Managerial economics and strategic analysis

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PART 3: STRATEGIC IMPLEMENTATION

chapter 11

Strategic Leadership: Creating a Learning Organization and an Ethical Organization

After reading this chapter, you should have a good understanding of the following learning objectives:

LO11.1 The three key interdependent activities in which all successful leaders must be continually engaged.

LO11.2 Two elements of effective leadership: overcoming barriers to change and the effective use of power.

LO11.3 The crucial role of emotional intelligence (EI) in successful leadership as well as its potential drawbacks.

LO11.4 The importance of developing competency companions and creating a learning organization.

LO11.5 The leader’s role in establishing an ethical organization.

LO11.6 The difference between integrity-based and compliance-based approaches to organizational ethics.

LO11.7 Several key elements that organizations must have to become an ethical organization.

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Learning from Mistakes

Most people have never heard of Synthes, a medical device maker headquartered in West Chester, Pennsylvania. Yet in 2012 it made national news when four of its corporate officers were found responsible for illegal actions taken by the company and sentenced to prison.1

When did the problems begin? Between 2002 and 2004, Synthes conducted clinical trials of Norian bone cement, a product used to treat vertebral compression fractures (VCFs), a type of fracture that occurs in nearly 500,000 elderly people each year. Norian, a subsidiary acquired for $50 million in 1999, was already approved for several types of bone-repair treatments. However, the Food and Drug Administration (FDA) had explicitly barred the use of Norian in treating VCFs because of concerns that it could get into the bloodstream and harm patients, possibly leading to death. In spite of the FDA restriction, Synthes decided to forgo the FDA approved clinic trial, launched right into market research, and began promoting Norian for unapproved use in VCF operations. Unfortunately, the patients were unaware of the deadly risks they faced.

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The results? Three patients died on the operating table after spine surgeries in 2003 and 2004! Synthes did not report these deaths to the FDA, because they claimed that the deaths were not due to their product alone. Such disclosures, however, are required by law. The U.S. Department of Justice is still seeking to prove that the cement caused the deaths, a claim supported by the surgeons who used the Norian product. Synthes had to pay $23.2 million in fines and was charged with 44 misdemeanors. Norian was charged with 52 felony counts, including lying to the FDA with the intent to defraud. As U.S. District Court Judge Legroom Davis said, “On the wrongful conduct scale, it’s 11 on a scale of 10. It’s over the top.”

The U.S. Department of Justice prosecuted under the Responsible Corporate Officer Doctrine, which holds executives in certain positions of authority criminally liable for violations of food and drug laws even if they did not have direct knowledge of the underlying conduct. The resulting sentences the four executives received were the stiffest to date under this law.

What might be the underlying problem at Synthes that caused such disregard for the law? In large part, it appears to have been a question of leadership. Hansjorg Wyss was the founder and CEO of

Synthes, which he sold to Johnson and Johnson for $20 billion in June 2012. Prior to the sale, Wyss played an intimidating, hands-on role in managing the company and owned a 50 percent share of it. Wyss was known for paying attention to even the minutia of the company, and nothing went past Wyss without his input or approval. Even the cafeteria plates, which Wyss insisted be square, and the toilet paper brand in the corporate office had Wyss’s input! He was referred to by former employees as “the eight-hundred pound gorilla in the room who liked getting his way.” Even though Wyss was included on emails and reports citing the product’s risks, he held all- hands meetings after the reports were released in order to make a strong push for Norian’s bone cement to be used in VCF. Synthes's strategy was to

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persuade a few doctors to do the procedure on their own and then the company would try to popularize the Norian product.

Early on, it was estimated that it would take three years for an approved clinical study. However, Wyss insisted, without any explanation, that no clinical study would be undertaken. The top levels of executives were all loyal to Wyss, and he had groomed them to come up through the company’s ranks. They knew better than to confront him!

Discussion Questions

1. Why would Synthes engage in such risky behavior for such a relatively small gain?

2. If you are Johnson and Johnson, what aspects of the Synthes culture would you change? Clearly, in the end, Synthes paid a high price for their unethical and illegal actions—fines, a loss of reputation, and even prison terms for some top executives. Perhaps the primary responsibility for the fiasco at Synthes lies with the CEO, Hansjorg Wyss. He was imperious and intimidating, tolerated no dissent, and focused on revenues and profits, while minimizing ethical and moral considerations. In contrast, effective leaders play an important and often pivotal role in creating an organizational culture that pursues excellence while adhering to high standards of ethical behavior.

This chapter provides insights into the role of strategic leadership in managing, adapting, and coping in the face of increased environmental complexity and uncertainty. First, we define leadership and its three interdependent activities—setting a direction, designing the organization, and nurturing a culture dedicated to excellence and ethical behavior. Then, we identify two elements of leadership that contribute to success—overcoming barriers to change and the effective use of power. The third section focuses on emotional intelligence, a trait that is increasingly acknowledged to be critical to successful leadership. Next, we emphasize the importance of leaders developing competency companions and creating a learning organization. Here, we focus on empowerment wherein employees and managers throughout an organization develop a sense of self-determination, competence, meaning, and impact that is centrally important to learning. Finally, we address the leader’s role in building an ethical organization and the elements of an ethical culture that contribute to firm effectiveness.

Leadership: Three Interdependent Activities

In today’s chaotic world, few would argue against the need for leadership, but how do we go about encouraging it? Is it enough to merely keep an organization afloat, or is it essential to make steady progress toward some well-defined objective? We believe custodial management is not leadership. Leadership is proactive, goal-oriented, and focused on the creation and implementation of a creative vision. Leadership is the process of transforming organizations from what they are to what the leader would have them become. This definition implies a lot: dissatisfaction with the status quo, a vision of what should be, and a process for bringing about change. An insurance company executive shared the following insight: “I lead by the Noah Principle: It’s all right to know when it’s going to rain, but, by God, you had better build the ark.”

leadership the process of transforming organizations from what they are to what the leader would have them become.

Doing the right thing is becoming increasingly important. Many industries are declining; the global village is becoming increasingly complex, interconnected, and unpredictable; and product and market life cycles are becoming increasingly compressed. When asked to describe the life cycle of his company’s products, the CEO of a supplier of

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computer components replied, “Seven months from cradle to grave—and that includes three months to design the product and get it into production!” Richard D’Aveni, author of Hypercompetition, argued that in a world where all dimensions of competition appear to be compressed in time and heightened in complexity, sustainable competitive advantages are no longer possible.

EXHIBIT 11.1 Three Interdependent Leadership Activities

Despite the importance of doing the “right thing,” leaders must also be concerned about “doing things right.” Charan and Colvin strongly believe that execution, that is, the implementation of strategy, is also essential to success.

Mastering execution turns out to be the odds-on best way for a CEO to keep his job. So what’s the right way to think about that sexier obsession, strategy? It’s vitally important—obviously. The problem is that our age’s fascination feeds the mistaken belief that developing exactly the right strategy will enable a company to rocket past competitors. In reality, that’s less than half the battle.2

LO11.1

The three key interdependent activities in which all successful leaders must be continually engaged.

Thus, leaders are change agents whose success is measured by how effectively they formulate and implement a strategic vision and mission.3

Many authors contend that successful leaders must recognize three interdependent activities that must be continually reassessed for organizations to succeed. As shown in Exhibit 11.1, these are: (1) setting a direction, (2) designing the organization, and (3) nurturing a culture dedicated to excellence and ethical behavior.4

The interdependent nature of these three activities is self-evident. Consider an organization with a great mission and a superb organizational structure, but a culture that implicitly encourages shirking and unethical behavior. Or one with a sound direction and strong culture, but counterproductive teams and a “zero-sum” reward system that leads to the dysfunctional situation in which one party’s gain is viewed as another party’s loss, and collaboration and sharing are severely hampered. Clearly, such combinations would be ineffective.

Often, failure of today’s organizations can be attributed to a lack of equal consideration of these three activities. The imagery of a three-legged stool is instructive: It will collapse if one leg is missing or broken. Let’s briefly look at each of these activities as well as the value of an ambicultural approach to leadership.

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Setting a Direction

setting a direction a strategic leadership activity of strategy analysis and strategy formulation.

A holistic understanding of an organization’s stakeholders requires an ability to scan the environment to develop a knowledge of all of the company’s stakeholders and other salient environmental trends and events. Managers must integrate this knowledge into a vision of

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what the organization could become.5 It necessitates the capacity to solve increasingly complex problems, become proactive in approach, and develop viable strategic options. A strategic vision provides many benefits: a clear future direction; a framework for the organization’s mission and goals; and enhanced employee communication, participation, and commitment.

STRATEGY

SPOTLIGHT 11.1 ENVIRONMENTAL

SUSTAINABILITY

A VISION OF ENVIRONMENTAL SUSTAINABILITY HELPS 3M TO STAY COMPETITIVE Vision and creative change are not solely domains of the CEO. Take former vice president of environmental engineering and pollution control at 3M Joe Ling as an example. In 1975 Mr. Ling oversaw 3M’s efforts to comply with new legal pollution requirements. Years ago, 3M focused on lowering its environmental impact through, for instance, placing scrubbers on smokestacks, treating effluence before releasing wastewater, and segregating solid waste. While this prevention strategy allowed 3M to comply with legal requirements, Mr. Ling’s vision went much further. Instead of seeing environmental concerns as a necessary evil, he asked whether 3M could prevent pollution altogether and profit from doing so. He thought 3M could, and he started 3M’s famous Pollution Prevention Pays (or 3P) program that survives to this day.

While it is challenging to introduce creative change into any organization, Mr. Ling did not shy away from setting challenging goals. Any idea that would reduce pollution must also save money for 3M. Executives at 3M stick to this ideal and reiterate that “anything not a product is considered a cost.” This sustainability strategy is firmly grounded in the 3P philosophy that everything that increases 3M’s footprint is not just pollution or waste, but also a sign of operational inefficiency.

3P not only encourages top executives to rethink products and processes, but also empowers lower-level employees to generate sustainability improvements. Mr. Ling’s vision to embed 3P in 3M’s corporate culture has grown to phenomenal success, culminating in more than 6,300 sustainability projects and 2.6 billion pounds of pollutants saved. Consistent with 3P’s mantra that pollution prevention is instrumental to 3M’s financial success, the company achieved over $1 billion in first-year project savings.

3P has been an integral part of 3M’s corporate strategy in an increasingly global marketplace. One could imagine that sustainability cost savings show up in increased profitability, yet 3M’s profit margins are roughly the same as 30 years ago. Yet 3M operates in increasingly competitive industrial businesses, reducing operating margins and making operational efficiency programs such as 3P crucial to 3M’s long-term success. Therefore, it comes as no surprise that 3M continues to challenge its employees with high sustainability standards. Over the past two decades, 3M has slashed toxic releases by 99 percent and greenhouse gas emissions by 72 percent. This makes 3M the only company that has won the EPA’s Energy Star Award every year since the prize has been awarded, and they have saved costs and stayed competitive while doing so.

Sources: Esty, D.C. & Winston, A.S. 2009. Green to Gold. Hoboken, NJ: Wiley: 106–110; Anonymous. 2012. 2015 Sustainability goals: Sometimes our toughest challenges are the ones we put on ourselves. www.3m.com, June 10: np; and Winston, A.S. 2012. 3M’s sustainability innovation machine. www.businessweek.com, May 15: np.

At times the creative process involves what the CEO of Yokogawa, GE’s Japanese partner in the Medical Systems business, called “bullet train” thinking.6 That is, if you want to increase the speed by 10 miles per hour, you look for incremental advances. However, if you want to double the speed, you’ve got to think “out of the box” (e.g., widen the track, change the overall suspension system). Leaders need more creative solutions than just keeping the same train with a few minor tweaks. Instead, they must come up with more revolutionary visions.

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Strategy Spotlight 11.1 discusses Joe Ling’s visionary approach to 3M’s sustainability strategy. This example illustrates that visionary leadership is not just the domain of the CEO.

Designing the Organization

designing the organization a strategic leadership activity of building structures, teams, systems, and organizational processes that facilitate the implementation of the leader’s vision and strategies.

At times, almost all leaders have difficulty implementing their vision and strategies.7 Such problems may stem from a variety of sources:

• Lack of understanding of responsibility and accountability among managers.

• Reward systems that do not motivate individuals (or collectives such as groups and divisions) toward desired organizational goals.

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• Inadequate or inappropriate budgeting and control systems.

• Insufficient mechanisms to integrate activities across the organization.

Successful leaders are actively involved in building structures, teams, systems, and organizational processes that facilitate the implementation of their vision and strategies. Without appropriately structuring organizational activities, a firm would generally be unable to attain an overall low-cost advantage by closely monitoring its costs through detailed and formalized cost and financial control procedures. With regard to corporate-level strategy, a related diversification strategy would necessitate reward systems that emphasize behavioral measures because interdependence among business units tends to be very important. In contrast, reward systems associated with an unrelated diversification strategy should rely more on financial indicators of performance because business units are relatively autonomous.

These examples illustrate the important role of leadership in creating systems and structures to achieve desired ends. As Jim Collins says about the importance of designing the organization, “Along with figuring out what the company stands for and pushing it to understand what it’s really good at, building mechanisms is the CEO’s role—the leader as architect.”8

Nurturing a Culture Committed to Excellence and Ethical Behavior

excellent and ethical organizational culture an organizational culture focused on core competencies and high ethical standards.

Organizational culture can be an effective means of organizational control.9 Leaders play a key role in changing, developing, and sustaining an organization’s culture. Consider a Chinese firm, Huawei, a highly successful producer of communication network solutions and services.10 In 2012, it achieved revenues of $35.4 billion and net profits of $2.5 billion. Its strong culture can be attributed to its founder, Ren Zhengfei, and his background in the People’s Liberation Army. It is a culture which eliminates individualism and promotes collectivism and the idea of hunting in packs. It is the “wolf culture” of Huawei:

The culture of Huawei is built on a sense of patriotism, with Mr. Zhengfei frequently citing Mao Zedong’s thoughts in his speeches and internal publications such as the employee magazine Huawei People. Sales teams are referred to as “Market Guerrillas,” and battlefield tactics, such as “occupy rural areas first to surround cities,” are used internally. In addition to Mao Zedong, Mr. Zhengfei has urged his employees to look to the Japanese and Germans for inspiration on how to conduct themselves. This is exemplified by the words written in a letter to new hires that states, “I hope you abandon the mentality of achieving quick results, learn from the Japanese down-to-earth attitude and the German’s spirit of being scrupulous to every detail.”

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The notion of “wolf culture” stems from the fact that Huawei workers are encouraged to learn from the behavior of wolves, which have a keen sense of smell, are aggressive, and, most important of all, hunt in packs. It is this collective and aggressive spirit that is the center of the Huawei culture. Combining the behavior of wolves with military-style training has been instrumental in building the culture of the company, which, in turn, is widely thought to be instrumental in the company’s success.

In sharp contrast, leaders can also have a very detrimental effect on a firm’s culture and ethics. Imagine the negative impact that Todd Berman’s illegal activities have had on a firm that he cofounded—New York’s private equity firm Chartwell Investments.11 He stole more than $3.6 million from the firm and its investors. Berman pleaded guilty to fraud charges brought by the Justice Department. For 18 months he misled Chartwell’s investors concerning the financial condition of one of the firm’s portfolio companies by falsely claiming it needed to borrow funds to meet operating expenses. Instead, Berman transferred the money to his personal bank account, along with fees paid by portfolio companies.

Clearly, a leader’s behavior and values can make a strong impact on an organization—for good or for bad. Strategy Spotlight 11.2 provides a positive example. It discusses how the chairman of Infosys create an ethical culture by “walking the talk.”

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STRATEGY SPOTLIGHT 11.2 ETHICS

INSTILLING ETHICS AND A FIRM’S VALUES: WALKING THE TALK Firms often draft elaborate value statements and codes of conduct, yet many firms do not to live up to their own standards—or in other words, fail to “walk the talk.” Take the positive example of N. R. Narayana Murthy, chairman and one of the founders of Infosys (a giant Indian technology company). In February 1984, shortly after the firm was founded, Infosys decided to import a super minicomputer so that it could start developing software for overseas clients. When the machine landed at Bangalore Airport, the local customs official refused to clear it unless the company “took care of him”—the Indian euphemism for demanding a bribe. A delay at customs could have threatened the project. Yet, instead of caving into the unethical customs official’s demands, Mr. Murthy kept true to his values and took the more expensive formal route of paying a customs duty of 135 percent with dim chances of successfully appealing the duty and receiving a refund.

Reflecting on these events, Mr. Murthy reasons, “We didn’t have enough money to pay the duty and had to borrow it. However, because we had decided to do business ethically, we didn’t have a choice. We would not pay bribes. We effectively paid twice for the machine and had only a slim chance of recovering our money. But a clear conscience is the softest pillow on which you can lay your head down at night…. It took a few years for corrupt officials to stop approaching us for favors.”

Source: Raman, A. P. 2011. “Why don’t we try to be India’s most respected company?” Harvard Business Review, 89(11): 82.

Managers and top executives must accept personal responsibility for developing and strengthening ethical behavior throughout the organization. They must consistently demonstrate that such behavior is central to the vision and mission of the organization. Several elements must be present and reinforced for a firm to become highly ethical, including role models, corporate credos and codes of conduct, reward and evaluation systems, and policies and procedures. Given the importance of these elements, we address them in detail in the last section of this chapter.

LO11.2

Two elements of effective leadership: overcoming barriers to change and the effective use of power.

Getting Things Done: Overcoming Barriers and Using Power

The demands on leaders in today’s business environment require them to perform a variety of functions. The success of their organizations often depends on how they as individuals meet challenges and deliver on promises. What practices and skills are needed to get the job done effectively? In this section, we focus on two capabilities that are marks of successful leadership—overcoming barriers to change and the effective use of power. Then, in the next section, we will examine an important human trait that helps leaders be more effective—emotional intelligence.

Overcoming Barriers to Change What are the barriers to change that leaders often encounter, and how can they best bring about organizational change? 12 After all, people generally have some level of choice about how strongly they support or resist a leader’s change initiatives. Why is there often so much resistance? Organizations at all levels are prone to inertia and are slow to learn, adapt, and change because:

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barriers to change characteristics of individuals and organizations that prevent a leader from transforming an organization.

1. Many people have vested interests in the status quo. People tend to be risk averse and resistant to change. There is a broad stream of research on “escalation,” wherein certain individuals continue to throw “good money at bad decisions” despite negative performance feedback.13

vested interest in the status quo a barrier to change that stems from people’s risk aversion.

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2. There are systemic barriers. The design of the organization’s structure, information processing, reporting relationships, and so forth impede the proper flow and evaluation of information. A bureaucratic structure with multiple layers, onerous requirements for documentation, and rigid rules and procedures will often “inoculate” the organization against change.

systemic barriers barriers to change that stem from an organizational design that impedes the proper flow and evaluation of information.

3. Behavioral barriers cause managers to look at issues from a biased or limited perspective due to their education, training, work experiences, and so forth. Consider an incident shared by David Lieberman, marketing director at GVO, an innovation consulting firm:

behavioral barriers barriers to change associated with the tendency for managers to look at issues from a biased or limited perspective based on their prior education and experience.

A company’s creative type had come up with a great idea for a new product. Nearly everybody loved it. However, it was shot down by a high-ranking manufacturing representative who exploded: “A new color? Do you have any idea of the spare-parts problem that it will create?” This was not a dimwit exasperated at having to build a few storage racks at the warehouse. He’d been hearing for years about cost cutting, lean inventories, and “focus.” Lieberman’s comment: “Good concepts, but not always good for innovation.”

4. Political barriers refer to conflicts arising from power relationships. This can be the outcome of a myriad of symptoms such as vested interests, refusal to share information, conflicts over resources, conflicts between departments and divisions, and petty interpersonal differences.

political barriers barriers to change related to conflicts arising from power relationships.

5. Personal time constraints bring to mind the old saying about “not having enough time to drain the swamp when you are up to your neck in alligators.” Gresham’s law of planning states that operational decisions will drive out the time necessary for strategic thinking and reflection. This tendency is accentuated in organizations experiencing severe price competition or retrenchment wherein managers and employees are spread rather thin.

personal time constraints a barrier to change that stems from people’s not having sufficient time for strategic thinking and reflection.

Strategy Spotlight 11.3 discusses how Microsoft and Natura Cosméticos were able to overcome political barriers to change through creating a more collaborative environment.

Leaders must draw on a range of personal skills as well as organizational mechanisms to move their organizations forward in the face of such barriers. Two factors mentioned earlier—building a learning organization and ethical

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organization—provide the kind of climate within which a leader can advance the organization’s aims and make progress toward its goals.

One of the most important tools a leader has for overcoming barriers to change is their personal and organizational power. On the one hand, good leaders must be on guard not to abuse power. On the other hand, successful leadership requires the measured exercise of power. We turn to that topic next.

The Effective Use of Power Successful leadership requires the effective use of power in overcoming barriers to change.14 As humorously noted by Mark Twain, “I’m all for progress. It’s change I object to.” Power refers to a leader’s ability to get things done in a way he or she wants them to be done. It is the ability to influence other people’s behavior, to persuade them to do things that they otherwise would not do, and to overcome resistance and opposition. Effective exercise of power is essential for successful leadership.15

power a leader’s ability to get things done in a way he or she wants them to be done.

A leader derives his or her power from several sources or bases. The simplest way to understand the bases of power is by classifying them as organizational and personal, as shown in Exhibit 11.2.

Organizational bases of power refer to the power that a person wields because of her formal management position.16

These include legitimate, reward, coercive, and information power. Legitimate power is derived from organizationally conferred decision-making

organizational bases of power a formal management position that is the basis of a leader’s power.

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authority and is exercised by virtue of a manager’s position in the organization. Reward power depends on the ability of the leader or manager to confer rewards for positive behaviors or outcomes. Coercive power is the power a manager exercises over employees using

STRATEGY SPOTLIGHT 11.3

OVERCOMING POLITICAL BARRIERS TO CHANGE To overcome barriers to organizational change, companies today work more collaboratively than ever before, inside their own organizations and with outsiders. While virtual team meetings and other technology gadgets such as Facebook and Twitter facilitate discussions and employee empowerment, it is not enough for leaders to rely on technology. Instead, top management must lead by example and be good collaborators themselves. One obstacle to effective collaboration is higher-level political battles. Take Microsoft as an example. Before Apple released its tablet smash hit iPad, Microsoft had developed a viable tablet more than a decade earlier. However, entrenched interests and turf fights between competing Microsoft divisions eventually killed the project. Microsoft since then appears to be focusing on closer managerial collaboration, as the recent acquisition of Skype illustrates. The voice and video conferencing provider will become a Microsoft business unit that is required to collaborate closely with other Microsoft divisions in an effort to realize the anticipated synergies of the acquisition.

Brazil’s Natura Cosméticos provides another example of overcoming barriers to change by addressing political barriers. Alessandro Carlucci, CEO of the large manufacturer and marketer of beauty products, has implemented a comprehensive “engagement process” that promotes a collaborative mindset at all levels of the organization. As part of this process, Mr. Carlucci made it a priority to unify his top executives behind common goals and stop internal power struggles that became increasingly evident after Natura became a public company in 2004. He asked top managers to invest in self-development as part of their stewardship of the company. So each executive embarked on a “personal journey” with a dedicated coach, who met with everyone individually and with the team as a whole. Carlucci explains that “it is a different type of coaching. It’s not just talking to your boss or subordinates but talking about a person’s life history, with their families; it is more holistic, broader, integrating all the different roles of a human being.” Different from other developmental processes, this coaching approach emphasizes the human side of top team members, with all their distinct strengths but also their weaknesses. This coaching experience effectively illustrates that no top manager at Natura alone has all the answers and that collaboration is not only possible but also essential for long-term success. Carlucci’s efforts to create a collaborative mindset have started to get recognized by outsiders and have helped the firm win a top spot on Fortune’s list of best companies for leaders.

Source: Ibarra, H. and Hansen, M.T. 2011. Are you a collaborative leader? Harvard Business Review, 89(7/8): 68–75; Anonymous. 2011. Analysis: What does Microsoft’s Skype acquisition mean for businesses? www.computerweekly.com, May 13: np; Hansen, M.T. and Ibarra, H. 2011. Getting collaboration right. blogs.hbr.org, May 16: np.

EXHIBIT 11.2 A Leader’s Bases of Power

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fear of punishment for errors of omission or commission. Information power arises from a manager’s access, control, and distribution of information that is not freely available to everyone in an organization.

STRATEGY SPOTLIGHT 11.4

THE USE OF “SOFT” POWER AT SIEMENS Until 1999, paying bribes in international markets was not only legally allowed in Germany, German corporations could also deduct bribes from taxable income. However, once those laws changed, German industrial powerhouse Siemens found it hard to break its bribing habit in its sprawling global operations. Eventually a major scandal forced many top executives out of the firm, including CEO Klaus Kleinfeld. As the successor to Mr. Kleinfeld, Peter Löscher became the first outside CEO in the more than 160-year history of Siemens in 2007. As an outsider Mr. Löscher found it challenging to establish himself as a strong leader inside the bureaucratic Siemens organization. However, he eventually found a way to successfully transition into his new position.

