Managing Innovation and Fostering Corporate Entrepreneurship

Chapter 12 Managing Innovation and Fostering Corporate Entrepreneurship

SUMMARY/OBJECTIVES

Strategic management and leadership are essential for entrepreneurial success. To remain competitive, established firms must seek out opportunities for growth and avenues for strategic renewal. Changes in customer needs, new technologies, and shifts in the competitive landscape require that companies continually innovate and initiate corporate ventures. This chapter addresses how innovation and corporate entrepreneurship help firms create competitive advantages. The chapter is divided into three major sections:

1. The first section addresses the role of innovation in the venture creation and strategic renewal process. We also discuss how firms can effectively manage the innovation process and overcome impediments and challenges to successful innovation.

2. The second section addresses corporate entrepreneurship. It describes techniques used by established firms to instill a spirit of entrepreneurship into corporate strategic thinking. It also discusses the role of focused and dispersed approaches to the venture development process.

3. The third section describes the influence of an entrepreneurial orientation on the venture creation processes. It outlines several practical applications of entrepreneurial thinking to strategic decision making and cautions about some of the pitfalls associated with an entrepreneurial frame of mind.

Transparency 105 (Learning Objectives)

LECTURE/DISCUSSION OUTLINE

The introductory case is Polaroid. A major corporation that was considered one of the first great research-based companies, Polaroid built its success on the basis of an early innovation—a photographic process that would develop film in a single-step in 60 seconds. It refined and expanded that technology for 30 years reaching $1.4 billion in sales in 1978.

Polaroid seemed to be the picture of success. Founder Edwin Land had been hailed as a new breed of corporate leader—both technically savvy and entrepreneurial. But by 1991, the year Land died, the company was unraveling. New products were lagging in the marketplace and its administrative costs were out of control. Polaroid’s most serious problems began when it failed to get on the digital photography bandwagon. Once Polaroid realized the extent of the digital photography trend, it was too late.

Polaroid had no long-term financial plan and continued to go into debt. By October, 2001 its financial troubles led it to declare bankruptcy. (Its assets, including the name, were purchased by OEP

203 Imaging Operating Corporation.) At a more fundamental level, Polaroid stopped thinking and acting like an entrepreneurial company.

 What mistakes did Polaroid’s top management make?

 How could the problems encountered by the management of Polaroid have been avoided?

 What does the case teach about the role of strategic management and leadership in effectively managing corporate entrepreneurship?

I. MANAGING 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. The innovation process needs to be managed.

STRATEGY SPOTLIGHT 12.1 highlights three relatively low-tech innovations used by Rubbermaid to build marketing-related competitive advantages.

A. TYPES OF INNOVATION

There are several ways to characterize innovations. Innovations can be viewed in terms of their degree of innovativeness on a continuum from radical to incremental.

1. Radical innovations. Produce fundamental changes by evoking major departures from existing practices. These are breakthrough innovations that can transform a company or even revolutionize an industry.

2. Incremental Innovations. Enhance existing practices or make small improvements in products and processes. They represent evolutionary rather than revolutionary applications within existing paradigms.

EXHIBIT 12.1 depicts an incremental-radical continuum and shows examples of several innovations. Transparency 106 Ex. 12.1 Continuum of Radical and Incremental Innovations

Another distinction often used is between product and process innovation. Product innovation refers to efforts to create product designs and applications of technology to develop new products for end users. Product innovations are commonly associated with a differentiation strategy. Process innovation, by contrast, is typically associated with improving the efficiency of organizational processes especially manufacturing systems and operations. Process innovations are often associated with overall low cost leader strategies.

 What can be learned from characterizing innovations in different ways? How does this help to better understand the strategic implications of innovation?

204  What are some examples of product and process innovations? What types of firms are most likely to favor product innovations? process innovations?

The SUPPLEMENT below addresses Starbucks efforts to continually innovate.

STARBUCKS: HOW IT IS INNOVATING TO STAY ON TOP

Starbucks, one of the fastest-growing young corporations, is also one of the most innovative. Although most of its innovations are incremental rather than radical, it does address both product and process issues in its ongoing innovation efforts. One reason is the company’s concern that its rapid growth may soon level off, especially in the United States. As a result, Starbucks is faced with what may be its next biggest challenge: attracting the next generation of customers. Younger coffee drinkers are not as comfortable in Starbucks, which tends to cater to boomers and GenXers. When Starbucks surveyed twentysomethings recently, they got some bad news. “They either can’t afford to buy coffee at Starbucks, or the only peers they see are those working behind the counter,” says Mark Barden who conducted the survey for Hal Riney & Partners, a San Francisco ad agency. As a result, Starbucks is innovating to keep growing.

