized by a combative posture or an aggressive response aimed at
improving position or overcoming a threat in a competitive marketplace.
Competitive aggressiveness is directed toward competitors. The SWOT analysis discussed in Chapters 2 and 3
provides a useful way to distinguish between these different approaches to CE. Proactiveness, as we saw in the last
section, is a response to opportunities—the O in SWOT. Competitive aggressiveness, by contrast, is a response to
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. threats—the T in SWOT. A competitively aggressive posture is important for firms that seek to enter new markets in the
face of intense rivalry.
Strategic managers can use competitive aggressiveness to combat industry trends that threaten their survival or market
position. Sometimes firms need to be forceful in defending
403
the competitive position that has made them an industry leader. Firms often need to be aggressive to ensure their
advantage by capitalizing on new technologies or serving new market needs. Exhibit 12.7 suggests two of the ways
competitively aggressive firms enhance their entrepreneurial position.
EXHIBIT 12.7 Competitive Aggressiveness Techniques
Competitive Aggressiveness
Technique Description/Purpose Example
Enter markets
with drastically
lower prices.
Narrow operating margins make companies
vulnerable to extended price competition.
Using open-source software, California-based
Zimbra, Inc. has become a leader in messaging
and collaboration software. Its product costs about
one-third less than its direct competitor Microsoft
Exchange. Zimbra generated $4.3 billion in sales in
2012.
Find successful
business models
and copy them.
As long as a practice is not protected by
intellectual property laws, it’s probably okay to
imitate it. Finding solutions to existing problems
is generally quicker and cheaper than inventing
them.
Best Practices LLC is a North Carolina consulting
group that seeks out best practices and then
repackages and resells them. With annual
revenues in excess of $8 million, Best Practices
has become a leader in continuous improvement
and benchmarking strategies.
Sources: Guth, R. A. 2006. Trolling the Web for Free Labor, Software Upstarts Are New Force. The Wall Street Journal , November 12: 1; Mochari, I. 2001.
Steal This Strategy. Inc. , July: 62–67; www.best-in-class.com ; and www.zimbra.com .
Another practice companies use to overcome the competition is to make preannouncements of new products or
technologies. This type of signaling is aimed not only at potential customers but also at competitors to see how they will
react or to discourage them from launching similar initiatives. Sometimes the preannouncements are made just to scare
off competitors, an action that has potential ethical implications.
Competitive aggressiveness may not always lead to competitive advantages. Some companies (or their CEOs) have
severely damaged their reputations by being overly aggressive. Although it continues to be a dominant player,
Microsoft’s highly aggressive profile makes it the subject of scorn by some businesses and individuals. Efforts to find
viable replacements for the Microsoft products have helped fuel interest in alternative options provided by Google,
Apple, and the open-source software movement. 70
Competitive aggressiveness is a strategy that is best used in moderation. Companies that aggressively establish their
competitive position and vigorously exploit opportunities to achieve profitability may, over the long run, be better able to
sustain their competitive advantages if their goal is to defeat, rather than decimate, their competitors.
Risk Taking
Risk taking refers to a firm’s willingness to seize a venture opportunity even though it does not know whether the
venture will be successful—to act boldly without knowing the consequences. To be successful through corporate
entrepreneurship, firms usually have to take on riskier alternatives, even if it means forgoing the methods or products that
have worked in the past. To obtain high financial returns, firms take such risks as assuming high levels of debt,
committing large amounts of firm resources, introducing new products into new markets, and investing in unexplored
technologies.
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. risk taking
making decisions and taking action without certain knowledge of probable outcomes. Some undertakings may also
involve making substantial resource commitments in the process of venturing forward.
All of the approaches to internal development that we have discussed are potentially risky. Whether they are being
aggressive, proactive, or innovative, firms on the path of CE must act without knowing how their actions will turn out.
Before launching their strategies, corporate entrepreneurs must know their firm’s appetite for risk. 71
404
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 404
Three types of risk that organizations and their executives face are business risk, financial risk, and personal risk:
• Business risk taking involves venturing into the unknown without knowing the probability of success. This is the
risk associated with entering untested markets or committing to unproven technologies.
• Financial risk taking requires that a company borrow heavily or commit a large portion of its resources in order to
grow. In this context, risk is used to refer to the risk/return trade-off that is familiar in financial analysis.
