Professional Documents
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Chapter 13
Strategic Entrepreneurship
LEARNING OBJECTIVES
CHAPTER OUTLINE
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LECTURE NOTES
OPENING CASE
Entrepreneurial Fervor and Innovation Drive Disney’s Success
The Opening Case describes how innovation is important to drive organic growth and
generate sustained above-average returns. The Disney Company, best known for its
cartoon characters and theme parks has, in recent years, acquired large companies such as
Pixar, Marvel Entertainment and Lucasfilm, among others. The company has integrated
and built on the innovative capabilities of these highly creative operations to make
Disney one of the largest companies in the entertainment industry. In addition to spurring
innovation within Disney, the acquisition of this diverse portfolio of firms has allowed
the company to reach new markets and increase the overall visibility of the Disney brand.
From developing new animated movies through Pixar to releasing a new Star Wars epic
through Lucasfilm, Disney is finding innovative new ways to reach audiences. As an
example, Disney signed a contract with IMAX Corp. to show the company’s animated
and live-action movies in IMAX theaters. This gives Disney another outlet to deliver
entertainment to the public and an opportunity to increase the company’s value. Disney
has many ways to create profits. Most of them come from innovation and creativity in the
way the company deals with and reaches the consuming public.
Entrepreneurship is the economic engine driving many nations’ economies in the global
competitive landscape. Entrepreneurship and innovation have become important for young
and old, large and small organizations in all types of industries.
* Note
Research conducted by the Center for Entrepreneurial Leadership at the Kauffman
Foundation has shown that in recent years almost 100 percent of the new jobs in the
US have been created by entrepreneurial firms of less than two years of age.
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Because of today’s uncertain environment (i.e., a complex global marketplace), firms cannot
easily predict the future. As a result, they must develop strategic flexibility to have a range of
strategic alternatives they can implement as needed. Creating tomorrow’s business requires a
constant search for emerging opportunities.
*Note
According to Schumpeter, entrepreneurship is a process of “creative destruction,”
through which existing products or methods of production are destroyed and replaced
with new ones. Thus, entrepreneurship is concerned with discovering and exploiting
profitable opportunities.
After identifying opportunities, entrepreneurs take actions to exploit them and establish a
competitive advantage. To do that, actions must be valuable, rare, costly to imitate, and
nonsubstitutable.
INNOVATION
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Peter Drucker argues that innovation is a function of entrepreneurship, as well as the means
that an entrepreneur uses to create wealth-producing resources or enhance the potential of
existing resources for creating wealth.
Entrepreneurship and innovation are important for large and small firms (and start-ups) as
they compete in the new competitive landscape. These are central to creativity, economic
growth, productivity, and job creation.
*Note
Innovation has long been recognized as vital to competitive success. For example,
Henry Ford, founder of Ford Motor Company, observed that, “The competitor to be
feared is one who never bothers about you at all, but goes on making his own
business better all the time. Businesses that grow by development and improvement
do not die. But when a business ceases to be creative, when it believes it has reached
perfection and needs to do nothing but produce—no improvement, no development—
it is done.”
Schumpeter suggested that firms generally engage in three types of innovative activity:
Invention, the act of creating or developing a new product (good or service) or process
idea
Innovation, the process of creating a commercializable product from invention
Imitation, the adoption of innovation by similar firms, which often leads to
standardization of the product or process and lower prices—all of this while maintaining
many of the same features
In the United States in particular, innovation is the most critical of the three types of
innovative activity. Many companies are able to create ideas that lead to inventions, but
commercializing those inventions through innovation has, at times, proved difficult. This
difficulty is suggested by the fact that approximately 80 percent of R&D occurs in large
firms, but these same firms produce fewer than 50 percent of the patents.
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mind-set.
ENTREPRENEURS
Evidence suggests that successful entrepreneurs have an entrepreneurial mind-set. The person
with an entrepreneurial mind-set values uncertainty in the marketplace and seeks to
continuously identify opportunities with the potential to lead to important innovations.
Because it has the potential to lead to continuous innovation, individuals’ entrepreneurial
mind-sets can be a source of competitive advantage for a firm.
