MODULE IN

Strategic Management

11
EHM

SAMCIS

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 “The greatest strategy is

STRAMA
doomed if it is
implemented badly.”
-Bernard Reimann-

COURSE LEARNING OUTCOMES

At the end of the module, you should
be able to:
1. Describe the importance of
implementing strategies and practices
that foster innovation
2. Discuss the challenges and pitfalls of
managing corporate innovation
processes
3. Analyze how corporations use new
venture teams, business incubators,
and product champions to create an
internal environment and culture that
promote entrepreneurial
development
4. Discuss how corporate
entrepreneurship achieves both
STRATEGIC financial goals and strategic goals

MANAGEMENT 5. Discuss and apply the benefits and

potential drawbacks of real options
analysis in making resource
deployment decisions in corporate
entrepreneurship contexts
6. Discuss how an entrepreneurial
orientation can enhance a firm’s
efforts to develop promising corporate
venture initiatives.

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 “As market windows open and close more
quickly, it is important that R&D be tied more
closely to corporate strategy.”
-William Spenser-

Module 11: Managing Innovation and

Fostering Corporate Entrepreneurship

Discussion Outline

Strategic management and leadership are essential for entrepreneurial success. To

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

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

2. The second section addresses corporate entrepreneurship. It describes

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

3. The third section addresses the practical implications of real options theory (ROA)
in the context of corporate venturing. ROA has been found to be a useful tool to
help managers with resource allocation decisions. We also address some
potential drawbacks of ROA.

4. The third section describes the influence of an entrepreneurial orientation on the

venture creation processes. It outlines several practical applications of
entrepreneurial thinking to strategic decision making and cautions about some
of the pitfalls associated with an entrepreneurial frame of mind.

The opening incident, in LEARNING FROM MISTAKES, refers to how Google, a firm
that has developed several successful innovative products, was unable to successfully
innovate in the radio advertising industry. This demonstrates the challenges even successful
firms can have when innovating.

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 Google has developed a very effective online-search advertising model for
corporations. By collecting data on user demographics, interests, and buying habits,
Google is able to target ads to users to increase click through rates and generate
advertising revenue. Several years ago, Google moved to expand its advertising model to
radio and hoped to eventually enter print and TV advertising. Their goal was to provide an
entire suite of advertising options to corporations and provide them with a dashboard with
which to assess the effectiveness of their advertising portfolio. This would allow Google to
tailor an entire range of advertising options to provide a comprehensive advertising
solution to firms.

What Google found was that their business model did not translate well into other
advertising platforms, and after spending several hundred million dollars, they pulled the
plug on this entrepreneurial venture.

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

Response guidelines: Google’s success in online advertising depends on its tracking

consumers’ responses to advertisements and subsequent buying behavior. These data
enable Google to give advertisers a detailed description of the effectiveness of their
advertising. In the radio market, however, despite various attempts, Google could not
gather these data. Therefore, much of the value added to advertisers that Google offered
in online advertising could not apply to the radio environment.

In addition, Google did not have the relationships needed to buy large blocks of
radio airtime. Radio stations already sold most of their airtime to media companies or
advertising agencies, leaving only small blocks of time left for Google. The stations were not
willing to drop these dependable clients for Google. Advertising agencies had less
enthusiasm for selling to Google, as they saw it as a rival.

Also, in the USA, radio advertising is a mature market that has a working system.
Google did not offer radio stations, advertising agencies, or advertisers any new
advantage that would enable it to break into the industry.

I. Managing Innovation

Innovation involves using new knowledge to transform organizational processes or

create commercially viable products and services. The sources of new knowledge may
include the latest technology, the results of experiments, creative insights, or competitive
information. The innovation process needs to be managed.

A. Types of Innovation

There are several ways to characterize innovations. One distinction that is often used
is between product and process innovation. Product innovation refers to efforts to create
product designs and applications of technology to develop new products for end users.
Product innovations are commonly associated with a differentiation strategy. Process

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 innovation, by contrast, is typically associated with improving the efficiency of
organizational processes, especially manufacturing systems and operations. Process
innovations are often associated with overall low-cost leader strategies.

 Discussion Question 2: What are some examples of product and process

innovations? What types of firms are most likely to favor product innovations?
Process innovations?

Innovations can also be viewed in terms of their degree of innovativeness on a

continuum from radical to incremental.

1. Radical innovations. Produce fundamental changes by evoking major

departures from existing practices. These are breakthrough innovations that
can transform a company or even revolutionize an industry.