Naturally, in the early stage of his tenure, he lacked internal connections and the bases of power associated with inside knowledge of people and processes. Yet Siemens faced tremendous challenges, such as a lack of customer orientation, and required a strong leader with the ability to change the status quo. Absent a more formal power base, he turned to more informal means to accomplish his mandate of organizational change and increasing customer orientation.

Once a year, all 700 of Siemens top managers come together for a leadership conference in Berlin. Given the historical lack of customer focus, Löscher used peer pressure as an informal (or soft) form of power in order to challenge and eventually change the lack of customer orientation. As he recalls from his first leadership conference as CEO, “I collected the Outlook calendars for the previous year from all my division CEOs and board members. Then I mapped how much time they had spent with customers and I ranked them. There was a big debate in my inner circle over whether I should use names. Some felt we would embarrass people, but I decided to put the names on the screen anyway.”

The results of this exercise were quite remarkable: Mr. Löscher spent around 50 percent of his time with customers, more than any other top executive. Clearly, the people who were running the business divisions should rank higher on customer interaction than the CEO. This confirmed the lack of customer orientation in the

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organization. This ranking has been repeated at every Siemens leadership conference since Löscher took office. Over time, customer orientation has improved because nobody wants to fall short on this metric and endure potential ridicule. Löscher’s leadership style and use of soft power during his early time in office seemed to have paid off, as the Siemens board extended his contract as CEO of the German industry icon a year early.

Source: Löscher, P. 2012. The CEO of Siemens on using a scandal to drive change. Harvard Business Review, 90(11): 42; and Anonymous. 2011. Löscher soll Vorstandschef bleiben. www.manager-magazin.de, July 25: np.

A leader might also be able to influence subordinates because of his or her personality characteristics and behavior. These would be considered the personal bases of power, including referent power and expert power. The source of referent power is a subordinate’s identification with the leader. A leader’s personal attributes or charisma might influence subordinates and make them devoted to that leader. The source of expert power is the leader’s expertise and knowledge. The leader is the expert on whom subordinates depend for information that they need to do their jobs successfully.

personal bases of power a leader’s personality characteristics and behavior that are the basis of the leader’s power.

Successful leaders use the different bases of power, and often a combination of them, as appropriate to meet the demands of a situation, such as the nature of the task, the personality characteristics of the subordinates, and the urgency of the issue.17 Persuasion and developing consensus are often essential, but so is pressing for action. At some point stragglers must be prodded into line.18 Peter Georgescu, who recently retired as CEO of Young & Rubicam (an advertising and media subsidiary of the UK-based WPP Group), summarized a leader’s dilemma brilliantly (and humorously), “I have knee pads and a .45. I get down and beg a lot, but I shoot people too.”19

Strategy Spotlight 11.4 addresses some of the subtleties of power. Here, the CEO of Siemens successfully brought about organizational change by the effective use of peer pressure.

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LO11.3

The crucial role of emotional intelligence (EI) in successful leadership as well as its potential drawbacks.

Emotional Intelligence: A Key Leadership Trait

In the previous sections, we discussed skills and activities of strategic leadership. The focus was on “what leaders do and how they do it.” Now, the issue becomes “who leaders are,” that is, what leadership traits are the most important. Clearly, these two issues are related, because successful leaders possess the valuable traits that enable them to perform effectively in order to create value for their organization.20

There has been a vast amount of literature on the successful traits of leaders.21 These traits include integrity, maturity, energy, judgment, motivation, intelligence, expertise, and so on. For simplicity, these traits may be grouped into three broad sets of capabilities:

• Purely technical skills (like accounting or operations research).

• Cognitive abilities (like analytical reasoning or quantitative analysis).

• Emotional intelligence (like self-management and managing relationships).

“Emotional intelligence (EI)” has become popular in both the literature and management practice in recent years.22

Harvard Business Review articles published in 1998 and 2000 by psychologist/journalist Daniel Goleman, who is most closely associated with the concept, have become HBR’s most highly requested reprint articles. And two of Goleman’s recent books, Emotional Intelligence and Working with Emotional Intelligence, were both on the New York Times’s best- seller lists. Goleman defines emotional intelligence as the capacity for recognizing one’s own emotions and those of others.23

emotional intelligence (EI) an individual’s capacity for recognizing his or her own emotions and those of others, including the five components of self-awareness, self-regulation, motivation, empathy, and social skills.

Recent studies of successful managers have found that effective leaders consistently have a high level of EI.24

Findings indicate that EI is a better predictor of life success (economic well-being, satisfaction with life, friendship, family life), including occupational attainments, than IQ. Evidence is consistent with the catchy phrase: “IQ gets you hired, but EQ (Emotional Quotient) gets you promoted.” Human resource managers believe this statement to be true, even for highly technical jobs such as those of scientists and engineers.

This is not to say that IQ and technical skills are irrelevant, but they become “threshold capabilities.” They are the necessary requirements for attaining higher-level managerial positions. EI, on the other hand, is essential for leadership success. Without it, Goleman claims, a manager can have excellent training, an incisive analytical mind, and many smart ideas but will still not be a great leader.

Exhibit 11.3 identifies the five components of EI: self-awareness, self-regulation, motivation, empathy, and social skill.

Self-Awareness Self-awareness is the first component of EI and brings to mind that Delphic oracle who gave the advice “know thyself” thousands of years ago. Self-awareness involves a person having a deep understanding of his or her emotions, strengths, weaknesses, and drives. People with strong self-awareness are neither overly critical nor unrealistically optimistic. Instead, they are honest with themselves and others.

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People generally admire and respect candor. Leaders are constantly required to make judgment calls that require a candid assessment of capabilities—their own and those of others. People who assess themselves honestly (i.e., self-aware people) are well suited to do the same for the organizations they run.25

Self-Regulation Biological impulses drive our emotions. Although we cannot do away with them, we can strive to manage them. Self- regulation, which is akin to an ongoing inner conversation, frees us from being prisoners of our feelings.26 People engaged in such conversation feel bad moods and emotional impulses just as everyone else does. However, they find ways to control them and even channel them in useful ways.

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EXHIBIT 11.3 The Five Components of Emotional Intelligence at Work

Definition Hallmarks

Self-management skills:

Self- awareness

• The ability to recognize and understand your moods, emotions, and drives, as well as their effect on others.

• Self-confidence

• Realistic self-assessment

• Self-deprecating sense of humor

Self- regulation

• The ability to control or redirect disruptive impulses and moods. • Trustworthiness and integrity

• Comfort with ambiguity

• The propensity to suspend judgment—to think before acting. • Openness to change

Motivation • A passion to work for reasons that go beyond money or status. • Strong drive to achieve

• Optimism, even in the face of failure

• A propensity to pursue goals with energy and persistence. • Organizational commitment

Managing relationships:

Empathy • The ability to understand the emotional makeup of other people. • Expertise in building and retaining talent

• Cross-cultural sensitivity

• Skill in treating people according to their emotional reactions. • Service to clients and customers

Social skill • Proficiency in managing relationships and building networks. • Effectiveness in leading change

• Persuasiveness

• An ability to find common ground and build rapport. • Expertise in building and leading teams

Source: Reprinted by permission of Harvard Business Review. Exhibit from “What Makes a Leader,” by D. Goleman, January 2004. Copyright © 2004 by the Harvard Business School Publishing Corporation; all rights reserved.

Self-regulated people are able to create an environment of trust and fairness where political behavior and infighting are sharply reduced and productivity tends to be high. People who have mastered their emotions are better able to bring

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about and implement change in an organization. When a new initiative is announced, they are less likely to panic; they are able to suspend judgment, seek out information, and listen to executives explain the new program.

Motivation Successful executives are driven to achieve beyond expectations—their own and everyone else’s. Although many people are driven by external factors, such as money and prestige, those with leadership potential are driven by a deeply embedded desire to achieve for the sake of achievement.

Motivated people show a passion for the work itself, such as seeking out creative challenges, a love of learning, and taking pride in a job well done. They also have a high level of energy to do things better as well as a restlessness with the status quo. They are eager to explore new approaches to their work.

Empathy Empathy is probably the most easily recognized component of EI. Empathy means thoughtfully considering an employee’s feelings, along with other factors, in the process of making intelligent decisions. Empathy is particularly important in today’s business

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environment for at least three reasons: the increasing use of teams, the rapid pace of globalization, and the growing need to retain talent.27

STRATEGY SPOTLIGHT 11.5

EMPATHY IN A PEDIATRIC DENTAL PRACTICE A key strength of effective leaders is to see situations from another person’s perspective—or in other words, to show empathy. Empathy is especially important when dealing with customers who may not always be able to articulate their preferences. Take dental practices for children. Children’s dental offices often look, smell, and sound remarkably similar to regular dental practices for the simple reason that the owners design their offices in terms of what they produce (i.e., dental services) instead of what would be best for their customers.

While even many parents have negative feelings toward dental offices, it is naturally quite challenging to create some excitement or at least lower the anxieties children experience. That’s where a healthy portion of empathy enters the picture. Let’s try to view your dental practice from a child’s point of view. How to best accomplish this? Forget conventional wisdom, and experience your dental practice from your knees! Several interesting insights may emerge just by emulating a child’s experience. First, what is the first thing that you see when you enter the practice? Chances are, not much, as the reception area is conveniently set at eye level—adult eye level. Even the most wonderful receptionist remains invisible for children coming into the practice. Second, what do you hear? Again, chances are that you will hear the all-too-familiar sound of dental equipment, something that may sound to children like torturing mice in the next room. Third, what do you smell? Frankly, doctor’s offices have a distinct smell that equals panic for children and even many adults.

So what is the major takeaway from putting yourself into a kid’s shoes? Seeing the world from your customer’s point of view may lead you to lower the reception desk so children can see the sweet receptionist. You may also play some one-beat-per-second music to evoke the sense of a heartbeat. Finally, you could sound-proof the examination rooms so that dental drilling noise is reduced. Overall, this example demonstrates that empathy—or the ability to see situations from another person’s perspective—may allow business owners to tailor their service and product offerings to specific customer segments.

Source: Burrus, D. 2011. Flash foresight. New York: Harper Business: xxii–xxiv.

When leading a team, a manager is often charged with arriving at a consensus—often in the face of a high level of emotions. Empathy enables a manager to sense and understand the viewpoints of everyone around the table.

Globalization typically involves cross-cultural dialogue that can easily lead to miscues. Empathetic people are attuned to the subtleties of body language; they can hear the message beneath the words being spoken. They have a deep understanding of the existence and importance of cultural and ethnic differences.

Empathy also plays a key role in retaining talent. Human capital is particularly important to a firm in the knowledge economy when it comes to creating advantages that are sustainable. Leaders need empathy to develop and keep top talent, because when high performers leave, they take their tacit knowledge with them.

Strategy Spotlight 11.5 shows that empathy can pay off in a wide variety of settings. Here it helps a pediatric dental practice to view its business through the eyes of a child.

Social Skill While the first three components of EI are all self-management skills, the last two—empathy and social skill—concern a person’s ability to manage relationships with others. Social skill may be viewed as friendliness with a purpose: moving

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people in the direction you desire, whether that’s agreement on a new marketing strategy or enthusiasm about a new product.

Socially skilled people tend to have a wide circle of acquaintances as well as a knack for finding common ground and building rapport. They recognize that nothing gets done alone, and they have a network in place when the time for action comes.

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Social skill can be viewed as the culmination of the other dimensions of EI. People will be effective at managing relationships when they can understand and control their own emotions and empathize with others’ feelings. Motivation also contributes to social skill. People who are driven to achieve tend to be optimistic, even when confronted with setbacks. And when people are upbeat, their “glow” is cast upon conversations and other social encounters. They are popular, and for good reason.

A key to developing social skill is to become a good listener—a skill that many executives find to be quite challenging. Teresa Taylor, chief operating officer at Quest Communications, says:28

“Over the years, something I really try to focus on is truly listening. When I say that, I mean sometimes people act like they’re listening but they’re really formulating their own thoughts in their heads. I’m trying to put myself into someone else’s shoes, trying to figure out what’s motivating them, and why they are in the spot they are in.”

Emotional Intelligence: Some Potential Drawbacks and Cautionary Notes Many great leaders have great reserves of empathy, interpersonal astuteness, awareness of their own feelings, and an awareness of their impact on others.29 More importantly, they know how to apply these capabilities judiciously as best benefits the situation. Having some minimum level of EI will help a person be effective as a leader as long as it is channeled appropriately. However, if a person has a high level of these capabilities it may become “too much of a good thing” if he or she is allowed to drive inappropriate behaviors. Some additional potential drawbacks of EI can be gleaned by considering the flip side of its benefits.

Effective Leaders Have Empathy for Others However, they also must be able to make the “tough decisions.” Leaders must be able to appeal to logic and reason and acknowledge others’ feelings so that people feel the decisions are correct. However, it is easy to overidentify with others or confuse empathy with sympathy. This can make it more difficult to make the tough decisions.

Effective Leaders Are Astute Judges of People A danger is that leaders may become judgmental and overly critical about the shortcomings they perceive in others. They are likely to dismiss other people’s insights, making them feel undervalued.

Effective Leaders Are Passionate about What They Do, and They Show It This doesn’t mean that they are always cheerleaders. Rather, they may express their passion as persistence in pursuing an objective or a relentless focus on a valued principle. However, there is a fine line between being excited about something and letting your passion close your mind to other possibilities or cause you to ignore realities that others may see.

Effective Leaders Create Personal Connections with Their People Most effective leaders take time to engage employees individually and in groups, listening to their ideas, suggestions and concerns, and responding in ways that make people feel that their ideas are respected and appreciated. However, if the leader makes too many unannounced visits, it may create a culture of fear and micromanagement. Clearly, striking a correct balance is essential.

From a moral standpoint, emotional leadership is neither good nor bad. On the one hand, emotional leaders can be altruistic, focused on the general welfare of the company and its employees, and highly principled. On the other hand, they can be manipulative, selfish, and dishonest. For example, if a person is using leadership solely to gain power, that is not leadership at all.30 Rather, they are using their EI to grasp what people want and pander to those desires in order to gain authority and influence. After all, easy answers sell.

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LO11.4

The importance of developing competency companions and creating a learning organization.

Developing Competency Companions and Creating a Learning Organization

Leaders at all levels of the organization need to reflect on the skills that they have and how they can build and extend their skill set.31 Too often leaders get stuck extending the competencies they already have. However, the most promising path for an individual to learn and grow may be to develop new competencies that complement the skills and abilities they already have. For example, a leader who has great competency in developing innovative ideas can extend the value of that competency by developing strong communication skills. Such a leader would benefit from an interaction effect, a situation where the combination of two skills can generate an outcome that is significantly greater than either skill can produce on its own. By enhancing communication skills, this highly innovative leader is more likely to be able to communicate the value of both innovative ideas she has developed and also the necessity to push innovative learning and development throughout the organization.

Strategy Spotlight 11.6 provides useful insights on the benefits of developing competency companions and how to go about it.

Once leaders have reflected on and enhanced their own competencies, they can turn their attention to building a learning organization. Such an organization is capable of adapting to change, fostering creativity, and succeeding in highly competitive markets.

To introduce the concept of a learning organization, we’ll draw on Charles Handy, one of today’s most respected business visionaries. He is author of The Age of Unreason and The Age of Paradox and he shared an amusing story several years ago:

The other day, a courier could not find my family’s remote cottage. He called his base on his radio, and the base called us to ask directions. He was just around the corner, but his base managed to omit a vital part of the directions. So he called them again, and they called us again. Then the courier repeated the cycle a third time to ask whether we had a dangerous dog. When he eventually arrived, we asked whether it would not have been simpler and less aggravating to everyone if he had called us directly from the roadside telephone booth where he had been parked. “I can’t do that,” he said, “because they won’t refund any money I spend.” “But it’s only pennies!” I exclaimed. “I know,” he said, “but that only shows how little they trust us!”32

At first glance, it would appear that the story epitomizes the lack of empowerment and trust granted to the hapless courier: Don’t ask questions! Do as you’re told!33 However, implicit in this scenario is also the message that learning, information sharing, adaptation, decision making, and so on are not shared throughout the organization. In contrast, leading-edge organizations recognize the importance of having everyone involved in the process of actively learning and adapting. As noted by today’s leading expert on learning organizations, MIT’s Peter Senge, the days when Henry Ford, Alfred Sloan, and Tom Watson “learned for the organization” are gone.

In an increasingly dynamic, interdependent, and unpredictable world, it is simply no longer possible for anyone to “figure it all out at the top.” The old model, “the top thinks and the local acts,” must now give way to integrating thinking and acting at all levels. While the challenge is great, so is the potential payoff. “The person who figures out how to harness the collective genius of the people in his or her organization,” according to former Citibank CEO Walter Wriston, “is going to blow the competition away.”34

Learning and change typically involve the ongoing questioning of an organization’s status quo or method of procedure. This means that all individuals throughout the organization must be reflective.35 Many organizations get so caught up in carrying out their

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day-to-day work that they rarely, if ever, stop to think objectively about themselves and their businesses. They often fail to ask the probing questions that might lead them to call into question their basic assumptions, to refresh their strategies, or to reengineer their work processes. According to Michael Hammer and Steven Stanton, the pioneer consultants who touched off the reengineering movement:

STRATEGY SPOTLIGHT 11.6

COMPETENCY COMPANIONS: LEVERAGING A LEADER’S STRENGTHS Leaders who want to take the next step in their career can follow a straightforward four-step cross-training process. The basic idea behind this cross-training approach is simple yet effective. While the most effective leaders have at least one competency that makes them great and eventually indispensable, it makes little sense to continually work on already great qualities. Instead, leaders can benefit from identifying and developing complementary strengths. Building complementary strengths—or competency companions—may lead to substantially greater leadership effectiveness than finding increasingly rare opportunities to improve an already outstanding competency.

First, leaders must identify their strengths in areas that usually fall into five categories: character, personal capability, getting results, interpersonal skills, and leading change. While this task can be done in multiple ways, it is important to realize that your own view is less important than how others see you, making a 360-degree evaluation the method of choice.

Second, choose a strength to focus on. Most people find it easy to identity weaknesses and focus their attention on improving them. Unless a competence is extremely underdeveloped (i.e., in the 10th percentile), however, it may pay to focus on an already strong yet not outstanding competency. Developing a competency from strong to outstanding often can raise the perceived leadership effectiveness dramatically. However, choosing between multiple strong competencies is easier said than done, because most people lack clear selection criteria. To engage effectively in this process, leaders should focus on a strong competency that is important to the organization. Moreover, leaders should choose a competency they feel passionate about.

Third, select a companion behavior. While developing a great or outstanding competency is an important step on the journey to becoming an indispensable leader, it may increasingly pay to also focus on a mediocre competency that can be developed in an interacting (or complementary) fashion. As before, this companion competency should be valued by the organization and also be something the leader feels passionate about.

Lastly, develop your companion behavior. Once you have settled on an organizationally valued and personally engaging competency, you should now work on improving the basic skills in this area. Practically speaking, you could look for as many opportunities as possible to develop this competency, both inside and outside of work. For instance, you could take courses or practice informally with friends and coworkers. Volunteer to engage in activities that allow you to practice this skill, and ask for continuous feedback.

Extensive research by Zenger Folkman, a leadership development consultancy, provides solid evidence of the benefits of pairing leader attributes. Such findings were based on an analysis of their database of more than a quarter million 360-degree surveys of some 30,000 developing leaders. Take, for example, the competencies “focuses on results” and “builds relationships.” Only 14 percent of leaders who were reasonably strong (that is, scored in the 75th percentile) in focusing on results but less so in building relationships reached the extraordinary leadership level: the 90th percentile in overall leadership effectiveness. Similarly, only 12 percent of those who were reasonably strong in building relationships but less so in focusing on results reached that level. However, when an individual performed well in both categories, something dramatic happened: Fully 72 percent of those in the 75th percentile in both categories reached the 90th percentile on overall leadership effectiveness.

Source: Zenger, J. H., Folkman, J. R., & Edinger, S. K. 2011. Making yourself indispensable. Harvard Business Review, 89(10): 84–92.

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Reflection entails awareness of self, of competitors, of customers. It means thinking without preconception. It means questioning cherished assumptions and replacing them with new approaches. It is the only way in which a winning company can maintain its leadership position, by which a company with great assets can ensure that they continue to be well deployed.36

To adapt to change, foster creativity, and remain competitive, leaders must build learning organizations. Exhibit 11.4 lists the five elements of a learning organization.

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EXHIBIT 11.4 Key Elements of a Learning Organization

These are the five key elements of a learning organization. Each of these items should be viewed as necessary, but not sufficient. That is, successful learning organizations need all five elements.

1. Inspiring and motivating people with a mission or purpose.

2. Empowering employees at all levels.

3. Accumulating and sharing internal knowledge.

4. Gathering and integrating external information.

5. Challenging the status quo and enabling creativity.

Inspiring and Motivating People with a Mission or Purpose Successful learning organizations create a proactive, creative approach to the unknown, actively solicit the involvement of employees at all levels, and enable all employees to use their intelligence and apply their imagination. Higher-level skills are required of everyone, not just those at the top.37 A learning environment involves organizationwide commitment to change, an action orientation, and applicable tools and methods.38 It must be viewed by everyone as a guiding philosophy and not simply as another change program.

learning organizations organizations that create a proactive, creative approach to the unknown, characterized by (1) inspiring and motivating people with a mission and purpose, (2) empowering employees at all levels, (3) accumulating and sharing internal knowledge, (4) gathering and integrating external information, and (5) challenging the status quo and enabling creativity.

A critical requirement of all learning organizations is that everyone feels and supports a compelling purpose. In the words of William O’Brien, CEO of Hanover Insurance, “Before there can be meaningful participation, people must share certain values and pictures about where we are trying to go. We discovered that people have a real need to feel that they’re part of an enabling mission.”39 Such a perspective is consistent with an intensive study by Kouzes and Posner, authors of The Leadership Challenge.40 They recently analyzed data from nearly one million respondents who were leaders at various levels in many organizations throughout the world. A major finding was that what leaders struggle with most is communicating an image of the future that draws others in, that is, it speaks to what others see and feel. To illustrate:

Buddy Blanton, a principal program manager at Rockwell Collins, learned this lesson firsthand. He asked his team for feedback on his leadership, and the vast majority of it was positive. However, he got some strong advice from his team about how he could be more effective in inspiring a shared vision. “You would benefit by helping us, as a team, to understand how you go to your vision. We want to walk with you while you create the goals and vision, so we all get to the end of the vision together.”41

Inspiring and motivating people with a mission or purpose is a necessary but not sufficient condition for developing an organization that can learn and adapt to a rapidly changing, complex, and interconnected environment.

Empowering Employees at All Levels “The great leader is a great servant,” asserted Ken Melrose, CEO of Toro Company and author of Making the Grass Greener on Your Side.42 A manager’s role becomes one of creating an environment where employees can achieve their potential as they help move the organization toward its goals. Instead of viewing themselves as resource controllers and power brokers, leaders must envision themselves as flexible resources willing to assume numerous roles as coaches, information providers, teachers, decision makers, facilitators, supporters, or listeners, depending on the needs of their employees.43

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The central key to empowerment is effective leadership. Empowerment can’t occur in a leadership vacuum. According to Melrose, “You best lead by serving the needs of your people. You don’t do their jobs for them; you enable them to learn and progress on the job.”

Leading-edge organizations recognize the need for trust, cultural control, and expertise at all levels instead of the extensive and cumbersome rules and regulations inherent

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in hierarchical control.44 Some have argued that too often organizations fall prey to the “heroes-and-drones syndrome,” wherein the value of those in powerful positions is exalted and the value of those who fail to achieve top rank is diminished. Such an attitude is implicit in phrases such as “Lead, follow, or get out of the way” or, even less appealing, “Unless you’re the lead horse, the view never changes.” Few will ever reach the top hierarchical positions in organizations, but in the information economy, the strongest organizations are those that effectively use the talents of all the players on the team.

STRATEGY

SPOTLIGHT 11.7

CROWDSOURCING

USING THE WISDOM OF YOUR EMPLOYEES TO MAKE BETTER DECISIONS CEOs are often surrounded by an aura of unfailing business acumen. Yet few CEOs live up to these high expectations over the long run, suggesting that even the most able CEOs have limited abilities. Ironically, shattering the image of the almighty CEO by realizing and identifying cognitive limitations may help us to improve organizational decision making. Consider WBG Construction, a small home builder west of Boston. When important decisions need to be made, Greg Burrill, the president, asks all employees with relevant knowledge or a stake in the outcome for their thoughts. This collaborative approach recently led to a decision that not only sold a house but also inspired a new floor plan that appealed to a whole new segment of buyers.

