CH-12 Managing Innovation and Fostering Corporate Entrepreneurship – Strategic Management: Creating Competitive Advantages : Book Guide

Chapter 12 Managing Innovation and Fostering Corporate Entrepreneurship Summary/Objectives 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 chapter addresses how innovation and corporate entrepreneurship help firms create competitive advantages. The chapter 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. Lecture/Discussion Outline The opening incident 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. 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. Students should understand that 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. Answer: Google’s experience with online advertising didn’t transfer to radio because the radio market operates on different principles. Online advertising thrives on precise, data-driven targeting, whereas radio advertising is more about broad reach and brand awareness. Radio’s entrenched industry practices and limited digital integration also posed barriers to applying Google's model.  Discussion Question 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? Response guidelines: One of Google’s advantages appears to be its ability to track consumers’ media usage, advertising consumption, and buying behavior. It is able to combine these data, which enables it to target specific consumers for specific advertising messages. Google makes money because advertisers are willing to pay more for targeted and effective advertising than for less efficient advertising. Students should appreciate this advantage that Google offers. The challenge is to get students to link Google’s advantage to the satellite and streaming radio systems. If consumers listen to radio while they are on a screen, then their clicks on advertisements could be recorded, and Google’s model has potential. Otherwise, it is not clear how Google’s system would be an advantage. The current system already measures audience size and characteristics, so it is not necessarily an advantage to know who is listening to what programs. Existing systems can target advertisements to specific radio programs, and it is not clear how Google’s expertise would be an advantage. Times change. If students are clicking on banner and sidebar ads while listening to radio through their devices, then the Google model may apply. Other possibilities are that Google may offer advertisers a better medial targeting strategy than advertising agencies can due to its existing analyses. Google may also offer better media models than existing advertising agencies. It may be possible for Google to enter the advertising market, and students can consider that option. Answer: Google could view the shift to satellite and streaming radio as an opportunity due to the increasing digitalization of radio. This space aligns with Google’s strengths in data analytics and digital platforms, potentially enabling new ad models and streaming services. However, the radio market’s existing dynamics and competitors might also pose significant challenges. 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. STRATEGY SPOTLIGHT 12.1 shows how a relatively low-tech innovation by Dutch Boy Paints helped build marketing-related competitive advantages. 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 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 3: What are some examples of product and process innovations? What types of firms are most likely to favor product innovations? Process innovations? Answer: Innovations can also be viewed in terms of their degree of innovativeness on a continuum from radical to incremental. Product innovations involve creating new or improved products, like Apple's iPhone, while process innovations enhance efficiency, such as Toyota’s production system. Firms focused on technology or consumer products often favor product innovations, while process innovations are typically pursued by firms aiming to improve operational efficiency. 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. EXHIBIT 12.1 depicts an incremental-radical continuum and shows examples of several innovations. 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 4: What can be learned from characterizing innovations in different ways? How does this help to better understand the strategic implications of innovation? Answer: Characterizing innovations helps differentiate between incremental and radical changes, influencing strategic decisions. It clarifies whether a firm should focus on refining existing products or exploring new markets, aiding in resource allocation and aligning strategies with innovation types. STRATEGY SPOTLIGHT 12.2 describes how Aereo is striving to disrupt the TV market by bringing a simpler and cheaper alternative to cable television. 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. The SUPPLEMENT below reports on how effectively major corporations manage innovation. Studies by three major consultancies confirm that it is an important but difficult strategic activity.  Extra Example: Managing Innovation—How Well Do the Big Firms Do It? The text has emphasized the importance of managing innovation as well as how difficult it can be. But what kinds of efforts are large firms actually making to manage innovation and how effectively are they doing it? Recent surveys by three leading consultancies—Boston Consulting Group, McKinsey & Company, and Booz Allen Hamilton—indicate that innovation remains a high priority for most corporate leaders around the world and a key driver of growth. Unfortunately, the surveys also reflect a broad belief that most companies don’t have the leadership, systems, or tools to successfully and consistently innovate. Here are some of the conclusions: The Booz Allen report, which focused on companies considered top global innovators—such as Apple, Google, Plantronics and Siemens—revealed the importance of aligning innovation initiatives with corporate strategy and of in-depth customer understanding. The report also found that the most successful innovators have a rigorous process for managing innovation including “a disciplined, stage-by-stage approval process combined with regular measurement of every critical factor, from time and money spent…to the success of new products in the market.” The McKinsey report, a survey of 1,000 top executives, 44 percent of whom worked at companies with $1 billion or more in annual revenues, found that in many leading companies, there is no process in place to manage—or, presumably, measure—innovation efforts. For instance, “although more than a third of top managers (senior VP level and higher) say innovation is part of the leadership team’s agenda, an equal number say their companies govern innovation in an ad hoc way.” Such a lack of innovation management strategies leaves most top managers feeling as if they “don’t seem to think they have a lot of control over the innovation process,” the survey concludes. The Boston Consulting Group survey tapped nearly 2,500 senior executives from 58 countries and all major industries. The companies represented in the survey employ a range of metrics to measure their innovation success including customer satisfaction, overall revenue growth, and the percentage of total company sales from new products or services. No matter how they measured it, though, the majority of respondents expressed dissatisfaction with the return on their innovation investment, a frustration that varied little across industries. Source: Scanlon, J. & Jana, R. 2007. The state of innovation. www.businessweek.com, December 19: np.  