• Personal risk taking refers to the risks that an executive assumes in taking a stand in favor of a strategic course of
action. Executives who take such risks stand to influence the course of their whole company, and their decisions
also can have significant implications for their careers.
Even though risk taking involves taking chances, it is not gambling. The best-run companies investigate the
consequences of various opportunities and create scenarios of likely outcomes. A key to managing entrepreneurial risks
is to evaluate new venture opportunities thoroughly enough to reduce the uncertainty surrounding them. Exhibit 12.8
indicates two methods companies can use to strengthen their competitive position through risk taking.
Risk taking, by its nature, involves potential dangers and pitfalls. Only carefully managed risk is likely to lead to
competitive advantages. Actions that are taken without sufficient forethought, research, and planning may prove to be
very costly. Therefore, strategic managers must always remain mindful of potential risks. In his book Innovation and
Entrepreneurship , Peter Drucker argued that successful entrepreneurs are typically not risk takers. Instead, they take
steps to minimize risks by carefully understanding them. That is how they avoid focusing on risk and remain focused on
opportunity. 72 Risk taking is a good place to close this chapter on corporate entrepreneurship. Companies that choose to
grow through internal corporate venturing must remember that entrepreneurship always involves embracing what is new
and uncertain.
EXHIBIT 12.8 Risk-Taking Techniques
Risk Taking
Technique Description/Purpose Example
Research and
assess risk
factors to
minimize
uncertainty
Companies that “do their
homework”—that is, carefully
evaluate the implications of bold
actions—reduce the likelihood of
failure.
Graybar Electric Co. took a risk when it invested $144 million to
revamp its distribution system. It consolidated 231 small
centers into 16 supply warehouses and installed the latest
communications network. Graybar is now considered a leader
in facility redesign and its sales have increased steadily since
the consolidation, topping $5 billion in sales in a recent year.
Use techniques
that have worked
in other domains
Risky methods that other companies
have tried may provide an avenue for
advancing company goals.
Autobytel.com , one of the first companies to sell cars online,
decided on an approach that worked well for
others—advertising during the Super Bowl. It was the first dot-
com ever to do so and its $1.2 million 30-second ad paid off
well by generating weeks of free publicity and favorable
business press.
Sources: Anonymous. 2006. Graybar Offers Data Center Redesign Seminars. Cabling Installation and Maintenance , www.cim.pennnet.com , September 1;
Keenan, F. & Mullaney, T. J. 2001. Clicking at Graybar. BusinessWeek , June 18: 132–34; Weintraub, A. 2001. Make or break for Autobytel. BusinessWeek
e.biz , July 9: EB30-EB32; www.autobytel.com ; and www.graybar.com .
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 405
ISSUE FOR DEBATE
Microsoft generated $74 billion in sales and nearly $17 billion in profits in 2012 and dominates the market for PC operating
system and office suite application software, yet its stock price has been flat for the last 10 years. Why is this the case?
Investors have little confidence that Microsoft will produce blockbuster products that will replace its core PC software
products as the information technology market moves into the post-PC phase.
It isn’t that Microsoft has failed to generate innovative ideas. The firm spends nearly $9 billion a year on R&D. Over 10
years ago, engineers at Microsoft developed a tablet PC. They also pioneered Web-TV. But they failed to turn these
pioneering efforts into marketable products. In markets where they have not pioneered, Microsoft has had limited success
with products they’ve designed to meet emerging challengers. The Zune music player was supposed to challenge the iPod
but was a flop in the market. Recently, they have also struggled to develop a position in the smartphone market.
Microsoft has struggled to build and leverage their innovative capabilities into entrepreneurial ventures for at least two
reasons. First, the dominance of the Windows and Office software has made it difficult to launch new products. Developers
of new products have, at times, had to justify how their new product fit into the core Microsoft product line. Dick Brass, a
former VP at Microsoft, stated, “The company routinely manages to frustrate the efforts of its visionary leaders.” Second,
Microsoft has a difficult time attracting the top software designers. The firm is not seen as a hip place to work. It is seen by
developers as too bureaucratic. And their flat stock price makes it hard to entice top designers with promises of wealth from
rising stock options—a common compensation element for attracting technology talent.