In fact, Starbucks has proven to be very innovative in how it sells coffee, its main course. Here are some examples:

 It has installed automatic espresso machines to speed up service in over 800 of its locations.

 It recently began offering prepaid Starbucks cards that clerk’s swipe through a reader to deduct a sale. Starbucks claims the cards cut transaction times in half.

 It installed Wi-Fi networks, that is, high-speed wireless Internet services, in over 1200 stores. These Wi-Fi “hot spots” allow customers to check e-mail, surf the web or wirelessly download multimedia presentations while sitting in a Starbucks.

As these examples indicate, Starbucks’ approach to innovation makes use of the latest technical innovations as well as focuses on marketing innovations in order to both increase sales and also sustain its competitive advantages.

Source: Holmes, S. 2002. Planet Starbucks. BusinessWeek, September 9, pp. 100-110.

 What is your view of Starbucks? Is it a place you go for coffee? Why or why not?

 As a college student, what innovations could Starbucks make to be more appealing to you?

B. CHALLENGES OF INNOVATION

Innovation is essential to sustaining competitive advantages, but firms are often resistant to innovation. Only those companies that actively pursue innovation, even though it is often difficult and uncertain, will get a pay-off from their innovation efforts. What makes innovation so difficult? Five dilemmas that companies must wrestle with when pursuing innovation include:

1. Seeds versus weeds – Companies must decide which of many ideas is most likely to bear fruit— the “Seeds”—and which should be cast aside—the “Weeds.” 2. Experience versus initiative – Senior managers have experience and credibility but tend to be risk averse; mid-level employees may be overly enthusiastic but see the value of the innovation first-hand. 3. Internal versus external staffing – Insiders may have social capital but fail to think outside the box; outsiders need time to train and build relationships.

205 4. Building capabilities versus collaborating – Internal development is costly and time-consuming but helps firms maintain control; partnering brings resources and experience but may result in conflict. 5. Incremental versus pre-emptive launch – Incremental launches are less risky but may not pay off; large-scale launches are riskier but may pre-empt competitive responses.

 What are some examples that you are familiar with of companies that have faced these dilemmas? Can you apply any of these dilemmas to your own business life or life as a student?

The next three sections address steps that firms can take to address the dilemmas and challenges of innovation.

C. DEFINING THE SCOPE OF INNOVATION

Firms must have a means to focus their innovation efforts. By defining the “strategic envelope,” that is, the scope of a firm’s innovation efforts, firms ensure that their innovation efforts are not wasted on projects that are uncertain or outside the firm’s domain of interest. DuPont’s biodegradable plastics are presented as an example.

To maintain focus, a company needs to develop innovation questions to ask itself:  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?

 If a company were to invest a large amount of time and money on a potential innovation that did not work out, would you consider it a failure? Why or why not? What factors would you consider to assess whether it was a failure?

The SUPPLEMMENT below describes a five stage process that Corning, Inc., a leading innovator for over 150 years, uses to achieve superior innovation results.

206 CORNING’S FIVE STAGE INNOVATION PROCESS

Corning, Inc. has been a leading innovator since it was founded in the 1850s. It has made some risky moves and has suffered during the recent economic downturn as some of its decisions proved to be costly. But in periods of both success and failure, Corning has survived by using a systematic management innovation process that has been effective for Corning and proven useful to many other companies. The process consists of five steps that a firm can use to advance through the stages of innovation:

1. Build Knowledge. This involves establishing a shared view of trends, discontinuities and related events that could shape the future. It often includes developing a road map of industry conditions and events that is useful in formulating a portfolio of innovation projects. 2. Determine Feasibility. This includes experimenting with new ideas both in laboratory settings and with potential customers and often involves developing a small working prototype. If proof of concept can be achieved and the technology can accomplish the intended objectives, the prototype can be developed into a product with significant market potential. 3. Test Practicality. This includes developing a larger prototype that reflects the initial product or process concept and testing the prototype with customers and in the lab. At this stage, manufacturing costs and overall capital requirements are estimated, potential competitive responses are assessed, and funds may be appropriated. 4. Prove Profitability. This involves determining if the product will satisfy a large market need, can be manufactured reliably, and produced at a cost that generates a profit. 5. Manage Life Cycle. This involves building sales volume, gaining market share, and satisfying customer needs. In order to keep the product from maturing too rapidly, it also includes efforts to continuously improve the product and seek new growth markets.