2. Incremental Innovations. Enhance existing practices or make small

improvements in products and processes. They represent evolutionary rather
than revolutionary applications within existing paradigms.

Another distinction (introduced by Harvard Professor Clayton Christensen) is

between sustaining and disruptive innovations. Sustaining innovations are those that
extend sales in an existing market and may be either radical or incremental. Disruptive
innovations are those that overturn markets by providing an alternative approach to
meeting customer needs. Disruptive innovations tend to:

• Be technologically simpler.
• Appeal to less demanding customers.
• Become disruptive only after they have taken root in a new part of the market.

Southwest Airlines and Wal-Mart are provided as examples of disruptive innovation.

 Discussion Question 3: What can be learned from characterizing innovations in

different ways? How does this help to better understand the strategic implications of
innovation?

B. Challenges of Innovation

Innovation is essential to sustaining competitive advantages, but firms are often

resistant to innovation. Only those companies that actively pursue innovation, even though
it is often difficult and uncertain, will get a pay-off from their innovation efforts.

At times, innovating firms reallocate their innovation resources on an annual basis

(see EXTRA EXAMPLE Below).

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  Extra Example: Is there a Sweet Spot for Reallocating R&D Resources?

When allocating investment resources to units in the corporations, many companies simply
allocate the same level of innovation resources to each unit year in and year out. On
average, companies only alter about 13% of their R&D allocations on a year-to-year basis.
Thus, firms don’t allocate R&D resources actively based on the performance or innovation
prospects in different units. Instead, nearly 90% of the R&D resources a unit receives is
based on last year’s allocation.

However, research by McKinsey & Company suggests there may be a sweet spot for
changes in R&D adjustments. In a study of large corporations (over $1 billion in sales), this
research found that successful innovators typically reallocated between 6% and 30% of the
corporate R&D budget from one division to another each year. In contrast, unsuccessful
innovators most commonly reallocated less than 5% of their R&D budgets year-to-year.

This research suggests that corporate managers who want to maximize the firm’s
innovation potential should not see the annual R&D budgeting cycle as a simple
continuation of prior allocations. They should actively assess the potential in corporate units
and be willing to alter allocations to each unit to match that unit’s opportunities.

Source: Chan, V., de Jong, M., & Ranade, V. 2014. Finding the Sweet Spot for Allocating
Innovation Resources. McKinsey Quarterly. May.

 Discussion Question 4: Why is it important for firms to consider reallocating R&D

resources on a regular basis?

What makes innovation so difficult? Five dilemmas that companies must wrestle with
when pursuing innovation include

1. Seeds versus weeds—Companies must decide which of many ideas is most likely to
bear fruit —the “Seeds” —and which should be cast aside —the “Weeds.”
2. Experience versus initiative—Senior managers have experience and credibility but
tend to be risk averse; mid-level employees may be overly enthusiastic but see the
value of the innovation first-hand.
3. Internal versus external staffing—Insiders may have social capital but fail to think
outside the box; outsiders need time to train and build relationships.
4. Building capabilities versus collaborating—Internal development is costly and time-
consuming but helps firms maintain control; partnering brings resources and
experience but may result in conflict.
5. Incremental versus pre-emptive launch—Incremental launches are less risky but
may not pay off; large-scale launches are riskier but may pre-empt competitive
responses.

 Discussion Question 5: What are some examples of other companies that you are
familiar with that have faced these dilemmas? Can you apply any of these

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 dilemmas to your own business life or life as a student?

Innovative companies must be able to effectively manage innovation: embracing

the tension between creativity and efficiency rather than struggling with it. Toyota is an
example of a company that explores and experiments with new things but at the same
time being able to exploit efficiencies sin ongoing operations. PIXAR is also a company that
is quite successful in managing innovations.

 Discussion Question 6: Recall from Module 8 that one of the keys to entrepreneurial
success is to “do more with less.” In your opinion, is it possible to be both highly
innovative and highly efficient? Why or why not?

Discussion Question 7: What are some examples of companies that you are familiar
with that have highly innovative products (or services) but relatively low costs. What
accounts for their ability to do that?

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

C. Cultivating Innovation Skills

The ability to think innovatively can be developed in managers. Jeff Dyer and his
colleagues discuss the need to cultivate the Innovative DNA of managers. They identify
five traits that managers should build on to be more innovative.

