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CHAPTER 12

Managing Innovation and Fostering Corporate Entrepreneurship

Learning Objectives

After reading this chapter, you should have a good understanding of:

12-1 The importance of implementing strategies and practices that foster innovation.

12-2 The challenges and pitfalls of managing corporate innovation processes.

12-3 How corporations use new venture teams, business incubators, and product champions to create an internal environment and culture that promote entrepreneurial development.

12-4 How corporate entrepreneurship achieves both financial goals and strategic goals.

12-5 The benefits and potential drawbacks of real options analysis in making resource deployment decisions in corporate entrepreneurship contexts.

12-6 How an entrepreneurial orientation can enhance a firm’s efforts to develop promising corporate venture initiatives.

©McGraw-Hill Education.

Managing Innovation

Consider . . .

To remain competitive, established firms must continually seek out opportunities for growth and develop new methods for strategically renewing their performance.

How can innovation and corporate entrepreneurship activities become an avenue for achieving competitive advantage?

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Strategic leaders need to manage change. Changes in customer needs, new technologies, and shifts in the competitive landscape require that companies continually innovate and initiate corporate ventures in order to compete effectively. That is why managing innovation is an important strategic implementation issue. Innovation plays an important role in identifying venture opportunities and creating strategic renewal. Firms need to learn how to successfully manage the innovation process and develop corporate entrepreneurship activities. A firm’s entrepreneurial orientation can contribute to its growth and renewal as well as enhance the methods and processes strategic managers use to recognize opportunities and develop initiatives for internal growth and development.

Managing Innovation: Definition

Innovation allows for

Transformation of organizational processes

Creation of new & commercially viable products & services

Innovation requires new knowledge from

Latest technology

Results of experiments

Creative insights

Competitive information

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Growth opportunities come through innovation. Innovation = the use of 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. In fact, the root of the word innovation is the Latin novus, which means new. Innovation involves introducing or changing to something new. It is a critical part of strategic implementation.

Question (1 of 2)

Whereas _______ are often associated with the low-cost leader strategy, ________ are frequently an important aspect of the differentiation strategy.

process innovations; product innovations

product innovations; service innovations

radical innovations; instrumental innovations

marketing innovations; incremental innovations

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Answer: A. Managing innovation is an important strategic implementation issue. Once strategic leaders have chosen a strategy to implement, they must then anticipate how to eventually expand or improve their business through innovation or corporate entrepreneurship. If a firm has chosen the low-cost leader strategy, most likely process innovations are required in order to improve the business in the long term. On the other hand, if a firm has chosen differentiation as a strategy, then expansion of the business through product innovations will be required in order to grow.

Managing Innovation: Types (1 of 4)

Types of innovation include:

Product innovation

Creates new product designs

Applies technology to develop new products for end-users

Common during early stages of an industry’s life cycle

Associated with a differentiation strategy

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Sometimes even a small innovation can add value and create competitive advantages. Product innovation = efforts to create product designs and applications of technology to develop new products for end users. Product innovations tend to be more common during the earlier stages of an industry’s lifecycle. 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.

Managing Innovation: Types (2 of 4)

Types of innovation also include:

Process innovation

Improves the efficiency of an organizational process

Improves materials utilization, shortens cycle time, increases quality

Common during later stages of an industry’s lifecycle

Associated with overall cost leadership strategies

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Innovation can and should occur throughout an organization – in every department and all aspects of the value chain. Process innovation = efforts to improve the efficiency of organizational processes, especially manufacturing systems and operations. By drawing on new technologies and an organization’s accumulated experience, 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 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.

Managing Innovation: Types (3 of 4)

Other types of innovation include:

Radical innovation

Major departure from existing practices

Usually as a result of technological change

Can be highly disruptive

Can transform or revolutionize a whole industry

Incremental innovation

Can enhance existing practices

Make small improvements in products & processes

Can create evolutionary applications of earlier innovations; provide new capabilities

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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. Radical innovation = an innovation that fundamentally changes existing practices. 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 the whole industry. They may lead to products or processes that can be patented, giving the firm a strong competitive advantage. Incremental innovation = an innovation that enhances existing practices or makes small improvements in products and processes. Incremental innovations 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.