Top-level managers should try to establish an entrepreneurial culture that inspires individuals
and groups to engage in corporate entrepreneurship. For example, Steve Jobs of Apple
Computer believed one of his key responsibilities was to help Apple become more
entrepreneurial and more like a start-up.
In most cases, knowledge must be transferred to others in the organization (even in smaller
ventures) to enhance the entrepreneurial competence of the firm. The transfer is likely to be
more difficult in larger firms. Research has shown, however, that units within firms are more
innovative if they have access to new knowledge.
Managers need to develop the capabilities of their human capital to build on their current
knowledge base while incrementally expanding that knowledge.
Developing innovations and achieving success in the marketplace require effective human
capital. In particular, a firm must have strong human capital throughout its workforce if
employees are to develop an entrepreneurial mind-set.
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INTERNATIONAL ENTREPRENEURSHIP
Entrepreneurship is a top priority in many countries of the world (e.g., India, Turkey, United
States).
A recent report reveals that there is a strong positive relationship between the rate of
entrepreneurial activity and economic development in the country.
With increasing globalization, a growing number of new ventures are “born global” (i.e.,
started as an international concern). New ventures that enter international markets to increase
their technological knowledge thereby enhance their performance.
The probability of entering international markets increases when the firm has top executives
with international experience. Furthermore, the firm has a higher likelihood of successfully
competing in international markets when its top executives have international experience.
Because of the learning and economies of scale and scope afforded by operating in
international markets, both young and established internationally diversified firms often are
stronger competitors in their domestic market as well. Additionally, as research has shown,
internationally diversified firms are generally more innovative.
INTERNAL INNOVATION
Most innovation is developed through Research and Development (R&D). In fact, R&D may
be the most critical factor in gaining and sustaining a competitive advantage in some
industries (e.g., pharmaceuticals).
Effective R&D often leads to firms’ filing for patents to protect their innovative work.
Increasingly, successful R&D results from integrating the skills available in the global
workforce. In the years to come, the ability to have a competitive advantage based on
innovation may accrue to firms that are able to meld the talent of human capital from
countries across the world.
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Internal R&D programs often develop ideas outside the laboratory. Firms have learned that
customers, external networks (e.g., scientists outside the company, published research,
alliance partners, etc.), and even public knowledge, can be sources of innovation.
Most innovations are incremental. That is, they build on existing knowledge bases and
provide small improvements in the current product lines. Alternatively, novel or
breakthrough innovations usually provide significant technological changes (breakthroughs)
and create new knowledge. Novel or breakthrough innovations are rare because of the
difficulty and risk involved in developing them.
Internal corporate venturing represents the set of activities used to create inventions and
innovations within a single organization. The internal corporate venturing process is
illustrated in Figure 13.1
Figure 13.1
Model of Internal Corporate Venturing
STRATEGIC FOCUS
Innovation Can Be Quirky
Quirky is a unique new venture founded in 2009 that has been described by some as an
innovation machine—their mission is to commercialize new product ideas. The company
built a social network of inventors and others who were used to evaluate new products for
their feasibility and potential commercial success. At its peak, Quirky received around 4,000
product ideas each week and, by 2015, the company had brought 400 Quirky-generated
products to market. It received funding from some large venture capital firms and by one
major corporate partner, GE, who invested $30 million. Given the response to its products,
the company raised $185 million in venture capital and grew to 300 employees. Although
there was much excitement, Quirky experienced problems. Some of its products failed to
achieve their projected sales in the marketplace and other products had quality issues. Quirky
tried to move its products to the market too quickly. As a result, it lost $120 million and had
to reduce operations to avoid a cash shortage. This included laying off about 20 percent of its
staff. The company decided to focus the brunt of its efforts on appealing almost exclusively
to corporate partners, rather than individual consumers. It is currently trying to focus more of
its efforts on products for the smart home. For example, Quirky’s Wink smartphone and
tablet app provides a dashboard to link and control smart home devices. Quirky now has 15
corporate partners, among them are GE, Honeywell, and Philips, that will offer about 60
Wink-enabled products in the near future.
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*Note
The Strategic Focus should make obvious the point that there is often considerable risk
associated with innovation. You should realize that innovation needs to be focused on
those things that have a compelling customer value proposition that can be verified by
market research.
