STRATEGIC MANAGEMENT - HARD PROFESSOR

12

Managing Innovation and
Fostering Corporate Entrepreneurship
Professor John Coy

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Learning Objectives

• After reading this chapter, you should have a good understanding of:
• The importance of implementing strategies and practices that foster innovation.
• The challenges and pitfalls of managing corporate innovation processes.
• The role of product champions and exit champions in internal corporate venturing.
• How independent venture teams and business incubators are used to develop corporate ventures.

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Learning Objectives

• After reading this chapter, you should have a good understanding of:
• How corporations create an internal environment and culture that promotes entrepreneurial development.
• The benefits and potential drawbacks of real options analysis in making resource deployment decisions in corporate entrepreneurship contexts.
• How an entrepreneurial orientation can enhance a firm’s efforts to develop promising corporate venture initiatives.

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Question

What is one of the most important sources of growth opportunities?

A) The economy

B) Labor capital

C) Financial capital

D) Innovation

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Managing Innovation

• Innovation: using new knowledge to transform organizational processes or create commercially viable products and services
• Latest technology
• Results of experiments
• Creative insights
• Competitive information

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Example

• Some Companies, such as Apple, are always innovating popular products, while others are constantly struggling for their one great idea.
• There are “five disciplines” for creating what customers want
• Identify important customer needs
• Create solutions that fill those needs
• Build innovation teams
• Empower "innovation champions" who keep the effort on track
• Align the entire enterprise around creating value for customers

Source: “Getting to ‘Aha!’,” Business Week. September 4, 2006.

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Types of Innovation

• Degree of innovativeness
• Radical innovation
• Fundamental changes and breakthroughs
• Evoke major departures from existing practices
• Can be highly disruptive
• Can transform or revolutionize a whole industry
• Incremental innovation
• Enhance existing practices
• Small improvements in products and processes
• Evolutionary applications within existing paradigms

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Continuum of Radical and
Incremental Innovations

Exhibit 12.1 Continuum of Radical and Incremental Innovations

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Types of Innovation

• Product and process innovations
• Product innovation
• Efforts to create product designs
• Applications of technology to develop new products for end users
• More radical and common during early stages of an industry’s life cycle
• Associated with differentiation strategies

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Types of Innovation

• Product and process innovations
• Process innovations
• Improving efficiency of an organizational process
• Manufacturing systems and operations
• Can improve materials utilization
• Shorten cycle time
• Increase quality
• More likely to occur in later stages of an industry’s life cycle
• Associated with cost leader strategies

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Challenges of Innovation

• Seeds versus Weeds
• Deciding the merits of innovative ideas
• Seeds – likely to bear fruit
• Weeds – should be cast aside
• Dilemma
• Some innovation projects require considerable level of investment before merit can be determined

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Challenges of Innovation

• Experience versus initiative
• Deciding who will lead an innovation project
• Senior managers
• Have experience and credibility
• Tend to be more risk averse
• Midlevel employees
• May be the innovators themselves
• May have more enthusiasm

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Challenges of Innovation

• Internal versus external staffing
• Innovation projects need competent staffs to succeed
• People drawn from inside the firm
• May have greater social capital
• Know the organization’s culture and routines
• May not be able to think outside the box
• People drawn from outside the firm
• Are costly to recruit, hire, train
• May have difficulty building relationships

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Challenges of Innovation

• Building capabilities versus collaborating
• Innovation projects often require building new sets of skills
• Firms can seek help
• Other departments
• Partner with other companies that bring resources and experience
• Partnerships
• Create dependencies and inhibit internal skills development
• Sharing benefits of innovation may create conflict

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Challenges of Innovation

• Incremental versus preemptive launch
• Companies must manage the timing and scale of new innovation projects
• Incremental launch
• Less risky
• Requires few resources
• Serves as a market test
• Can undermine the project’s credibility if too tentative
• Large-scale launch
• Requires more resources
• Can effectively preempt a competitive response

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Defining the Scope of Innovation

• Firms must define the “strategic envelope” (scope of the innovation efforts)
• In defining the strategic envelope, a firm should answer several questions
• How much will the innovation 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?

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Managing the Pace of Innovation

• Firms need to regulate the pace of innovation
• Incremental innovation
• May be six months to two years
• May use a milestone approach driven by goals and deadlines
• Radical innovation
• Typically long term – 10 years or more
• Often involves open-ended experimentation and time-consuming mistakes
• Strict timelines unrealistic

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Collaborating with Innovation Partners

• Innovation often requires collaborating with others who possess complementary knowledge and skills
• Partners can come from several sources
• Other personnel within the department
• Personnel within the firm but from another department
• Partners outside the firm
• Non-business sources, including research universities and the federal government

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Corporate Entrepreneurship

• Corporate culture
• Leadership
• Structural features that guide and constrain action
• Organizational systems that foster learning and manage rewards

• Use of teams in strategic decision making
• Whether the company is product or service oriented
• Whether the firm’s innovation efforts are aimed at product or process improvements
• The extent to which it is high-tech or low-tech

Determining

how

entrepreneurial projects will be pursued

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Focused Approaches to Corporate Entrepreneurship

Autonomous corporate venturing work group

• Autonomous corporate venturing (work) group
• Frees entrepreneurial team members from constraints imposed by existing norms and routines
• Facilitates open-minded creativity
• But, does isolate the group from the corporate mainstream
• New venture groups (NVGs)
• Business incubators

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New Venture Groups (NVGs)

• Goal is to identify, evaluate, and cultivate venture opportunities
• Typically function as semi-autonomous units with little formal structure
• Involvement includes
• Innovation and experimentation
• Coordinating with other corporate divisions
• Identifying potential venture partners
• Gathering resources
• Launching the venture