As another example, EMC, the data storage giant, enables participation by a social media platform called EMC | One. When the recession hit and cost cutting became imperative, EMC used this social media platform to do something most companies would leave to top management: decide where to cut costs. Several thousand employees participated and identified cost savings that were largely unknown to top management. The resulting cuts were less painful because employees had a say in the cost reduction. Empowering employees in this manner utilizes the day-to-day insights of lower-level employees and benefits both the firm and the workforce.

In some other cases, bad decisions not only cost money but also can lead to heartbreaking accidents. NASA can look back at some 50 years of pioneering success, but also tragic accidents caused by bad judgment. In February 2009, the flight of space shuttle Discovery was overshadowed by uncertainties about whether an issue with the fuel system should delay the launch. Prior space shuttle launch decisions were made by a small group of individuals supported by a culture of complacency born of many prior successes and communication breakdowns. But NASA finally implemented a much needed change of culture that now values input from all group members. As Mike Ryschkewitsch, NASA’s chief engineer observed, “One of the things that NASA strongly emphasizes now is that any individual who works here, if they see something that doesn’t look right, they have a responsibility to raise it, and they can raise it.” By utilizing the insights of individuals in their organizations, leaders hope to improve organizational decision making and secure the long-term success of their businesses.

Source: Davenport, T. H. 2012. The wisdom of your in-house crowd. Harvard Business Review, 90(10): 40; and Davenport, T. H., & Manville, B. 2012. Judgment calls: Twelve stories of big decisions and the teams that got them right. Boston: Harvard Business Review Press: 25–38.

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Empowering individuals by soliciting their input helps an organization to enjoy better employee morale. It also helps create a culture in which middle- and lower-level employees feel that their ideas and initiatives will be valued, and enhance firm performance as explained in Strategy Spotlight 11.7.

Accumulating and Sharing Internal Knowledge Effective organizations must also redistribute information, knowledge (skills to act on the information), and rewards.45 A company might give frontline employees the power to act as “customer advocates,” doing whatever is necessary to satisfy customers. The company needs to disseminate information by sharing customer expectations and feedback as well as financial information. The employees must know about the goals of the business as well as how key value-creating activities in the organization are related to each other. Finally, organizations should allocate rewards on how effectively employees use information, knowledge, and power to improve customer service quality and the company’s overall performance.46

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Let’s take a look at Whole Foods Market, Inc., the largest natural foods grocer in the United States.47 An important benefit of the sharing of internal information at Whole Foods becomes the active process of internal benchmarking. Competition is intense at Whole Foods. Teams compete against their own goals for sales, growth, and productivity; they compete against different teams in their stores; and they compete against similar teams at different stores and regions. There is an elaborate system of peer reviews through which teams benchmark each other. The “Store Tour” is the most intense. On a periodic schedule, each Whole Foods store is toured by a group of as many as 40 visitors from another region. Lateral learning—discovering what your colleagues are doing right and carrying those practices into your organization—has become a driving force at Whole Foods.

In addition to enhancing the sharing of company information both up and down as well as across the organization, leaders also have to develop means to tap into some of the more informal sources of internal information. In a recent survey of presidents, CEOs, board members, and top executives in a variety of nonprofit organizations, respondents were asked what differentiated the successful candidates for promotion. The consensus: The executive was seen as a person who listens. According to Peter Meyer, the author of the study, “The value of listening is clear: You cannot succeed in running a company if you do not hear what your people, customers, and suppliers are telling you…. Listening and understanding well are key to making good decisions.”48

Gathering and Integrating External Information Recognizing opportunities, as well as threats, in the external environment is vital to a firm’s success. As organizations and environments become more complex and evolve rapidly, it is far more critical for employees and managers to become more aware of environmental trends and events—both general and industry-specific—and more knowledgeable about their firm’s competitors and customers. Next, we will discuss some ideas on how to do it.

First, the Internet has dramatically accelerated the speed with which anyone can track down useful information or locate people who might have useful information. Prior to the Net, locating someone who used to work at a company—always a good source of information—was quite a challenge. However, today people post their résumés on the web; they participate in discussion groups and talk openly about where they work.

Marc Friedman, manager of market research at $1 billion Andrew Corporation, a fast-growing manufacturer of wireless communications products provides an example of effective Internet use.49 One of Friedman’s preferred sites to visit is Corptech’s website, which provides information on 45,000 high-tech companies and more than 170,000 executives. One of his firm’s product lines consisted of antennae for air-traffic control systems. He got a request to provide a country-by-country breakdown of upgrade plans for various airports. He knew nothing about air-traffic control at the time. However, he found a site on the Internet for the International Civil Aviation Organization. Fortunately, it had a great deal of useful data, including several research companies working in his area of interest.

benchmarking managers seeking out best examples of a particular practice as part of an ongoing effort to improve the corresponding practice in their own organization.

Second, company employees at all levels can use “garden variety” traditional sources to acquire external information. Much can be gleaned by reading trade and professional journals, books, and popular business magazines. Other venues for gathering external information include membership in professional or trade organizations, attendance at meetings and conventions, and networking among colleagues inside and outside of your industry. Intel’s Andy Grove gathered information from people like DreamWorks SKG’s Steven Spielberg and Tele-Communications Inc.’s John Malone.50 He believed that such interaction provides insights into how to make personal computers more entertaining and better at communicating. Internally, Grove spent time with the young engineers who run Intel Architecture labs, an Oregon-based facility that Grove hoped to become the de facto R&D lab for the entire PC industry.

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Third, benchmarking can be a useful means of employing external information. Here managers seek out the best examples of a particular practice as part of an ongoing effort to improve the corresponding practice in their own organization.51 There are two primary types of benchmarking. Competitive benchmarking restricts the search for best practices to competitors, while functional benchmarking endeavors to determine best practices regardless of industry. Industry-specific standards (e.g., response times required to repair power outages in the electric utility industry) are typically best handled through competitive benchmarking, whereas more generic processes (e.g., answering 1-800 calls) lend themselves to functional benchmarking because the function is essentially the same in any industry.

competitive benchmarking benchmarking where the examples are drawn from competitors in the industry.

functional benchmarking benchmarking where the examples are drawn from any organization, even those outside the industry.

Ford Motor Company used benchmarking to study Mazda’s accounts payable operations.52 Its initial goal of a 20 percent cut in its 500-employee accounts payable staff was ratcheted up to 75 percent—and met. Ford found that staff spent most of their time trying to match conflicting data in a mass of paper, including purchase orders, invoices, and receipts. Following Mazda’s example, Ford created an “invoiceless system” in which invoices no longer trigger payments to suppliers. The receipt does the job.

Fourth, focus directly on customers for information. For example, William McKnight, head of 3M’s Chicago sales office, required that salesmen of abrasives products talk directly to the workers in the shop to find out what they needed, instead of calling on only front-office executives.53 This was very innovative at the time—1909! But it illustrates the need to get to the end user of a product or service. (McKnight went on to become 3M’s president from 1929 to 1949 and chairman from 1949 to 1969.) More recently, James Taylor, senior vice president for global marketing at Gateway 2000, discussed the value of customer input in reducing response time, a critical success factor in the PC industry.

We talk to 100,000 people a day—people calling to order a computer, shopping around, looking for tech support. Our website gets 1.1 million hits per day. The time it takes for an idea to enter this organization, get processed, and then go to customers for feedback is down to minutes. We’ve designed the company around speed and feedback.54

Challenging the Status Quo and Enabling Creativity Earlier in this chapter we discussed some of the barriers that leaders face when trying to bring about change in an organization: vested interests in the status quo, systemic barriers, behavioral barriers, political barriers, and personal time constraints. For a firm to become a learning organization, it must overcome such barriers in order to foster creativity and enable it to permeate the firm. This becomes quite a challenge if the firm is entrenched in a status quo mentality.

Perhaps the best way to challenge the status quo is for the leader to forcefully create a sense of urgency. For example, when Tom Kasten was vice president of Levi Strauss, he had a direct approach to initiating change.

You create a compelling picture of the risks of not changing. We let our people hear directly from customers. We videotaped interviews with customers and played excerpts. One big customer said, “We trust many of your competitors implicitly. We sample their deliveries. We open all Levi’s deliveries.” Another said, “Your lead times are the worst. If you weren’t Levi’s, you’d be gone.” It was powerful. I wish we had done more of it.55

Such initiative, if sincere and credible, establishes a shared mission and the need for major transformations. It can channel energies to bring about both change and creative endeavors.

Establishing a “culture of dissent” can be another effective means of questioning the status quo and serving as a spur toward creativity. Here norms are established whereby dissenters can openly question a superior’s perspective without fear of retaliation or

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retribution. Consider the perspective of Steven Balmer, Microsoft’s CEO, in discussing the firm’s former chairman, Bill Gates.

Bill [Gates] brings to the company the idea that conflict can be a good thing…. Bill knows it’s important to avoid that gentle civility that keeps you from getting to the heart of an issue quickly. He likes it when anyone, even a junior employee, challenges him, and you know he respects you when he starts shouting back.56

Closely related to the culture of dissent is the fostering of a culture that encourages risk taking. “If you’re not making mistakes, you’re not taking risks, and that means you’re not going anywhere,” claimed John Holt, coauthor of Celebrate Your Mistakes.57 “The key is to make errors faster than the competition, so you have more chances to learn and win.”

Companies that cultivate cultures of experimentation and curiosity make sure that failure is not, in essence, an obscene word. They encourage mistakes as a key part of their competitive advantage. It has been said that innovation has a great paradox: Success—that is, true breakthroughs—usually come through failure. Below are some approaches to encourage risk taking and learning from mistakes in an organization:58

• Formalize Forums for Failure To keep failures and the important lessons that they offer from getting swept under the rug, carve out time for reflection. GE recently began sharing lessons from failure by bringing together managers whose “Imagination Breakthrough” efforts were put on the shelf.

• Move the Goalposts Innovation requires flexibility in meeting goals, since early predictions are often little more than educated guesses. Intuit’s Scott Cook even goes so far as to suggest that teams developing new products ignore forecasts in the early days. “For every one of our failures, we had spreadsheets that looked awesome,” he claims.

• Bring in Outsiders Outsiders can help neutralize the emotions and biases that prop up a flop. Customers can be the most valuable. After its DNA chip failed, Corning brought pharmaceutical companies in early to test its new drug- discovery technology, Epic.

• Prove Yourself Wrong, Not Right Development teams tend to look for supporting, rather than countervailing, evidence. “You have to reframe what you’re seeking in the early days,” says Innosight’s Scott Anthony. “You’re not really seeking proof that you have the right answer. It’s more about testing to prove yourself wrong.”

Finally, failure can play an important and positive role in one’s professional development. John Donahue, eBay’s CEO, draws on the sport of baseball in recalling the insight (and inspiration!) one of his former bosses shared with him:59

“The best hitters in Major League Baseball, world class, they can strike out six times out of ten and still be the greatest hitters of all time. That’s my philosophy—the key is to get up in that batter’s box and take a swing. And all you have to do is hit one single, a couple of doubles, and an occasional home run out of every ten at-bats, and you’re going to be the best hitter or the best business leader around. You can’t play in the major leagues without having a lot of failures.”

LO11.5

The leader’s role in establishing an ethical organization.

Creating an Ethical Organization

Ethics may be defined as a system of right and wrong.60 Ethics assists individuals in deciding when an act is moral or immoral, socially desirable or not. The sources for an individual’s ethics include religious beliefs, national and ethnic heritage, family practices, community standards, educational experiences, and friends and neighbors. Business ethics is the application of ethical standards to commercial enterprise.

ethics

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a system of right and wrong that assists individuals in deciding when an act is moral or immoral and/or socially desirable or not.

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Individual Ethics versus Organizational Ethics

organizational ethics the values, attitudes, and behavioral patterns that define an organization’s operating culture and that determine what an organization holds as acceptable behavior.

Many leaders think of ethics as a question of personal scruples, a confidential matter between employees and their consciences. Such leaders are quick to describe any wrongdoing as an isolated incident, the work of a rogue employee. They assume the company should not bear any responsibility for individual misdeeds. In their view, ethics has nothing to do with leadership.

Ethics has everything to do with leadership. Seldom does the character flaw of a lone actor completely explain corporate misconduct. Instead, unethical business practices typically involve the tacit, if not explicit, cooperation of others and reflect the values, attitudes, and behavior patterns that define an organization’s operating culture. Ethics is as much an organizational as a personal issue. Leaders who fail to provide proper leadership to institute proper systems and controls that facilitate ethical conduct share responsibility with those who conceive, execute, and knowingly benefit from corporate misdeeds.61

The ethical orientation of a leader is a key factor in promoting ethical behavior. Ethical leaders must take personal, ethical responsibility for their actions and decision making. Leaders who exhibit high ethical standards become role models for others and raise an organization’s overall level of ethical behavior. Ethical behavior must start with the leader before the employees can be expected to perform accordingly.

ethical orientation the practices that firms use to promote an ethical business culture, including ethical role models, corporate credos and codes of conduct, ethically-based reward and evaluation systems, and consistently enforced ethical policies and procedures.

There has been a growing interest in corporate ethical performance. Some reasons for this trend may be the increasing lack of confidence regarding corporate activities, the growing emphasis on quality of life issues, and a spate of recent corporate scandals. Without a strong ethical culture, the chance of ethical crises occurring is enhanced. Ethical crises can be very expensive—both in terms of financial costs and in the erosion of human capital and overall firm reputation. Merely adhering to the minimum regulatory standards may not be enough to remain competitive in a world that is becoming more socially conscious. Strategy Spotlight 11.8 highlights potential ethical problems at utility companies that are trying to capitalize on consumers’ desire to participate in efforts to curb global warming.

The past several years have been characterized by numerous examples of unethical and illegal behavior by many top- level corporate executives. These include executives of firms such as Enron, Tyco, WorldCom, Inc., Adelphia, and Healthsouth Corp., who were all forced to resign and are facing (or have been convicted of) criminal charges. Perhaps the most glaring example is Bernie Madoff, whose Ponzi scheme, which unraveled in 2008, defrauded investors of $50 billion in assets they had set aside for retirement and charitable donations.

The ethical organization is characterized by a conception of ethical values and integrity as a driving force of the enterprise.62 Ethical values shape the search for opportunities, the design of organizational systems, and the decision- making process used by individuals and groups. They provide a common frame of reference that serves as a unifying force across different functions, lines of business, and employee groups. Organizational ethics helps to define what a company is and what it stands for.

There are many potential benefits of an ethical organization, but they are often indirect. Research has found somewhat inconsistent results concerning the overall relationship between ethical performance and measures of financial performance.63 However, positive relationships have generally been found between ethical performance and strong

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organizational culture, increased employee efforts, lower turnover, higher organizational commitment, and enhanced social responsibility.

The advantages of a strong ethical orientation can have a positive effect on employee commitment and motivation to excel. This is particularly important in today’s knowledge-intensive organizations, where human capital is critical in creating value and competitive advantages. Positive, constructive relationships among individuals (i.e., social capital) are vital in leveraging human capital and other resources in an organization. Drawing on the

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concept of stakeholder management, an ethically sound organization can also strengthen its bonds among its suppliers, customers, and governmental agencies.

STRATEGY

SPOTLIGHT

11.8 ENVIRONMENTAL SUSTAINABILITY

ETHICS

GREEN ENERGY: REAL OR JUST A MARKETING PLOY? Many consumers want to “go green” and are looking for opportunities to do so. Utility companies that provide heat and electricity are one of the most obvious places to turn, because they often use fossil fuels that could be saved through energy conservation or replaced by using alternative energy sources. In fact, some consumers are willing to pay a premium to contribute to environmental sustainability efforts if paying a little more will help curb global warming. Knowing this, many power companies in the United States have developed alternative energy programs and appealed to customers to help pay for them.

Unfortunately, many of the power companies that are offering eco-friendly options are falling short on delivering on them. Some utilities have simply gotten off to a slow start or found it difficult to profitably offer alternative power. Others, however, are suspected of committing a new type of fraud—“greenwashing.” This refers to companies that make unsubstantiated claims about how environmentally friendly their products or services really are. In the case of many power companies, their claims of “green power” are empty promises. Instead of actually generating additional renewable energy, most of the premiums are going for marketing costs. “They are preying on people’s goodwill,” says Stephen Smith, executive director of the Southern Alliance for Clean Energy, an advocacy group in Knoxville, Tennessee.

Consider what two power companies offered and how the money was actually spent:

• Duke Power of Indiana created a program called “GoGreen Power.” Customers were told that they could pay a green-energy premium and a specific amount of electricity would be obtained from renewable sources. What actually happened? Less than 18 percent of voluntary customer contributions in a recent year went to renewable energy development.

• Alliant Energy of Iowa established a program dubbed “Second Nature.” Customers were told that they would “support the growth of earth-friendly ‘green power’ created by wind and biomass.” What actually happened? More than 56 percent of expenditures went to marketing and administrative costs, not green-energy development.

Sources: Elgin, B. & Holden, D. 2008. Green Power: Buyers Beware. BusinessWeek, September 29: 68–70; www.cleanenergy.org; duke-energy.com; and alliantenergy.com.

LO11.6

The difference between integrity-based and compliance-based approaches to organizational ethics.

Integrity-Based versus Compliance-Based Approaches to Organizational Ethics Before discussing the key elements of an ethical organization, one must understand the links between organizational integrity and the personal integrity of an organization’s members.64 There cannot be high-integrity organizations without high-integrity individuals. However, individual integrity is rarely self-sustaining. Even good people can lose their bearings when faced with pressures, temptations, and heightened performance expectations in the absence of organizational support systems and ethical boundaries. Organizational integrity rests on a concept of purpose,

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responsibility, and ideals for an organization as a whole. An important responsibility of leadership is to create this ethical framework and develop the organizational capabilities to make it operational.65

Lynn Paine, an ethics scholar at Harvard, identifies two approaches: the compliance-based approach and the integrity- based approach. (See Exhibit 11.5 for a comparison of compliance-based and integrity-based strategies.) Faced with the prospect of litigation, several organizations reactively implement compliance-based ethics programs. Such programs are typically designed by a corporate counsel with the goal of preventing, detecting, and punishing legal violations. But being ethical is much more than being legal, and an integrity-based approach addresses the issue of ethics in a more comprehensive manner.

compliance-based ethics programs programs for building ethical organizations that have the goal of preventing, detecting, and punishing legal violations.

Integrity-based ethics programs combine a concern for law with an emphasis on managerial responsibility for ethical behavior. It is broader, deeper, and more demanding

integrity-based ethics programs programs for building ethical organizations that combine a concern for law with an emphasis on managerial responsibility for ethical behavior, including (1) enabling ethical conduct; (2) examining the organization’s and members’ core guiding values, thoughts, and actions; and (3) defining the responsibilities and aspirations that constitute an organization’s ethical compass.

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than a legal compliance initiative. It is broader in that it seeks to enable responsible conduct. It is deeper in that it cuts to the ethos and operating systems of an organization and its members, their core guiding values, thoughts, and actions. It is more demanding because it requires an active effort to define the responsibilities that constitute an organization’s ethical compass. Most importantly, organizational ethics is seen as the responsibility of management.

EXHIBIT 11.5 Approaches to Ethics Management

Characteristics Compliance-Based Approach Integrity-Based Approach

Ethos Conformity with externally imposed standards

Self-governance according to chosen standards

Objective Prevent criminal misconduct Enable responsible conduct

Leadership Lawyer-driven Management-driven with aid of lawyers, HR, and others

Methods Education, reduced discretion, auditing and controls, penalties

Education, leadership, accountability, organizational systems and decision processes, auditing and controls, penalties

Behavioral Assumptions

Autonomous beings guided by material self-interest

Social beings guided by material self-interest, values, ideals, peers

Source: Reprinted by permission of Harvard Business Review. Exhibit from “Managing Organizational Integrity,” by L. S. Paine. Copyright © 1994 by the Harvard Business School Publishing Corporation; all rights reserved.

A corporate counsel may play a role in designing and implementing integrity strategies, but it is managers at all levels and across all functions that are involved in the process. Once integrated into the day-to-day operations, such strategies can prevent damaging ethical lapses, while tapping into powerful human impulses for moral thought and action. Ethics becomes the governing ethos of an organization and not burdensome constraints. Here is an example of an organization that goes beyond mere compliance to laws in building an ethical organization:

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In teaching ethics to its employees, Texas Instruments, the $13 billion chip and electronics manufacturer, asks them to run an issue through the following steps: Is it legal? Is it consistent with the company’s stated values? Will the employee feel bad doing it? What will the public think if the action is reported in the press? Does the employee think it is wrong? If the employees are not sure of the ethicality of the issue, they are encouraged to ask someone until they are clear about it. In the process, employees can approach high-level personnel and even the company’s lawyers. At TI, the question of ethics goes much beyond merely being legal. It is no surprise, that this company is a benchmark for corporate ethics and has been a recipient of three ethics awards: the David C. Lincoln Award for Ethics and Excellence in Business, American Business Ethics Award, and Bentley College Center for Business Ethics Award.66

LO11.7

Several key elements that organizations must have to become an ethical organization.

Compliance-based approaches are externally motivated—that is, based on the fear of punishment for doing something unlawful. On the other hand, integrity-based approaches are driven by a personal and organizational commitment to ethical behavior.

A firm must have several key elements to become a highly ethical organization:

• Role models.

• Corporate credos and codes of conduct.

• Reward and evaluation systems.

• Policies and procedures.

These elements are highly interrelated. Reward structures and policies will be useless if leaders are not sound role models. That is, leaders who implicitly say, “Do as I say, not as

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I do,” will quickly have their credibility eroded and such actions will sabotage other elements that are essential to building an ethical organization.

Role Models For good or for bad, leaders are role models in their organizations. Perhaps few executives can share an experience that better illustrates this than Linda Hudson, president of General Dynamics.67 Right after she was promoted to become her firm’s first female president, she went to Nordstrom and bought some new suits to wear to work. A lady at the store showed her how to tie a scarf in a very unique way. The day after she wore it to work, guess what: no fewer than a dozen women in the organization were wearing scarves tied exactly the same way! She reflects:

“And that’s when I realized that life was never going to be the way it had been before, that people were watching everything I did. And it wasn’t just going to be about how I dressed. It was about my behavior, the example I set, the tone I set, the way I carried myself, and how confident I was—all those kinds of things…. As the leader, people are looking at you in a way you could not have imagined in other roles.”

Clearly, leaders must “walk the talk”; they must be consistent in their words and deeds. The values as well as the character of leaders become transparent to an organization’s employees through their behaviors. When leaders do not believe in the ethical standards that they are trying to inspire, they will not be effective as good role models. Being an effective leader often includes taking responsibility for ethical lapses within the organization—even though the executives themselves are not directly involved. Consider the perspective of Dennis Bakke, CEO of AES, the $18 billion global electricity company based in Arlington, Virginia.

There was a major breach (in 1992) of the AES values. Nine members of the water treatment team in Oklahoma lied to the EPA about water quality at the plant. There was no environmental damage, but they lied about the test results. A new, young chemist at the plant discovered it, told a team leader, and we then were notified. Now, you could argue that the people who lied were responsible and were accountable, but the senior management team also took responsibility by taking pay cuts. My reduction was about 30 percent.68

Such action enhances the loyalty and commitment of employees throughout the organization. Many would believe that it would have been much easier (and personally less expensive!) for Bakke and his management team to merely take strong punitive action against the nine individuals who were acting contrary to the behavior expected in AES’s ethical culture. However, by sharing responsibility for the misdeeds, the top executives—through their highly visible action—made it clear that responsibility and penalties for ethical lapses go well beyond the “guilty” parties. Such courageous behavior by leaders helps to strengthen an organization’s ethical environment.

Corporate Credos and Codes of Conduct

corporate credo a statement of the beliefs typically held by managers in a corporation.

Corporate credos and codes of conduct are mechanisms that provide statements of norms and beliefs as well as guidelines for decision making. They provide employees with a clear understanding of the organization’s policies and ethical position. Such guidelines also provide the basis for employees to refuse to commit unethical acts and help to make them aware of issues before they are faced with the situation. For such codes to be truly effective, organization members must be aware of them and what behavioral guidelines they contain.69 Strategy Spotlight 11.9 identifies four key reasons why codes of conduct support organizational efforts to maintain a safe and ethical workplace.

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STRATEGY SPOTLIGHT 11.9 ETHICS

ELEMENTS OF A CORPORATE CODE Corporate codes are not simply useful for conveying organizational norms and policies, but they also serve to legitimize an organization in the eyes of others. In the United States, federal guidelines advise judges, when determining how to sentence a company convicted of a crime, to consider whether it had a written code and was out of compliance with its own ethical guidelines. The United Nations and countries around the world have endorsed codes as a way to promote corporate social responsibility. As such, a code provides an increasingly important corporate social contract that signals a company’s willingness to act ethically.