Discussion Question 5: According to these reports, why is innovation an important strategic activity? What do these reports suggest are the key factors that make managing innovation so challenging? Answer: Innovation is crucial for maintaining competitive advantage and adapting to market changes. Reports suggest that managing innovation is challenging due to factors like uncertainty, resource allocation, and the need for organizational support. Effective management involves balancing creativity with strategic goals and operational constraints. 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. 6. 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. STRATEGY SPOTLIGHT 12.3 discusses how Procter & Gamble has been struggling with these challenges to improve its innovativeness.  Discussion Question 6: What are some examples of other companies that you are familiar with of companies that have faced these dilemmas? Can you apply any of these dilemmas to your own business life or life as a student? Answer: Companies like Kodak faced dilemmas with innovation, struggling to transition from film to digital photography. Similarly, Blockbuster failed to adapt to streaming services. These dilemmas highlight the importance of adapting to market changes and technological advancements, which can also apply to individual career or academic challenges. The SUPPLEMENT below identifies a key idea for effectively managing innovation: embracing the tension between creativity and efficiency rather than struggling with it.  Extra Example: Key to Managing Innovation? Make the Novel Routine. Former Apple Computer product designer Andrew Hargadon believes the key challenge in managing innovation is being simultaneously innovative and efficient. Hargadon, who holds a PhD from Stanford’s School of Engineering, makes a case that the best way to manage both creativity and efficiency is to build a bridge between them: “Our obsession with the tension between the wild and crazy side of innovation and the button-downed nature of ongoing operations is distracting us from one of the more real problems in managing innovation.” “The big challenge in managing innovation lies, I would suggest, not in building up two very strong skills in innovation and in operations, but rather in building the bridge between them–of developing the people and processes that facilitate the routinization of novelty. Of turning good ideas into practical processes that the larger organization can value, adopt, implement, and manage.” “Forget 3M–think about Toyota. They are leaders in manufacturing efficiencies and also at exploring the new frontiers of innovation automobiles. How have they managed the tension? Read any number of books on them (but the original Machine that Changed the World remains the best read) and you find that they are extremely effective at recognizing those ideas that can be routinized and doing so before their competition. Sometimes decades before. Consider the Prius. Ford and GM had many of the same technologies lying around R&D, but having the ideas is not the same as converting them into manufacturing routines, processes, supply chains, and ultimately customers. That’s execution.” Sources: Deschene, L. 2007. Avoid complacency: How to manage innovation. BNET Intercom, www.bnet.com, August 27; and Hargadon, A. 2007. Creative efficiency or efficient creativity?  Discussion Question 7: Recall from Chapter 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? Answer: Being both innovative and efficient is challenging but possible. It requires balancing creativity with operational effectiveness. Firms like Google manage this by fostering a culture of innovation while maintaining streamlined processes, though not all organizations can easily achieve this balance. Discussion Question 8: 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? Answer: Companies like Tesla have highly innovative products and relatively low costs due to vertical integration and efficient manufacturing processes. Their ability to innovate at scale while controlling costs results from strategic investments in technology and operational efficiency. Successful firms often struggle to maintain creativeness and a drive to improve its innovation. The SUPPLEMENT below discusses how Pixar Studios acts to limit complacency.  Extra Example: Pixar’s Steps to Push for Creativity and Improvement Pixar has had a remarkable run of over a dozen hit animated films. Such a pattern of success could easily lead to complacency and risk aversion in Pixar. To limit this tendency, Pixar undertakes a rigorous review of every film to assess the process used to make the film – even though each of its films have been box office successes. Top managers change the review process each time to limit the degree to which employees can game the system and to keep them engaged in the process. One question they have asked participants is to identify the top five things they would do again in a future movie project and the top five things they would not do again. Pixar also diligently collects data on all aspects of the film production process and uses this data “to stimulate discussion and challenge assumptions arising from personal impressions” during the postmortems. They also occasionally do a multi-project review where they compare experiences across several productions to develop compare and contrast assessments and more general insights on what works and what doesn’t work. Sometimes, they use an outsider or a newly hired manager to conduct these broad reviews to maintain an objective evaluation and to get a fresh perspective. Sources: Gino, F. & Pisano, G. 2011. Why leaders don’t learn from success. Harvard Business Review. 89(4): 68-75. The next four sections address 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 work to build 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. • EXHIBIT 12.2 discusses the Innovator’s DNA and provides examples of each of the underlying traits.  