Managing Innovation: Types (4 of 4)

Additional types of innovation include:

Sustaining innovations

Extend sales in an existing market

Enable new products or services to be sold at higher margins, i.e., via the Internet

May be incremental or radical innovations

Disruptive innovations

Overturn markets with a new approach to meeting customer needs

Are technologically simpler & less sophisticated

Appeal to less demanding customers

Take time to take effect

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Harvard professor Clayton Christensen identified another useful approach to characterize types of innovations. Sustaining innovations are those that extend sales in existing markets, usually by enabling new products or services to be sold at higher margins. Such innovations may include either incremental or radical innovations. For example, smartphone technology was a breakthrough that transformed how people access the Internet, but rather than disrupting activities of Google & Facebook, smartphones offered service providers new opportunities to extend into users’ lives. 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 because they are technologically simpler and less sophisticated than currently available products or services. They appeal to less-demanding customers who are seeking more convenient, less expensive solutions, and they 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. Christiansen says “instead of sustaining the trajectory of improvement that has been established in a market, a disruptive innovation disrupts it and redefines it by bringing to the market something that is simpler.”

Managing Innovation: Challenges (1 of 3)

Innovation challenges/dilemmas:

Seeds versus weeds

Which project should we pursue?

Seeds are likely to bear fruit; weeds should be cast aside.

Projects may require considerable investment before merit can be determined.

Experience versus initiative

Who should lead an innovation project?

Senior managers have experience & credibility, but tend to be more risk averse.

Mid-level employees may be the innovators themselves and have more enthusiasm, but need to be supported.

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Innovation is essential to sustaining competitive advantages. 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. The uncertainty about outcomes is one factor that makes innovation so difficult. 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 dilemmas that companies must wrestle with when pursuing innovation. Seeds versus weeds reflects the fact that most companies have an abundance of innovative ideas. They must decide which of these is most likely to bear fruit and which should be cast aside. 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 reflects the fact that companies must decide who will lead an innovation project. Senior managers may have experience and credibility but tend to be more risk averse. Mid-level employees, who may be the innovators themselves, may have more enthusiasm because they can see firsthand how an innovation would address specific problems, but firms need to support and reward those who bring new ideas to the table.

Managing Innovation: Challenges (2 of 3)

Innovation challenges/dilemmas, continued:

Internal versus external staffing

Where do we get competent staff?

Insiders have greater social capital, know the firm’s culture & routines, but can they think outside the box?

Outsiders are costly to recruit, hire, & train; may have difficulty building relationships.

Building capabilities versus collaborating

How do we find needed skills?

Capabilities may come from internal departments.

Collaborators may come from other companies.

Dependencies may inhibit internal skills development or create conflict.

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Other dilemmas that companies must wrestle with when pursuing innovation include the following: internal versus external staffing reflects the fact that 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. Building capabilities versus collaborating implies that 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 to create mechanisms for linking outside parties to the innovation process.

Managing Innovation: Challenges (3 of 3)

Innovation dilemmas, final choices:

Incremental versus preemptive launch

An incremental launch is less risky, requires fewer resources, serves as a market test.

An incremental launch can undermine the project’s credibility if it is too tentative.

An incremental launch can open the door for a competitive response.

A large-scale launch requires more resources.

A large-scale launch can effectively preempt a competitive response.

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A final dilemma that companies must wrestle with when pursuing innovation includes 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.

Managing Innovation: Improving the Process (1 of 5)

Cultivating innovation skills:

Discovery skills allow leaders to see the potential in innovations.