In an effort to be more entrepreneurial, Microsoft decided to go outside the boundaries of their existing firm. It set up a
business incubator, the Bing Fund. The incubator aims to work with start-up firms working on innovative ideas on Web and
mobile software solutions. The managers of the incubator will select a small set of firms to support at any one time. As
these firms graduate out of the incubator, new firms will be added. Microsoft will provide capital for these firms, space to
work near Microsoft’s campus, access to Microsoft software, mentoring by Microsoft’s programmers and managers, and
access to Microsoft’s network. Microsoft promoted the fund, saying the Bing Fund is “backed by the experience, expertise,
and resources of Microsoft.” The potential benefit for Microsoft is that they could acquire a larger stake in a start-up firms
or acquire the right to software developed by a start-up and use the acquired resources as the foundation for entrepreneurial
growth efforts.
Discussion Questions
1. If you headed up a tech start-up, would you want to work with the Bing Fund?
2. Do you think Microsoft will be able to use the innovative ideas developed by firms working in the Bing Fund program
and leverage them inside Microsoft to become more entrepreneurial?
3. In the end, will the Bing Fund help Microsoft to become more successful at corporate entrepreneurship?
Sources: Vance, A. 2010. At top of business but just not cool. International Herald Tribune , July 6: 2; Clarke, G. 2010. Inside Microsoft’s innovation
crisis. Theregister.co.uk , February 5: np; Blacharski, D. 2012. Microsoft’s Bing Fund takes angel investing to the next level. Itworld.com , July 26: np; and
Lardinois, F. 2012. Bing Fund: Microsoft officially launches its new angel fund and incubator program. Techcrunch.com , July 12: np.
406
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 406
Reflecting on Career Implications …
Innovation: Identify the types of innovations being pursued by your company. Do they tend to be
incremental or radical? Product-related or process-related? Are there ways in which you can add value to
such innovations, no matter how minor your contributions are?
Cultivating Innovation Skills: Exhibit 12.2 describes the five traits of an effective innovator (associating,
questioning, observing, experimenting, and networking). Assess yourself on each of these traits. Practice
the skills in your work and professional life to build your skills as an innovator. If you are interviewing for a
job with an organization that is considered high on innovation, it might be in your interest to highlight these
traits.
Real Options Analysis: Success in your career often depends on creating and exercising career “options.”
However, creation of options involves costs as well, such as learning new skills, obtaining additional
certifications, and so on. Consider what options you can create for yourself. Evaluate the cost of these
options.
Entrepreneurial Orientation: Consider the five dimensions of entrepreneurial orientation. Evaluate
yourself on each of these dimensions (autonomy, innovativeness, proactiveness, competitive
aggressiveness, and risk taking). If you are high on entrepreneurial orientation, you may have a future as an
entrepreneur. Consider the ways in which you can use the experience and learning from your current job to
become a successful entrepreneur in later years.
summary
To remain competitive in today’s economy, established firms must find new avenues for development and growth. This
chapter has addressed how innovation and corporate entrepreneurship can be a means of internal venture creation and
strategic renewal, and how an entrepreneurial orientation can help corporations enhance their competitive position.
Innovation is one of the primary means by which corporations grow and strengthen their strategic position.
Innovations can take several forms, ranging from radical breakthrough innovations to incremental improvement
innovations. Innovations are often used to update products and services or for improving organizational processes.
Managing the innovation process is often challenging, because it involves a great deal of uncertainty and there are many
choices to be made about the extent and type of innovations to pursue. By cultivating innovation skills, defining the
scope of innovation, managing the pace of innovation, staffing to capture value from innovation, and collaborating with
innovation partners, firms can more effectively manage the innovation process.
We also discussed the role of corporate entrepreneurship in venture development and strategic renewal. Corporations
usually take either a focused or dispersed approach to corporate venturing. Firms with a focused approach usually
separate the corporate venturing activity from the ongoing operations of the firm in order to foster independent thinking
and encourage entrepreneurial team members to think and act without the constraints imposed by the corporation. In
corporations where venturing activities are dispersed, a culture of entrepreneurship permeates all parts of the company in
order to induce strategic behaviors by all organizational members. In measuring the success of corporate venturing
activities, both financial and strategic objectives should be considered. Real options analysis is often used to make better
quality decisions in uncertain entrepreneurial situations. However, a real options approach has potential drawbacks.