• Associating: The ability to integrate questions and ideas that, to others, appear
random and unrelated.
• Questioning: The practice of questioning the status quo and taken for granted
assumptions that exist within firm and industries.
• Observing: The behavior of regularly observing customers and potential
customers to identify their unmet needs and desires.
• Experimenting: The willingness to try and fail regularly with new innovations.
Innovators see experimentation, failure, and learning as the foundation for
successful innovations.
• Networking: Building diverse networks of friends and colleagues to get a range
of insights and observations that serve to identify innovative opportunities and
solutions.

 Discussion Question 8: Is it more important for entrepreneurs to develop these traits

or for managers of large, established firms?

D. Defining the Scope of Innovation

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

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 interest. DuPont’s biodegradable plastics are presented as an example.

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

• How much will the innovation initiative cost?
• How likely is it to actually become commercially viable?
• How much value will it add; that is, what will it be worth if it works?
• What will be learned if it does not pan out?

 Discussion Question 9: If a company were to invest a large amount of time and

money on a potential innovation that did not work out, would you consider it a
failure? Why or why not? What factors would you consider to assess whether it was a
failure?

E. Managing the Pace of Innovation

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

F. Staffing to Capture Value from Innovation

People are central to the process of identifying, developing, and commercializing

innovations. Human resource practices that support innovation help companies effectively
capture value from innovation activities.

Four practices identified by researchers Rita McGrath and Thomas Keil include:
• Include experienced staffers on innovation teams to mentor new staffers.
• Use membership on innovation teams to advance careers.
• Transfer innovation members to mainstream activities to help revitalize core
activities.
• Separate performance of individuals from the performance of the innovation when
evaluating outcomes.

HR practices to avoid include:

• Using only experienced mainstream players on innovation teams.
• Using only volunteers on innovation projects.
• Creating a climate where innovation teams members feel “second class.”

 Discussion Question 10: What are examples that you are familiar with of other HR
practices that companies have used to enhance their innovation activities?

Thus, it is important for a company to manage the human resources to contribute to

a company’s innovation efforts.

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  Discussion Question 11: What other factors determine how effectively an innovation
team performs?

G. Collaborating with Innovation Partners

Innovation partners can provide skills and insights that are often needed to make
innovation projects succeed. Strategic partnering has other benefits as well. It requires firms
to identify their strengths and weaknesses and make choices about which capabilities to
leverage, which need further development, and which are outside the firm’s current or
projected scope of operations.
Firms need a mechanism to help decide whom to partner with. Firms need to ask
what competencies they are looking for and what the innovation partner will contribute.
Innovation partnerships also need to specify how the rewards of the innovation will be
shared and who will own the intellectual property that is developed.

 Discussion Question 12: What are some examples that you are familiar with of
companies that have joined forces in order to collaborate on an innovation? What
was the outcome of the collaboration?

Discussion Question 13: What are some of the reasons a company would chose to
partner on an innovation project?

Discussion Question 14: What is the downside of partnering for the purpose of
product or process innovation?

 Discussion Question 15: What type of fears and concerns prevent companies from
using a crowdsourcing approach to developing new products and processes? Are
these fears and concerns valid? Why or why not? If so, can a company thrive using
the traditional “closed” approach to innovation? If not, how can companies
overcome their fears and concerns?

In the SUPPLEMENT/EXTRA EXAMPLE below, we discuss how pharmaceutical firms

scour the globe for new innovative compounds to solve diseases.

 Extra Example: The Role of Pharmaceutical Scouts in Keeping Big Drug Firms Innovative

Sports teams have long used scouts to travel around the world looking for up and coming
talent that will serve as the future lifeblood of major league teams. Pharmaceutical firms
are now following the same path, employing scouts who travel around assessing the
potential of new drugs being developed around the world and signing them to the
pharma firm’s “team” before competitors can.

In the past, large pharma firms preferred to develop drugs in house. But these firms have
found limited success in developing blockbuster new treatments to treat challenging
diseases, such as diabetes, cancer, and Alzheimer’s. This has led the firms to increasingly
look to outside partners with early stage development drugs as partners. As a result, over
1/3 of the drugs being developed in large pharma firms were initially discovered outside

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 the firms. To accomplish the task, the major pharma firms have developed staffs of
scientists and researchers who are experts in different diseases and technologies. They then
send out these scouts to attend conferences, listen to talks, develop relationships with
researchers in small firms and university labs so that the firm can early on develop
knowledge about drugs in the early stage of development. If a drug looks promising, the
pharma firm tries to strengthen the relationship with the small firm or university lab and
begin the process of making a deal to acquire or co-develop the drug with the smaller
firm.