For employees, codes of conduct serve four key purposes:

1. Help employees from diverse backgrounds work more effectively across cultural backgrounds.

2. Provide a reference point for decision making.

3. Help attract individuals who want to work for a business that embraces high standards.

4. Help a company to manage risk by reducing the likelihood of damaging misconduct.

With recent scandals on Wall Street, many corporations are trying to put more teeth into their codes of conduct. Nasdaq now requires that listed companies distribute a code to all employees. German software giant SAP’s code informs employees that violations of the code “can result in consequences that affect employment, and could possibly lead to external investigation, civil law proceedings, or criminal charges.” Clearly, codes of conduct are an important part of maintaining an ethical organization.

Sources: Paine, L., Deshpande, R., Margolis, J. D., & Bettcher, K. E. 2005. Up to Code: Does Your Company’s Conduct Meet World Class Standards? Harvard Business Review, 82(12): 122–126; and Stone, A. 2004. Putting Teeth in Corporate Ethics Codes. www.businessweek.com, February 19.

Large corporations are not the only ones to develop and use codes of conduct. Consider the example of Wetherill Associates (WAI), a small, privately held supplier of electrical parts to the automotive market.

Rather than a conventional code of conduct, WAI has a Quality Assurance Manual—a combination of philosophy text, conduct guide, technical manual, and company profile—that describes the company’s commitment to honesty, ethical action, and integrity. WAI doesn’t have a corporate ethics officer, because the company’s corporate ethics officer is Marie Bothe, WAI’s CEO. She sees her main function as keeping the 350-employee company on the path of ethical behavior and looking for opportunities to help the community. She delegates the “technical” aspects of the business—marketing, finance, personnel, and operations—to other members of the organization.70

Reward and Evaluation Systems It is entirely possible for a highly ethical leader to preside over an organization that commits several unethical acts. How? A flaw in the organization’s reward structure may inadvertently cause individuals to act in an inappropriate manner if rewards are seen as being distributed on the basis of outcomes rather than the means by which goals and objectives are achieved.71

Generally speaking, unethical (or illegal) behaviors are also more likely to take place when competition is intense. Some have called this the “dark side of competition.” Consider a couple of examples:72

• Competition among educational institutions for the best student is becoming stiffer. A senior admissions officer at Claremont McKenna College resigned after admitting to inflating SAT scores of the incoming classes for six years. The motive, of course, was to boost the school’s rankings in the U.S. News and World Report’s annual listing of top colleges and universities in the United States. Carmen Nobel, who reported the incident in Working

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Knowledge (a Harvard Business School publication), suggested that the scandal “questions the value of competitive rankings.”

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•   A study of 11,000 New York vehicle emission test facilities found that companies with a greater number of local  competitors passed cars with considerably high emission rates, and lost customers when they failed to pass the  tests. The authors of the study concluded, “In contexts when pricing is restricted, firms use illicit quality as a  business strategy.”

Many  companies  have  developed  reward  and  evaluation  systems  that  evaluate  whether  a  manager  is  acting  in  an  ethical  manner.  For  example,  Raytheon,  a  $24  billion  defense  contractor,  incorporates  the  following  items  in  its  “Leadership Assessment Instrument”:73

•   Maintains unequivocal commitment to honesty, truth, and ethics in every facet of behavior.

•   Conforms with the letter and intent of company policies while working to affect any necessary policy changes.

•   Actions are consistent with words; follows through on commitments; readily admits mistakes.

•   Is trusted and inspires others to be trusted.

As noted by Dan Burnham, Raytheon’s former CEO: “What do we look for in a leadership candidate with respect to  integrity? What we’re really looking for are people who have developed an inner gyroscope of ethical principles. We  look for people for whom ethical thinking is part of what they do—no different from ‘strategic thinking’ or ‘tactical  thinking.’ ”

Policies and Procedures Many situations that a firm faces have regular, identifiable patterns. Leaders tend to handle such routine by establishing a  policy or procedure to be followed that can be applied uniformly to each occurrence. Such guidelines can be useful in  specifying  the  proper  relationships  with  a  firm’s  customers  and  suppliers.  For  example,  Levi  Strauss  has  developed  stringent global sourcing guidelines and Chemical Bank (part of J. P. Morgan Chase Bank) has a policy of forbidding any  review that would determine if suppliers are Chemical customers when the bank awards contracts.

Carefully developed policies and procedures guide behavior so that all employees will be encouraged to behave in an  ethical manner. However, they must be reinforced with effective communication, enforcement, and monitoring, as well  as  sound  corporate  governance  practices.  In  addition,  the  Sarbanes-Oxley  Act  of  2002  provides  considerable  legal  protection to employees of publicly traded companies who report unethical or illegal practices. Provisions in the Act  coauthored by Senator Grassley include:74

•   Make it unlawful to “discharge, demote, suspend, threaten, harass, or in any manner discriminate against ‘a  whistleblower.’ ”

•   Establish criminal penalties of up to 10 years in jail for executives who retaliate against whistleblowers.

•   Require board audit committees to establish procedures for hearing whistleblower complaints.

•   Allow the Secretary of Labor to order a company to rehire a terminated whistleblower with no court hearings  whatsoever.

•   Give a whistleblower the right to a jury trial, bypassing months or years of cumbersome administrative hearings.

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ISSUE FOR DEBATE

Pacific Investment Management Company, LLC (commonly called PIMCO), is an investment firm headquartered in  Newport Beach, California. PIMCO oversees investments on behalf of a wide range of clients, including millions of  retirement savers, public and private pension plans, educational institutions, central banks, foundations and endowments,  among others. With $290 billion in assets, PIMCO Total Return Fund is managed by co-founder and Co-Chief Investment  Officer Bill Gross.

Several years ago, Gross noted a problem brewing that could really affect his investment strategy:

“In 2006, there were signs that this had become a highly leveraged Ponzi economy and that housing was at the pinnacle of  this leverage. The temperature of the U.S. housing market was always the best read here in Orange County (California). But  one day that August, as I was going across the street for my daily yoga exercise, it occurred to me that we needed to get a  feel for the rest of the country.”

Gross’s radical idea was to take 10 of PIMCO’s 40 credit analysts and turn them into “fake” home buyers to see what  was actually happening in the housing market! While they didn’t have a bankroll and had no intention of buying a house,  they each were given a territory that they would visit multiple times a month. These analysts would pretend to be a serious  buyer in order to get information on mortgage lending practices. Over a two-year period, they found that many houses could  be bought with no money down, or without any documentation to prove income. This was occurring all across the country!

Gross admitted that he was “not necessarily proud of the obvious deception.” However, “this little bit of trickery alerted  [PIMCO] to what was really going on—liar loans and extravagant lending practices.” The information these analysts found  was shocking and led PIMCO to stay out of the subprime mortgage market. Although not readily apparent at the time to all,  the housing bubble and subprime mortgage market would later play a key role in the economy’s meltdown.

Discussion Questions

1.   What do you think about the ethics of pretending to buy homes?

2.   Do the means justify the ends?

3.   Was this effective leadership?

Sources: Brady, D. 2011. Etc. Hard choices—Interview with Bill Gross. Bloomberg Businessweek, June 13:88; and Vaishampayan, S. & Collins, M. 2012.  Bill Miller looks to housing for redemption. Bloomberg Businessweek, October 22: 53–54.

Reflecting on Career Implications …

Strategic Leadership: The chapter identifies three interdependent activities that are central to strategic leadership; namely, setting direction, designing the organization, and nurturing a culture dedicated to excellence and ethical behavior. Both during your life as a student and in organizations you work, you have often assumed leadership positions. To what extent have you consciously and successfully engaged in each of these activities? Observe the leaders in your organizations and assess to what extent you can learn from them the qualities of strategic leadership that you can use to advance your own careers.

Power: Identify the sources of power used by your superior at work. How do his or her primary source of power and the way he/she uses it affect your own creativity, morale, and willingness to stay with the organization? In addition, identify approaches you will use to enhance your power as

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you move up your career ladder. Explain why you chose these approaches.

Emotional Intelligence: The chapter identifies the five components of Emotional Intelligence (self-awareness, self-regulation, motivation, empathy, and social skills). How do you rate yourself on each of these components? What steps can you take to improve your Emotional Intelligence and achieve greater career success?

Creating an Ethical Organization: Identify an ethical dilemma that you personally faced in the course of your work. How did you respond to it? Was your response compliance-based, integrity-based, or even unethical? If your behavior was compliance-based, speculate on how it would have been different if it were integrity-based. What have you learned from your experience that would make you a more ethical leader in the future?

summary

Strategic leadership is vital in ensuring that strategies are formulated and implemented in an effective manner. Leaders must play a central role in performing three critical and interdependent activities: setting the direction, designing the organization, and nurturing a culture committed to excellence and ethical behavior. If leaders ignore or are ineffective at performing any one of the three, the organization will not be very successful. We also identified two elements of leadership that contribute to success—overcoming barriers to change and the effective use of power.

For leaders to effectively fulfill their activities, emotional intelligence (EI) is very important. Five elements that contribute to EI are self-awareness, self-regulation, motivation, empathy, and social skill. The first three elements pertain to self-management skills, whereas the last two are associated with a person’s ability to manage relationships with others. We also addressed some of the potential drawbacks from the ineffective use of EI. These include the dysfunctional use of power as well as a tendency to become overly empathetic, which may result in unreasonably lowered performance expectations.

Leaders need to develop competency companions and play a central role in creating a learning organization. Gone are the days when the top-level managers “think” and everyone else in the organization “does.” With rapidly changing, unpredictable, and complex competitive environments, leaders must engage everyone in the ideas and energies of people throughout the organization. Great ideas can come from anywhere in the organization—from the executive suite to the factory floor. The five elements that we discussed as central to a learning organization are inspiring and motivating people with a mission or purpose, empowering people at all levels throughout the organization, accumulating and sharing internal knowledge, gathering external information, and challenging the status quo to stimulate creativity.

In the final section of the chapter, we addressed a leader’s central role in instilling ethical behavior in the organization. We discussed the enormous costs that firms face when ethical crises arise—costs in terms of financial and reputational loss as well as the erosion of human capital and relationships with suppliers, customers, society at large, and governmental agencies. And, as we would expect, the benefits of having a strong ethical organization are also numerous. We contrasted compliance-based and integrity-based approaches to organizational ethics. Compliance-based approaches are largely externally motivated; that is, they are motivated by the fear of punishment for doing something that is unlawful. Integrity-based approaches, on the other hand, are driven by a personal and organizational commitment to ethical behavior. We also addressed the four key elements of an ethical organization: role models, corporate credos and codes of conduct, reward and evaluation systems, and policies and procedures.

SUMMARY REVIEW QUESTIONS 1. Three key activities—setting a direction, designing the organization, and nurturing a culture and ethics—are all part

of what effective leaders do on a regular basis. Explain how these three activities are interrelated. 2. Define emotional intelligence (EI). What are the key elements of EI? Why is EI so important to successful strategic

leadership? Address potential “downsides.”

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3. The knowledge a firm possesses can be a source of competitive advantage. Describe ways that a firm can continuously learn to maintain its competitive position.

4. How can the five central elements of “learning organizations” be incorporated into global companies? 5. What are the benefits to firms and their shareholders of conducting business in an ethical manner? 6. Firms that fail to behave in an ethical manner can incur high costs. What are these costs and what is their source? 7. What are the most important differences between an “integrity organization” and a “compliance organization” in a

firm’s approach to organizational ethics? 8. What are some of the important mechanisms for promoting ethics in a firm?

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key terms

leadership setting a direction designing the organization excellent and ethical organizational culture barriers to change vested interest in the status quo systemic barriers behavioral barriers political barriers personal time constraints power organizational bases of power personal bases of power emotional intelligence (EI) learning organizations benchmarking competitive benchmarking functional benchmarking ethics organizational ethics ethical orientation compliance-based ethics programs integrity-based ethics programs corporate credo

experiential exercise Select two well-known business leaders—one you admire and one you do not. Evaluate each of them on the five characteristics of emotional intelligence.

Emotional Intelligence Characteristics Admired Leader Leader Not Admired

Self-awareness

Self-regulation

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Motivation

Empathy

Social skills

application questions & exercises 1. Identify two CEOs whose leadership you admire. What is it about their skills, attributes, and effective use of power

that causes you to admire them? 2. Founders have an important role in developing their organization’s culture and values. At times, their influence

persists for many years. Identify and describe two organizations in which the cultures and values established by the founder(s) continue to flourish. You may find research on the Internet helpful in answering these questions.

3. Some leaders place a great emphasis on developing superior human capital. In what ways does this help a firm to develop and sustain competitive advantages?

4. In this chapter we discussed the five elements of a “learning organization.” Select a firm with which you are familiar and discuss whether or not it epitomizes some (or all) of these elements.

ethics questions 1. Sometimes organizations must go outside the firm to hire talent, thus bypassing employees already working for the

firm. Are there conditions under which this might raise ethical considerations? 2. Ethical crises can occur in virtually any organization. Describe some of the systems, procedures, and processes that

can help to prevent such crises.

references 1. Kimes, M. 2012. Bad to the bone. Forbes, October 12:140-154; Loftus, P. 2011. 4 former Synthes executives sentenced to prison time for

unapproved bone cement study. www.orthostreams.com, December 13: np; Lotus, P. 2011. Corporate News: Former Synthes officers receive prison sentences. Wall Street Journal, November 22: B4; and Synthes Annual Report, 2011.

2. Charan, R. & Colvin, G. 1999. Why CEOs fail. Fortune, June 21: 68–78. 3. Yukl, G. 2008. How leaders influence organizational effectiveness. Leadership Quarterly, 19(6): 708–722. 4. These three activities and our discussion draw from Kotter, J. P. 1990. What leaders really do. Harvard Business Review, 68(3): 103–111;

Pearson, A. E. 1990. Six basics for general managers. Harvard Business Review, 67(4): 94–101; and Covey, S. R. 1996. Three roles of the leader in the new paradigm. In The leader of the future: 149–160. Hesselbein, F., Goldsmith, M., & Beckhard, R. (Eds.). San Francisco: Jossey-Bass. Some of the discussion of each of the three leadership activity concepts draws on Dess, G. G. & Miller, A. 1993. Strategic management: 320–325. New York: McGraw-Hill.

5. García-Morales, V. J., Lloréns-Montes, F. J., & Verdú-Jover, A. J. 2008. The effects of transformational leadership on organizational

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performance through knowledge and innovation. British Journal of Management, 19(4): 299–319. 6. Day, C., Jr. & LaBarre, P. 1994. GE: Just your average everyday $60 billion family grocery store. Industry Week, May 2: 13–18. 7. Martin, R. 2010. The execution trap. Harvard Business Review, 88(7/8): 64–71. 8. Collins, J. 1997. What comes next? Inc. Magazine. October: 34–45. 9. Hsieh, T. 2010. Zappos’s CEO on going to extremes for customers. Harvard Business Review, 88(7/8): 41–44. 10. Andersen, M. M., Froholdt, M. & Poulfelt, F. 2010. Return on strategy. New York: Routledge; and 2009 Huawei Annual Report. 11. Anonymous. 2006. Looking out for number one. BusinessWeek, October 30: 66. 12. Schaffer, R. H. 2010. Mistakes leaders keep making. Harvard Business Review, 88(9): 86–91. 13. For insightful perspectives on escalation, refer to Brockner, J. 1992. The escalation of commitment to a failing course of action. Academy of

Management Review, 17(1): 39–61; and Staw, B. M. 1976. Knee-deep in the big muddy: A study of commitment to a chosen course of action. Organizational Behavior and Human Decision Processes, 16: 27–44. The discussion of systemic, behavioral, and political barriers draws on Lorange, P. & Murphy, D. 1984. Considerations in implementing strategic control. Journal of Business Strategy, 5: 27–35. In a similar vein, Noel M. Tichy has addressed three types of resistance to change in the context of General Electric: technical resistance, political resistance, and cultural resistance. See Tichy, N. M. 1993. Revolutionalize your company. Fortune, December 13: 114–118. Examples draw from O’Reilly, B. 1997. The secrets of America’s most admired corporations: New ideas and new products. Fortune, March 3: 60–64.

14. This section draws on Champoux, J. E. 2000. Organizational behavior: Essential tenets for a new millennium. London: South-Western; and The mature use of power in organizations. 2003. RHR International-Executive Insights, May 29, 12.19.168.197/execinsights/8-3.htm.

15. An insightful perspective on the role of power and politics in organizations is provided in Ciampa, K. 2005. Almost ready: How leaders move up. Harvard Business Review, 83(1): 46–53.

16. Pfeffer, J. 2010. Power play. Harvard Business Review, 88(7/8): 84–92. 17. Westphal, J. D., & Graebner, M. E. 2010. A matter of appearances: How corporate leaders manage the impressions of financial analysts

about the conduct of their boards. Academy of Management Journal, 53(4): 15–44. 18. A discussion of the importance of persuasion in bringing about change can be found in Garvin, D. A. & Roberto, M. A. 2005. Change

through persuasion. Harvard Business Review, 83(4): 104–113. 19. Lorsch, J. W. & Tierney, T. J. 2002. Aligning the stars: How to succeed when professionals drive results. Boston: Harvard Business School

Press. 20. Some consider EI to be a “trait,” that is, an attribute that is stable over time. However, many authors, including Daniel Goleman, have argued

that it can be developed through motivation, extended practice, and feedback. For example, in D. Goleman, 1998, What makes a leader? Harvard Business Review, 76(5): 97, Goleman addresses this issue in a sidebar: “Can emotional intelligence be learned?”

21. For a review of this literature, see Daft, R. 1999. Leadership: Theory and practice. Fort Worth, TX: Dryden Press. 22. This section draws on Luthans, F. 2002. Positive organizational behavior: Developing and managing psychological strengths. Academy of

Management Executive, 16(1): 57–72; and Goleman, D. 1998. What makes a leader? Harvard Business Review, 76(6): 92–105. 23. EI has its roots in the concept of “social intelligence” that was first identified by E. L. Thorndike in 1920 (Intelligence and its uses. Harper’s

Magazine, 140: 227–235). Psychologists have been uncovering other intelligences for some time now and have grouped them into such clusters as abstract intelligence (the ability to understand and manipulate verbal and mathematical symbols), concrete intelligence (the ability to understand and manipulate objects), and social intelligence (the ability to understand and relate to people). See Ruisel, I. 1992. Social intelligence: Conception and methodological problems. Studia Psychologica, 34(4–5): 281–296. Refer to trochim.human.cornell.edu/gallery.

24. See, for example, Luthans, op. cit.; Mayer, J. D., Salvoney, P., & Caruso, D. 2000. Models of emotional intelligence. In Sternberg, R. J. (Ed.). Handbook of intelligence. Cambridge, UK: Cambridge University Press; and Cameron, K. 1999. Developing emotional intelligence at the Weatherhead School of Management. Strategy: The Magazine of the Weatherhead School of Management, Winter: 2–3.

25. Tate, B. 2008. A longitudinal study of the relationships among self-monitoring, authentic leadership, and perceptions of leadership. Journal of Leadership & Organizational Studies, 15(1): 16–29.

26. Moss, S. A., Dowling, N., & Callanan, J. 2009. Towards an integrated model of leadership and self-regulation. Leadership Quarterly, 20(2): 162–176.

27. An insightful perspective on leadership, which involves discovering, developing and celebrating what is unique about each individual, is found in Buckingham, M. 2005. What great managers do. Harvard Business Review, 83(3): 70–79.

28. Bryant, A. 2011. The corner office. New York: St. Martin’s Griffin, 197. 29. This section draws upon Klemp. G. 2005. Emotional intelligence and leadership: What really matters. Cambria Consulting, Inc.,

www.cambriaconsulting.com. 30. Heifetz, R. 2004. Question authority. Harvard Business Review, 82(1): 37. 31. Our discussion of competency companions draws on: Zenger, J. H., Folkman, J. R., & Edinger, S. K. 2011. Making yourself indispensable.

Harvard Business Review, 89(10): 84–92. 32. Handy, C. 1995. Trust and the virtual organization. Harvard Business Review, 73(3): 40–50.

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33. This section draws upon Dess, G. G. & Picken, J. C. 1999. Beyond productivity. New York: AMACOM. The elements of the learning organization in this section are consistent with the work of Dorothy Leonard-Barton. See, for example, Leonard-Barton, D. 1992. The factory as a learning laboratory. Sloan Management Review, 11: 23–38.

34. Senge, P. M. 1990. The leader’s new work: Building learning organizations. Sloan Management Review, 32(1): 7–23.

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35. Bernoff, J. & Schandler, T. 2010. Empowered. Harvard Business Review, 88(7/8): 94–101. 36. Hammer, M. & Stanton, S. A. 1997. The power of reflection. Fortune, November 24: 291–296. 37. Hannah, S. T. & Lester, P. B. 2009. A multilevel approach to building and leading learning organizations. Leadership Quarterly, 20(1): 34

–48. 38. For some guidance on how to effectively bring about change in organizations, refer to Wall, S. J. 2005. The protean organization: Learning

to love change. Organizational Dynamics, 34(1): 37–46. 39. Covey, S. R. 1989. The seven habits of highly effective people: Powerful lessons in personal change. New York: Simon & Schuster. 40. Kouzes, J. M. & Posner, B. Z. 2009. To lead, create a shared vision. Harvard Business Review, 87(1): 20–21. 41. Kouzes and Posner, op. cit. 42. Melrose, K. 1995. Making the grass greener on your side: A CEO’s journey to leading by servicing. San Francisco: Barrett-Koehler. 43. Tekleab, A. G., Sims Jr., H. P., Yun, S., Tesluk, P. E., & Cox, J. 2008. Are we on the same page? Effects of self-awareness of empowering

and transformational leadership. Journal of Leadership & Organizational Studies, 14(3): 185–201. 44. Helgesen, S. 1996. Leading from the grass roots. In Leader of the future: 19–24 Hesselbein et al. 45. Bowen, D. E. & Lawler, E. E., III. 1995. Empowering service employees. Sloan Management Review, 37: 73–84. 46. Easterby-Smith, M. & Prieto, I. M. 2008. Dynamic capabilities and knowledge management: An integrative role for learning? British

Journal of Management, 19(3): 235–249. 47. Schafer, S. 1997. Battling a labor shortage? It’s all in your imagination. Inc., August: 24. 48. Meyer, P. 1998. So you want the president’s job … Business Horizons, January–February: 2–8. 49. Imperato, G. 1998. Competitive intelligence: Get smart! Fast Company, May: 268–279. 50. Novicki, C. 1998. The best brains in business. Fast Company, April: 125. 51. The introductory discussion of benchmarking draws on Miller, A. 1998. Strategic management: 142–143. New York: McGraw-Hill. 52. Port, O. & Smith, G. 1992. Beg, borrow—and benchmark. BusinessWeek, November 30: 74–75. 53. Main, J. 1992. How to steal the best ideas around. Fortune, October 19: 102–106. 54. Taylor, J. T. 1997. What happens after what comes next? Fast Company, December–January: 84–85. 55. Sheff, D. 1996. Levi’s changes everything. Fast Company, June–July: 65–74. 56. Isaacson, W. 1997. In search of the real Bill Gates. Time, January 13: 44–57. 57. Holt, J. W. 1996. Celebrate your mistakes. New York: McGraw-Hill. 58. McGregor, J. 2006. How failure breeds success. Bloomberg Businessweek, July 10: 42–52. 59. Bryant, A. 2011. The Corner Office. New York: St. Martin’s Griffin, 34. 60. This opening discussion draws upon Conley, J. H. 2000. Ethics in business. In Helms, M. M. (Ed.). Encyclopedia of management (4th ed.):

281–285; Farmington Hills, MI: Gale Group; Paine, L. S. 1994. Managing for organizational integrity. Harvard Business Review, 72(2): 106–117; and Carlson, D. S. & Perrewe, P. L. 1995. Institutionalization of organizational ethics through transformational leadership. Journal of Business Ethics, 14: 829–838.

61. Pinto, J., Leana, C. R., & Pil, F. K. 2008. Corrupt organizations or organizations of corrupt individuals? Two types of organization-level corruption. Academy of Management Review, 33(3): 685–709.

62. Soule, E. 2002. Managerial moral strategies—in search of a few good principles. Academy of Management Review, 27(1): 114–124. 63. Carlson & Perrewe, op. cit. 64. This discussion is based upon Paine. Managing for organizational integrity; Paine, L. S. 1997. Cases in leadership, ethics, and

organizational integrity: A Strategic approach. Burr Ridge, IL: Irwin; and Fontrodona, J. 2002. Business ethics across the Atlantic. Business Ethics Direct, www.ethicsa.org/BED_art_fontrodone.html.

65. For more on operationalizing capabilities to sustain an ethical framework, see Largay III, J. A. & Zhang, R. 2008. Do CEOs worry about being fired when making investment decisions. Academy of Management Perspectives, 22(1): 60–61.