Most entrepreneurial firms need to have an entrepreneurial orientation: the methods, practices, and decision-making
styles that strategic managers use to act entrepreneurially. Five dimensions of entrepreneurial orientation are found in
firms that pursue corporate venture strategies. Autonomy, innovativeness, proactiveness, competitive aggressiveness, and
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. risk taking each make a unique contribution to the pursuit of new opportunities. When deployed effectively, the methods
and practices of an entrepreneurial orientation can be used to engage successfully in corporate entrepreneurship and new
venture creation. However, strategic managers must remain mindful of the pitfalls associated with each of these
approaches.
SUMMARY REVIEW QUESTIONS
1. What is meant by the concept of a continuum of radical and incremental innovations?
2. What are the dilemmas that organizations face when deciding what innovation projects to pursue? What steps can
organizations take to effectively manage the innovation process?
3. What is the difference between focused and dispersed approaches to corporate entrepreneurship?
4. How are business incubators used to foster internal corporate venturing?
5. What is the role of the product champion in bringing a new product or service into existence in a corporation? How
can companies use product champions to enhance their venture development efforts?
6. Explain the difference between proactiveness and competitive aggressiveness in terms of achieving and sustaining
competitive advantage.
7. Describe how the entrepreneurial orientation (EO) dimensions of innovativeness, proactiveness, and risk taking can
be combined to create competitive advantages for entrepreneurial firms.
407
Entrepreneurial Orientation Company A Company B
Autonomy
Innovativeness
Proactiveness
Competitive Aggressiveness
Risk Taking
key terms
innovation
product innovation
process innovation
radical innovation
incremental innovation
strategic envelope
corporate entrepreneurship
focused approaches to corporate entrepreneurship
new venture group
business incubator
dispersed approaches to corporate entrepreneurship
entrepreneurial culture
product champion
exit champion
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. real options analysis
back-solver dilemma
managerial conceit
escalation of commitment
entrepreneurial orientation
autonomy
innovativeness
proactiveness
competitive aggressiveness
risk taking
experiential exercise
Select two different major corporations from two different industries (you might use Fortune 500 companies to make
your selection). Compare and contrast these organizations in terms of their entrepreneurial orientation.
BASED ON YOUR COMPARISON:
1. How is the corporation’s entrepreneurial orientation reflected in its strategy?
2. Which corporation would you say has the stronger entrepreneurial orientation?
3. Is the corporation with the stronger entrepreneurial orientation also stronger in terms of financial performance?
application questions & exercises
1. Select a firm known for its corporate entrepreneurship activities. Research the company and discuss how it has
positioned itself relative to its close competitors. Does it have a unique strategic advantage? Disadvantage?
Explain.
2. Explain the difference between product innovations and process innovations. Provide examples of firms that have
recently introduced each type of innovation. What are the types of innovations related to the strategies of each
firm?
3. Using the Internet, select a company that is listed on the NASDAQ or New York Stock Exchange. Research the
extent to which the company has an entrepreneurial culture. Does the company use product champions? Does it
have a corporate venture capital fund? Do you believe its entrepreneurial efforts are sufficient to generate
sustainable advantages?
4. How can an established firm use an entrepreneurial orientation to enhance its overall strategic position? Provide
examples.
ethics questions
1. Innovation activities are often aimed at making a discovery or commercializing a technology ahead of the
competition. What are some of the unethical practices that companies could engage in during the innovation
process? What are the potential long-term consequences of such actions?
2. Discuss the ethical implications of using entrepreneurial policies and practices to pursue corporate social
responsibility goals. Are these efforts authentic and genuine or just an attempt to attract more customers?
408
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 408
references
1. Yarow, J. 2012. It’s official: Apple is just a niche player in smartphones now. businessinsider.com , November 2: np; Vascellaro, J. 2009.
Radio tunes out Google in rare miss for web titan. wsj.com , May 12: np; and McGrath, R. 2011. Failing by design. Harvard Business
Review , 89(4): 76–83.