In one example of this, Johnson & Johnson (J&J) had its eyes on a small California firm,
Pharmacyclics that was developing a new drug to treat blood cancers. The drug was so
early in development that it didn’t even have a name yet. J&J initiated a conversation
with the firm about making a deal in 2010, but J&J lacked expertise in blood cancers, and
Pharmacyclics was initially skeptical of working with J&J. J&J set out to strengthen its scout
team and recruited a new researcher from a competing pharma firm, Merck. J&J sent its
new scout, Peter Lebowitz, to check out Pharmacyclics and its experimental cancer drug
in early 2011. After spending three days checking out the drug and the firm, Lebowitz
emailed his boss and said “We have to get this one.” He and other J&J executives made
several trips to court the California firm and signed a deal to co-develop the drug with
Pharmacyclics in December of that year. This development deal along with others J&J has
made have rejuvenated J&J’s drug portfolio. The drug developed by the firm, now
branded as Imbruvica, is now coming on the market and has shown great potential in
treating a rare lymphoma and a type of leukemia. One investment bank estimates
Imbruvica will generate $1.3 billion in revenue for J&J in 2017.

Source: Rockoff, J. 2014. Pharmaceutical Scouts Seek New Star Drugs for Cancer, Diabetes.
wsj.com. March 9: np.

 Discussion Question 16: What other industries could use a scout team approach to
identify innovation partners?

H. The Value of Unsuccessful Innovation

This section draws on research by NYU Professor JP Eggers that challenges conventional
wisdom that there is a great deal of risk with innovations and, if firms pick the wrong
technology, they are doomed. His research suggests that firms that initially choose the
wrong technology often end up dominating the market in the long run. The key is to be
open to change and to learn from early mistakes. He offers the following insights for firms
pursuing innovation

• Avoid overcommitting
• Don’t let shame or despair knock you out of the game
• Pivot quickly once you realize you’ve made a mistake
• Transfer knowledge from the failure to other market opportunities
• Be aware that it is dangerous to be right at the outset since it often leads to
complacency

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 II. Corporate Entrepreneurship

Corporate entrepreneurship (CE) refers to building entrepreneurial businesses within

existing corporations. It has two primary aims: the creation of new venture opportunities
and strategic renewal. In this section, we address corporate growth and renewal v ia
internal venture development.

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

In some large corporations, the spirit of entrepreneurship permeates every part of

the organization. It is found in companies where the strategic leaders and the culture
together generate a strong impetus to innovate, take risks, and seek out new venture
opportunities. Two distinct approaches to corporate entrepreneurship —focused corporate
venturing and dispersed CE activities —are discussed in the next two sections.

 Discussion Question 17: What are some examples of major corporations that have a
strong entrepreneurial spirit?

Discussion Question 18: What actions have they taken that make them
entrepreneurial?

A. Focused Approaches to Corporate Entrepreneurship

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

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

The SUPPLEMENT/EXTRA EXAMPLE below describes one type of highly focused

entrepreneurial environment—Samsung’s “VIP Center” where innovative ideas and
engineering problems are addressed with great intensity and speed.

 Extra Example: Samsung’s Intensely Focused VIP Center

Some of the most successful corporate innovators operate in a climate of intense pressure.
One of these is Samsung, the South Korean electronics maker that made a $22 billion profit
in 2012 compared to a $7 billion loss for Sony, its close competitor.

This success—and the pressure—is due in part to the role played by its VIP Center. VIP
stands for Value Innovation Program (not very important person) and it refers to a 5-story
building in the heart of Samsung’s industrial complex in Suwon, South Korea. It is completely

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 dedicated to research, engineering and design. The first-floor houses big training rooms.
Floors two through four are workrooms for various team projects. The top floor has 42
dormitory-style rooms, each containing two beds, a shower, and a small desk. In the
basement, there’s a gym and sauna as well as ping-pong and billiards tables. In essence, it
is an around-the-clock assembly line for ideas and experiments.

When an engineer or other Samsung employee is assigned there, they know they will be
there until the particular problem they are working on is solved. “When people are told
they have to come here,” says Sun Woo Song, a senior engineer and project leader at the
VIP Center, “they know they have to come up with results in a very, very short time.” As a
result, the building is occupied 24 hours a day, seven days a week. Samsung has
developed a set of best practices they have put in place at the VIP. First, the teams
developing new ideas at the VIP are isolated from their normal roles. They work at the VIP
exclusively for weeks on end until the project is complete. Second, there are fifty or so
specialists at the VIP that support the teams and give advice as they work through the
decision process for developing new products. Third, they pull together teams of engineers,
designers, and planners from across the company. They believe that the fresh mix of
viewpoints and knowledge leads to more creative ideas. Third, they set deadlines for
various steps in the process and for the project’s completion to keep the teams moving
forward. Finally, each team assesses their ideas on rank them on a range of attributes to
create “value curves.” This helps them understand the strengths and weaknesses of each
option and identify how they can differentiate Samsung with the product they are
developing.