Sources: Graham, M. B. W., & Shuldiner, A. T. 2001. Corning and the Craft of Innovation. New York: Oxford University Press; www.1000ventures.com.

Teaching Tip: Corning has suffered financially in recent years because of its moves into industries, such as telecommunications, that later contracted due to changes in the business environment and general economic conditions. Ask students to what extent Corning’s downturn is the “fault” of the innovation process, if at all? This is an opportunity to encourage students to think about the relationship between external business conditions and internal innovation development. A similar question asks how information about environmental and economic conditions helps firms resolve the five dilemmas that often challenge their ability to effectively innovate.

D. MANAGING THE PACE OF INNOVATION

Firms need to regulate the pace of innovation. Radical and incremental innovations need different amounts of time to realistically come to fruition. The project time line of an incremental innovation may be six months to two years, whereas a more radical innovation may take ten years or more. Thus, radical innovations often involve more exploration in which experimentation makes strict timelines unrealistic. In contrast, firms that are innovating incrementally may use a milestone approach that is more stringently driven by goals and deadlines. The concept of time pacing from Competing on the Edge by Brown and Eisenhardt is introduced.

E. COLLABORATING WITH INNOVATION PARTNERS

Innovation partners can provide skills and insights that are often needed to make innovation projects succeed. Strategic partnering has other benefits as well. It 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. Intel and RadioFrame are used as examples.

207 Firms need a mechanism to help decide whom to partner with. Firms need to ask what competencies they are looking for and what the innovation partner will contribute. Innovation partnerships also need to specify how the rewards of the innovation will be shared and who will own the intellectual property that is developed.

 What are some examples that you are familiar with of companies that have joined forces in order to collaborate on an innovation? What was the outcome of the collaboration?

 What is the downside of partnering for the purpose of product or process innovation? What are some of the reasons a company would chose to partner on an innovation project?

STRATEGY SPOTLIGHT 12.2 emphasizes the role of collaboration and partnerships in successful innovation. Based on a book by Harvard Professor Henry Chesbrough, it discusses a new approach labeled “open innovation.”

The SUPPLEMENT below quotes a noted innovation consultant, Fred Wiersema, about the innovation process including the importance of collaborating with strategic partners.

WIERSEMA DISCUSSES THE DEMANDS OF THE INNOVATION PROCESS

Fred Wiersema, strategic consultant, lecturer and co-author of The Discipline of Market Leaders, has helped major corporations such as Ford, Xerox, and Apple Computers with their innovation efforts. In his experience, he has found that companies that work closely alongside strategic partners when innovating are the most effective. Not only does it allow a company to tap into the knowledge base of those partners, but also the demands of effective collaboration require that all organizational members endeavor to do their part in the overall innovation process in order to maintain their standards and reputation both outside and inside the firm. Here’s how Wiersema describes elements of the innovation process and the importance of integrating a company’s efforts with those of its strategic partners:

“The innovation process has three major components. The first is invention—getting ideas. The second is development—turning ideas into reality. This stage calls for extraordinary discipline and focus. The third stage is getting the product on the market and making it a huge success. This stage—which includes distribution, pricing, marketing, and public relations—demands integration. The best companies forge electronic links between suppliers, distributors, and customers. Setting up this complex and instantly responsive system requires a whole different set of skills than the first two stages.”

“One of the first things a company should do is take an innovation inventory: assess its strength and weaknesses at each stage. It’s also crucial to understand how willing, ready, and able your people are. Stimulating individual innovation is a challenge in itself. Turning your entire company into a perpetual innovation machine is obviously far more complex. It requires a tremendous amount of organizational discipline.”

Source: Wiersema, F. 1997. Editor’s Note. In R. M. Kanter, J. Kao, & F. Wiersema (Eds.), Innovation: Breakthrough thinking at 3M, DuPont, GE, Pfizer, and Rubbermaid: 8. New York: HarperCollins.

 What do you think an innovation inventory would consist of? That is, name some of the strengths and weaknesses a company might have that would affect its ability to effectively innovate.

208 III. CORPORATE ENTREPRENEURSHIP

Corporate entrepreneurship (CE) refers to building entrepreneurial businesses within existing corporations. It has two primary aims: the creation of new venture opportunities and strategic renewal. In this section, we address corporate growth and renewal via internal venture development.

All the factors that influence the strategy implementation process—corporate culture, leadership, features of organizational structure, and rewards and learning systems—will affect how corporations engage in internal corporate venturing.