66. See www.ti.com/corp/docs/company/citizen/ethics/benchmark.shtml; and www.ti.com/corp/docs/company/citizen/ethics/quicktest.shtml. 67. Bryant, A. 2011. The corner office. New York: St. Martin’s Griffin, 91. 68. Wetlaufer, S. 1999. Organizing for empowerment: An interview with AES’s Roger Sant and Dennis Bakke. Harvard Business Review, 77

(1): 110–126. 69. For an insightful, academic perspective on the impact of ethics codes on executive decision making, refer to Stevens, J. M., Steensma, H. K.,

Harrison, D. A., & Cochran, P. S. 2005. Symbolic or substantive document? The influence of ethics code on financial executives’ decisions. Strategic Management Journal, 26(2): 181–195.

70. Paine. Managing for organizational integrity.

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71. For a recent study on the effects of goal setting on unethical behavior, read Schweitzer, M. E., Ordonez, L., & Douma, B. 2004. Goal setting as a motivator of unethical behavior. Academy of Management Journal, 47(3): 422–432.

72. Williams, R. 2012. How competition can encourage unethical business practices. business.financialpost.com, July 31: np. 73. Fulmer, R. M. 2004. The challenge of ethical leadership. Organizational Dynamics, 33 (3): 307–317. 74. www.sarbanes-oxley.com.

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PART 3: STRATEGIC IMPLEMENTATION

chapter 12

Managing Innovation and Fostering Corporate Entrepreneurship

After reading this chapter, you should have a good understanding of the following learning objectives:

LO12.1   The importance of implementing strategies and practices that foster innovation.

LO12.2   The challenges and pitfalls of managing corporate innovation processes.

LO12.3   How corporations use new venture teams, business incubators, and product champions to create an  internal environment and culture that promote entrepreneurial development.

LO12.4   How corporate entrepreneurship achieves both financial goals and strategic goals.

LO12.5   The benefits and potential drawbacks of real options analysis in making resource deployment  decisions in corporate entrepreneurship contexts.

LO12.6   How an entrepreneurial orientation can enhance a firm’s efforts to develop promising corporate venture  initiatives.

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Learning from Mistakes

If  you  ask  a  group  of  students  to  name  a  successful  company,  Google  is  likely  to  be  one  of  the  first  firms  mentioned. It dominates online search and advertising, has developed a successful browser, and developed the  operating system that powers 75 percent of the smartphones sold in 2012.1 Its success is evident in its stock  price, which rose from about $350 at the beginning of 2009 to near $800 a share in early 2013. But that doesn’t  mean that Google has been successful at all it has tried. One of Google’s most notable failures occurred when it  tried  to  venture  outside  the  online  and  wireless  markets.  In  2006,  Google  decided  to  expand  its  advertising  business to radio advertising. After spending several hundred million dollars on their entrepreneurial effort in the  radio advertising market, Google pulled the plug on this business in 2009.

Google saw great potential in applying its business model to the radio advertising industry. In the traditional  radio  advertising  model,  companies  that  wished  to  advertise  their  products  and  services  contracted  with  an  advertising agency to develop a set of radio spots (commercials). They then bought blocks of advertising time  from radio stations.

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Advertisers paid based on the number of listeners on each station. Google believed that they could develop a  stronger model. Their design was to purchase large blocks of advertising time from stations. They would then  sell the time in a competitive auction to companies who wished to advertise. Google believed they could sell ad  time to advertisers at a higher rate if they could identify what ads on what stations had the greatest impact for  advertisers. Thus, rather than charging based on audience size, Google would follow the model they used on  the  Web  and  charge  based  on  ad  effectiveness.  To  develop  the  competency  to  measure  ad  effectiveness,  Google purchased dMarc, a company that developed technology to manage and measure radio ads, for $102  million.

Google’s overall vision was even broader. They also planned to enter print and TV advertising. They could  then provide a “dashboard” to marketing executives at firms that would provide information on the effectiveness  of advertising on the Web, TV, print, and radio. Google would then sell them a range of advertising space among  all four to maximize a firm’s ad expenditures.

However,  Google  found  that  their  attempt  to  innovate  the  radio  market  bumped  up  against  two  core  challenges. First,  the radio advertising model was based much more on relationships than online advertising  was.  Radio  stations,  advertising  firms,  and  advertising  agencies  had  long-standing  relationships  that  limited  Google’s ability to break into the market. In fact, few radio stations were willing to sell advertising time to Google.  Also, advertising agencies saw Google as a threat to their business model and were unwilling to buy time from  Google. Second, Google found that their ability to measure the effectiveness of radio ads was limited. Unlike  online markets, where they could measure if people clicked on ads, they found it difficult to measure whether  listeners responded to ads. They tried ads that mentioned specific websites that listeners could go to, but they  found few people accessed these sites. In the end, Google was able to sell radio time at only a fraction of what  radio stations could get from working their traditional advertising deals. This led stations to abandon Google’s  radio business.

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Google found that they had the initiative to innovate the radio market, but they didn’t have the knowledge,  experience, or social connections needed to win in this market.

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Discussion Questions

1.   Why didn’t the lessons Google learned in the online advertising market apply to the radio market?

2.   Radio is  increasingly moving to satellite and streaming systems. Is this a new opportunity for Google, or  should they steer clear of radio altogether?

Managing change is one of the most important functions performed by strategic leaders. There are two major avenues through which companies can expand or improve their business—innovation and corporate entrepreneurship. These two activities go hand-in-hand because they both have similar aims. The first is strategic renewal. Innovations help an organization stay fresh and reinvent itself as conditions in the business environment change. This is why managing innovation is such an important strategic implementation issue. The second is the pursuit of venture opportunities. Innovative breakthroughs, as well as new product concepts, evolving technologies, and shifting demand, create opportunities for corporate venturing. In this chapter we will explore these topics—how change and innovation can stimulate strategic renewal and foster corporate entrepreneurship.

LO12.1

The importance of implementing strategies and practices that foster innovation.

Managing Innovation

One of the most important sources of growth opportunities is innovation. Innovation involves using new knowledge to transform organizational processes or create commercially viable products and services. The sources of new knowledge may include the latest technology, the results of experiments, creative insights, or competitive information. However it comes about, innovation occurs when new combinations of ideas and information bring about positive change.

innovation the use of new knowledge to transform organizational processes or create commercially viable products and services.

The emphasis on newness is a key point. For example, for a patent application to have any chance of success, one of the most important attributes it must possess is novelty. You can’t patent an idea that has been copied. This is a central idea. In fact, the root of the word innovation is the Latin novus, which means new. Innovation involves introducing or changing to something new.2

Among the most important sources of new ideas is new technology. Technology creates new possibilities. Technology provides the raw material that firms use to make innovative products and services. But technology is not the only source of innovations. There can be innovations in human resources, firm infrastructure, marketing, service, or in many other value-adding areas that have little to do with anything “high-tech.” Strategy Spotlight 12.1 highlights a simple but effective innovation by Dutch Boy paints. As the Dutch Boy example suggests, innovation can take many forms.

Types of Innovation Although innovations are not always high-tech, changes in technology can be an important source of change and growth. When an innovation is based on a sweeping new technology, it often has a more far-reaching impact. Sometimes even a small innovation can add value and create competitive advantages. Innovation can and should occur throughout an organization—in every department and all aspects of the value chain.

One distinction that is often used when discussing innovation is between process innovation and product innovation.3

Product innovation refers to efforts to create product designs and applications of technology to develop new products for end users. Recall

product innovation efforts to create product designs and applications of technology to develop new products for end users.

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from Chapter 5 how generic strategies were typically different depending on the stage of the industry life cycle. Product innovations tend to be more common during the earlier stages of an industry’s life cycle. Product innovations are also commonly associated with a differentiation strategy. Firms that differentiate by providing customers with new products or services that offer unique features or quality enhancements often engage in product innovation.

STRATEGY SPOTLIGHT 12.1

DUTCH BOY’S SIMPLE PAINT CAN INNOVATION Sometimes a simple change can make a vast improvement in a product. Any painter knows that getting the paint  can open and pouring out paint without drips are two of the challenges of painting. Dutch Boy addressed this issue  by developing a twist and pour paint container. The all-plastic container has a large, easy-to-use twist-off top and a  handle on the side. The result was a consumer-friendly product that made painting easier and less messy. The  handle also reduces the need for a paint stirring stick since you can mix the paint by shaking the container. Even  though  Dutch  Boy’s  innovation  was  simple,  nontechnological,  and  had  nothing  to  do  with  the  core  product,  the  launch of the new packaging led to articles in 30 national consumer magazines and 60 major newspapers as well as  a story on Good Morning America. The Twist and Pour can was also named “Product of the Year” by USA Today, Bloomberg Businessweek,  and  Better Homes & Gardens.  It  was  also  named  a  winner  of  the  2011  Good  Housekeeping VIP Awards, which commemorate the most innovative products from the past decade.

Sources: 11 Innovative Products from the Past Decade. 2011 The Good Housekeeping Research Institute; and www.fallscommunications.com.

Process innovation, by contrast, is typically associated with improving the efficiency of an organizational process, especially manufacturing systems and operations. By drawing on new technologies and an organization’s accumulated experience (Chapter 5), firms can often improve materials utilization, shorten cycle time, and increase quality. Process innovations are more likely to occur in the later stages of an industry’s life cycle as companies seek ways to remain viable in markets where demand has flattened out and competition is more intense. As a result, process innovations are often associated with overall cost leader strategies, because the aim of many process improvements is to lower the costs of operations.

process innovation efforts to improve the efficiency of organizational processes, especially manufacturing systems and operations.

Another way to view the impact of an innovation is in terms of its degree of innovativeness, which falls somewhere on a continuum that extends from incremental to radical.4

• Radical innovations produce fundamental changes by evoking major departures from existing practices. These breakthrough innovations usually occur because of technological change. They tend to be highly disruptive and can transform a company or even revolutionize a whole industry. They may lead to products or processes that can be patented, giving a firm a strong competitive advantage. Examples include electricity, the telephone, the transistor, desktop computers, fiber optics, artificial intelligence, and genetically engineered drugs.

radical innovation an innovation that fundamentally changes existing practices.

• Incremental innovations enhance existing practices or make small improvements in products and processes. They may represent evolutionary applications within existing paradigms of earlier, more radical innovations. Because they often sustain a company by extending or expanding its product line or manufacturing skills, incremental

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innovations can be a source of competitive advantage by providing new capabilities that minimize expenses or speed productivity. Examples include frozen food, sports drinks, steel-belted radial tires, electronic bookkeeping, shatterproof glass, and digital thermometers.

incremental innovation an innovation that enhances existing practices or makes small improvements in products and processes.

Some innovations are highly radical; others are only slightly incremental. But most innovations fall somewhere between these two extremes (see Exhibit 12.1).

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EXHIBIT 12.1 Continuum of Radical and Incremental Innovations

Harvard Business School Professor Clayton M. Christensen identified another useful approach to characterize types of innovations.5 Christensen draws a distinction between sustaining and disruptive innovations. Sustaining innovations are those that extend sales in an existing market, usually by enabling new products or services to be sold at higher margins. Such innovations may include either incremental or radical innovations. For example, the Internet was a breakthrough technology that transformed retail selling. But rather than disrupting the activities of catalog companies such as Lands’ End and L.L. Bean, the Internet energized their existing business by extending their reach and making their operations more efficient.

By contrast, disruptive innovations are those that overturn markets by providing an altogether new approach to meeting customer needs. The features of a disruptive innovation make it somewhat counterintuitive. Disruptive innovations:

• Are technologically simpler and less sophisticated than currently available products or services.

• Appeal to less demanding customers who are seeking more convenient, less expensive solutions.

• Take time to take effect and only become disruptive once they have taken root in a new market or low-end part of an existing market.

Christensen cites Walmart and Southwest Airlines as two disruptive examples. Walmart started with a single store, Southwest with a few flights. But because they both represented major departures from existing practices and tapped into unmet needs, they steadily grew into ventures that appealed to a new category of customers and eventually overturned the status quo. “Instead of sustaining the trajectory of improvement that has been established in a market,” says Christensen, a disruptive innovation “disrupts it and redefines it by bringing to the market something that is simpler.”6

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Spotlight 12.2 discusses how Aereo is striving to disrupt the TV market by bringing a simpler and cheaper alternative to cable television.

Innovation is a force in both the external environment (technology, competition) and also a factor affecting a firm’s internal choices (generic strategy, value-adding activities).7 Nevertheless, innovation can be quite difficult for some firms to manage, especially those that have become comfortable with the status quo.

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STRATEGY SPOTLIGHT 12.2

AEREO AIMS TO RECONFIGURE THE TV INDUSTRY Over the last few decades, the network TV industry has had a fairly stable business model. While the broadcast  networks transmit their signals over the air, few customers use antennas to capture these signals. Instead, they get  their TV programming from cable and satellite TV service providers. The cable and satellite service providers pay  the TV networks—NBC, ABC, CBS, Fox, and Univision—for the right to broadcast their content to customers. These  cable  and  satellite  service  providers  then  charge  customers  for  these  channels  as  part  of  larger  bundles  of  broadcast and cable channels that they provide.

Barry Diller, the founder of the Fox network, aims to upset this business model with his start-up firm, Aereo. His  firm uses Internet and cloud computing technology to provide local TV service to subscribing customers. For $12 a  month,  Aereo  will  stream  the  local  broadcast  signals  to  customers  to  watch  at  home  or  on  their  PCs  or  tablet  computers. Customers can choose to watch the shows live or later.

However,  it  is  a  violation  of  copyright  laws  for  a  firm  to  rebroadcast  TV  signals  without  the  TV  networks’  permission.  Since  Aereo  doesn’t  pay  the  TV  networks  for  the  signals,  the  networks  have  refused  to  grant  this  permission. How does Aereo get around this issue? It argues it doesn’t rebroadcast the signal. Instead, it puts up a  mini-TV antenna that’s the size of a dime for every customer and saves a unique copy of the TV broadcast for each  subscribing  customer—a  recording  that  customers  retrieve  from  the  cloud  when  they  want  to  watch  the  shows.  Since copyright law allows each user to make a personal copy of broadcast media, Aereo argues that its service is  legal. Each subscribing customer is simply saving her copy remotely using her own personal antenna and cloud  computing account.

The  TV  networks  are  challenging  this  logic.  This  firm  has  the  potential  to  dramatically  disrupt  the  economic  structure of the TV industry since Aereo cuts out the per-customer fees that cable and satellite providers pay. Cable  and satellite firms could also see their business decline because Aereo offers much of what they offer at a lower  cost. To blunt this, the major TV networks have challenged Aereo in court, arguing that they are violating copyright  laws since Aereo, not the end customer, is recording and storing the shows. In essence, according to the networks,  Aereo  is  rebroadcasting  the  signal  over  the  web  to  customers  in  violation  of  the  law.  In  the  initial  federal  court  decision in 2012, Aereo won. However, the TV networks have appealed and are waiting to hear the decision from  the Southern District Court of New York.

While the court case plays out, Aereo is off and running and building its business. In its initial market of New York  City,  Aereo  set  up  over  ten  thousand  mini-antennas  in  a  converted  warehouse  in  Brooklyn  and  has  signed  up  several  thousand customers for  its service. Aereo has raised $63 million in venture capital and plans to roll out  service to 22 additional cities, starting in the spring of 2013.

Sources: Stewart, C. & Marr. M. 2012. High noon for Diller’s Aereo. wsj.com, May 24: np; Poltrack, A. 2012. The Aereo internet TV battle: What’s happening and why it matters. digitaltrends.com, December 16: np; and Kafka, P. 2013. Aereo raises $38 million to take its cord-cutting service to 22 more cities. allthingsd.com, January 8: np.

LO12.2

The challenges and pitfalls of managing corporate innovation processes.

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Challenges of Innovation Innovation is essential to sustaining competitive advantages. Recall from Chapter 3 that one of the four elements of the Balanced Scorecard is the innovation and learning perspective. The extent and success of a company’s innovation efforts are indicators of its overall performance. As management guru Peter Drucker warned, “An established company which, in an age demanding innovation, is not capable of innovation is doomed to decline and extinction.”8 In today’s competitive environment, most firms have only one choice: “Innovate or die.”

As with change, however, firms are often resistant to innovation. Only those companies that actively pursue innovation, even though it is often difficult and uncertain, will get a payoff from their innovation efforts. But managing innovation is challenging.9 As former Pfizer chairman and CEO William Steere puts it: “In some ways, managing innovation is analogous to breaking in a spirited horse. You are never sure of success until you achieve your goal. In the meantime, everyone takes a few lumps.”10

What is it that makes innovation so difficult? The uncertainty about outcomes is one factor. Companies are often reluctant to invest time and resources into activities with an unknown future. Another factor is that the innovation process involves so many choices. These choices present five dilemmas that companies must wrestle with when pursuing innovation.11

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• Seeds versus Weeds. Most companies have an abundance of innovative ideas. They must decide which of these is most likely to bear fruit—the “Seeds”—and which should be cast aside—the “Weeds.” This is complicated by the fact that some innovation projects require a considerable level of investment before a firm can fully evaluate whether they are worth pursuing. Firms need a mechanism with which they can choose among various innovation projects.

• Experience versus Initiative. Companies must decide who will lead an innovation project. Senior managers may have experience and credibility but tend to be more risk averse. Midlevel employees, who may be the innovators themselves, may have more enthusiasm because they can see firsthand how an innovation would address specific problems. Firms need to support and reward organizational members who bring new ideas to light.

• Internal versus External Staffing. Innovation projects need competent staffs to succeed. People drawn from inside the company may have greater social capital and know the organization’s culture and routines. But this knowledge may actually inhibit them from thinking outside the box. Staffing innovation projects with external personnel requires that project managers justify the hiring and spend time recruiting, training, and relationship building. Firms need to streamline and support the process of staffing innovation efforts.

• Building Capabilities versus Collaborating. Innovation projects often require new sets of skills. Firms can seek help from other departments and/or partner with other companies that bring resources and experience as well as share costs of development. However, such arrangements can create dependencies and inhibit internal skills development. Further, struggles over who contributed the most or how the benefits of the project are to be allocated may arise. Firms need a mechanism for forging links with outside parties to the innovation process.

• Incremental versus Preemptive Launch. Companies must manage the timing and scale of new innovation projects. An incremental launch is less risky because it requires fewer resources and serves as a market test. But a launch that is too tentative can undermine the project’s credibility. It also opens the door for a competitive response. A large-scale launch requires more resources, but it can effectively preempt a competitive response. Firms need to make funding and management arrangements that allow for projects to hit the ground running and be responsive to market feedback.

These dilemmas highlight why the innovation process can be daunting even for highly successful firms. Strategy Spotlight 12.3 discusses how Procter & Gamble has been struggling with these challenges to improve its innovativeness. Next, we consider five steps that firms can take to improve the innovation process within the firm.12

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Cultivating Innovation Skills Some firms, such as Apple, Google, and Amazon, regularly produce innovative products and services, while other firms struggle to generate new, marketable products. What separates these innovative firms from the rest of the pack? Jeff Dyer, Hal Gregersen, and Clayton Christensen argue it is the Innovative DNA of the leaders of these firms.13 The leaders of these firms have exhibited “discovery skills” that allow them to see the potential in innovations and to move the organization forward in leveraging the value of those innovations.14 These leaders spend 50 percent more time on these discovery activities than the leaders of less innovative firms. To improve their innovative processes, firms need to cultivate the innovation skills of their managers.

The key attribute that firms need to develop in their managers in order to improve their innovative potential is creative intelligence. Creative intelligence is driven by a core skill

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of associating—the ability to see patterns in data and integrating different questions, information, and insights—and four patterns of action: questioning, observing, experimenting, and networking. As managers practice the four patterns of action, they will begin to develop the skill of association. Dyer and his colleagues offer the following illustration to demonstrate that individuals using these skills are going to develop more-creative, higher-potential innovations.

STRATEGY SPOTLIGHT 12.3

PROCTER & GAMBLE STRIVES TO REMAIN INNOVATIVE From the development of Ivory Soap in 1879; to Crisco Oil, the first all-vegetable shortening, in 1911; to Crest, the  first fluoridated toothpaste in 1955; to the stackable Pringles chips in 1968; to the Swiffer mop in 1998, Procter &  Gamble (P&G) has long been known as a successful innovative firm. It led the market with these products and used  these innovative products to build up its position as a differentiated consumer products firm. By all measures, P&G  is a very successful company and was honored as the Fifth Most Admired Company by Fortune magazine in 2012.  Still,  P&G  has  found  it  challenging  to  remain  innovative.  The  last  major  innovative  blockbuster  product  P&G  launched  was  Crest  Whitestrips,  and  this  product  was  introduced  in  2001.  Instead,  in  recent  years,  their  new  products  have  been  extensions  of  current  products,  such  as  adding  whitening  flecks  to  Crest  toothpaste,  or  derivatives of current products, such as taking the antihistamine in Nyquil and using it as a sleeping aid, labeled  ZzzQuil. With ZzzQuil, P&G is not an innovator in this market, since there were a number of earlier entrants in the  sleep market, such as Johnson & Johnson with its Tylenol PM product. One portfolio manager at a mutual fund  manager derided the ZzzQuil product, saying, “It’s a sign of what passes for innovation at P&G. It’s not enough. It’s  incremental, derivative.”

The factors leading to P&G’s struggles to remain innovative should not be surprising. They largely grow out of the  success the firm has had. First, with its wide range of products, P&G has a wide range of potential new product  extensions and derivatives from which to choose. Though these are unlikely to be blockbusters, they look much  safer  than  truly  new  innovative  ideas.  Second,  while  lower-level  managers  at  P&G  may  be  excited  about  new,  innovative ideas, the division heads of P&G units, who are responsible for developing new products, are likely to shy  away from big-bet product launches. These unit heads are also responsible for and rewarded on current division  performance, a metric that will be negatively affected by the large costs associated with developing and marketing  truly innovative new products. Third, due to its large size, P&G moved R&D responsibilities down to the divisions.  While  this  enhances  the  divisions’  abilities  to  quickly  launch  incrementally  new  products,  it  doesn’t  facilitate  the  collaboration across units often needed to develop boldly new products.

P&G  is  trying  to  address  these  issues  by  centralizing  20  to  30  percent  of  its  research  efforts  within  a  new  corporate-level business creation and innovation unit. Having a corporate effort at innovation separates the budget  for  product  development  from  divisional  profit  numbers,  enhancing  the  firm’s  willingness  to  invest  in  long-term  product development efforts. Also, the corporate unit will be able to foster collaboration between units to develop  blockbuster products.

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Sources: Coleman-Lochner, L. & Hymowitz, C. 2012. At P&G, the innovation well runs dry. Bloomberg Businessweek, September 10: 24–26; and Bussey, J. 2012. The innovator’s enigma. wsj.com, October 4: np.

Imagine that you have an identical twin, endowed with the same brains and natural talents that you have. You’re both given one week to come up with a creative new business-venture idea. During that week, you come up with ideas alone in your room. In contrast, your twin (1) talks with 10 people—including an engineer, a musician, a stay-at-home dad, and a designer—about the venture, (2) visits three innovative start-ups to observe what they do, (3) samples five “new to the market” products, (4) shows a prototype he’s built to five people, and (5) asks the questions “What if I tried this?” and “Why do you do that?” at least 10 times each day during these networking, observing, and experimenting activities. Who do you bet will come up with the more innovative (and doable) ideas?

The point is that by questioning, observing, experimenting, and networking as part of the innovative process, managers will both make better innovation decisions now but, more importantly, start to build the innovative DNA needed to be more successful innovators in the future. As they get into the practice of these habits, decision makers will see opportunities and be more creative as they associate information from different parts of their life,

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different people they come in contact with, and different parts of their organizations. The ability to innovate is not hard- wired into our brains at birth. Research suggests that only one-third of our ability to think creatively is genetic. The other two-thirds is developed over time. Neuroscience research indicates that the brain is “plastic,” meaning it changes over time due to experiences. As managers build up the ability to ask creative questions, develop a wealth of experiences from diverse settings, and link together insights from different arenas of their lives, their brains will follow suit and will build the ability to easily see situations creatively and draw upon a wide range of experiences and knowledge to identify creative solutions. The five traits of the effective innovator are described and examples of each trait are presented in Exhibit 12.2.

Defining the Scope of Innovation Firms must have a means to focus their innovation efforts. By defining the “strategic envelope”—the scope of a firm’s innovation efforts—firms ensure that their innovation efforts are not wasted on projects that are outside the firm’s domain of interest. Strategic

EXHIBIT 12.2 The Innovator’s DNA

Trait Description Example

Associating Innovators have the ability to connect seemingly  unrelated questions, problems, and ideas from  different fields. This allows them to creatively see  opportunities that others miss.

Pierre Omidyar saw the opportunity that led to eBay  when he linked three items: (1) a personal fascination  with creating more efficient markets, (2) his fiancee’s  desire to locate hard to find collectible Pez  dispensers, and (3) the ineffectiveness of local  classified ads in locating such items.

Questioning Innovators constantly ask questions that challenge  common wisdom. Rather than accept the status  quo, they ask “Why not?” or “What if?” This gets  others around them to challenge the assumptions  that limit the possible range of actions the firm can  take.