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Business Incubators

• Business incubators are designed to “hatch” new businesses
• Incubators provide some or all of the following functions
• Funding
• Physical space
• Business services
• Monitoring
• Networking

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Dispersed Approaches to
Corporate Entrepreneurship

• Dedication to principles and practices of entrepreneurship is spread throughout the firm
• Ability to change is a core capability
• Stakeholders can bring new ideas or venture opportunities to anyone in the organization
• Two related aspects of dispersed entrepreneurship
• Entrepreneurial culture
• Product champions

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Entrepreneurial Culture

• Culture of entrepreneurship
• Search for venture opportunities permeates every part of the organization
• Effect is strongest when it animates all parts of the organization
• Strategic leaders and the culture generate a strong impetus
• To innovate
• Take risks
• Seek out new venture opportunities

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Product Champions

• Product (or project) 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
• New project must pass two critical stages
• Project definition
• Project impetus

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Measuring the Success of Corporate Entrepreneurship Activities

• Techniques used to limit the expense of venturing or to cut losses when entrepreneurial initiatives (CE) appear doomed
• Comparing strategic and financial CE goals
• Are the products or services offered by the venture accepted in the marketplace?
• Are the contributions of the venture to the corporation’s internal competencies and experience valuable?
• Is the venture able to sustain its basis of competitive advantage?

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Measuring the Success of Corporate Entrepreneurship Activities

• Techniques used to limit the expense of venturing or to cut losses when entrepreneurial initiatives (CE) appear doomed
• Exit champions
• Willing to question the viability of a venture project
• Demand hard evidence and challenge the belief system that is carrying an idea forward
• Hold the line on ventures that appear shaky
• Real options
• Managing the uncertainty associated with launching new ventures

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Real Options Analysis

• Real options analysis (ROA) is an investment tool from the field of finance.
• The phrase “real options” applies to situations where options theory and valuation techniques are applied to real assets or physical things as opposed to financial assets.
• Potential pitfalls include
• Agency theory and the back-solver dilemma
• Managerial conceit: overconfidence and the illusion of control
• Managerial conceit: irrational escalation of commitment

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Question

Discuss the traps that can affect decision makers. Have you experienced any of these?

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Entrepreneurial Orientation

Dimension Definition

Autonomy Independent action by an individual or team aimed at bringing forth a business concept or vision and carrying it through to completion.

Innovativeness A willingness to introduce novelty through experimentation and creative processes aimed at developing new products and services as well as new processes.

Proactiveness A forward-looking perspective characteristic of a marketplace leader that has the foresight to seize opportunities in anticipation of future demand.

Source: J. G. Covin and D. P. Sleving, “A conceptual Model of Entrepreneurship As Firm Behavior,” Entrepreneurship Theory & Practice, Fall 1991, pp. 7-25; G. T. Lumpkin and G. G. Dess, “Clarifying the Entrepreneurial Orientation Construct and Linking It to Performance,” Academy of Management Review 21, no. 1 (1996), pp. 135-72; D. Miller, “The Correlates of Entrepreneurship in Three Types of Firms,” Management Science 29 (1983), pp. 770-91.

Adapted from Exhibit 12.3 Dimensions of Entrepreneurial Orientation

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Entrepreneurial Orientation

Dimension Definition

Source: J. G. Covin and D. P. Sleving, “A conceptual Model of Entrepreneurship As Firm Behavior,” Entrepreneurship Theory & Practice, Fall 1991, pp. 7-25; G. T. Lumpkin and G. G. Dess, “Clarifying the Entrepreneurial Orientation Construct and Linking It to Performance,” Academy of Management Review 21, no. 1 (1996), pp. 135-72; D. Miller, “The Correlates of Entrepreneurship in Three Types of Firms,” Management Science 29 (1983), pp. 770-91.

Adapted from Exhibit 12.3 Dimensions of Entrepreneurial Orientation

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.

Competitive An intense effort to outperform industry rivals. It is characterized by a combative posture or an aggressive response aimed at improving position or overcoming a threat in a competitive marketplace.

aggressiveness

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Entrepreneurial Orientation

• Autonomy
• Two techniques often used to promote autonomy
• Using skunkworks to foster entrepreneurial thinking
• Designing organization structures that support independent action
• Innovativeness
• Two methods used to enhance competitive position through innovativeness
• Fostering creativity and experimentation
• Investing in new technology, R&D, and continuous improvement

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Entrepreneurial Orientation

• Proactiveness
• Two methods to promote acting proactively
• Introducing new products or technological capabilities ahead of the competition
• Continuously seeking out new product or service offerings
• Competitive aggressiveness
• Two ways competitively aggressive firms enhance their entrepreneurial position
• Entering markets with drastically lower prices
• Finding successful business models and copying them.

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Entrepreneurial Orientation

• Risk taking
• Three types of risks faced by organizations and their executives
• Business risk taking
• Financial risk taking
• Personal risk taking
• Two methods to strengthen competitive position through risk taking
• Researching and assessing risk factors to minimize uncertainty
• Using techniques that have worked in other domains

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Example

• A design thinking approach can help you deal with risk.
• Here are seven ways to get started:
• Cultivate an unreasonable obsession with desirability
• Become more comfortable acting on your informed intuition
• Prototype, prototype, prototype
• Think big, but start small(er)
• Treat money as a positive constraint
• Make a list of the best things that could happen
• Seek challenges

Source: Rodriguea, Diego and Jacoby, Ryan. “Embracing Risk to Grow Innovation,” Business Week. May 16, 2007

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Managing Innovation and
Fostering Corporate Entrepreneurship
Professor John Coy