2. For an interesting discussion, see Johannessen, J. A., Olsen, B., & Lumpkin, G. T. 2001. Innovation as newness: What is new, how new, and
new to whom? European Journal of Innovation Management , 4(1): 20–31.
3. The discussion of product and process innovation is based on Roberts, E. B. (Ed.). 2002. Innovation: Driving product, process, and market
change. San Francisco: Jossey-Bass; Hayes, R. & Wheelwright, S. 1985. Competing through manufacturing. Harvard Business Review , 63
(1): 99–109; and Hayes, R. & Wheelwright, S. 1979. Dynamics of product–process life cycles. Harvard Business Review , 57(2): 127–136.
4. The discussion of radical and incremental innovations draws from Leifer, R., McDermott, C. M., Colarelli, G., O’Connor, G. C., Peters, L.
S., Rice, M. P., & Veryzer, R. W. 2000. Radical innovation: How mature companies can outsmart upstarts. Boston: Harvard Business
School Press; Damanpour, F. 1996. Organizational complexity and innovation: Developing and testing multiple contingency models.
Management Science , 42(5): 693–716; and Hage, J. 1980. Theories of organizations. New York: Wiley.
5. Christensen, C. M. & Raynor, M. E. 2003. The innovator’s solution. Boston: Harvard Business School Press.
6. Dressner, H. 2004. The Gartner Fellows interview: Clayton M. Christensen. www.gartner.com , April 26.
7. For another perspective on how different types of innovation affect organizational choices, see Wolter, C. & Veloso, F. M. 2008. The effects
of innovation on vertical structure: Perspectives on transactions costs and competences. Academy of Management Review , 33(3): 586–605.
8. Drucker, P. F. 1985. Innovation and entrepreneurship: 2000 New York: Harper & Row.
9. Birkinshaw, J., Hamel, G., & Mol, M. J. 2008. Management innovation. Academy of Management Review, 33(4): 825–845.
10 . Steere, W. C., Jr. & Niblack, J. 1997. Pfizer, Inc. In Kanter, R. M., Kao, J., & Wiersema, F. (Eds.), Innovation: Breakthrough thinking at
3M, DuPont, GE, Pfizer, and Rubbermaid: 123–145. New York: HarperCollins.
11 . Morrissey, C. A. 2000. Managing innovation through corporate venturing. Graziadio Business Report , Spring, gbr.pepperdine.edu ; and
Sharma, A. 1999. Central dilemmas of managing innovation in large firms. California Management Review , 41(3): 147–164.
12 . Sharma, op. cit.
13 . Dyer, J. H., Gregerson, H. B., & Christensen, C. M. 2009. The innovator’s DNA. Harvard Business Review , December: 61-67.
14 . Eggers, J. P., & Kaplan, S. 2009. Cognition and renewal: Comparing CEO and organizational effects on incumbent adaptation to technical
change. Organization Science , 20: 461–477.
15 . Biodegradable Products Institute. 2003. “Compostable Logo” of the Biodegradable Products Institute gains momentum with approval of
DuPont Biomax resin, www.bpiworld.org , June 12; Leifer et al., op. cit.
16 . For more on defining the scope of innovation, see Valikangas, L. & Gibbert, M. 2005. Boundary-setting strategies for escaping innovation
traps. MIT Sloan Management Review , 46(3): 58–65.
17 . Leifer et al., op. cit.
18 . Bhide, A. V. 2000. The origin and evolution of new businesses. New York: Oxford University Press; Brown, S. L. & Eisenhardt, K. M. 1998.
Competing on the edge: Strategy as structured chaos. Cambridge, MA: Harvard Business School Press.
19 . McGrath, R. G. & Keil, T. 2007. The value captor’s process: Getting the most out of your new business ventures. Harvard Business Review ,
May: 128–136.
20 . For an interesting discussion of how sharing technology knowledge with different divisions in an organization can contribute to innovation
processes, see Miller, D. J., Fern, M. J., & Cardinal, L. B. 2007. The use of knowledge for technological innovation within diversified
firms. Academy of Management Journal, 50(2): 308–326.
21 . Ketchen Jr., D. J., Ireland, R. D., & Snow, C. C. 2007 Strategic entrepreneurship, collaborative innovation, and wealth creation. Strategic
Entrepreneurship Journal , 1(3–4): 371–385.