Creative intelligence allows individuals to develop more creative, higher potential innovations by means of:

Associating patterns, information & insights

Questioning common wisdom

Observing behavior

Experimenting with new possibilities

Networking with a diverse set of individuals

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The innovation process can be daunting even for highly successful firms. Some firms regularly produce innovative products and services, while other firms struggle to generate new, marketable ideas. Clayton Christiansen (and others) argues it is the innovative DNA of the leaders of some firms, their discovery skills, that allow them to see the potential in innovations and to move the organization forward in leveraging the value of those innovations. 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 of associating – the ability to seek 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. 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, they will build the ability to easily see situations creatively and draw upon a wide range of experiences and knowledge to identify creative solutions. See the description and examples of each of these traits in Exhibit 12.2.

Managing Innovation: Improving the Process (2 of 5)

Scope of innovation

Defining the strategic envelope:

Focus on a common technology?

Focus on a market theme?

Evaluating results:

How much will the innovation initiative cost?

How likely is it to actually become commercially viable?

How much value will it add; what will it be worth if it works?

What will be learned if it does not pan out?

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Firms must have the means to focus their innovation efforts. Firms must ensure that their innovation efforts are not wasted on projects that are outside the firm’s domain of interest. A strategic envelope defines the range of acceptable projects. 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. The strategic envelope also gives direction to a firm’s innovation efforts, which helps separate seeds from weeds and builds internal capabilities. 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. Companies must be clear not only about the kinds of innovation they are looking for but also the expected results. However, a firm envisions its innovation goals, it needs to develop a systematic approach to evaluating its results and learning from its innovation initiatives. It needs to develop a set of questions to ask itself about its innovation efforts.

Managing Innovation: Improving the Process (3 of 5)

Managing the pace of innovation

Incremental innovations

May take six months or two years

May use a milestone approach, goals & deadlines

Radical innovations

May take 10 years or more

May involve open ended experimentation & time-consuming mistakes

“Time pacing” allows for control of the innovation process.

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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? Managing the pace of innovation can be an important factor in long-term success. The project timeline of an incremental innovation may be six months to two years, whereas a more radical innovation is typically long-term – 10 years or more. Radical innovations often begin with a long period of exploration in which experimentation makes strict guidelines 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. 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. “Time pacing” can be a source of competitive advantage because it helps a company manage transitions and develop an internal rhythm. 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.

Managing Innovation: Improving the Process (4 of 5)

Staffing to capture value from innovation

Effective human resource management practices for innovation projects include:

Use experienced players from diverse areas.

Require employees to serve in the new venture group as part of career development.

Transfer experienced people to mainstream management, revitalizing core businesses.

Separate individual performance from innovation performance so failure is not a stigma.

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People are central to the processes of identifying, developing, and commercializing innovations effectively. People need broad sets of skills as well as experience – experience working with teams and experience working on successful innovation projects. Companies must provide strategic decision makers with the appropriate staff, and use human resource management practices to capture value from innovation efforts. Firms must 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. However, make sure to staff with players who have a diverse experience, not just those from the company’s core business. Require that employees seeking to advance their career with the organization serve in the new venture group as part of their career climb. Don’t just allow in volunteers who want to work on interesting projects. 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. Don’t create a climate where innovation team members are considered second-class citizens. 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.

Managing Innovation: Improving the Process (5 of 5)

Collaborating with innovation partners:

Research universities & the government provide new skills & insights.

Capabilities include market & technology expertise, social capital contacts.

Issues include how to share rewards & intellectual property.

The value of unsuccessful innovation

Even unsuccessful innovation efforts bear fruit.

Value is in learning & experience gained from failure.

Don’t overcommit or despair; pivot quickly & transfer knowledge; rethink the details; engage in continuous incremental innovation.

©McGraw-Hill Education.