Autonomous strategic behavior is based on a firm’s knowledge and resources that are the
sources of a firm’s innovation, so a firm’s capabilities and competencies are the basis for new
products and processes.
FIGURE 13.1
Model of Internal Corporate Venturing
Whichever process is followed takes place within and is affected by the structural and
strategic context of the organization.
* Note
The following is another useful example on the topic. Using state-of-the-art
technology and relying in part on autonomous strategic behaviors among some of the
firm’s personnel, Callaway Golf Co. is known for reinventing industries. Callaway
invented the oversize club segment of the golf club industry when it introduced its
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“Big Bertha” club, but the firm has also been seeking to reinvent the golf ball
segment of the golfing industry.
To be effective, an autonomous process for developing new products requires that new
knowledge be continuously diffused throughout the firm. In particular, the diffusion of tacit
knowledge is important for development of more effective new products.
The second approach to creating internal corporate venturing is induced strategic behavior, a
top-down process where the current strategy and structure foster product innovations that are
associated closely with the firm’s current strategy and structure. In other words, strategy is
filtered through the firm’s existing structural hierarchy, a process that leads to internal
innovations that are highly consistent with the firm’s current strategies.
Having processes and structures in place through which a firm can successfully implement
the outcomes of internal corporate ventures and commercialize innovations is critical.
Indeed, the successful introduction of innovations into the marketplace reflects
implementation effectiveness.
*Note
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Some of the core horizontal processes that are critical to innovation efforts are formal; they
may be defined and documented as procedures and practices. More commonly, however,
these processes are informal—that is, these routines or ways of working evolve over time.
Often invisible, informal processes are critical to successful product innovations and are
supported properly through horizontal organizational structures more so than through vertical
organizational structures.
There are two primary barriers that may prevent the use of cross-functional teams as a means
of integrating organizational functions: (1) independent frames of reference of team members
and (2) organizational politics.
Research suggests that functional departments vary along four dimensions: time orientation,
interpersonal orientation, goal orientation, and formality of structure. Thus, individuals from
different functional departments have different orientations on these dimensions and will
view product development activities in different ways.
Political activity may center on allocating resources to different functions. Interunit conflict
may result from aggressive competition for resources among those representing different
organizational functions.
Shared values and effective leadership are important to achieving cross-functional integration
and implementing innovation. Highly effective shared values are framed around the firm’s
vision and mission, and they become the glue that promotes integration between functional
units. Thus, the firm’s culture promotes unity and internal innovation.
Strategic leadership is also highly important for achieving cross-functional integration and
promoting innovation. Leaders set goals and allocate resources. The goals include integrated
development and commercialization of new goods and services. Effective strategic leaders
also ensure a high-quality communication system to facilitate cross-functional integration.
The model in Figure 13.2 shows how value can be created for the firm from internal
processes designed to develop and commercialize new goods and services. An
entrepreneurial mind-set must be developed so that managers and employees will seek to
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identify and exploit opportunities for new goods and services and new markets. Cross-
functional teams are important to promote integrated new product design ideas and
commitment to their implementation thereafter. Effective leadership and shared values
promote integration and vision for innovation and commitment to it. The end result for the
firm is the creation of value for the customers and shareholders through development and
commercialization of new products.
Figure Note
Figure 13.2 illustrates relationships discussed in the chapter that enable the firm to
appropriate value from innovation: barriers to integration, integration facilitating
methods, and the advantages of cross-functional integration. It can either be referred
to in summary form or used to summarize the preceding discussion.
FIGURE 13.2
Creating Value through Internal Innovation Processes
The model in this figure shows how firms can create value from the internal processes they
use to develop and commercialize new goods and services.
An entrepreneurial mind-set is necessary so that managers and employees will consistently
try to identify entrepreneurial opportunities the firm can pursue by developing new goods
and services and new markets.
Cross-functional teams promote integrated new product ideas and commitment to their
implementation.
Effective leadership and shared values promote integration and vision for innovation and
commitment to it.
The end result for the firm is the creation of value for the customers and shareholders by
developing and commercializing new products.
As the model in Figure 13.2 suggests, internal corporate ventures must be effectively
managed to facilitate cross-functional integration so a firm will be able to gain maximum
value from its product design and commercialization efforts.