This may seem like an extreme situation but most at Samsung see it as highly valuable.
Doosik Joo, a father of three and five-time VIP alumnus says, “People say, ‘You’ve spent all
your life there, and what have you done?’” He says, “I can say, ‘I drove down costs,
created more value for the customer.’” Clearly, this level of commitment is a key element
of Samsung’s success: The company has lower manufacturing costs, higher profit margins,
quicker time to market, and, more often than not, more innovative products than its
competition.

Source: Lewis, P. 2005. A perpetual crisis machine. Fortune, September 19:59-76. Ihlwan, M.
2006. Camp Samsung. BusinessWeek, July 3: 46-48

 Discussion Question 19: What are the advantages and disadvantages of an

innovation program such as the Samsung VIP Center?

1. New Venture Groups

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

 Discussion Question 20: What are the advantages and disadvantages of separating
New Venture Group activities from other ongoing operations of the corporation?

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 Explain.

 Discussion Question 21: What are the advantages and disadvantages of acquiring
existing companies as a way to expand corporate innovation activities?

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

2. Business Incubators

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

Company-sponsored incubators provide experience and resources. The following

five functions are typically provided by corporate parents:

1. Funding
2. Physical Space
3. Business Services
4. Mentoring
5. Networking

 Discussion Question 22: What are the advantages and disadvantages of company
sponsored incubators as a way to support corporate entrepreneurial ventures?

B. Dispersed Approaches to Corporate Entrepreneurship

Corporate entrepreneurship that is dispersed occurs when a dedication to the

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

Three related aspects of dispersed entrepreneurship include entrepreneurial

cultures, resource allotments to support entrepreneurial actions, and the use of product
champions in promoting entrepreneurial behaviors.

1. Entrepreneurial Culture

A culture of entrepreneurship is one in which the search for venture opportunities

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 permeates every part of the organization. Everyone is attuned to opportunities to leverage
the assets and capabilities of the corporation to create new businesses.

 Discussion Question 23: What are some examples of firms that you are familiar with
that have an entrepreneurial culture?

Discussion Question 24: What are the elements of an entrepreneurial culture? That is,
what does it take in terms of beliefs, values, incentives, rewards, and so forth for an
organization to be continually thinking about entrepreneurial opportunities?

2. Resource Allotments

Corporate entrepreneurship will only be successful if firms are willing to commit the
resources necessary to both generate and implement innovative ideas. Some firms, such
as 3M and Intuit, provide employees with time to generate and develop innovative ideas.
Firms can also provide capital to internal entrepreneurs to develop new businesses.
Johnson & Johnson, Nike, and Google are provided as examples of firms that provide
financial support for corporate entrepreneurs.

 Discussion Question 25: What are some other examples of firms that provide
resources to entrepreneurs within the firm? What are some innovative products that
have come out of these programs?

Discussion Question 26: Does providing time for entrepreneurial idea development
work for all firms or for certain types of firms? For what types of firms does it offer the
most potential?

3. Product Champions

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

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

1. Project Definition A promising opportunity has to be justified in terms of

whether it will be attractive in the marketplace and how well
it fits with the corporation’s other strategic objectives.

2. Project Impetus The strategic and economic impact of a project must be

supported by senior managers who have experience with
similar projects. Then it becomes an embryonic business with
its own organization and budget.

The role of product champions is to generate support, especially during the time
after a new project has been defined but before it gains momentum. They form a link
between the definition and impetus stages of development. They do this by procuring

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 resources and stimulating interest in the project. A good example on this is Ken Kutagari,
who championed the Sony Playstation.

 Discussion Question 27: What are some examples of companies that have a
favorable policy toward product champions?

C. Measuring the Success of Corporate Entrepreneurship Activities

This section asks, “Is corporate entrepreneurship successful?” What factors do

corporations consider when evaluating the success of CE programs?

1. Comparing Strategic and Financial CE Goals

Just over 50 percent of corporate venturing efforts reach profitability (measured by

ROI) within six years of their launch. In addition to financial goals, however, most CE
programs also have strategic goals.