It is rare for any one organization to have all the information it needs to carry an innovation from concept to commercialization, so firms need to seek out innovation partners to provide new skills & insights to make innovation projects succeed. Innovation partners may come from many sources, including research universities and the federal government. 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. Capabilities can include knowledge of markets, technology expertise, or contacts with key players in an industry. Issues might include how the rewards of the innovation will be shared and who will own the intellectual property that is developed. Regarding unsuccessful innovation efforts, NYU professor J. P. Eggers found that firms that initially invest in an unsuccessful innovative effort often end up dominating the market in the long run. The key is that the firm remains open to change and to learning from both its mistakes and the experience of its innovators. When companies are competing in a dynamic market where it is uncertain which technology will emerge triumphant, they need to avoid overcommitting or staking out a decisive position; instead consider joint ventures and other alliances to avoid overinvestments they may come to regret. In addition, firms shouldn’t let shame or despair knock them out of the game; even those betting on the wrong technology can still persevere and use this experience to search for future market opportunities. Once they realized they made a mistake, firms that were ultimately successful changed course and pivoted, or moved quickly. Successful firms also use the information they gathered in a losing bet to exploit other market opportunities. Successful firms are never complacent: the key to who wins typically isn’t who is there first. Instead, the winning firm is the one that continuously incrementally innovates on the initial bold innovation to offer the best product at the best price.

Corporate Entrepreneurship

Corporate entrepreneurship

Pursuit of new venture opportunities

Strategic renewal via “intrapreneuring”

How to pursue entrepreneurial projects?

Consider corporate culture & leadership.

Consider supportive structures & systems.

Consider using teams.

Consider whether the company is product or service oriented; high-tech or low-tech.

Is innovation aimed at product or process improvements?

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Corporate entrepreneurship (CE) = the creation of new value for a corporation through investments that create either new sources of competitive advantage or renewal of the value proposition. The innovation process keeps firms alert by exposing them to new technologies, making them aware of marketplace trends, and helping them evaluate new possibilities. Just as the innovation process helps firms to make positive improvements, corporate entrepreneurship helps firms identify opportunities and launch new ventures. Corporate new venture creation was labeled “intrapreneuring” by Gifford Pinchot because it refers to building entrepreneurial businesses within existing corporations. In a typical corporation, what determines how entrepreneurial projects will be perceived? That depends on many factors, including corporate culture, leadership, structural features that guide and constrain action, organizational systems that foster learning and manage rewards. Firms might also want to consider the use of teams in strategic decision making, whether the company is product or service oriented, whether it’s innovation efforts are aimed at product or process improvements, and 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.

Corporate Entrepreneurship: Focused Approach

Focused approaches to corporate entrepreneurship

Create an autonomous corporate venturing workgroup separated from the rest of the firm.

Free up entrepreneurial team members from constraints imposed by existing norms & routines; facilitate open-minded creativity.

Isolate the group from the corporate mainstream.

New venture groups

Business incubators

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Two distinct approaches to corporate venturing are found among firms that pursue entrepreneurial aims. The first is focused corporate venturing, in which activities are isolated from the 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 organizational member are engaged in intrapreneurial activities. Focused approaches to corporate entrepreneurship = corporate entrepreneurship in which the venturing entity is separated from the other ongoing operations of the firm. This is when autonomous workgroups 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. The disadvantage is that, because of their isolation from the corporate mainstream, the workgroups that concentrate on internal ventures may fail to obtain the resources or support needed to carry an entrepreneurial project through to completion. New venture groups and business incubators are the most common types of focused approaches.

Corporate Entrepreneurship: New Venture Groups

New venture groups

Semi-autonomous units with an informal structure

Innovate and experiment

Coordinate with other corporate divisions

Identify potential venture partners

Gather resources & launch the venture

Business incubators hatch new businesses.

Operate independently

Provide funding, physical space, business services, monitoring, networking

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The new venture group (NVG) = a group of individuals, or a division within the corporation, that identifies, evaluates, and cultivates venture opportunities. This 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. They usually have a substantial amount of freedom to take risks and the supply of resources to do it with. Their involvement extends beyond a typical research and development department to include innovation and experimentation, coordinating with other corporate divisions, identifying potential venture partners, gathering resources, and actually launching the venture. A 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. Incubators are designed to “hatch” new businesses. 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. Incubators typically provide funding, physical space, business services, mentoring, and networking.

Corporate Entrepreneurship: Dispersed Approaches

Dispersed approaches to corporate entrepreneurship

Entrepreneurship is spread throughout the firm.