In some large corporations, the spirit of entrepreneurship permeates every part of the 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. Two distinct approaches to corporate entrepreneurship—focused corporate venturing and dispersed CE activities—are discussed in the next two sections.

 What are some examples of major corporations that have a strong entrepreneurial spirit?

 What actions have they taken that make them entrepreneurial?

A. FOCUSED APPROACHES TO CORPORATE ENTREPRENEURSHIP

Firms using a focused approach typically separate the corporate venturing activity from the other ongoing operations of the firm. That is, CE is usually the domain of autonomous work groups that pursue entrepreneurial aims independent of the rest of the firm.

Two forms—new venture groups (NVGs) and business incubators—are among the most common types of focused approaches.

1. NEW VENTURE GROUPS

Corporations often form new venture groups whose goal is to identify, evaluate, and cultivate venture opportunities. These groups typically function as semi-autonomous units with little formal structure. A NVG’s mandate often extends beyond innovation and experimentation to coordinating with other corporate divisions, identifying potential venture partners, gathering resources, and, in some case, actually launching the venture. Nortel Networks NVG is presented as an example.

 What are the advantages and disadvantages of separating New Venture Group activities from other ongoing operations of the corporation? Explain.

STRATEGY SPOTLIGHT 12.3 describes an alternative to internal venture development for firms that want to be entrepreneurial but still maintain their autonomy—corporate venture funding.

The SUPPLEMENT below describes efforts that major corporations have made to acquire some of the technologies and innovative new products that were developed during the dot-com era. Many of these innovative Internet ventures live on as part of an established corporation that had the foresight to acquire them as a way to expand their business.

209 INTERNET STARTUPS LIVE ON AS PART OF LARGER CORPORATIONS

The Internet boom stimulated a giant leap forward in business creativity. Nearly 6000 tech companies were financed by venture capital and entrepreneurs were given permission to pursue their dreams. Although many were truly brilliant, they did not make it big before they ran out of money or were swallowed by a larger fish. Later, in the post dot-com crash era, many were snapped up at a fraction of their once lofty market value.

For established corporations looking to expand, the potential has been great. “The task is sifting through the wreckage and seeing where there’s an overlooked opportunity,” says Paul Saffo, executive director of think tank Institute for the Future. “ A lot of these ideas were good, but were ahead of their time.” According to Robert Tarkoff, chief strategy officer for Documentum, Inc., the leader in document-management software, which bought 3 distressed dot-coms, “We take pieces funded by tens of millions of dollars in venture-capital money, pick them up much more cheaply and get their products into the mainstream much faster than they would have gone otherwise.”

Here are some examples:

 Software maker BEA Systems, Inc. paid $240 million for WebLogic, Inc. a leader in Web application server software. The software has become a mainstay of Internet computing in corporations and, in 2002, counted for 70% of BEA’s $934 million in revenues.

 Peapod, LLC, the online grocery delivery service, was purchased by grocery store giant Royal Ahold in mid-2001. By plugging into Ahold’s existing grocery chains, Peapod gets price advantages and promotion. Peapod’s sales grew 20% in 2002 to $150 million.

 Earthlink, Inc. purchased PeoplePC for a measly $10 million in 2002. As a subsidiary of Earthlink, PeoplePC still functions as a separate business and is thriving by selling consumers PCs and Internet access in a single affordable package for just $24.95 per month.

Clearly, these efforts represent an important means by which large corporations can enjoy the benefits of owning new ventures. By recognizing the value of the business and acquiring it for a bargain price, corporate venture groups have found new homes for many valuable products.

Source: Hamm, S. 2003. Startups may die, but not their bright ideas. BusinessWeek, March 10, pp. 70-71.

Teaching Tip: Even organizations that have New Venture Groups often fail to convert their efforts into profit-making successes. Lucent and Xerox are notable examples. Ask students what is it about large corporations that makes it difficult for smart, new ideas to find a home? Why is it that corporations frequently have to go outside the organization to find fresh ideas? This line of questioning can provide a means to address other implementation issues such as structure, control, and reward systems and how they contribute to or distract from successful corporate innovation and venturing.

2. BUSINESS INCUBATORS

Business incubators are designed to “hatch” new businesses. They are a type of corporate new venture group with a more specialized purpose—to support and nurture fledgling entrepreneurial ventures until they can thrive on their own as stand alone businesses.

210 Company-sponsored incubators provide experience and resources. The following five functions are typically provided by corporate parents: 1. Funding 2. Physical Space 3. Business Services 4. Mentoring 5. Networking

 What are the advantages and disadvantages of company sponsored incubators as a way to support corporate entrepreneurial ventures?