After witnessing the emergence of eBay and  Amazon, Marc Benioff questioned why computer  software was still sold in boxes rather than leased  with a subscription and downloaded through the  Internet. This was the genesis of Salesforce.com, a  firm with over $2.2 billion in sales in 2012.

Observing Discovery-driven executives produce innovative  business ideas by observing regular behavior of  individuals, especially customers and potential  customers. Such observations often identify  challenges customers face and previously  unidentified opportunities.

From watching his wife struggle to keep track of the  family’s finances, Intuit founder Scott Cook identified  the need for easy-to-use financial software that  provided a single place for managing bills, bank  accounts, and investments.

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Experimenting Thomas Edison once said, “I haven’t failed. I’ve  simply found 10,000 ways that do not work.”  Innovators regularly experiment with new  possibilities, accepting that many of their ideas will  fail. Experimentation can include new jobs, living in  different countries, and new ideas for their  businesses.

Founders Larry Page and Sergey Brin provide time  and resources for Google employees to experiment.  Some, such as the Android cell phone platform, have  been big winners. Others, such as the Orkut and  Buzz social networking systems, have failed. But  Google will continue to experiment with new products  and services.

Networking Innovators develop broad personal networks. They  use this diverse set of individuals to find and test  radical ideas. This can be done by developing a  diverse set of friends. It can also be done by  attending idea conferences where individuals from  a broad set of backgrounds come together to share  their perspectives and ideas, such as the  Technology, Entertainment, and Design (TED)  Conference or the Aspen Ideas Festival.

Michael Lazaridis got the idea for a wireless, email  device that led him to found Research in Motion, now  called Blackberry, from a conference he attended. At  the conference, a speaker was discussing a wireless  system Coca-Cola was using that allowed vending  machines to send a signal when they needed refilling.  Lazaridis saw the opportunity to use the same  concept with email communications, and the idea for  the Blackberry was hatched.

Source: Reprinted by permission of Harvard Business Review. Exhibit from “The Innovator’s DNA,” by J. H. Dyer, H. G. Gregerson and C. M. Christensen. Copyright 2009 by The Harvard Business School Publishing Corporation; all rights reserved.

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enveloping defines the range of acceptable projects. A strategic envelope creates a firm-specific view of innovation that defines how a firm can create new knowledge and learn from an innovation initiative even if the project fails. It also gives direction to a firm’s innovation efforts, which helps separate seeds from weeds and builds internal capabilities.

strategic envelope a firm-specific view of innovation that defines how a firm can create new knowledge and learn from an innovation  initiative even if the project fails.

One way to determine which projects to work on is to focus on a common technology. Then, innovation efforts across the firm can aim at developing skills and expertise in a given technical area. Another potential focus is on a market theme. Consider how DuPont responded to a growing concern for environmentally sensitive products:

In the early 1990s, DuPont sought to use its knowledge of plastics to identify products to meet a growing market demand for biodegradable products. It conducted numerous experiments with a biodegradable polyester resin it named Biomax. By trying different applications and formulations demanded by potential customers, the company was finally able to create a product that could be produced economically and had market appeal. DuPont has continued to extend the Biomax brand and now produces a large line of environmentally sensitive plastics.15

Companies must be clear not only about the kinds of innovation they are looking for but also the expected results. Each company needs to develop a set of questions to ask itself about its innovation efforts:

• How much will the innovation initiative cost?

• How likely is it to actually become commercially viable?

• How much value will it add; that is, what will it be worth if it works?

• What will be learned if it does not pan out?

However a firm envisions its innovation goals, it needs to develop a systematic approach to evaluating its results and learning from its innovation initiatives. Viewing innovation from this perspective helps firms manage the process.16

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Managing the Pace of Innovation Along with clarifying the scope of an innovation by defining a strategic envelope, firms also need to regulate the pace of innovation. How long will it take for an innovation initiative to realistically come to fruition? The project time line of an incremental innovation may be 6 months to 2 years, whereas a more radical innovation is typically long term—10 years or more.17 Radical innovations often begin with a long period of exploration in which experimentation makes strict timelines unrealistic. In contrast, firms that are innovating incrementally in order to exploit a window of opportunity may use a milestone approach that is more stringently driven by goals and deadlines. This kind of sensitivity to realistic time frames helps companies separate dilemmas temporally so they are easier to manage.

Time pacing can also be a source of competitive advantage because it helps a company manage transitions and develop an internal rhythm.18 Time pacing does not mean the company ignores the demands of market timing; instead, companies have a sense of their own internal clock in a way that allows them to thwart competitors by controlling the innovation process. With time pacing, the firm works to develop an internal rhythm that matches the buying practices of customers. For example, for years, Intel worked to develop new microprocessor chips every 18 months. They would have three chips in process at any point in time—one they were producing and selling, one they were currently developing, and one that was just on the drawing board. This pacing also matched the market, because most corporate customers bought new computers about every three years. Thus, customers were then two generations behind in their computing technology, leading them to feel the need to upgrade at the three-year point. In the post-PC era, Apple has developed a similar but faster internal cycle, allowing them to launch a new generation of the iPad on an annual basis.

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This doesn’t mean the aim is always to be faster when innovating. Some projects can’t be rushed. Companies that hurry up their research efforts or go to market before they are ready can damage their ability to innovate—and their reputation. Thus, managing the pace of innovation can be an important factor in long-term success.

Staffing to Capture Value from Innovation People are central to the processes of identifying, developing, and commercializing innovations effectively. They need broad sets of skills as well as experience—experience working with teams and experience working on successful innovation projects. To capture value from innovation activities, companies must provide strategic decision makers with staff members who make it possible.

This insight led strategy experts Rita Gunther McGrath and Thomas Keil to research the types of human resource management practices that effective firms use to capture value from their innovation efforts.19 Four practices are especially important:

• Create innovation teams with experienced players who know what it is like to deal with uncertainty and can help new staff members learn venture management skills.

• Require that employees seeking to advance their career with the organization serve in the new venture group as part of their career climb.

• Once people have experience with the new venture group, transfer them to mainstream management positions where they can use their skills and knowledge to revitalize the company’s core business.

• Separate the performance of individuals from the performance of the innovation. Otherwise, strong players may feel stigmatized if the innovation effort they worked on fails.

There are other staffing practices that may sound as if they would benefit a firm’s innovation activities but may, in fact, be counterproductive:

• Creating a staff that consists only of strong players whose primary experience is related to the company’s core business. This provides too few people to deal with the uncertainty of innovation projects and may cause good ideas to be dismissed because they do not appear to fit with the core business.

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• Creating a staff that consists only of volunteers who want to work on projects they find interesting. Such players are often overzealous about new technologies or overly attached to product concepts, which can lead to poor decisions about which projects to pursue or drop.

• Creating a climate where innovation team members are considered second-class citizens. In companies where achievements are rewarded, the brightest and most ambitious players may avoid innovation projects with uncertain outcomes.

Unless an organization can align its key players into effective new venture teams, it is unlikely to create any differentiating advantages from its innovation efforts.20 An enlightened approach to staffing a company’s innovation efforts provides one of the best ways to ensure that the challenges of innovation will be effectively met. Strategy Spotlight 12.4 describes the approach Air Products and Chemicals Inc. is using to enhance its innovation efforts.

Collaborating with Innovation Partners It is rare for any one organization to have all the information it needs to carry an innovation from concept to commercialization. Even a company that is highly competent with its current operations usually needs new capabilities to achieve new results. Innovation partners provide the skills and insights that are needed to make innovation projects succeed.21

Innovation partners may come from many sources, including research universities and the federal government. Each year the federal government issues requests for proposals (RFPs) asking private companies for assistance in improving services or finding solutions

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to public problems. Universities are another type of innovation partner. Chip-maker Intel, for example, has benefited from underwriting substantial amounts of university research. Rather than hand universities a blank check, Intel bargains for rights to patents that emerge from Intel-sponsored research. The university retains ownership of the patent, but Intel gets royalty-free use of it.22

STRATEGY SPOTLIGHT 12.4

STAFFING FOR INNOVATION SUCCESS AT AIR PRODUCTS When  it  comes  to  implementing  its  innovation  efforts,  Air  Products  and  Chemicals,  Inc.  (APCI)  recognizes  the  importance of staffing for achieving success. Air Products is a global manufacturer of industrial gases, chemicals,  and related equipment. Headquartered in Allentown, Pennsylvania, Air Products has annual sales of $10 billion,  manufacturing  facilities  in  over  30  countries,  and  22,000  employees  worldwide.  The  company  has  a  strong  reputation for effectively embedding innovation into its culture through its unique employee engagement processes.

Ron Pierantozzi, a 30-year veteran of the company and its director of innovation and new product development,  says, “Innovation is about discipline…. It requires a different type of training, different tools and new approaches to  experimentation.”  To  enact  this  philosophy,  Pierantozzi  begins  with  his  people.  He  recruits  people  with  diverse  backgrounds and a wide range of expertise including engineers, entrepreneurs, and government officials. It is made  clear to those on his innovation teams that they will return to mainstream operations after four years—a fact that  most consider a plus since working in the innovation unit usually provides a career boost. He also assures players  that there is no stigma associated with a failed venture because experimentation is highly valued.

Innovation teams are created to manage the company’s  intellectual assets and determine which technologies  have  the  most  potential  value.  A  key  benefit  of  this  approach  has  been  to  more  effectively  leverage  its  human  resources  to  achieve  innovative  outcomes  without  increasing  its  R&D  expenses.  These  efforts  resulted  in  an  innovation award from APQC (formerly known as the American Productivity and Quality Center) which recognizes  companies for exemplary practices that increase productivity.

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Sources: Chesbrough, H. 2007. Why Bad Things Happen to Good Technology. The Wall Street Journal: April 28–29, R11; Leavitt, P. 2005. Delivering the Difference: Business Process Management at APCI. APQC, www.apqc.com; McGrath, R. G. & Keil, T. 2007. The Value Captor’s Process: Getting the Most Out of Your New Business Ventures. Harvard Business Review, May: 128–136; and www.apci.com.

Strategic partnering requires firms to identify their strengths and weaknesses and make choices about which capabilities to leverage, which need further development, and which are outside the firm’s current or projected scope of operations.

To choose partners, firms need to ask what competencies they are looking for and what the innovation partner will contribute.23 These might include knowledge of markets, technology expertise, or contacts with key players in an industry. Innovation partnerships also typically need to specify how the rewards of the innovation will be shared and who will own the intellectual property that is developed.24 Strategy Spotlight 12.5 discusses how Coke and Deka found that they each had only some of the resources needed to take on a bold global initiative, but together they had all the resources needed.

Innovation efforts that involve multiple partners and the speed and ease with which partners can network and collaborate are changing the way innovation is conducted.25 Strategy Spotlight 12.6 outlines how IBM is using crowdsourcing technologies to foster collaboration between employees, customers, suppliers, and other stakeholders to enhance its innovation efforts.

Corporate Entrepreneurship

Corporate entrepreneurship (CE) has two primary aims: the pursuit of new venture opportunities and strategic renewal.26 The innovation process keeps firms alert by exposing them to new technologies, making them aware of marketplace trends, and helping them evaluate new possibilities. CE uses the fruits of the innovation process to help firms

corporate entrepreneurship the creation of new value for a corporation, through investments that create either new sources of competitive advantage  or renewal of the value proposition.

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build new sources of competitive advantage and renew their value propositions. Just as the innovation process helps firms to make positive improvements, corporate entrepreneurship helps firms identify opportunities and launch new ventures.

STRATEGY

SPOTLIGHT 12.5 ENVIRONMENTAL

SUSTAINABILITY

COKE AND DEKA: PARTNERS TO SOLVE THE NEED FOR CLEAN WATER Coca-Cola and DEKA each have an innovative vision. Apart, they are unlikely to reach their visions. Together, they  just may make it happen. Coca-Cola set a goal of replenishing 100 percent of the water used in the production of its  beverages by the year 2020. To get there, they have worked to improve the water efficiency of their plants and  invested in a number of water projects. This has gotten them 35 percent of the way to their goal, but they need to  find ways to add fresh water into the equation. DEKA Research has a vision to provide clean drinking water to areas  of the developing world where clean water is a scarce commodity, but they don’t have the financial resources to  make it happen.

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While we take drinking water for granted in the developed world, 20 percent of the world’s population does not  have access to clean water. Governments and nongovernmental organizations (NGOs) have invested billions of  dollars in major public water projects to take available water from rivers, lakes, and oceans and treat it to provide  drinkable water. But this effort still hasn’t met the need of many. DEKA Research has an innovative solution to this  issue, a water purification system called the Slingshot that is simple, portable, and affordable. Rather than relying on  major, multimillion dollar water projects, this is a low-cost system (about $2,000 each) that can produce 250 gallons  of drinkable water each day, enough for about 300 people, using less electricity than needed to run a blow dryer.  The Slingshot is about the size of a dormitory refrigerator and its technology borrows from a desalination process  used to generate drinking water on naval ships. Using a vapor compression distillation process, the system heats  water  through  multiple  cycles.  This  process  removes  minerals,  heavy  metals,  and  other  contaminants  by  evaporating the water away from the contaminants. It also kills bacteria and viruses through pasteurization of the  water. Still, DEKA faced a major challenge bringing this technology to market. DEKA needed millions of dollars to  build a manufacturing facility to produce the Slingshots.

That is where Coke enters the picture. Coke’s CEO, Muhtar Kent, has pledged to become water neutral as a firm.  “Water is the lifeblood of our business, and our commitment is to ensure we’re doing our part to replenish the water  we use and give it back to communities around the world,” Kent said. Coke sees DEKA as a great partner to reach  their target. Coke has the financial resources to make it happen, but they didn’t have the technology to generate  water in the way that DEKA does. Coke has pledged “tens of millions of dollars” to help DEKA build their plant and  to begin to produce Slingshots. In addition to their financial investment, Coke also has the operational resources to  deliver the Slingshots to areas around the world that have no other access to fresh water. They have already begun  field  testing  the  machines  in  rural  areas  in  South  Africa,  Mexico,  and  Paraguay.  They  hope  to  ramp  up  mass  production of the machines by the middle of 2013. Combined, these two firms appear to have all  the resources  needed to make the Slingshot an innovative and valuable solution in the quest for clean water.

Sources: Copeland, M. V. 2010. Dean Kamen (Still) wants to save the world. Fortune, May 3: 61–62; Nasr, S. L. 2009. How the Slingshot water purifier works. HowStuffWorks.com, July 27: np; Solomon, D. 2012. Dean Kaman’s Slingshot heard ‘round the world. unionleader.com, October 7: np; and Geller, M. 2012. Coke, Segway inventor team up on clean water project. reuters.com, September 25: np.

Corporate new venture creation was labeled “intrapreneuring” by Gifford Pinchot because it refers to building entrepreneurial businesses within existing corporations.27 However, to engage in corporate entrepreneurship that yields above-average returns and contributes to sustainable advantages, it must be done effectively. In this section we will examine the sources of entrepreneurial activity within established firms and the methods large corporations use to stimulate entrepreneurial behavior.

In a typical corporation, what determines how entrepreneurial projects will be pursued? That depends on many factors, including:

• Corporate culture.

• Leadership.

• Structural features that guide and constrain action.

• Organizational systems that foster learning and manage rewards.

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STRATEGY

SPOTLIGHT 12.6

CROWDSOURCING

IBM’S INNOVATION JAM IBM is one of the best known corporations in the world, but their CEO, Samuel Palmisano, saw a major challenge  for  the  firm.  Though  IBM  had  great  ability  to  do  basic  scientific  research  and  owned  the  rights  to  over  40,000 

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patents, they had struggled to translate their patented knowledge into marketable products. Also, they had built a  reputation with  investors as a firm with  incremental product development, not  the reputation needed in dynamic  technological markets. Palmisano saw crowdsourcing as a means to move IBM forward in a bold way.

In 2006, IBM hosted an Innovation Jam, an open event that involved 150,000 IBM employees, family members,  business partners, clients, and university researchers. The jam took place over two 72-hour sessions. Participants  from over 100 countries jammed for 24 hours a day over three days. The discussions were organized around 25  technologies in six broad categories. While the jam discussions were rich in content, it was a challenge for IBM to  pull meaningful data from them. The 24-hour format meant that no single moderator could follow any discussion,  and  the  volume  of  posts  to  the  discussion  threads  left  IBM  with  a  huge  amount  of  data  to  wade  through.  The  discussions  yielded  46,000  potential  business  ideas. To make sense of  the data,  IBM organized the discussion  threads using sophisticated text analysis software and had a team of 50 managers read through the organized data.  Using data from the first session, the managers identified 31 “big ideas.” They further explored these 31 ideas in the  second jam session. IBM then used another set of 50 global managers to review the discussions from the jam.  Teams of managers focused on related groups of ideas, such as health care and the environment.

IBM’s managers saw the jam as serving three purposes. First, it gave individuals both inside and outside IBM  who already had big ideas a forum in which to share their vision with top managers. Second, it gave individuals with  smaller ideas a venue to link up with others with related ideas, resulting in larger major initiatives. For example,  individuals who had ideas about better local weather forecasting, sensing devices for water utilities, and long-term  climate forecasting came together to create “Predictive Water Management,” a comprehensive solution for water  authorities to manage their resources, a business solution no one at IBM had thought of before the jam. Third, the  global structure of the jam allowed IBM, early on, to see how employees, partners, and customers from different  regions had different goals and concerns about possible new businesses. For example, what customers wanted  from systems to manage health care records varied greatly across regions.

Based on the jam sessions, IBM launched 10 new businesses using $100 million in funding. One, the Intelligent  Transportation System, a system that gathers, manages, and disseminates real-time information about metropolitan  transportation  systems  to  optimize  traffic  flow,  has  been  sold  to  transportation  authorities  in  Sweden,  the  UK,  Singapore, Dubai, and Australia. Another, Intelligent Utility Networks, became a core product in IBM’s public utility  business. A third, Big Green, became part of the largest initiative in IBM’s history, a billion-dollar project on better  managing energy and other resources.

Sources: Bjelland, O. M. & Wood, R. C. 2008. An Inside View of IBM’s Innovation Jam. Sloan Management Review. Fall: 32–40; Hempel, J. 2006. Big Blue Brainstorm. BusinessWeek, August 7: 70; Takahashi, D. 2008. IBM’s Innovation Jam 2008 Shows How Far Crowdsourcing Has Come. Businessweek.com, October 9: np.

All of the factors that influence the strategy implementation process will also shape how corporations engage in internal venturing.

Other factors will also affect how entrepreneurial ventures will be pursued.

• The use of teams in strategic decision making.

• Whether the company is product or service oriented.

• Whether its innovation efforts are aimed at product or process improvements.

• The extent to which it is high-tech or low-tech.

Because these factors are different in every organization, some companies may be more involved than others in identifying and developing new venture opportunities.28 These factors will also influence the nature of the CE process.

Successful CE typically requires firms to reach beyond their current operations and markets in the pursuit of new opportunities. It is often the breakthrough opportunities that provide the greatest returns. Such strategies are not without risks, however. In the sections that follow, we will address some of the strategic choice and implementation issues that influence the success or failure of CE activities.

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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 CE activities are isolated from a firm’s existing operations and worked on by independent work units. The second approach is dispersed, in which all parts of the organization and every organization member are engaged in intrapreneurial activities.

LO12.3

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

Focused Approaches to Corporate Entrepreneurship

focused approaches to corporate entrepreneurship corporate entrepreneurship in which the venturing entity is seperated from the other ongoing operations of the firm.

Firms using a focused approach typically separate the corporate venturing activity from the other ongoing operations of the firm. CE is usually the domain of autonomous work groups that pursue entrepreneurial aims independent of the rest of the firm. The advantage of this approach is that it frees entrepreneurial team members to think and act without the constraints imposed by existing organizational norms and routines. This independence is often necessary for the kind of open-minded creativity that leads to strategic breakthroughs. The disadvantage is that, because of their isolation from the corporate mainstream, the work groups that concentrate on internal ventures may fail to obtain the resources or support needed to carry an entrepreneurial project through to completion. Two forms—new venture groups (NVGs) and business incubators—are among the most common types of focused approaches.

New Venture Groups (NVGs) Corporations often form NVGs whose goal is to identify, evaluate, and cultivate venture opportunities. These groups typically function as semi-autonomous units with little formal structure. The new venture group may simply be a committee that reports to the president on potential new ventures. Or it may be organized as a corporate division with its own staff and budget. The aims of the NVG may be open-ended in terms of what ventures it may consider. Alternatively, some corporations use them to promote concentrated effort on a specific problem. In both cases, they usually have a substantial amount of freedom to take risks and a supply of resources to do it with.29

new venture group a group of individuals, or a division within a corporation, that identifies, evaluates, and cultivates venture opportunities.

NVGs usually have a larger mandate than a typical R&D department. Their involvement extends beyond innovation and experimentation to coordinating with other corporate divisions, identifying potential venture partners, gathering resources, and actually launching the venture. Strategy Spotlight 12.7 shows how WD-40 has used an NVG to improve its CE efforts.

Business Incubators The term incubator was originally used to describe a device in which eggs are hatched. Business incubators are designed to “hatch” new businesses. They are a type of corporate NVG with a somewhat more specialized purpose—to support and nurture fledgling entrepreneurial ventures until they can thrive on their own as standalone businesses. Corporations use incubators as a way to grow businesses identified by the NVG. Although they often receive support from many parts of the corporation, they still operate independently until they are strong enough to go it alone. Depending on the type of business, they are either integrated into an existing corporate division or continue to operate as a subsidiary of the parent firm.

business incubator a corporate new venture group that supports and nurtures fledgling entrepreneurial ventures until they can thrive on their  own as stand-alone businesses.

Incubators typically provide some or all of the following five functions.30

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• Funding. Includes capital investments as well as in-kind investments and loans.

• Physical space. Incubators in which several start-ups share space often provide fertile ground for new ideas and collaboration.

• Business services. Along with office space, young ventures need basic services and infrastructure; may include anything from phone systems and computer networks to public relations and personnel management.

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STRATEGY SPOTLIGHT 12.7

USING TEAM TOMORROW TO GROW WD-40 When a hinge squeaks, most people reach for a can of WD-40. The iconic  lubricant  in the blue cans has been  around for over 50 years and commands a 70 percent market share in the spray lubricant business. Garry Ridge,  the CEO of WD-40, quips that “more people use WD-40 every day than use dental floss.” Still, Ridge wanted the  firm to look forward, searching for growth opportunities. Historically, WD-40’s marketing team was responsible for  new product development, but this typically involved minor product changes or new packaging for existing products.

Knowing the incremental focus of the current structure and wanting to get WD-40 focused on bolder new product  opportunities, Ridge created a multifunctional team, dubbed Team Tomorrow, to manage its global CE efforts. This  team includes members from marketing, research, supply chain, purchasing, and distribution. To head the team,  Ridge tapped an experienced executive, Graham Milner, who thought globally and had a marketing background.  There  was  some  resistance  from  the  marketing  staff,  because  they  lost  power  in  the  new  product-development  process. Ridge overcame this in a number of ways. He was active in forming the team, got involved during times of  conflict between Team Tomorrow and other groups in the organization, and carried around an early prototype of the  team’s first product, the No Mess Pen, to show how interested he was in the new product. His involvement signaled  the importance of the team to WD-40. By placing a marketing executive in charge of Team Tomorrow, he signaled  the  importance  of  marketing  to  the  organization.  Milner  and  the  other  team  leader,  Stephanie  Barry,  worked  collaboratively with the head of marketing, instituted an open-door policy, and shared information with marketing.  Collectively, these actions broke down resistance to Team Tomorrow.

Ridge also gave the team a bold goal. He charged the team to create new products that would generate $100  million in sales per year from products developed and launched within the previous three years. As of 2010, the  team had created products that generate $165 million in sales. Ridge also sees a large change in the rest of the firm  as a result of this effort. He sees the firm’s employees as being members of a “tribe” and the organization as a  “living learning laboratory.”

Sources: Ferrarini, E. 2010. WD-40 Company CEO Talks about Rebuilding an Innovative Brand and Taking It Global. Enterprise Leadership, February 27: np; Bounds, G. 2006. WD-40 CEO Repackages a Core Product. Pittsburgh Post Gazette, May 23: np; Govindarajan, V. & Trimble, D. 2010. Stop the Innovation Wars. Harvard Business Review, July–August: 76–83; www.intheboardroom.com.

• Mentoring. Senior executives and skilled technical personnel often provide coaching and experience-based advice.

• Networking. Contact with other parts of the firm and external resources such as suppliers, industry experts, and potential customers facilitates problem solving and knowledge sharing.

Because Microsoft has struggled to reinvigorate its entrepreneurial capabilities, the company has created a business incubator to enhance corporate entrepreneurship efforts.

To encourage entrepreneurship, corporations sometimes need to do more than create independent work groups or venture incubators to generate new enterprises. In some firms, the entrepreneurial spirit is spread throughout the organization.