Ability to change is a core capability.

Stakeholders can bring new opportunities to anyone in the organization.

Three related aspects:

An entrepreneurial culture focused on change & renewal

Resource allotments to support entrepreneurial activities

Product champions to promote projects from start to finish

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Dispersed approaches to corporate entrepreneurship = corporate entrepreneurship in which a dedication to the principles and policies 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 to be willing to change. The ability to change is considered to be a core capability in the organization. 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 corporate entrepreneurship sometimes feel they must change for the sake of change, causing them to lose vital competencies or spend heavily on 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 corporate entrepreneurship activities, resource allotments to support entrepreneurial actions, and the use of product champions in promoting entrepreneurial behaviors.

Corporate Entrepreneurship: Entrepreneurial Culture

An entrepreneurial culture exists when:

The search for venture opportunities permeates every part of the organization

Every value-chain activity is viewed as a source of competitive advantage

Top leaders support programs & incentives, allowing ideas to come from the bottom up

Strategic leadership & the culture encourages

Innovation

Risk taking

Search for new venture opportunities

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Entrepreneurial culture = corporate culture in which change and renewal are a constant focus of attention. 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. 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 where top leaders 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. Strategic leadership and culture together generate a strong impetus to innovate, take risks, and seek out new venture opportunities.

Corporate Entrepreneurship: Resource Allotments

Resource allotments involve the firm’s investment in the generation & execution of innovative ideas.

Time investment – free time to work on developing new products

Monetary investment – proposals are submitted for funding; further investments can come from operating divisions

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With a dispersed approach to corporate entrepreneurship, a dedication to the principles and policies of entrepreneurship is spread throughout the organization. This dispersed approach is supported by resource allotments which represent the firm’s willingness 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 instance, for decades, 3M allowed its engineers to spend up to 15% of their time working on developing new products. In addition to time, firms can foster corporate entrepreneurship by providing monetary investments to fund entrepreneurial ideas. J&J, Nike, and Google have review boards that decide which proposals to fund and then can solicit further investments from operating divisions. The availability of these time and financing sources can enhance the likelihood of successful entrepreneurial activities within the firm.

Corporate Entrepreneurship: Product Champions

Product champions

Bring entrepreneurial ideas forward

Identify what kind of market exists for the product or service

Find resources to support the venture

Promote the venture concept to upper management

A new project must pass two critical stages.

Project definition, justifying the opportunity

Project impetus, supporting its development

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With a dispersed approach to corporate entrepreneurship, a dedication to the principles and policies of entrepreneurship is spread throughout the organization. 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 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. No matter how an entrepreneurial idea comes to light, a new venture concept must pass through two critical stages or may never get off the ground. Project definition implies that 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. Project impetus means that in order 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 the 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. Product champions play an important entrepreneurial role in a corporate setting by encouraging others to take a chance on promising new ideas.

Corporate Entrepreneurship: Measuring Success

Is corporate entrepreneurship worth it?

Strategic reasons for undertaking a corporate venture include:

Strengthening competitive position

Entering into new markets

Expanding capabilities by learning & acquiring new knowledge

Building & extending the corporation’s base of resources & experience

However, new venture success must be measured.

Corporate venturing, like the innovation process, usually requires a tremendous effort. Is it worth it? Not all corporate venturing efforts are financially rewarding. In terms of financial performance, slightly more than 50% of corporate venturing efforts reach profitability (measured by ROI) within six years of their launch. These results should be expected, because corporate entrepreneurship is riskier than other investments. However, corporations do expect a higher return from corporate venturing projects in the long run. Luckily, financial criteria are not the only means for judging the success of a corporate venture initiative. Most corporate entrepreneurship programs have strategic goals. The strategic reasons for undertaking the 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 expertise. There are three questions that can be used to assess the effectiveness of the corporation’s venturing initiatives: (1) Are the products or services offered by the venture accepted in the marketplace? If the venture is considered a market success, 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? If the venture adds worth to the firm internally, then strategic goals such as leveraging existing assets, building new knowledge, and enhancing firm capabilities are likely to be met. (3) Is the venture able to sustain its basis of competitive advantage? If so, this will insulate it from competitive attack, and place the corporation in a stronger position relative to competitors, providing a base from which to build other advantages. When assessing the success of corporate venturing, it is important to look beyond simple financial returns and consider a well-rounded set of criteria.