Three questions should be used to assess the effectiveness of a corporation’s

venturing initiatives:

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

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

 Discussion Question 28: Should the same criteria that are used to evaluate
corporate performance in general also apply to corporate entrepreneurship? Why
or why not?

2. Exit Champions

Many entrepreneurial initiatives never work out or turn into profitable ventures.
However, companies often wait too long to terminate a new venture and do so only after
large sums of resources are used up, or worse, result in a marketplace failure.

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

III. REAL OPTIONS ANALYSIS: A USEFUL TOOL

This section discusses the practical implications of real options analysis (ROA) as a
tool that has been adopted by executives and consultants to support the strategic

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 decision-making in firms. The term “real options” applies to situations where option theory
and valuation techniques are applied to real assets or physical things, in contrast to
financial assets. The two sections below address the potential applications of ROA as well
as some possible drawbacks.

A. Applications of Real Options Analysis to Strategic Decisions

The concepts of options can be applied to strategic decisions to give management

flexibility. That is, it enables management to decide whether or not to invest additional
funds to grow or accelerate an activity, delay perhaps to learn more, shrink the scale of
the activity, or abandon it altogether. This aspect makes ROA attractive in a corporate
venturing context because firms can have the prospect of high gains with relatively little
upfront investments that represent limited losses.

To illustrate the rather abstract concept of Real Options, think why companies
provide business students with internships. Several reasons can explain this such as:
improved public relations, meet short-term staffing needs, or trying out the
candidate to see whether full-time employment will be later offered. The latter
option is, of course, an application of real options theory. That is, the firm is writing an
option on the individual and can later either kill the option (i.e., terminate the
employment relationship) or exercise the option by hiring the individual on a full-time
basis. In this manner, the firm may benefit from a long-term benefit while risking only
a short-term investment.

B. Potential Pitfalls of Real Options Analysis

We address some of the potential downsides of using ROA. These include:

• Agency Theory and the Back-Solver Dilemma - wherein managers may have
an incentive and the know-how to “game the system.”

• Managerial Conceit: Overconfidence and the Illusion of Control - in which

managers may shift away from careful analysis and rely on their “superior
judgment;” they believe they have the ability to reduce risks inherent in
decision making.

• Managerial Conceit: Irrational Escalation of Commitment - since the “option

to exit” requires reversing a decision often made by incumbent managers
who are still employed by the firm, there may be a tendency to further invest
in less promising opportunities—to save one’s reputation.

 Discussion Question 29: What are the advantages and disadvantages of using a
real options approach to evaluating entrepreneurial opportunities?

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 In the SUPPLEMENT below we link real options analysis to the task of evaluating
promising innovations in an entrepreneurial context.

 Extra Example: Using Real Options to Manage Innovation Strategies

A real options approach provides an ideal way for entrepreneurial firms to experiment by
making incremental investments. Staging investments is a useful technique for companies
seeking to explore opportunities and also avoid costly mistakes. Investments should be
aimed at testing assumptions and resolving critical unknowns. Once a company has
invested in the appropriate experiments, it is usually faced with one of four options:

• Double down—when winning strategies are identified, its time to move forward rapidly
including making additional investments if necessary.
• Continue exploring—experiments may require further investments to reduce uncertainty
and fully test assumptions.
• Adjust the game plan—experiments sometimes reveal that when one way is blocked
another is open; if so, change the approach and keep experimenting.
• Shelve—when no clear path forward exists, it is best to cease investing until something
changes.

Another issue that companies must manage is the number of projects it attempts to handle
at once. It’s important to experiment with a lot of ideas at first but once the unpromising
ones have been identified, companies need to focus and avoid trying to move dozens of
ideas forward simultaneously. It’s also important to make decisions rapidly and move
forward quickly on the projects with the fewest uncertainties and highest potential. Thus, a
real options approach provides a useful way to manage innovation.

Source: Anthony, S. D., Eyring, M., & Gibson, L. 2006. Mapping your innovation strategy.
Harvard Business Review, 84(5): 13-23.

 Discussion Question 30: Can you think of situations where a real options strategy
might not be the best approach to managing innovation? (Hint: 1) when a decision
to acquire a young firm requires a rapid response; 2) when a new technology
requires a large initial investment.)