B. DISPERSED APPROACHES TO CORPORATE ENTREPRENEURSHIP

Corporate entrepreneurship that is dispersed occurs when a dedication to the principles and practices of entrepreneurship is spread throughout the organization. Organizational members don’t have to be reminded to think entrepreneurially or be willing to change. That ability is considered to be a core capability. Such corporations often have a reputation for being entrepreneurial.

Two related aspects of dispersed entrepreneurship include entrepreneurial cultures and the use of product champions in promoting entrepreneurial behaviors.

1. ENTREPRENEURIAL CULTURE

A culture of entrepreneurship is one in which the search for venture opportunities permeates every part of the organization. Everyone is attuned to opportunities to leverage the assets and capabilities of the corporation to create new businesses.

STRATEGY SPOTLIGHT 12.4 describes the entrepreneurial culture of the Virgin Group, a British company that has spawned around 200 new ventures based on ideas provided by its employees.

 What are some examples of firms that you are familiar with that have an entrepreneurial culture?

 What are the elements of an entrepreneurial culture? That is, what does it take in terms of beliefs, values, incentives, rewards, and so forth for an organization to be continually thinking about entrepreneurial opportunities?

2. PRODUCT CHAMPIONS

In some organizations, even the best ideas have difficulty getting accepted. Therefore, many corporations rely on product champions to develop and build support for an entrepreneurial venture.

A new venture idea must pass through two critical stages or it may never get off the ground— project definition and project impetus:

1. Project Definition A promising opportunity has to be justified in terms of whether it will be attractive in the marketplace and how well it fits with the corporation’s other strategic objectives.

211 2. Project Impetus The strategic and economic impact of a project must be supported by senior managers who have experience with similar projects. Then it becomes an embryonic business with its own organization and budget.

The role of product champions is to generate support, especially 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 development. They do this by procuring resources and stimulating interest in the project. Ken Kutagari, who championed the Sony Playstation, is presented as an example.

The SUPPLEMENT discusses the important role that champions and internal entrepreneurs play in creating new wealth.

GARY HAMEL ADDRESSES THE NEED TO REWARD THE CHAMPIONS WHO CREATE WEALTH

“In Silicon Valley, everyone understands that innovation is the only way to create new wealth—both corporately and individually. But employees in most large companies live in a world where operational efficiency is everything. Their spirits crushed by a decade-long efficiency death march, few employees are able to even imagine another route to wealth creation.”

“All too often, the risk-reward trade-off for internal entrepreneurs is long on risk and short on reward. Why should employees risk a bruising battle with the defenders of the status quo when the potential payoff is so meager? Unless the champions of the new believe there is a chance for substantial personal wealth creation, the marketplace for ideas will be as barren as the shelves of a Soviet supermarket. It’s ironic that companies pay CEOs millions upon millions to unlock shareholder wealth but seem incapable of funneling six- and seven-figure rewards to people who actually create new wealth.”

Source: Hamel, G. 1999. Bringing Silicon Valley inside. Harvard Business Review, 7-(5): 77.

 Do you agree with Hamel that champions should receive greater rewards? Why or why not?

 What are some examples of companies that have a favorable policy toward product champions and internal entrepreneurs? How are they rewarded?

STRATEGY SPOTLIGHT 12.5 presents the example of Nokia, a highly innovative and entrepreneurial firm that practices both focused and dispersed approaches to corporate entrepreneurship.

C. MEASURING THE SUCCESS OF CORPORATE ENTREPRENEURSHIP ACTIVITIES

This section asks, “Is corporate entrepreneurship successful?” What factors do corporations consider when evaluating the success of CE programs?

1. COMPARING STRATEGIC AND FINANCIAL CE GOALS

Just over 50 percent of corporate venturing efforts reach profitability (measured by ROI) within six years of their launch. In addition to financial goals, however, most CE programs also have strategic goals.

212 Three questions should be used to assess the effectiveness of a corporation’s venturing initiatives:

1. Are the products or services offered by the venture accepted in the marketplace? 2. Are the contributions of the venture to the corporation’s internal competencies and experience valuable? 3. Is the venture able to sustain its basis of competitive advantage?

Another way to evaluate a corporate venture is in terms of the four criteria from the Balanced Scorecard.

 Why do you think corporate venturing activities are financially successful only about 50 percent of this time?

 Should the same criteria that are used to evaluate corporate performance in general also apply to corporate entrepreneurship? Why or why not?

2. EXIT CHAMPIONS AND REAL OPTIONS

Many entrepreneurial initiatives never work out or turn into profitable ventures. However, companies often 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.