Corporate Entrepreneurship: Exit Champions

Exit champions help avoid costly defeats by:

Questioning the viability of a venture project

Reducing ambiguity by gathering hard data

Developing a strong case for why a project should be killed

Reasserting decision-making criteria to guide venture decisions

Risking loss of status while opposing popular projects

Saving a corporation’s finances & reputation

Although a culture of championing venture projects is advantageous for stimulating an ongoing stream of entrepreneurial initiatives, many or most ideas will not work out. Sometimes 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. One way to avoid these costly and discouraging defeats is to support the key role of an 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. Exit champions reduce ambiguity by gathering hard data and developing a strong case for why a project should be killed. Exit champions often have to reinstate procedures and reassert 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. An exit champion can save a corporation both financially and in terms of its reputation in the marketplace.

Question (2 of 2)

Real options analysis is most appropriate when

the total investment required is small, but the environment is uncertain.

the investment required could be justified by Discounted Cash Flow (DCF) techniques.

a small investment upfront can be followed by a series of subsequent investments.

there is no prospect of obtaining additional information before making subsequent investments.

Answer: C. One way firms can minimize failure and avoid losses from pursuing faulty ideas is to apply the logic of real options. Options exist when the owner of the option has the right but not the obligation to engage in certain types of transactions. The investment to be made immediately is small, whereas the investment to be made in the future is generally larger. Options offer the prospect of high gains with relatively small up-front investments that represent limited losses.

Corporate Entrepreneurship: Real Options Analysis

Real options analysis is an investment tool.

It helps manage the uncertainty associated with launching new ventures.

ROA helps the firm make decisions.

Invest additional funds to accelerate the activity?

Delay further investment in order to learn more?

Shrink the scale of the activity?

Abandon the activity?

Requires a series of decisions.

Idea must prove itself at each stage of development.

Options exist when the owner of the option has the right but not the obligation to engage in certain types of transactions. 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 visible 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. Real options analysis (ROA) = 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. Many strategic decisions have the characteristic of containing a series of options. To decide whether to exercise an option, the idea must continue to prove itself at each stage of development. Entrepreneurial decision making at Johnson Controls is given as an example of how to evaluate ideas by separating winning ideas from losing ones in a way that keeps investments low.

Corporate Entrepreneurship: Real Options Limitations

Real options analysis has limitations.

Agency theory and the back-solver dilemma

Managers scheme to have a project meet investment approval criteria

Managerial conceit: overconfidence and the illusion of control

Blind spots leading to poor managerial decisions

Managers’ irrational escalation of commitment

Managers continue existing project even if it should be ended

Despite the many benefits that can be gained from using real options analysis, managers must be aware of its potential limitations or pitfalls. If you recall, agency problems occur when the managers of the firm are separated from its owners – when managers act as “agents” rather than “principals” (owners). The manager may have something to gain by not acting in the owner’s best interests, where the interests of managers and owners are not co-aligned. Agency theories suggest that as managerial and owner interests diverge, managers will follow the path of their own self-interests. If managers know that a certain option value must be met in order for the 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. 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. Managerial conceit = biases, blind spots, and other human frailties that lead to poor managerial decisions. 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 making to a much greater extent than they actually can. Employing the real options perspective can encourage decision makers toward a bias for action because real options are designed to minimize potential losses while preserving potential gains. Therefore, any problems that arise are likely to be smaller at first. When a problem is encountered, managers will assume that this problem is easy to solve and control, and may fail to respond appropriately because they believe 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. A strength of the real options perspective is also one of its problems. Real options analysis requires sequential decisions. 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. Hence, there is a greater likelihood that managers will continue an existing project even if it should perhaps be ended. Or engage in irrational 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 being met.