IV. Entrepreneurial Orientation

Entrepreneurial orientation (EO) refers to the strategy-making practices and

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

TABLE 1 Summarizes the Dimensions of an 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

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 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 marketplace
leader that has the foresight to seize opportunities in anticipation
of future demand
Competitive Aggressiveness An intense effort to outperform industry rivals characterized by
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

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

A. Autonomy

Autonomy refers to a willingness to act independently in order to carry forward an

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

Two methods companies can use to exercise autonomy:

1. Using skunkworks to foster entrepreneurial thinking.
2. Designing organization structures that support independent action.

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

 Discussion Question 31: How does autonomy help organizational members identify
and develop entrepreneurial opportunities?

The SUPPLEMENT/EXTRA EXAMPLE below notes that one of the techniques

corporations often use to achieve autonomy is physical separation.

 Extra Example: Corporations Use Physical Separation to Encourage Autonomy

One of the key techniques that organizations use to create autonomy is physically
separating venture development work teams from the rest of the organization. This is based
on the belief, as some consultants put it, that companies seeking to develop innovations
must “plant seeds in walled gardens so that established business can’t trample them.” As a

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 result, several major corporations have attempted physical separation as a way to create
autonomous environments. Here are some examples:

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

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

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

• Spanish shoemaker Camper shields its 35 shoe designers from the influences of the
fashion world by placing its design teams in remote locations such as a 17 th -
century estate and remove villages surrounded by mountains.

Sources: Hamner, S. 2005. Thinking outside the shoe box. Business 2.0, September: 68.
Chesbrough, H. 2003. Open innovation: The new imperative for creating and profiting from
technology. Cambridge, MA: Harvard Business School Press. Day, J.D., Mang, P. Y., Richter,
A. & Roberts, J. 2001. The innovative organization: Why new ventures need more than a
room of their own. The McKinsey Quarterly, 2: 21-31.

 Discussion Question 32: Why do you think it is often necessary for corporations to use
skunkworks and physical separation in order to stimulate entrepreneurial thinking in
its corporate venture teams?

B. Innovativeness

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

Two methods companies can use to be innovative:

1. Fostering creativity and experimentation.

2. Investing in new technology, R&D, and continuous improvement.

Pitfalls associated with innovativeness include potentially wasting resources, failure

to innovate ahead of competitors, and limited funds for innovation during an economic
downturn.

In the SUPPLEMENT/EXTRA EXAMPLE below, innovative practices from the domain of

social entrepreneurship are highlighted.

 Extra Example: Four Practices of Innovative Social Organizations

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 Daniel Bornstein writes about the role of innovativeness in the domain of social
entrepreneurship. One of his key points is that, to identify viable solutions, problems have to
be conceptualized differently. This stems, in part, from the fact that social entrepreneurs
often work in environments with highly constrained resources.

In his book How to Change the World Bornstein describes four characteristics of innovative
organizations that are valuable in any context, whether “social” or not:

1. Institutionalize learning. Innovative organizations institute systems and guidelines for

listening to their clients. Once you start listening to people, there is no limit to the ideas and
opportunities that emerge. Childline, a 24-hour helpline and emergency response system
for children in distress, provides explicit instructions to partner agencies about how to listen
to children.

2. Pay attention to the exceptional. From the standpoint of innovation, the most important
insights gained from listening or observing seem to come from exceptional or unexpected
information, particularly unexpected successes. Muhammad Ynus, founder of the
Grameen Bank, found this when the 42 poor villagers he loaned money to—people who
were considered “unbankable”—promptly repaid the loans.

3. Real solutions for real people. One of the hallmarks of social entrepreneurs is that they
are realistic about human behavior. They spend a great deal of time thinking about how to
get their clients actually to sue their products. A key factor is communicating clearly and
sensitively to the selected audience.

4. Focus on the human qualities. Organizations whose success hinges on high-quality

human interaction generally pay close attention to soft qualities when recruiting, hiring,
and managing staff. Ashoka, an organization that provides funding and support to social
entrepreneurs, looks to hire people who are intrapreneurial, have strong ethical fiber, and
consider themselves “innovators for the public.”

Source: Bornstein, D. 2004. How to change the world. New Delhi, India: Penguin.

 Discussion Question 33: How might the innovative practices discussed above be
used in for-profit settings? Are there major differences in how firms act innovatively
depending on whether they are socially-oriented or not?

C. Proactiveness

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

The benefit gained by firms that are the first to enter new markets, establish brand
identity, implement administrative techniques, or adopt new operating technologies in an
industry is called first mover advantage. First movers usually have several advantages. First,

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

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

Two methods companies can use to be proactive:

1. Introducing new products or technological capabilities ahead of the

competition.
2. Continuously seeking out new product or service offerings.