Corporations can avoid these costly defeats by supporting a key role in the CE process—“exit champions.” Exit champions question the viability of venture projects and hold the line on ventures that appear shaky. Exit champions reduce ambiguity by gathering hard data and developing a case for why a project should be killed.

Another way firms can minimize failure and avoid losses from pursuing faulty ideas is to apply the logic of real options. Based on feedback at each stage of development, firms decide whether to exercise their options by making further investments. Alternatively, they may decide that the idea is not worth further consideration. By making smaller and more incremental investments, firms keep their total investment low and minimize downside risk. Wal-Mart’s recent entry into automobile sales is presented as an example.

 What are the advantages of using a real options approach to investigating entrepreneurial opportunities? Are there any disadvantages? Explain.

STRATEGY SPOTLIGHT 12.6 describes the real options logic that auto parts maker Johnson Controls uses to advance or eliminate entrepreneurial ideas.

The SUPPLEMENT below explains that even when firms take steps to investigate a venture carefully, it may not be an immediate success. Some new products, such as pharmaceuticals, require large investments and a long time to pay off.

213 CORPORATE VENTURES OFTEN TAKE TIME TO SUCCEED BUT YOU STILL HAVE TO “PLACE YOUR BETS”

Janet Effland, General partner and head of Apax Partners’ health-care investment group, believes that you have to be brave enough to take a chance on the latest new products and patient enough to let them succeed. The following remarks provide interesting insights for corporate new ventures into the importance of striking a balance between taking risks and waiting out the results.

“Ask yourself, ‘Will dogs eat the dog food?’ Meaning, is there a true market, or are you trying to force people to do things before they are ready? If I’m going to fund a company, there has to be a clear, unmet critical need for the new product. A lot of people come up with products that are incrementally better, but that’s not good enough.

“Returns don’t come quickly. Your first-generation products often will not be cheaper, but they’ll be faster or better. The cost savings come in the second and third generations, and that’s when you’ll make your money.”

Source: Effland, J. 2002/2003. Bet on the next big thing. Business 2.0, December/January, p. 90.

IV. ENTREPRENEURIAL ORIENTATION

Entrepreneurial orientation (EO) refers to the strategy-making practices and decision-making styles that businesses use in identifying and launching corporate ventures. It consists of five dimensions which work together to enhance a firm’s entrepreneurial performance—autonomy, innovativeness, proactiveness, competitive aggressiveness, and risk taking.

EXHIBIT 12.2 summarizes the dimensions of an entrepreneurial orientation.

Transparency 107 (Ex. 12.2) Dimensions of Entrepreneurial Orientation

In this section, we will describe the five EO dimensions and how they contribute to internal venture development.

A. 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. In the context of CE, autonomy may apply to either dispersed or focused efforts. Corporate entrepreneurship requires that organizational members have time to investigate opportunities, act freely without fear of condemnation, and be allowed the independent thinking that goes into championing a corporate venture idea.

Two techniques often used to promote autonomy include: 1. Using skunkworks to foster entrepreneurial thinking. 2. Designing organization structures that support independent action.

Creating autonomous work units and encouraging independent action may have pitfalls that can jeopardize their effectiveness. Autonomous teams often lack coordination and excessive decentralization can create inefficiencies, such as duplication of effort and wasting of resources. Thus, for autonomous work units and independent projects to be effective, such efforts have to be measured and monitored.

 How does autonomy help organizational members identify and develop entrepreneurial opportunities?

214 The SUPPLEMENT below notes that one of the techniques corporations often use to achieve autonomy is physical separation.

CORPORATIONS USE PHYSICAL SEPARATION TO ENCOURAGE AUTONOMY

One of the key techniques that organizations use to create autonomy is physically separating venture development work teams from the rest of the organization. This is based on the belief, as some consultants put it, that companies seeking to develop innovations must “plant seeds in walled gardens so that established business can’t trample them.” As a result, several major corporations have attempted physical separation as a way to create autonomous environments. Here are some examples:

 Proctor & Gamble’s “Corporate New Ventures” division occupied a separate floor with a distinctly different appearance and a layout that encouraged informal meetings and easy exchange of information.

 Raytheon initially housed its “New Product Center” in run down facilities that were physically separated from the company’s headquarters.

 Food processing company Barilla located its “Divisione Prodotti Freschi” in an old building located several miles away from the firm’s main office.