Entrepreneurial Orientation

An entrepreneurial orientation involves:

Strategy making practices used to identify & launch new ventures

A perspective toward entrepreneurship

Reflected in a firm’s ongoing processes & culture

Permeates decision-making styles & practices of the firm’s members

Includes the dimensions of

Autonomy

Innovativeness

Proactiveness

Competitive aggressiveness

Risk taking

Firms that want to engage in successful corporate entrepreneurship need to have an entrepreneurial orientation = the practices that businesses use in identifying and launching corporate ventures. An entrepreneurial orientation 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. See Exhibit 12.3 for a summary of the dimensions of entrepreneurial orientation.

Entrepreneurial Orientation: Autonomy

Autonomy refers to a willingness to act independently in order to carry forward an entrepreneurial vision or opportunity.

Independent work groups to generate new ideas

Organizational structures to foster creativity and flexibility

Problems can include duplication of effort & wasting of resources.

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. Autonomy represents a type of empowerment that is directed at identifying and leveraging entrepreneurial opportunities. 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 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.

Entrepreneurial Orientation: Innovativeness

Innovativeness refers to a firm’s efforts to find new opportunities & novel solutions, and can be promoted by:

Fostering creativity & experimentation

Investing in product and process R&D

Encouraging & rewarding internal innovation

Problems can include:

Waste of resources may occur if no results.

Competitors may copy it more profitably.

The investment may not pay off.

Innovativeness = a willingness to introduce novelty through experimentation and creative processes aimed at developing new products and services as well as new processes. Innovativeness refers to 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. Innovativeness is one of the major components of an entrepreneurial strategy; however, the job of managing innovativeness can be very challenging. 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. Innovativeness can be a great source of progress and corporate growth, but there are also some major pitfalls: 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. R&D and other innovation efforts are also often among the first to be cut back during an economic downturn. Finally, investments in innovations may not pay off.

Entrepreneurial Orientation: Proactiveness

Proactiveness refers to a firm’s efforts to seize new opportunities.

Identifying future needs of existing customers

Being willing to act ahead of the competition

Problems can include:

First movers are not always successful.

Customers may be reluctant to commit to a new way of doing things.

Proactiveness = a forward-looking perspective characteristic of a marketplace leader that has the foresight to seize opportunities in anticipation of future demand. Proactive organizations monitor trends, identify the future needs of existing customers, and anticipate changes in demand or emerging problems that could lead to new venture opportunities. Proactiveness involves not only recognizing changes but also being willing to act on those insights ahead of the competition. 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. 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 onto the market share gains they earned by being first. 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. Careful monitoring and scanning of the environment, as well as extensive feasibility research, are needed for a proactive strategy to lead to competitive advantages.

Entrepreneurial Orientation: Competitive Aggressiveness

Competitive aggressiveness refers to a firm’s efforts to outperform its industry rivals by:

Entering markets with drastically lower prices

Finding successful business models & copying them

Problems can include:

Being overly aggressive & damaging a firm’s reputation

Trying to decimate rather than just defeat the competition

Competitive aggressiveness = an intense effort to outperform industry rivals characterized by a competitive posture or an aggressive response aimed at improving position or overcoming a threat in a competitive marketplace. 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. 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 the competitive position that has made them an industry leader. Companies can also overcome the competition by making pre-announcements 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. Competitive aggressiveness may not always lead to competitive advantages. Some companies have severely damaged their reputation by being overly aggressive. Competitive aggressiveness is a strategy that is best used in moderation. Companies that 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.

Entrepreneurial Orientation: Risk Taking

Risk taking refers to a firm’s willingness to act boldly without knowing the consequences by:

Knowing their firm’s appetite for risk including business, financial & personal risk

Evaluating new venture opportunities thoroughly

Problems can include:

Lack of forethought, research, & planning

Failure to evaluate uncertainty

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. 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. Three types of risk that organizations and their executives face are business risk, financial risk, and personal risk. 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. 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. 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.