22 . Chesbrough, H. 2003. Open innovation: The new imperative for creating and profiting from technology. Boston: Harvard Business School
Press.
23 . For a recent study of what makes alliance partnerships successful, see Sampson, R. C. 2007. R&D alliances and firm performance: The
impact of technological diversity and alliance organization on innovation. Academy of Management Journal , 50(2): 364–386.
24 . For an interesting perspective on the role of collaboration among multinational corporations see Hansen, M. T. & Nohria, N. 2004. How to
build collaborative advantage. MIT Sloan Management Review , 46(1): 22–30.
25 . Wells, R. M. J. 2008. The product innovation process: Are managing information flows and cross-functional collaboration key? Academy of
Management Perspectives , 22(1): 58–60. Dougherty, D., & Dunne, D. D. 2011. Organizing ecologies of complex innovation. Organization
Science , forthcoming. Kim, H. E., Pennings, J. M. 2009. Innovation and strategic renewal in mature markets: A study of the tennis racket
industry. Organization Science , 20: 368–383.
26 . Guth, W. D. & Ginsberg, A. 1990. Guest editor’s introduction: Corporate entrepreneurship. Strategic Management Journal , 11: 5–15.
27 . Pinchot, G. 1985. Intrapreneuring. New York: Harper & Row.
28 . For an interesting perspective on the role of context on the discovery and creation of opportunities, see Zahra, S. A. 2008. The virtuous cycle
of discovery and creation of entrepreneurial opportunities. Strategic Entrepreneurship Journal, 2(3): 243–257.
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 29 . Birkinshaw, J. 1997. Entrepreneurship in multinational corporations: The characteristics of subsidiary initiatives. Strategic Management
Journal , 18(3): 207–229; and Kanter, R. M. 1985. The change masters. New York: Simon & Schuster.
409
30 . Hansen, M. T., Chesbrough, H. W., Nohria, N., & Sull, D. 2000. Networked incubators: Hothouses of the new economy. Harvard Business
Review , 78(5): 74–84.
31 . For more on the importance of leadership in fostering a climate of entrepreneurship, see Ling, Y., Simsek, Z., Lubatkin, M. H., & Veiga, J.
F. 2008. Transformational leadership’s role in promoting corporate entrepreneurship: Examining the CEO-TMT interface. Academy of
Management Journal, 51(3): 557–576.
32 . Bryant, A. 2011. Got an idea? Sell it to me in 30 seconds. nytimes.com , January 1: np.
33 . Gunther, M. 2010. 3M’s innovation revival. Cnnmoney.com , September 24: np; Byrne, J. 2012. The 12 greatest entrepreneurs of our time.
Fortune , April 9: 76; and Anonymous. 2007. Johnson & Johnson turns to internal venturing. silico.wordpress.com , July 16: np.
34 . For an interesting discussion, see Davenport, T. H., Prusak, L., & Wilson, H. J. 2003. Who’s bringing you hot ideas and how are you
responding? Harvard Business Review , 80(1): 58–64.
35 . Howell, J. M. 2005. The right stuff. Identifying and developing effective champions of innovation. Academy of Management Executive , 19
(2): 108–119. See also Greene, P., Brush, C., & Hart, M. 1999. The corporate venture champion: A resource-based approach to role and
process. Entrepreneurship Theory & Practice , 23(3): 103–122; and Markham, S. K. & Aiman-Smith, L. 2001. Product champions: Truths,
myths and management. Research Technology Management, May–June: 44–50.
36 . Burgelman, R. A. 1983. A process model of internal corporate venturing in the diversified major firm. Administrative Science Quarterly, 28:
223–244.
37 . Hamel, G. 2000. Leading the revolution. Boston: Harvard Business School Press.
38 . Greene, Brush, & Hart, op. cit.; and Shane, S. 1994. Are champions different from non-champions? Journal of Business Venturing, 9(5): 397
–421.
39 . Block, Z. & MacMillan, I. C. 1993. Corporate venturing—Creating new businesses with the firm. Cambridge, MA: Harvard Business School
Press.
40 . For an interesting discussion of these trade-offs, see Stringer, R. 2000. How to manage radical innovation. California Management Review ,
42(4): 70–88; and Gompers, P. A. & Lerner, J. 1999. The venture capital cycle. Cambridge, MA: MIT Press.