Sources: Chesbrough, H. 2003. Open innovation: The new imperative for creating and profiting from technology. Cambridge, MA: Harvard Business School Press. Day, J.D., Mang, P. Y., Richter, A. & Roberts, J. 2001. The innovative organization: Why new ventures need more than a room of their own. The McKinsey Quarterly, 2: 21-31.

 Why do you think it is often necessary for corporations to use skunkworks and physical separation in order to stimulate entrepreneurial thinking in its corporate venture teams?

B. INNOVATIVENESS

Innovativeness refers to a firm’s efforts to find new opportunities and novel solutions. It involves creativity and experimentation and requires that firms depart from existing technologies and practices and venture beyond the current state of the art. Innovativeness is one of the major components of an EO.

Innovations come in many different forms including technological innovativeness, product- market innovativeness, and administrative innovativeness. Innovations can also be viewed in terms of their degree of innovativeness, which falls somewhere on an incremental-to-radical continuum.

1. Radical innovations Produce fundamental changes by evoking major departures from existing practices. These are breakthrough innovations that can transform a company or even revolutionize an industry.

2. Incremental innovations Enhance existing practices or make small improvements in products and processes. They represent evolutionary rather than revolutionary applications within existing paradigms.

The 3M Corporation provides a strong example of how a corporate strategy can induce entrepreneurial thinking and internal venture development. EXHIBIT 12.3 describes the policies that create a climate of innovation and entrepreneurial development at 3M.

Transparency 108 (Ex. 12.3) 3M’s Rules for Successful Innovations Two methods companies can use to be innovative include:

1. Fostering creativity and experimentation. 2. Investing in new technology, R&D, and continuous improvement.

Pitfalls associated with innovativeness include potentially wasting resources, failure to innovate ahead of competitors, and limited funds for innovation during an economic downturn.

C. PROACTIVENESS

Proactiveness refers to a firm’s efforts to find and seize new opportunities. Proactive organizations monitor trends, identify future needs, and anticipate changes in demand that can lead to new opportunities. Proactiveness involves not only recognizing changes but also being willing to act ahead of the competition.

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. First movers usually have several advantages. First, industry pioneers often capture unusually high profits because there are no competitors to drive prices down. Second, first movers are usually able to retain their image and hold on to the market share gains they earned by being first.

First movers are not always successful. For one thing, the customers of companies that introduce novel products or embrace breakthrough technologies may be reluctant to commit to a new way of doing things. Second, some companies try to be a first mover before they are ready.

Two methods companies can use to be proactive include:

1. Introducing new products or technological capabilities ahead of the competition. 2. Continuously seeking out new product or service offerings.

The SUPPLEMENT below describes another aspect of proactiveness: Strategically eliminating product lines or services that face declining demand.

BEING PROACTIVE IN THE FACE OF DECLINING DEMAND

Not all proactiveness is related to being a first mover. Sometimes it takes foresight to stop doing something that has made your company successful in the past. Consider the case of Mason & Hanger, a privately-held prime contractor for the U.S. government in military procurement involving nuclear weapons. When the cold war ended, they redefined their mission to include dismantling weapons and other “high consequence activities,” such as installing security systems in Saudi oil fields. Clearly, in the face of changing conditions, Mason & Hangar saw the need to eliminate a few key business activities without forfeiting their core competencies.

216 Source: Berman, P. 1996. A proud record. Forbes, January 22: 56-58.

 What do you think would have been the consequences if Mason and Hangar had not redefined its mission at the end of the cold war?

Pitfalls associated with proactiveness include launching pioneering products that don’t pay-off and introducing brands that don’t catch-on.

Teaching Tip: Although many companies recognize the value of having an entrepreneurial orientation, not all seem to be able to develop one. Ask students to speculate on why so many firms have difficulty innovating, acting proactively, and taking risks. Possible reasons may include failure to recognize why an entrepreneurial orientation may be needed to effectively pursue opportunities, how to develop the competencies that support corporate venturing, or problems with culture, structure, and reward systems within the organization. This serves to reinforce the point made earlier in the chapter about how the innovation process has to be managed. It can also be used to emphasize the importance of having a vision and sense of direction in order to make the difficult choices that are often associated with entrepreneurial venturing as well as the challenge of coordinating entrepreneurial efforts across all aspects of the organization.

D. 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 by slashing prices, sacrificing profitability to gain market share, or spending aggressively to obtain new capacity.

However, unlike innovativeness and proactiveness, which tend to focus on market opportunities, competitive aggressiveness is directed toward competitors. In terms of SWOT analysis (Chapters 2 and 3) 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 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 use competitive aggressiveness to combat industry trends that threaten their survival or market position. Sometimes firms need to be forceful in defending their competitive position or aggressive to ensure their advantages from capitalizing on new technologies or serving new market needs.