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Dispersed Approaches to Corporate Entrepreneurship

dispersed approaches to corporate entrepreneurship corporate entrepreunership in which a dedication to the principles and policies of entrepreunership is spread throughout  the organization.

The second type of CE is dispersed. For some companies, a dedication to the principles and practices of entrepreneurship is spread throughout the organization. One advantage of this approach is that organizational members don’t have to be reminded to think entrepreneurially or be willing to change. The ability to change is considered to be a core capability. This leads to a second advantage: Because of the firm’s entrepreneurial reputation, stakeholders such as vendors, customers, or alliance partners can bring new ideas or venture opportunities to anyone in the organization and expect them to be well-received. Such opportunities make it possible for the firm to stay ahead of the competition. However, there are disadvantages as well. Firms that are overzealous about CE sometimes feel they must change for the sake of change, causing them to lose vital competencies or spend heavily on

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R&D and innovation to the detriment of the bottom line. Three related aspects of dispersed entrepreneurship include entrepreneurial cultures that have an overarching commitment to CE activities, resource allotments to support entrepreneurial actions, and the use of product champions in promoting entrepreneurial behaviors.

Entrepreneurial Culture In some large corporations, the corporate culture embodies the spirit of entrepreneurship. A culture of entrepreneurship is one in which the search for venture opportunities permeates every part of the organization. The key to creating value successfully is viewing every value-chain activity as a source of competitive advantage. The effect of CE on a firm’s strategic success is strongest when it animates all parts of an organization. It is found in companies where the strategic leaders and the culture together generate a strong impetus to innovate, take risks, and seek out new venture opportunities.31

entrepreneurial culture corporate culture in which change and renewal are a constant focus of attention.

In companies with an entrepreneurial culture, everyone in the organization is attuned to opportunities to help create new businesses. Many such firms use a top-down approach to stimulate entrepreneurial activity. The top leaders of the organization support programs and incentives that foster a climate of entrepreneurship. Many of the best ideas for new corporate ventures, however, come from the bottom up. Catherine Winder, president of Rainmaker Entertainment, discussed how she welcomes any employee to generate and pitch innovative ideas this way32:

We have an open-door policy for anyone in the company to pitch ideas … to describe their ideas in 15 to 30 seconds. If we like the core idea, we’ll work with them. If you can be concise and come up with your idea in a really clear way, it means you’re on to something.

An entrepreneurial culture is one in which change and renewal are on everybody’s mind. Amazon, 3M, Intel, and Cisco are among the corporations best known for their corporate venturing activities. Many fast-growing young corporations also attribute much of their success to an entrepreneurial culture. But other successful firms struggle in their efforts to remain entrepreneurial. For example, Sony was very successful in their corporate venturing efforts for many years, but more recently they have had great difficulty maintaining their position as an entrepreneurial leader in consumer electronics and computers.

Resource Allotments CE requires the willingness of the firm to invest in the generation and execution of innovative ideas. On the generation side, employees are much more likely to develop these ideas if they have the time to do so. For decades, 3M allowed its engineers free time, up to 15 percent of their work schedule, to work on developing new products.33 Google has followed a similar path with its 70-20-10 rule. Google expects its employees to spend 70 percent of their time on the company’s core, existing product lines. Employees can spend 20 percent of their time on related product spheres in which the company can look to extend its product line. The remaining 10 percent of the time is open.

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This is time the employees can use to think up bold new ideas. According to Larry Page, Google’s CEO, this last 10 percent is “important to let people really be creative and think outside the box.” In addition to time, firms can foster CE by providing monetary investment to fund entrepreneurial ideas. Johnson & Johnson (J&J) uses its Internal Ventures Group to support entrepreneurial ideas developed inside the firm. Entrepreneurs within J&J submit proposals to the group. The review board decides which proposals to fund and then solicits further investments from J&J’s operating divisions. Nike’s Sustainable Business and Innovation Lab and Google’s Ventures Group have a similar charter to review and fund promising corporate entrepreneurship activities. The availability of these time and financing sources can enhance the likelihood of successful entrepreneurial activities within the firm.

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Product Champions CE does not always involve making large investments in start-ups or establishing incubators to spawn new divisions. Often, innovative ideas emerge in the normal course of business and are brought forth and become part of the way of doing business. Entrepreneurial champions are often needed to take charge of internally generated ventures. Product (or project) champions are those individuals working within a corporation who bring entrepreneurial ideas forward, identify what kind of market exists for the product or service, find resources to support the venture, and promote the venture concept to upper management.34

product champion an individual working within a corporation who brings entrepreneurial ideas forward, identifies what kind of market exists  for the product or service, finds resources to support the venture, and promotes the venture concept to upper  management.

When lower-level employees identify a product idea or novel solution, they will take it to their supervisor or someone in authority. A new idea that is generated in a technology lab may be introduced to others by its inventor. If the idea has merit, it gains support and builds momentum across the organization.35 Even though the corporation may not be looking for new ideas or have a program for cultivating internal ventures, the independent behaviors of a few organizational members can have important strategic consequences.

No matter how an entrepreneurial idea comes to light, however, a new venture concept must pass through two critical stages or it may never get off the ground:

1. Project definition. An opportunity has to be justified in terms of its attractiveness in the marketplace and how well it fits with the corporation’s other strategic objectives.

2. Project impetus. For a project to gain impetus, its strategic and economic impact must be supported by senior managers who have experience with similar projects. It then becomes an embryonic business with its own organization and budget.

For a project to advance through these stages of definition and impetus, a product champion is often needed to generate support and encouragement. Champions are especially important during the time after a new project has been defined but before it gains momentum. They form a link between the definition and impetus stages of internal development, which they do by procuring resources and stimulating interest for the product among potential customers.36

Often, they must work quietly and alone. Consider the example of Ken Kutaragi, the Sony engineer who championed the PlayStation.

Even though Sony had made the processor that powered the first Nintendo video games, no one at Sony in the mid-1980s saw any future in such products. “It was a kind of snobbery,” Kutaragi recalled. “For Sony people, the Nintendo product would have been very embarrassing to make because it was only a toy.” But Kutaragi was convinced he could make a better product. He began working secretly on a video game. Kutaragi said, “I realized that if it was visible, it would be killed.” He quietly began enlisting the support of senior executives, such as the head of R&D. He made a case that Sony could use his project to develop capabilities in digital technologies that would be important in the future. It was not until 1994, after years of “underground” development and quiet building of support, that Sony introduced the PlayStation. By the year 2000, Sony had sold 55 million of them, and Kutaragi became CEO of Sony Computer Entertainment. By 2005, Kutagari was Sony’s Chief Operating Officer, and was supervising efforts to launch PS3, the next generation version of the market-leading PlayStation video game console.37

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Product champions play an important entrepreneurial role in a corporate setting by encouraging others to take a chance on promising new ideas.38

Measuring the Success of Corporate Entrepreneurship Activities At this point in the discussion, it is reasonable to ask whether CE is successful. Corporate venturing, like the innovation process, usually requires a tremendous effort. Is it worth it? We consider factors that corporations need to take into consideration when evaluating the success of CE programs. We also examine techniques that companies can use to limit the expense of venturing or to cut their losses when CE initiatives appear doomed.

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LO12.4

How corporate entrepreneurship achieves both financial goals and strategic goals.

Comparing Strategic and Financial CE Goals Not all corporate venturing efforts are financially rewarding. In terms of financial performance, slightly more than 50 percent of corporate venturing efforts reach profitability (measured by ROI) within six years of their launch.39 If this were the only criterion for success, it would seem to be a rather poor return. On the one hand, these results should be expected, because CE is riskier than other investments such as expanding ongoing operations. On the other hand, corporations expect a higher return from corporate venturing projects than from normal operations. Thus, in terms of the risk–return trade-off, it seems that CE often falls short of expectations.40

There are several other important criteria, however, for judging the success of a corporate venture initiative. Most CE programs have strategic goals.41 The strategic reasons for undertaking a corporate venture include strengthening competitive position, entering into new markets, expanding capabilities by learning and acquiring new knowledge, and building the corporation’s base of resources and experience. Three questions should be used to assess the effectiveness of a corporation’s venturing initiatives:42

1. Are the products or services offered by the venture accepted in the marketplace? Is the venture considered to be a market success? If so, the financial returns are likely to be satisfactory. The venture may also open doors into other markets and suggest avenues for other venture projects.

2. Are the contributions of the venture to the corporation’s internal competencies and experience valuable? Does the venture add to the worth of the firm internally? If so, strategic goals such as leveraging existing assets, building new knowledge, and enhancing firm capabilities are likely to be met.43

3. Is the venture able to sustain its basis of competitive advantage? Does the value proposition offered by the venture insulate it from competitive attack? If so, it is likely to place the corporation in a stronger position relative to competitors and provide a base from which to build other advantages.

These criteria include both strategic and financial goals of CE. Another way to evaluate a corporate venture is in terms of the four criteria from the Balanced Scorecard (Chapter 3). In a successful venture, not only are financial and market acceptance (customer) goals met but so are the internal business and innovation and learning goals. Thus, when assessing the success of corporate venturing, it is important to look beyond simple financial returns and consider a well-rounded set of criteria.44

Exit Champions Although a culture of championing venture projects is advantageous for stimulating an ongoing stream of entrepreneurial initiatives, many—in fact, most—of the ideas will not work out. At some point in the process, a majority of initiatives will be abandoned. Sometimes, however, companies wait too long to terminate a new venture and do so only after large sums of resources are used up or, worse, result in a marketplace failure. Motorola’s costly global satellite telecom project known as Iridium provides a useful illustration. Even though problems with the project existed during the lengthy development process, Motorola refused to pull the plug. Only after investing $5 billion and years of effort was the project abandoned.45

One way to avoid these costly and discouraging defeats is to support a key role in the CE process: exit champions. In contrast to product champions and other entrepreneurial enthusiasts within the corporation, exit champions are willing to

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question the viability of a venture project.46 By demanding hard evidence and challenging the belief system that is carrying an idea forward, exit champions hold the line on ventures that appear shaky.

exit champion an individual working within a corporation who is willing to question the viability of a venture project by demanding hard  evidence of venture success and challenging the belief system that carries a venture forward.

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Both product champions and exit champions must be willing to energetically stand up for what they believe. Both put their reputations on the line. But they also differ in important ways.47 Product champions deal in uncertainty and ambiguity. Exit champions reduce ambiguity by gathering hard data and developing a strong case for why a project should be killed. Product champions are often thought to be willing to violate procedures and operate outside normal channels. Exit champions often have to reinstate procedures and re-assert the decision-making criteria that are supposed to guide venture decisions. Whereas product champions often emerge as heroes, exit champions run the risk of losing status by opposing popular projects.

The role of exit champion may seem unappealing. But it is one that could save a corporation both financially and in terms of its reputation in the marketplace. It is especially important because one measure of the success of a firm’s CE efforts is the extent to which it knows when to cut its losses and move on.

LO12.5

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

Real Options Analysis: A Useful Tool

One way firms can minimize failure and avoid losses from pursuing faulty ideas is to apply the logic of real options. Real options analysis (ROA) is an investment analysis tool from the field of finance. It has been slowly, but increasingly, adopted by consultants and executives to support strategic decision making in firms. What does ROA consist of and how can it be appropriately applied to the investments required to initiate strategic decisions? To understand real options it is first necessary to have a basic understanding of what options are.

real options analysis an investment analysis tool that looks at an investment or activity as a series of sequential steps, and for each step the  investor has the option of (a) investing additional funds to grow or accelerate, (b) delaying, (c) shrinking the scale of, or  (d) abandoning the activity.

Options exist when the owner of the option has the right but not the obligation to engage in certain types of transactions. The most common are stock options. A stock option grants the holder the right to buy (call option) or sell (put option) shares of the stock at a fixed price (strike price) at some time in the future.48 The investment to be made immediately is small, whereas the investment to be made in the future is generally larger. An option to buy a rapidly rising stock currently priced at $50 might cost as little as $.50.49 Owners of such a stock option have limited their losses to $.50 per share, while the upside potential is unlimited. This aspect of options is attractive, because options offer the prospect of high gains with relatively small up-front investments that represent limited losses.

The phrase “real options” applies to situations where options theory and valuation techniques are applied to real assets or physical things as opposed to financial assets. Applied to entrepreneurship, real options suggest a path that companies can use to manage the uncertainty associated with launching new ventures. Some of the most common applications of real options are with property and insurance. A real estate option grants the holder the right to buy or sell a piece of property at an established price some time in the future. The actual market price of the property may rise above the established (or strike) price—or the market value may sink below the strike price. If the price of the property goes up, the owner of the option is likely to buy it. If the market value of the property drops below the strike price, the option holder

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is unlikely to execute the purchase. In the latter circumstance, the option holder has limited his or her loss to the cost of the option, but during the life of the option retains the right to participate in whatever the upside potential might be.

Applications of Real Options Analysis to Strategic Decisions The concept of options can also be applied to strategic decisions where management has flexibility. Situations arise where management must decide whether to invest additional funds to grow or accelerate the activity, perhaps delay in order to learn more, shrink the scale of the activity, or even abandon it. Decisions to invest in new ventures or other business activities such as R&D, motion pictures, exploration and production

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of oil wells, and the opening and closing of copper mines often have this flexibility.50 Important issues to note are:

• ROA is appropriate to use when investments can be staged; a smaller investment up front can be followed by subsequent investments. Real options can be applied to an investment decision that gives the company the right, but not the obligation, to make follow-on investments.

• Strategic decision makers have “tollgates,” or key points at which they can decide whether to continue, delay, or abandon the project. Executives have flexibility. There are opportunities to make other go or no-go decisions associated with each phase.

• It is expected that there will be increased knowledge about outcomes at the time of the next investment and that additional knowledge will help inform the decision makers about whether to make additional investments (i.e., whether the option is in the money or out of the money).

Many strategic decisions have the characteristic of containing a series of options. The phenomenon is called “embedded options,” a series of investments in which at each stage of the investment there is a go/no–go decision. Consider the real options logic that Johnson Controls, a maker of car seats, instrument panels, and interior control systems uses to advance or eliminate entrepreneurial ideas.51 Johnson options each new innovative idea by making a small investment in it. To decide whether to exercise an option, the idea must continue to prove itself at each stage of development. Here’s how Jim Geschke, vice president and general manager of electronics integration at Johnson, describes the process:

Think of Johnson as an innovation machine. The front end has a robust series of gates that each idea must pass through. Early on, we’ll have many ideas and spend a little money on each of them. As they get more fleshed out, the ideas go through a gate where a go or no-go decision is made. A lot of ideas get filtered out, so there are far fewer items, and the spending on each goes up…. Several months later each idea will face another gate. If it passes, that means it’s a serious idea that we are going to develop. Then the spending goes way up, and the number of ideas goes way down. By the time you reach the final gate, you need to have a credible business case in order to be accepted. At a certain point in the development process, we take our idea to customers and ask them what they think. Sometimes they say, “That’s a terrible idea. Forget it.” Other times they say, “That’s fabulous. I want a million of them.”

This process of evaluating ideas by separating winning ideas from losing ones in a way that keeps investments low has helped Johnson Controls grow its revenues to over $42 billion a year. Using real options logic to advance the development process is a key way that firms reduce uncertainty and minimize innovation-related failures.52 Real options logic can also be used with other types of strategic decisions. Strategy Spotlight 12.8 discusses how Intel uses real options logic in making capacity expansion decisions.

Potential Pitfalls of Real Options Analysis Despite the many benefits that can be gained from using ROA, managers must be aware of its potential limitations or pitfalls. Below we will address three major issues.53

Agency Theory and the Back-Solver Dilemma Let’s assume that companies adopting a real-options perspective invest heavily in training and that their people understand how to effectively estimate variance—the amount of dispersion or range that is estimated for potential outcomes. Such training can help them use ROA. However, it does not solve another

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inherent problem: managers may have an incentive and the know-how to “game the system.” Most electronic spreadsheets permit users to simply back-solve any formula; that is, you can type in the answer you want and ask what values are needed in a formula to get that answer. If managers know that a certain option value must be met in order for the

back-solver dilemma problem with investment decisions in which managers scheme to have a project meet investment approval criteria, even  though the investment may not enhance firm value.

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proposal to get approved, they can back-solve the model to find a variance estimate needed to arrive at the answer that upper management desires.

STRATEGY SPOTLIGHT 12.8

SAVING MILLIONS WITH REAL OPTIONS AT INTEL The semiconductor business is complex and dynamic. This makes it a difficult one to manage. On the one hand,  both the technology in the chips and the consumer demand for chips are highly volatile. This makes planning for the  future as far as chip designs and the production plants needed difficult. On the other hand, it is incredibly expensive  to build new chip plants, about $5 billion each, and chip manufacturing equipment needs to be ordered well ahead  of when it  is needed. The lead time for ordering new equipment can be up to three years. This creates a great  challenge. Firms have to decide how much and what type of equipment to purchase long before they have a good  handle on what the demand for semiconductor chips will be. Guessing wrong leaves the firm with too much or too  little capacity.

Intel has figured out a way to limit the risk it faces by using option contracts. Intel pays an up-front fee for the right  to purchase key pieces of equipment at a specific future date. At that point, Intel either purchases the equipment or  releases the supplier from the contract. In these cases, the supplier is then free to sell the equipment to someone  else. This all seems fairly simple. A number of commodities, such as wheat and sugar, have robust option markets.  The challenge isn’t in setting up the contracts. It is in pricing those contracts. Unlike wheat and sugar, where a large  number of suppliers and buyers results in an efficient market that sets the prices of standard commodity products,  there  are  few  buyers  and  suppliers  of  chip  manufacturing  equipment.  Further,  the  equipment  is  not  a  standard  commodity. As a result, prices for equipment options are the outcome of difficult negotiations.

Karl Kempf, a mathematician with Intel, has figured out how to make this process smoother. Along with a group  of mathematicians at Stanford, Kempf has developed a computing logic for calculating the price of options. He and  his colleagues create a forecasting model for potential demand. They calculate the likelihood of a range of potential  demand levels. They also set up a computer simulation of a production plant. They then use the possible demand  levels to predict how many pieces of production equipment they will need in the plant to meet the demand. They run  this over and over again, thousands of times, to generate predictions about the likelihood they will need to purchase  a specific piece of equipment. They use this information to identify what equipment they definitely need to order.  Where there is significant uncertainty about the need for equipment, they use the simulation results to identify the  specific equipment for which they need option contracts and the value of those options to Intel. This helps with the  pricing.

Intel estimates that since 2008, the use of options in equipment purchases has saved the firm in excess of $125  million and provided the firm with at least $2 billion in revenue upside for expansions they could have quickly made  using optioned equipment.

Sources: Kempf, K., Erhun, F., Hertzler, E., Rosenberg, T., & Peng, C. 2013. Optimizing capital investment decisions at Intel Corporation, Interfaces, 43(1): 62 –78; and King, I. 2012. A chipmaker’s model mathematician. Bloomberg Businessweek, June 4: 35.

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Agency problems are typically inherent in investment decisions. They may occur when the managers of a firm are separated from its owners—when managers act as “agents” rather than “principals” (owners). A manager may have something to gain by not acting in the owner’s best interests, or the interests of managers and owners are not co-aligned. Agency theory suggests that as managerial and owner interests diverge, managers will follow the path of their own self- interests. Sometimes this is to secure better compensation: Managers who propose projects may believe that if their projects are approved, they stand a much better chance of getting promoted. So while managers have an incentive to propose projects that should be successful, they also have an incentive to propose projects that might be successful. And because of the subjectivity involved in formally modeling a real option, managers may have an incentive to choose variance values that increase the likelihood of approval.

Managerial Conceit: Overconfidence and the Illusion of Control Often, poor decisions are the result of such traps as biases, blind spots, and other human frailties. Much of this literature falls under the concept of managerial conceit.54

managerial conceit biases, blind spots, and other human frailties that lead to poor managerial decisions.

First, managerial conceit occurs when decision makers who have made successful choices in the past come to believe that they possess superior expertise for managing uncertainty. They believe that their abilities can reduce the risks inherent in decision

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making to a much greater extent than they actually can. Such managers are more likely to shift away from analysis to trusting their own judgment. In the case of real options, they can simply declare that any given decision is a real option and proceed as before. If asked to formally model their decision, they are more likely to employ variance estimates that support their viewpoint.

Second, employing the real-options perspective can encourage decision makers toward a bias for action. Such a bias may lead to carelessness. Managerial conceit is as much a problem (if not more so) for small decisions as for big ones. Why? The cost to write the first stage of an option is much smaller than the cost of full commitment, and managers pay less attention to small decisions than to large ones. Because real options are designed to minimize potential losses while preserving potential gains, any problems that arise are likely to be smaller at first, causing less concern for the manager. Managerial conceit could suggest that managers will assume that those problems are the easiest to solve and control—a concern referred to as the illusion of control. Managers may fail to respond appropriately because they overlook the problem or believe that since it is small, they can easily resolve it. Thus, managers may approach each real-option decision with less care and diligence than if they had made a full commitment to a larger investment.

Managerial Conceit: Irrational Escalation of Commitment A strength of a real options perspective is also one of its Achilles heels. Both real options and decisions involving escalation of commitment require specific environments with sequential decisions.55 As the escalation-of-commitment literature indicates, simply separating a decision into multiple parts does not guarantee that decisions made will turn out well. This condition is potentially present whenever the exercise decision retains some uncertainty, which most still do. The decision to abandon also has strong psychological factors associated with it that affect the ability of managers to make correct exercise decisions.56

escalation of commitment the tendency for managers to irrationally stick with an investment, even one that is broken down into a sequential series  of decisions, when investment criteria are not be met.

An option to exit requires reversing an initial decision made by someone in the organization. Organizations typically encourage managers to “own their decisions” in order to motivate them. As managers invest themselves in their decision, it proves harder for them to lose face by reversing course. For managers making the decision, it feels as if they made the wrong decision in the first place, even if it was initially a good decision. The more specific the manager’s human capital becomes, the harder it is to transfer it to other organizations. Hence, there is a greater likelihood that managers will stick around and try to make an existing decision work. They are more likely to continue an existing project even if it should perhaps be ended.57

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Despite the potential pitfalls of a real options approach, many of the strategic decisions that product champions and top managers must make are enhanced when decision makers have an entrepreneurial mind-set.

LO12.6

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

Entrepreneurial Orientation

Firms that want to engage in successful CE need to have an entrepreneurial orientation (EO).58 EO refers to the strategy- making practices that businesses use in identifying and launching corporate ventures. It represents a frame of mind and a perspective toward entrepreneurship that is reflected in a firm’s ongoing processes and corporate culture.59

An EO has five dimensions that permeate the decision-making styles and practices of the firm’s members: autonomy, innovativeness, proactiveness, competitive aggressiveness, and risk taking. These factors work together to enhance a firm’s entrepreneurial performance. But even those firms that are strong in only a few aspects of EO can be very successful.60 Exhibit 12.3 summarizes the dimensions of entrepreneurial orientation. Below, we discuss the five dimensions of EO and how they have been used to enhance internal venture development.

entrepreneurial orientation the practices that businesses us in identifying and launching corporate ventures.

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EXHIBIT 12.3 Dimensions of Entrepreneurial Orientation

Dimension Definition

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

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

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

Competitive  aggressiveness

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

Risk taking Making decisions and taking action without certain knowledge of probable outcomes; some  undertakings may also involve making substantial resource commitments in the process of  venturing forward.

Sources: Dess, G. G. & Lumpkin, G. T. 2005. The Role of Entrepreneurial Orientation in Stimulating Effective Corporate Entrepreneurship. Academy of Management Executive, 19(1): 147–156; Covin, J. G. & Slevin, D. P. 1991. A Conceptual Model of Entrepreneurship as Firm Behavior. Entrepreneurship Theory & Practice, Fall: 7–25; Lumpkin, G. T. and Dess, G. G. 1996. Clarifying the Entrepreneurial Orientation Construct and Linking It to Performance. Academy of Management Review, 21: 135–172; Miller, D. 1983. The Correlates of Entrepreneurship in Three Types of Firms. Management Science, 29: 770 –791.

Autonomy Autonomy refers to a willingness to act independently in order to carry forward an entrepreneurial vision or opportunity. It applies to both individuals and teams that operate outside an organization’s existing norms and strategies. In the context of corporate entrepreneurship, autonomous work units are often used to leverage existing strengths in new arenas,

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identify opportunities that are beyond the organization’s current capabilities, and encourage development of new ventures or improved business practices.61

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

The need for autonomy may apply to either dispersed or focused entrepreneurial efforts. Because of the emphasis on venture projects that are being developed outside of the normal flow of business, a focused approach suggests a working environment that is relatively autonomous. But autonomy may also be important in an organization where entrepreneurship is part of the corporate culture. Everything from the methods of group interaction to the firm’s reward system must make organizational members feel as if they can think freely about venture opportunities, take time to investigate them, and act without fear of condemnation. This implies a respect for the autonomy of each individual and an openness to the independent thinking that goes into championing a corporate venture idea. Thus, autonomy represents a type of empowerment (see Chapter 11) that is directed at identifying and leveraging entrepreneurial opportunities. Exhibit 12.4 identifies two techniques that organizations often use to promote autonomy.