Virtually all firms lack the breadth and depth of resources (e.g., human capital and social
capital) in their R&D activities to develop internally a sufficient number of innovations.
Firms frequently use cooperative strategies to develop innovations and to quicken the pace at
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which some of their own innovations are distributed. In other instances, they use cooperative
strategies to align what they believe are complementary assets with the potential to lead to
future innovations.
*Note
An alternative to internal innovation is to tap the resources available in other
organizations for the following reasons:
Knowledge is increasing rapidly, making it difficult for firms to remain up-to-date.
This vast knowledge base is also becoming increasingly specialized.
Firms may not possess the knowledge needed to commercialize goods and
services.
Some countries may have access to resources and capabilities that enable firms
located there to create specialized products.
Both entrepreneurial ventures and established firms use cooperative strategies (e.g., strategic
alliances and joint ventures) to innovate. Entrepreneurial ventures, for example, may seek
investment capital as well as established firms’ distribution capabilities to successfully
introduce one of its innovative products to the market. Alternatively, more established
companies may need new technological knowledge and can gain access to it by forming a
cooperative strategy with entrepreneurial ventures.
Alliances formed for the purpose of innovation are not without risks. One important risk is
that a partner will appropriate a firm’s technology or knowledge and use it to enhance its own
competitive abilities. To prevent or at least minimize this risk, firms, particularly new
ventures, need to select their partners carefully.
Firms sometimes acquire companies to gain access to their innovations and to their
innovative capabilities. One reason companies do this is that the capital markets value
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growth; acquisitions provide a means to rapidly extend one or more product lines and
increase the firm’s revenues.
A key risk of acquisitions is that a firm may substitute an ability to buy innovations for an
ability to produce innovations internally. In support of this contention, research shows that
firms engaging in acquisitions introduce fewer new products into the market.
STRATEGIC FOCUS
What Explains the Lack of Innovation at American Express?
American Express (AmEx) had a terrible year in 2014. During the course of the year, the
company lost two large accounts and a major court case. First, AmEx lost its partnership as
the exclusive co-branded credit card with the major retailer Costco. This was a problem for
AmEx because this represented approximately eight percent of the company’s annual
revenue. In addition, the company lost a major court case that ruled it was in ‘restraint of
trade’ and therefore violated antitrust laws. As a result, AmEx may be forced to reduce the
fees charged to merchants in the future, which is projected to reduce revenues even further.
Amex also lost its partnership with Jet Blue in the same year. Furthermore, AmEx has failed
to advance its purchasing technologies in some time; features such as facilitating customers’
car rentals or restaurant reservations has led to some of the company’s most notable and
wealthiest customers switching to competitors’ cards for better rewards and other benefits.
This has had a negative impact on AmEx’s brand image, as it is traditionally known for
capturing and holding some of the wealthiest clientele in the industry. AmEx recently
announced a renewed focus on affluent customers and more benefits for current cardholders.
However, most analysts believe that AmEx revenues are likely to fall over the next year or
two. It is clear that innovation and a new strategy are needed to revive the struggling credit
card company.
*Note: The Strategic Focus should emphasize the necessity for innovation, especially
among larger firms.
Newer entrepreneurial firms often are more effective than larger firms in identifying
opportunities. These firms tend to be more innovative as well because of their flexibility and
willingness to take risks. Alternatively, larger and well-established firms often have more
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By entering global markets that are new to them, firms can learn new technologies and
management practices and diffuse this knowledge throughout the entire enterprise.
Furthermore, the knowledge firms gain can contribute to their innovations. Research has
shown that firms operating in international markets tend to be more innovative.
Research shows that because of its economic importance and individual motives,
entrepreneurial activity is increasing across the globe. Even large, well-known firms are
experiencing significant competition that requires them to innovate if they wish to compete
effectively and survive over time.
*Note: Large firms can take several measures to act small and increase their
innovative capacity. These include the following:
Greater levels of individual autonomy can be created through the restructuring of a
firm into smaller and more manageable units (see Chapter 7).
The additional amounts of creativity and innovation that tend to be witnessed
among those granted more autonomy stimulates autonomous strategic behavior
when a firm pursues innovation through internal corporate ventures.
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