The SUPPLEMENT below describes how a younger, smaller company aggressively competed with a major established firm.

HOW QWEST COMMUNICATIONS AGGRESSIVELY ENTERED A NEW MARKET

Mergers are usually friendly. Corporate takeovers, however, tend to be hostile, especially when the company doing the taking is younger or smaller. But it did not stop Qwest Communications CEO Joe Nacchio from going after U.S. West—and succeeding. “We’re a predator,” said Nacchio, “We’re going to change the industry.” Qwest, which was founded in 1988 as a construction company for fiber-optic networks, has indeed been transformed into a major telecom player. After building an 18,500-mile fiber network, Qwest acquired three Internet service providers and LCI, the fourth largest long-distance carrier. Its latest acquisition is the biggest yet. Qwest swallowed a very big fish when it paid $58 billion for the regional phone company that used to be part of AT&T. In the process, it tripled its annual sales and market capitalization.

Source: Hawn, C. 2000. No ordinary Joe. Forbes, August 7: 82-88.

217  Do you think that Qwest might experience retribution because of how aggressively it competes? For example, do you think other companies might be unwilling to do business with them? If not that, what other kinds of consequences might result from Qwest’s aggressiveness?

218 Two methods companies use to strengthen their position by being competitively aggressive include:

1. Entering markets with drastically lower prices. 2. Copying the business practices or techniques of successful competitors.

One practice companies use to overcome the competition involves making preannouncements of new products or technologies. These announcements signal both customers and competitors.

STRATEGY SPOTLIGHT 12.7 describes potential ethical problems from “vaporware” which refers to product preannouncements in the software industry.

A pitfall associated with competitive aggressiveness is damaged reputation due to excessive aggressiveness.

E. 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 obtain high returns, firms often assume high levels of debt, commit large amounts of firm resources, introduce new products or invest in unexplored technologies.

Organizations and their executives face three types of risk:

1. Business risk taking Venturing into the unknown without knowing the probability of success. This is the risk associated with entering untested markets or committing to unproven technologies.

2. Financial risk taking Borrowing heavily or committing a large portion of resources in order to grow. Risk is used in this context to refer to the risk/return tradeoff that is familiar in financial analysis.

3. Personal risk taking Risks that an executive assumes in taking a stand in favor of a strategic course of action. Executives who take such risks influence the course of their company and impact their careers.

Even though risk taking involves taking chances, it is not gambling. The best run companies investigate the consequences of various actions and create scenarios of possible outcomes in order to reduce the riskiness of business decisions.

Two methods companies can use to gain competitive advantages via risk taking include:

1. Researching and assessing risk factors to minimize uncertainty. 2. Using techniques that have worked in other domains.

A pitfall associated with risk taking is acting before the risks of a project are clearly understood.

The SUPPLEMENT below identifies steps companies can take to reduce risk when the economy is weak.

219 CONFRONTING RISKS IN A RISKY ECONOMY

Business is riskier when the economy is stormy. Since the dot-com bubble burst in 2000 and 2001, technology firms have had a particularly difficult time. But there have been bright stars among tech companies. Many of them were identified in the Business 2.0 list of the 100 fastest-growing tech companies. Based on an analysis of what these companies had in common, here is a summary of the actions they have taken to stay afloat during the downturn in the tech business cycle:

1. Do one thing well. If you do one thing better than anyone else, in a downturn your customers will dump everyone else first. 2. Watch your wallet. In a rough market, protecting cash flow is everyone’s responsibility. 3. Keep innovating. While others protect gains in a slow economy, top performers continue to spend on continually improving and inventing new products. 4. Buy smart. Acquisitions need to be purposeful, that is, aimed at helping companies become better at what they already do. 5. Supply the suppliers. Sell to those companies that are working hard to strike it rich. They need things to keep working. 6. Hitch your wagon to a star. Some winning companies maintain relationships with the powerful; others make contracts with the federal government, which is all but immune to the business cycle. 7. Have a backup plan. In unpredictable times, you have to be prepared to scramble.

Source: Thomas, O. 2002. Seven Secrets of Success. Business 2.0, October, p. 87.

IV. 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 type innovations to incremental improvement type innovations. Innovations are often used to update products and services or for improving organization 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 defining the scope of innovation, managing the pace of 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 the company in order to induce strategic behaviors by all organizational members. In measuring the success of corporate venturing activities, both financial and strategic objective should be considered.

220 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 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.