Creating autonomous work units and encouraging independent action may have pitfalls that can jeopardize their effectiveness. Autonomous teams often lack coordination. Excessive decentralization has a strong potential to create inefficiencies, such as duplication of effort and wasting resources on projects with questionable feasibility. For example, Chris Galvin, former CEO of Motorola, scrapped the skunkworks approach the company had been using to develop new wireless phones. Fifteen teams had created 128 different phones, which led to spiraling costs and overly complex operations.62

For autonomous work units and independent projects to be effective, such efforts have to be measured and monitored. This requires a delicate balance: companies must have the patience and budget to tolerate the explorations of autonomous groups and the strength to cut back efforts that are not bearing fruit. It must be undertaken with a clear sense of purpose—namely, to generate new sources of competitive advantage.

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EXHIBIT 12.4 Autonomy Techniques

Autonomy

Technique Description/Purpose Example

Use skunkworks to  foster  entrepreneurial  thinking

Skunkworks are independent work units, often  physically separate from corporate  headquarters. They allow employees to get out  from under the pressures of their daily routines  to engage in creative problem solving.

Overstock.com created a skunkworks to address  the problem of returned merchandise. The  solution was a business within a business:  Overstock auctions. The unit has grown by selling  products returned to Overstock and offers fees 30  percent lower than eBay’s auction service.

Design  organizational  structures that  support independent  action

Established companies with traditional  structures often need to break out of such old  forms to compete more effectively.

Deloitte Consulting, a division of Deloitte Touche  Tohmatsu, found it difficult to compete against  young agile firms. So it broke the firm into small  autonomous units called “chip-aways” that operate  with the flexibility of a start-up. In its first year,  revenues were $40 million—10 percent higher  than its projections.

Sources: Conlin, M. 2006. Square Feet. Oh How Square! BusinessWeek, www.businessweek.com, July 3; Cross, K. 2001. Bang the Drum Quickly. Business 2.0, May: 28–30; Sweeney, J. 2004. A Firm for All Reasons. Consulting Magazine, www.consultingmag.com; and Wagner, M. 2005. Out of the Skunkworks. Internet Retailer, January, www.internetretailer.com.

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Innovativeness Innovativeness refers to a firm’s efforts to find new opportunities and novel solutions. In the beginning of this chapter we discussed innovation; here the focus is on innovativeness—a firm’s attitude toward innovation and willingness to innovate. It involves creativity and experimentation that result in new products, new services, or improved technological processes.63 Innovativeness is one of the major components of an entrepreneurial strategy. As indicated at the beginning of the chapter, however, the job of managing innovativeness can be very challenging.

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

Innovativeness requires that firms depart from existing technologies and practices and venture beyond the current state of the art. Inventions and new ideas need to be nurtured even when their benefits are unclear. However, in today’s climate of rapid change, effectively producing, assimilating, and exploiting innovations can be an important avenue for achieving competitive advantages. Interest in global warming and other ecological concerns has led many corporations to focus their innovativeness efforts on solving environmental problems.

As our earlier discussion of CE indicated, many corporations owe their success to an active program of innovation- based corporate venturing.64 Exhibit 12.5 highlights two of the methods companies can use to enhance their competitive position through innovativeness.

Innovativeness can be a source of great progress and strong corporate growth, but there are also major pitfalls for firms that invest in innovation. Expenditures on R&D aimed at identifying new products or processes can be a waste of resources if the effort does not yield results. Another danger is related to the competitive climate. Even if a company innovates a new capability or successfully applies a technological breakthrough, another company may develop a similar innovation or find a use for it that is more profitable. Finally R&D and other innovation efforts are among the first to be cut back during an economic downturn.

Even though innovativeness is an important means of internal corporate venturing, it also involves major risks, because investments in innovations may not pay off. For strategic managers of entrepreneurial firms, successfully developing and adopting innovations can generate competitive advantages and provide a major source of growth for the firm.

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EXHIBIT 12.5 Innovativeness Techniques

Innovativeness

Technique Description/Purpose Example

Foster creativity and  experimentation

Companies that support idea exploration  and allow employees to express  themselves creatively enhance innovation  outcomes.

To tap into its reserves of innovative talent, Royal  Dutch/Shell created “GameChanger” to help  employees develop promising ideas. The process  provides funding up to $600,000 for would-be  entrepreneurs to pursue innovative projects and  conduct experiments.

Invest in new  technology, R&D, and  continuous  improvement

The latest technologies often provide  sources of new competitive advantages.  To extract value from a new technology,  companies must invest in it.

Dell Computer Corporation’s OptiPlex manufacturing  system revolutionized the traditional assembly line.  Hundreds of custom-built computers can be made in  an eight-hour shift using state of the art automation  techniques that increased productivity per person by  160 percent.

Sources: Breen, B. 2004. Living in Dell Time. Fast Company, November: 88–92: Hammonds, K. H. 2002. Size Is Not a Strategy. Fast Company, August: 78 –83; Perman, S. 2001. Automate or Die. eCompanyNow.com, July; Dell, M. 1999. Direct from Dell. New York: HarperBusiness; and Watson, R. 2006. Expand Your Innovation Horizons. Fast Company, www.fastcompany.com, May.

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Proactiveness Proactiveness refers to a firm’s efforts to seize new opportunities. Proactive organizations monitor trends, identify the future needs of existing customers, and anticipate changes in demand or emerging problems that can lead to new venture opportunities. Proactiveness involves not only recognizing changes but also being willing to act on those insights ahead of the competition.65 Strategic managers who practice proactiveness have their eye on the future in a search for new possibilities for growth and development. Such a forward-looking perspective is important for companies that seek to be industry leaders. Many proactive firms seek out ways not only to be future oriented but also to change the very nature of competition in their industry.

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

Proactiveness puts competitors in the position of having to respond to successful initiatives. The benefit gained by firms that are the first to enter new markets, establish brand identity, implement administrative techniques, or adopt new operating technologies in an industry is called first mover advantage.66

First movers usually have several advantages. First, industry pioneers, especially in new industries, often capture unusually high profits because there are no competitors to drive prices down. Second, first movers that establish brand recognition are usually able to retain their image and hold on to the market share gains they earned by being first. Sometimes these benefits also accrue to other early movers in an industry, but, generally speaking, first movers have an advantage that can be sustained until firms enter the maturity phase of an industry’s life cycle.67

First movers are not always successful. The customers of companies that introduce novel products or embrace breakthrough technologies may be reluctant to commit to a new way of doing things. In his book Crossing the Chasm, Geoffrey A. Moore noted that most firms seek evolution, not revolution, in their operations. This makes it difficult for a first mover to sell promising new technologies.68

Even with these caveats, however, companies that are first movers can enhance their competitive position. Exhibit 12.6 illustrates two methods firms can use to act proactively.

Being an industry leader does not always lead to competitive advantages. Some firms that have launched pioneering new products or staked their reputation on new brands have

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failed to get the hoped-for payoff. Coca-Cola and PepsiCo invested $75 million to launch sodas that would capitalize on the low-carb diet trend. But with half the carbohydrates taken out, neither C2, Coke’s entry, nor Pepsi Edge tasted very good. The two new brands combined never achieved more than one percent market share. PepsiCo halted production in 2005 and Coca-Cola followed suit in 2007.69 Such missteps are indicative of the dangers of trying to proactively anticipate demand. Another danger for opportunity-seeking companies is that they will take their proactiveness efforts too far. For example, Porsche has tried to extend its brand images outside of the automotive arena. While some efforts have worked, such as Porsche-designed T-shirts and sunglasses, other efforts have failed, such as the Porsche-branded golf clubs.

EXHIBIT 12.6 Proactiveness Techniques

Proactiveness

Technique Description/Purpose Example

Introduce new  products or  technological  capabilities ahead of  the competition.

Being a first mover provides  companies with an ability to shape the  playing field and shift competitive  advantages in their favor.

Amazon was able to define the online bookselling market  by entering the market early and defining the user  experience. They further leveraged their position as an  early mover when moving into other retailing ventures and  later into cloud computing.

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Continuously seek  out new product or  service offerings.

Firms that provide new resources or  sources of supply can benefit from a  proactive stance.

Costco seized a chance to leverage its success as a  warehouse club that sells premium brands when it  introduced Costco Home Stores. The home stores are  usually located near its warehouse stores and its rapid  inventory turnover gives it a cost advantage of 15 to 25  percent over close competitors such as Bassett Furniture  and the Bombay Company.

Sources: Bryce, D. J. & Dyer, J. H. 2007. Strategies to Crack Well-Guarded Markets. Harvard Business Review, May: 84–92; Collins, J. C. & Porras, J. I. 1997. Built to Last. New York: HarperBusiness; Robinson, D. 2005. Sony Pushes Reliability in Vaio Laptops. IT Week, www.itweek.co.uk, October 12; and www.sony.com.

Careful monitoring and scanning of the environment, as well as extensive feasibility research, are needed for a proactive strategy to lead to competitive advantages. Firms that do it well usually have substantial growth and internal development to show for it. Many of them have been able to sustain the advantages of proactiveness for years.

Competitive Aggressiveness Competitive aggressiveness refers to a firm’s efforts to outperform its industry rivals. Companies with an aggressive orientation are willing to “do battle” with competitors. They might slash prices and sacrifice profitability to gain market share or spend aggressively to obtain manufacturing capacity. As an avenue of firm development and growth, competitive aggressiveness may involve being very assertive in leveraging the results of other entrepreneurial activities such as innovativeness or proactiveness.

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

Competitive aggressiveness is directed toward competitors. The SWOT analysis discussed in Chapters 2 and 3 provides a useful way to distinguish between these different approaches to CE. Proactiveness, as we saw in the last section, is a response to opportunities—the O in SWOT. Competitive aggressiveness, by contrast, is a response to threats—the T in SWOT. A competitively aggressive posture is important for firms that seek to enter new markets in the face of intense rivalry.

Strategic managers can use competitive aggressiveness to combat industry trends that threaten their survival or market position. Sometimes firms need to be forceful in defending

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the competitive position that has made them an industry leader. Firms often need to be aggressive to ensure their advantage by capitalizing on new technologies or serving new market needs. Exhibit 12.7 suggests two of the ways competitively aggressive firms enhance their entrepreneurial position.

EXHIBIT 12.7 Competitive Aggressiveness Techniques

Competitive Aggressiveness

Technique Description/Purpose Example

Enter markets  with drastically  lower prices.

Narrow operating margins make companies  vulnerable to extended price competition.

Using open-source software, California-based  Zimbra, Inc. has become a leader in messaging  and collaboration software. Its product costs about  one-third less than its direct competitor Microsoft  Exchange. Zimbra generated $4.3 billion in sales in  2012.

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Find successful  business models  and copy them.

As long as a practice is not protected by  intellectual property laws, it’s probably okay to  imitate it. Finding solutions to existing problems  is generally quicker and cheaper than inventing  them.

Best Practices LLC is a North Carolina consulting  group that seeks out best practices and then  repackages and resells them. With annual  revenues in excess of $8 million, Best Practices  has become a leader in continuous improvement  and benchmarking strategies.

Sources: Guth, R. A. 2006. Trolling the Web for Free Labor, Software Upstarts Are New Force. The Wall Street Journal, November 12: 1; Mochari, I. 2001. Steal This Strategy. Inc., July: 62–67; www.best-in-class.com; and www.zimbra.com.

Another practice companies use to overcome the competition is to make preannouncements of new products or technologies. This type of signaling is aimed not only at potential customers but also at competitors to see how they will react or to discourage them from launching similar initiatives. Sometimes the preannouncements are made just to scare off competitors, an action that has potential ethical implications.

Competitive aggressiveness may not always lead to competitive advantages. Some companies (or their CEOs) have severely damaged their reputations by being overly aggressive. Although it continues to be a dominant player, Microsoft’s highly aggressive profile makes it the subject of scorn by some businesses and individuals. Efforts to find viable replacements for the Microsoft products have helped fuel interest in alternative options provided by Google, Apple, and the open-source software movement.70

Competitive aggressiveness is a strategy that is best used in moderation. Companies that aggressively establish their competitive position and vigorously exploit opportunities to achieve profitability may, over the long run, be better able to sustain their competitive advantages if their goal is to defeat, rather than decimate, their competitors.

Risk Taking Risk taking refers to a firm’s willingness to seize a venture opportunity even though it does not know whether the venture will be successful—to act boldly without knowing the consequences. To be successful through corporate entrepreneurship, firms usually have to take on riskier alternatives, even if it means forgoing the methods or products that have worked in the past. To obtain high financial returns, firms take such risks as assuming high levels of debt, committing large amounts of firm resources, introducing new products into new markets, and investing in unexplored technologies.

risk taking making decisions and taking action without certain knowledge of probable outcomes. Some undertakings may also  involve making substantial resource commitments in the process of venturing forward.

All of the approaches to internal development that we have discussed are potentially risky. Whether they are being aggressive, proactive, or innovative, firms on the path of CE must act without knowing how their actions will turn out. Before launching their strategies, corporate entrepreneurs must know their firm’s appetite for risk.71

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

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

• Financial risk taking requires that a company borrow heavily or commit a large portion of its resources in order to grow. In this context, risk is used to refer to the risk/return trade-off that is familiar in financial analysis.

• Personal risk taking refers to the risks that an executive assumes in taking a stand in favor of a strategic course of action. Executives who take such risks stand to influence the course of their whole company, and their decisions also can have significant implications for their careers.

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Even though risk taking involves taking chances, it is not gambling. The best-run companies investigate the consequences of various opportunities and create scenarios of likely outcomes. A key to managing entrepreneurial risks is to evaluate new venture opportunities thoroughly enough to reduce the uncertainty surrounding them. Exhibit 12.8 indicates two methods companies can use to strengthen their competitive position through risk taking.

Risk taking, by its nature, involves potential dangers and pitfalls. Only carefully managed risk is likely to lead to competitive advantages. Actions that are taken without sufficient forethought, research, and planning may prove to be very costly. Therefore, strategic managers must always remain mindful of potential risks. In his book Innovation and Entrepreneurship, Peter Drucker argued that successful entrepreneurs are typically not risk takers. Instead, they take steps to minimize risks by carefully understanding them. That is how they avoid focusing on risk and remain focused on opportunity.72 Risk taking is a good place to close this chapter on corporate entrepreneurship. Companies that choose to grow through internal corporate venturing must remember that entrepreneurship always involves embracing what is new and uncertain.

EXHIBIT 12.8 Risk-Taking Techniques

Risk Taking

Technique Description/Purpose Example

Research and  assess risk  factors to  minimize  uncertainty

Companies that “do their  homework”—that is, carefully  evaluate the implications of bold  actions—reduce the likelihood of  failure.

Graybar Electric Co. took a risk when it invested $144 million to  revamp its distribution system. It consolidated 231 small  centers into 16 supply warehouses and installed the latest  communications network. Graybar is now considered a leader  in facility redesign and its sales have increased steadily since  the consolidation, topping $5 billion in sales in a recent year.

Use techniques  that have worked  in other domains

Risky methods that other companies  have tried may provide an avenue for  advancing company goals.

Autobytel.com, one of the first companies to sell cars online,  decided on an approach that worked well for  others—advertising during the Super Bowl. It was the first dot- com ever to do so and its $1.2 million 30-second ad paid off  well by generating weeks of free publicity and favorable  business press.

Sources: Anonymous. 2006. Graybar Offers Data Center Redesign Seminars. Cabling Installation and Maintenance, www.cim.pennnet.com, September 1; Keenan, F. & Mullaney, T. J. 2001. Clicking at Graybar. BusinessWeek, June 18: 132–34; Weintraub, A. 2001. Make or break for Autobytel. BusinessWeek e.biz, July 9: EB30-EB32; www.autobytel.com; and www.graybar.com.

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ISSUE FOR DEBATE

Microsoft generated $74 billion in sales and nearly $17 billion in profits in 2012 and dominates the market for PC operating system and office suite application software, yet its stock price has been flat for the last 10 years. Why is this the case? Investors have little confidence that Microsoft will produce blockbuster products that will replace its core PC software products as the information technology market moves into the post-PC phase.

It isn’t that Microsoft has failed to generate innovative ideas. The firm spends nearly $9 billion a year on R&D. Over 10 years ago, engineers at Microsoft developed a tablet PC. They also pioneered Web-TV. But they failed to turn these pioneering efforts into marketable products. In markets where they have not pioneered, Microsoft has had limited success with products they’ve designed to meet emerging challengers. The Zune music player was supposed to challenge the iPod but was a flop in the market. Recently, they have also struggled to develop a position in the smartphone market.

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Microsoft has struggled to build and leverage their innovative capabilities into entrepreneurial ventures for at least two reasons. First, the dominance of the Windows and Office software has made it difficult to launch new products. Developers of new products have, at times, had to justify how their new product fit into the core Microsoft product line. Dick Brass, a former VP at Microsoft, stated, “The company routinely manages to frustrate the efforts of its visionary leaders.” Second, Microsoft has a difficult time attracting the top software designers. The firm is not seen as a hip place to work. It is seen by developers as too bureaucratic. And their flat stock price makes it hard to entice top designers with promises of wealth from rising stock options—a common compensation element for attracting technology talent.

In an effort to be more entrepreneurial, Microsoft decided to go outside the boundaries of their existing firm. It set up a business incubator, the Bing Fund. The incubator aims to work with start-up firms working on innovative ideas on Web and mobile software solutions. The managers of the incubator will select a small set of firms to support at any one time. As these firms graduate out of the incubator, new firms will be added. Microsoft will provide capital for these firms, space to work near Microsoft’s campus, access to Microsoft software, mentoring by Microsoft’s programmers and managers, and access to Microsoft’s network. Microsoft promoted the fund, saying the Bing Fund is “backed by the experience, expertise, and resources of Microsoft.” The potential benefit for Microsoft is that they could acquire a larger stake in a start-up firms or acquire the right to software developed by a start-up and use the acquired resources as the foundation for entrepreneurial growth efforts.

Discussion Questions

1. If you headed up a tech start-up, would you want to work with the Bing Fund?

2. Do you think Microsoft will be able to use the innovative ideas developed by firms working in the Bing Fund program and leverage them inside Microsoft to become more entrepreneurial?

3. In the end, will the Bing Fund help Microsoft to become more successful at corporate entrepreneurship?

Sources: Vance, A. 2010. At top of business but just not cool. International Herald Tribune, July 6: 2; Clarke, G. 2010. Inside Microsoft’s innovation crisis. Theregister.co.uk, February 5: np; Blacharski, D. 2012. Microsoft’s Bing Fund takes angel investing to the next level. Itworld.com, July 26: np; and Lardinois, F. 2012. Bing Fund: Microsoft officially launches its new angel fund and incubator program. Techcrunch.com, July 12: np.

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Reflecting on Career Implications …

Innovation: Identify the types of innovations being pursued by your company. Do they tend to be  incremental or radical? Product-related or process-related? Are there ways in which you can add value to  such innovations, no matter how minor your contributions are?

Cultivating Innovation Skills: Exhibit 12.2 describes the five traits of an effective innovator (associating,  questioning, observing, experimenting, and networking). Assess yourself on each of these traits. Practice  the skills in your work and professional life to build your skills as an innovator. If you are interviewing for a  job with an organization that is considered high on innovation, it might be in your interest to highlight these  traits.

Real Options Analysis: Success in your career often depends on creating and exercising career “options.”  However, creation of options involves costs as well, such as learning new skills, obtaining additional  certifications, and so on. Consider what options you can create for yourself. Evaluate the cost of these  options.

Entrepreneurial Orientation: Consider the five dimensions of entrepreneurial orientation. Evaluate  yourself on each of these dimensions (autonomy, innovativeness, proactiveness, competitive  aggressiveness, and risk taking). If you are high on entrepreneurial orientation, you may have a future as an  entrepreneur. Consider the ways in which you can use the experience and learning from your current job to  become a successful entrepreneur in later years.

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summary

To remain competitive in today’s economy, established firms must find new avenues for development and growth. This chapter has addressed how innovation and corporate entrepreneurship can be a means of internal venture creation and strategic renewal, and how an entrepreneurial orientation can help corporations enhance their competitive position.

Innovation is one of the primary means by which corporations grow and strengthen their strategic position. Innovations can take several forms, ranging from radical breakthrough innovations to incremental improvement innovations. Innovations are often used to update products and services or for improving organizational processes. Managing the innovation process is often challenging, because it involves a great deal of uncertainty and there are many choices to be made about the extent and type of innovations to pursue. By cultivating innovation skills, defining the scope of innovation, managing the pace of innovation, staffing to capture value from innovation, and collaborating with innovation partners, firms can more effectively manage the innovation process.

We also discussed the role of corporate entrepreneurship in venture development and strategic renewal. Corporations usually take either a focused or dispersed approach to corporate venturing. Firms with a focused approach usually separate the corporate venturing activity from the ongoing operations of the firm in order to foster independent thinking and encourage entrepreneurial team members to think and act without the constraints imposed by the corporation. In corporations where venturing activities are dispersed, a culture of entrepreneurship permeates all parts of the company in order to induce strategic behaviors by all organizational members. In measuring the success of corporate venturing activities, both financial and strategic objectives should be considered. Real options analysis is often used to make better quality decisions in uncertain entrepreneurial situations. However, a real options approach has potential drawbacks.

Most entrepreneurial firms need to have an entrepreneurial orientation: the methods, practices, and decision-making styles that strategic managers use to act entrepreneurially. Five dimensions of entrepreneurial orientation are found in firms that pursue corporate venture strategies. Autonomy, innovativeness, proactiveness, competitive aggressiveness, and risk taking each make a unique contribution to the pursuit of new opportunities. When deployed effectively, the methods and practices of an entrepreneurial orientation can be used to engage successfully in corporate entrepreneurship and new venture creation. However, strategic managers must remain mindful of the pitfalls associated with each of these approaches.

SUMMARY REVIEW QUESTIONS 1. What is meant by the concept of a continuum of radical and incremental innovations? 2. What are the dilemmas that organizations face when deciding what innovation projects to pursue? What steps can

organizations take to effectively manage the innovation process? 3. What is the difference between focused and dispersed approaches to corporate entrepreneurship? 4. How are business incubators used to foster internal corporate venturing? 5. What is the role of the product champion in bringing a new product or service into existence in a corporation? How

can companies use product champions to enhance their venture development efforts? 6. Explain the difference between proactiveness and competitive aggressiveness in terms of achieving and sustaining

competitive advantage. 7. Describe how the entrepreneurial orientation (EO) dimensions of innovativeness, proactiveness, and risk taking can

be combined to create competitive advantages for entrepreneurial firms.

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Entrepreneurial Orientation Company A Company B

Autonomy

Innovativeness

Proactiveness

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Competitive Aggressiveness

Risk Taking

key terms

innovation product innovation process innovation radical innovation incremental innovation strategic envelope corporate entrepreneurship focused approaches to corporate entrepreneurship new venture group business incubator dispersed approaches to corporate entrepreneurship entrepreneurial culture product champion exit champion real options analysis back-solver dilemma managerial conceit escalation of commitment entrepreneurial orientation autonomy innovativeness proactiveness competitive aggressiveness risk taking

experiential exercise Select two different major corporations from two different industries (you might use Fortune 500 companies to make your selection). Compare and contrast these organizations in terms of their entrepreneurial orientation.

BASED ON YOUR COMPARISON: 1. How is the corporation’s entrepreneurial orientation reflected in its strategy? 2. Which corporation would you say has the stronger entrepreneurial orientation? 3. Is the corporation with the stronger entrepreneurial orientation also stronger in terms of financial performance?

application questions & exercises 1. Select a firm known for its corporate entrepreneurship activities. Research the company and discuss how it has

positioned itself relative to its close competitors. Does it have a unique strategic advantage? Disadvantage? Explain.

2. Explain the difference between product innovations and process innovations. Provide examples of firms that have recently introduced each type of innovation. What are the types of innovations related to the strategies of each firm?

3. Using the Internet, select a company that is listed on the NASDAQ or New York Stock Exchange. Research the extent to which the company has an entrepreneurial culture. Does the company use product champions? Does it

have a corporate venture capital fund? Do you believe its entrepreneurial efforts are sufficient to generate sustainable advantages?

4. How can an established firm use an entrepreneurial orientation to enhance its overall strategic position? Provide examples.

ethics questions 1. Innovation activities are often aimed at making a discovery or commercializing a technology ahead of the

competition. What are some of the unethical practices that companies could engage in during the innovation process? What are the potential long-term consequences of such actions?

2. Discuss the ethical implications of using entrepreneurial policies and practices to pursue corporate social responsibility goals. Are these efforts authentic and genuine or just an attempt to attract more customers?

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