Pitfalls associated with proactiveness include launching pioneering products that

don’t pay off and introducing brands that don’t catch on.

Although many companies recognize the value of having an entrepreneurial

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

D. Competitive Aggressiveness

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

Companies with an aggressive orientation are willing to “do battle” with competitors by
slashing prices, sacrificing profitability to gain market share, or spending aggressively to
obtain new capacity.

However, unlike innovativeness and proactiveness, which tend to focus on market

opportunities, competitive aggressiveness is directed toward competitors. In terms of SWOT
analysis (Modules 2 and 3) proactiveness, as we saw in the last section, is a response to
opportunities —the O in SWOT. Competitive aggressiveness, by contrast, is a response to
threats —the T in SWOT. A competitively aggressive posture is important for firms that seek
to enter new markets in the face of intense rivalry.

Strategic managers use competitive aggressiveness to combat industry trends that

threaten their survival or market position. Sometimes firms need to be forceful in defending

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 their competitive position or aggressive to ensure their advantages from capitalizing on
new technologies or serving new market needs.

Two methods companies use to strengthen their position by being competitively

aggressive:

1. Entering markets with drastically lower prices.

2. Copying the business practices or techniques of successful competitors.

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

A pitfall associated with competitive aggressiveness is damaged reputation due to

excessive aggressiveness.

E. Risk Taking

Risk taking refers to a firm’s willingness to seize a venture opportunity even though it
does not know whether the venture will be successful. To obtain high returns, firms often
assume high levels of debt, commit large amounts of firm resources, introduce new
products or invest in unexplored technologies.

Organizations and their executives face three types of risk:

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

2. Financial risk-taking Borrowing heavily or committing a large portion of

3. Personal risk-taking
resources in order to grow. Risk is used in this context to
refer to the risk/return tradeoff that is familiar in financial
analysis.
Risks that an executive assumes in taking a stand in favor
of a strategic course of action. Executives who take such
risks influence the course of their company and impact
their careers.

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

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

1. Researching and assessing risk factors to minimize uncertainty.

2. Using techniques that have worked in other domains.

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

The SUPPLEMENT/EXTRA EXAMPLE below identifies steps companies can take to

reduce risk when the economy is weak.

 Extra Example: Confronting Risks in a Risky Economy

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

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

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

 Discussion Question 34: How might the suggestions made in the example above be
applied to your personal career planning and efforts?

V. SUMMARY

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

Innovation is one of the primary means by which corporations grow and strengthen
their strategic position. Innovations can take several forms ranging from radical
breakthrough type innovations to incremental improvement type innovations. Innovations
are often used to update products and services or for improving organization processes.
Managing the innovation process is often challenging because it involves a great deal of

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 uncertainty and there are many choices to be made about the extent and type of
innovations to pursue. By defining the scope of innovation, managing the pace of
innovation, 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 the company in order to
induce strategic behaviors by all organizational members. In measuring the success of
corporate venturing activities, both financial and strategic objective should be considered.
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.

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 Application Questions and Exercises

1. Cultivating Innovation Skills:

Earlier on, the five traits of an effective innovator (associating, questioning, observing,
experimenting, and networking) had been enumerated. Assess yourself on each of these
traits. It may be useful to know what your strongest trait is, and defend your choice with a
personal anecdote. Are these innovation traits worth building as you will pursue your
careers someday?

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.

2. 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.

As a student, how do you choose between a desirable and an undesirable career

decision? What information will you need to consider? What trends would help you in your
new career trajectory? Rewarding career options can take many forms. It is not always so
simple to just follow what everyone else is doing. A few years ago, many people saw IT as a
growth field and now that field is oversupplied, and job prospects are low. It may pay off to
develop options in less popular fields, but fields where you can develop and exploit their
unique skills and capabilities.

3. 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 being a student etc to become a successful entrepreneur in later years.

Which part is your strength, and support your claim with a personal anecdote? This exercise
will help you understand the concept and can apply it to yourself. Next, assess the plans
that you may have for developing your entrepreneurial capabilities

The point of this exercise is to get you thinking about incorporating entrepreneurial
activities into your professional plans. Entrepreneurs are the lifeblood of economic growth,
so they are an important part of the economy. Do you want to be an entrepreneur, or
maybe participate in an entrepreneurial venture at some point in your career? Even if you
do not want to participate, you may have to at some point. The point is that
entrepreneurial activities are an ingrained part of business.

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 4. Using the Internet, select a company that is listed on the NASDAQ or New York Stock
Exchange or the Philippine 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?

5. 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?

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