41 . Cardinal, L. B., Turner, S. F., Fern, M. J., & Burton, R. M. 2011. Organizing for product development across technological environments:
Performance trade-offs and priorities. Organization Science , Forthcoming.
42 . Albrinck, J., Hornery, J., Kletter, D., & Neilson, G. 2001. Adventures in corporate venturing. Strategy + Business , 22: 119–129; and
McGrath, R. G. & MacMillan, I. C. 2000. The entrepreneurial mind-set. Cambridge, MA: Harvard Business School Press.
43 . Kiel, T., McGrath, R. G., Tukiainen, T., 2009. Gems from the ashes: Capability creation and transforming in internal corporate venturing.
Organization Science , 20: 601–620.
44 . For an interesting discussion of how different outcome goals affect organizational learning and employee motivation, see Seijts, G. H. &
Latham, G. P. 2005. Learning versus performance goals: When should each be used? Academy of Management Executive , 19(1): 124–131.
45 . Crockett, R. O. 2001. Motorola. BusinessWeek , July 15: 72–78.
46 . The ideas in this section are drawn from Royer, I. 2003. Why bad projects are so hard to kill. Harvard Business Review , 80(1): 48–56.
47 . For an interesting perspective on the different roles that individuals play in the entrepreneurial process, see Baron, R. A. 2008. The role of
affect in the entrepreneurial process. Academy of Management Review, 33(2): 328–340.
48 . Hoskin, R. E. 1994. Financial accounting. New York: Wiley.
49 . We know stock options as derivative assets—that is, “an asset whose value depends on or is derived from the value of another, the
underlying asset”: Amram, M. & Kulatilaka, N. 1999. Real options: Managing strategic investment in an uncertain world: 34. Boston:
Harvard Business School Press.
50 . For an interesting discussion on why it is difficult to “kill options,” refer to Royer, I. 2003. Why bad projects are so hard to kill. Harvard
Business Review , 81(2): 48–57.
51 . Slywotzky, A. & Wise, R. 2003. Double-digit growth in no-growth times. Fast Company, April: 66–72; www.hoovers.com ; and
www.johnsoncontrols.com .
52 . For more on the role of real options in entrepreneurial decision making, see Folta, T. B. & O’Brien, J. P. 2004. Entry in the presence of
dueling options. Strategic Management Journal , 25: 121–138.
53 . This section draws on Janney, J. J. & Dess, G. G. 2004. Can real options analysis improve decision-making? Promises and pitfalls. Academy
of Management Executive, 18(4): 60–75. For additional insights on pitfalls of real options, consider McGrath, R. G. 1997. A real options
logic for initiating technology positioning investment. Academy of Management Review , 22(4): 974–994; Coff, R. W. & Laverty, K. J.
2001. Real options on knowledge assets: Panacea or Pandora’s box. Business Horizons , 73: 79, McGrath, R. G. 1999. Falling forward: Real
options reasoning and entrepreneurial failure. Academy of Management Review , 24(1): 13–30; and, Zardkoohi, A. 2004.
54 . For an understanding of the differences between how managers say they approach decisions and how they actually do, March and Shapira’s
discussion is perhaps the best. March, J. G. & Shapira, Z. 1987. Managerial perspectives on risk and risk--taking. Management Science , 33
(11): 1404–1418.
55 . A discussion of some factors that may lead to escalation in decision making is included in Choo, C. W. 2005. Information failures and
organizational disasters. MIT Sloan Management Review , 46(3): 8–10.
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 56 . For an interesting discussion of the use of real options analysis in the application of wireless communications, which helped to lower the
potential for escalation, refer to McGrath, R. G., Ferrier, W. J., & Mendelow, A. L. 2004. Real options as engines of choice and
heterogeneity. Academy of Management Review , 29(1): 86–101.
57 . One very useful solution for reducing the effects of managerial conceit is to incorporate an “exit champion” into the decision process. Exit
champions provide arguments for killing off the firm’s commitment to a decision. For a very insightful discussion on exit champions, refer
to Royer, I. 2003. Why bad projects are so hard to kill. Harvard Business Review , 81(2): 49–56.
410
PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be
reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.