Discussion Question 9: Is it more important for entrepreneurs to develop these skills or for managers of large, established firms? Answer: Entrepreneurs often need to develop skills for rapid innovation and adaptability, while managers of established firms focus on scaling and optimizing existing processes. Both sets of skills are crucial, but the emphasis varies depending on the firm’s stage and objectives. 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 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 10: 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? Answer: Investing in an innovation that fails isn’t necessarily a failure if it provides valuable insights or lessons. Success is often measured by the learning and improvement that result from such investments, which can guide future efforts and reduce risk. The SUPPLEMENT below describes a five stage process that Corning, Inc., a leading innovator for over 150 years, uses to achieve superior innovation results.  Extra Example: Corning’s Five Stage Innovation Process Corning, Inc. has been a leading innovator since it was founded in the 1850s. It has made some risky moves and has suffered during the recent economic downturn as some of its decisions proved to be costly. But in periods of both success and failure, Corning has survived by using a systematic management innovation process that has been effective for Corning and proven useful to many other companies. The process consists of five steps that a firm can use to advance through the stages of innovation: 1. Build Knowledge. This involves establishing a shared view of trends, discontinuities and related events that could shape the future. It often includes developing a road map of industry conditions and events that is useful in formulating a portfolio of innovation projects. 2. Determine Feasibility. This includes experimenting with new ideas both in laboratory settings and with potential customers and often involves developing a small working prototype. If proof of concept can be achieved and the technology can accomplish the intended objectives, the prototype can be developed into a product with significant market potential. 3. Test Practicality. This includes developing a larger prototype that reflects the initial product or process concept and testing the prototype with customers and in the lab. At this stage, manufacturing costs and overall capital requirements are estimated, potential competitive responses are assessed, and funds may be appropriated. 4. Prove Profitability. This involves determining if the product will satisfy a large market need, can be manufactured reliably, and produced at a cost that generates a profit. 5. Manage Life Cycle. This involves building sales volume, gaining market share, and satisfying customer needs. In order to keep the product from maturing too rapidly, it also includes efforts to continuously improve the product and seek new growth markets. Sources: Graham, M. B. W., & Shuldiner, A. T. 2001. Corning and the Craft of Innovation. New York: Oxford University Press; www.1000ventures.com.  Discussion Question 11: How can the five stages of innovation used by Corning be used to help address the first dilemma – defining the scope of innovation? Answer: Corning’s five stages of innovation can help define innovation scope by outlining phases from ideation to commercialization. This structured approach aids in clarifying objectives, managing resources, and aligning efforts with strategic goals, thus addressing scope challenges. 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. We provide the examples of Intel and Apple as firms that effectively managed their product development using time pacing. 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. The SUPPLEMENT discusses how Microsoft has restructured its management team to try to enhance its innovativeness.  Extra Example: Changing the Team at Microsoft to Ramp up Innovation Microsoft has long been led by managers who built their careers in the Windows business. Steven Sinofsky was one of these leaders. Over his 23 years at Microsoft, he became the go to guy to lead the most difficult projects. However, soon after the launch of Windows 8, a project he led, Sinofsky abruptly left Microsoft, apparently at the behest of Steve Ballmer, Microsoft’s CEO. What led to his exit from Microsoft, and how is his exit symptomatic of how Microsoft changing? Microsoft has long been known for its silo way of operating. Windows designers worked on Windows. Applications designers worked on application software. The Xbox team worked on Xbox. There was little communication across these teams. Critics saw Sinofsky managing the Windows 8 launch in this way. He didn’t emphasize the need to work with others within Microsoft or with outside developers to make sure that there was a wide range of applications for Windows 8 at its launch. As a result, there were no Windows 8 applications for Facebook, Dropbox, or other major applications when Windows 8 hit the market. When Windows 8 struggled to build strong market enthusiasm, Sinofsky’s ways of managing the launch was seen as one of the problems. Microsoft saw the need to change its ways to work collaboratively inside and outside the firm to enhance its innovativeness. Sinofsky’s exit was a strong symbol of this change. Both the structure and the dynamics within the management team are now very different. Microsoft now has a management team that includes individuals from a range of product platforms, not just Windows. Top executives from the Xbox, search and advertising, mobile platforms, and Windows meet at a Seattle restaurant about every six weeks to discuss strategy for the firm and ways that they can collaborate to develop new products. Their aim is to reduce the emphasis on meeting design schedules while increasing the emphasis on building innovative and integrated products to better respond to the opportunities in mobile computing. Source: Vance, A.; Bass, D.; & Burrows, P. 2012. Microsoft: No company for solo artists. Bloomberg BusinessWeek, November 19: 37-38.  Discussion Question 12: What are some other firms that have had great success with a single product but struggled to retain its innovativeness? Have any of them been able to renew themselves and regain their innovativeness? If so, how did they accomplish this? Answer: 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 13: What are examples that you are familiar with of other HR practices that companies have used to enhance their innovation activities? Answer: HR practices enhancing innovation include offering training programs, promoting cross-functional collaboration, and recognizing innovative contributions. For example, Google’s 20% time policy encourages employees to spend part of their workweek on personal projects, leading to significant innovations. STRATEGY SPOTLIGHT 12.4 illustrates how Air Products and Chemicals Inc. (APCI) is using staffing practices to enhance the performance of its innovation teams. The SUPPLEMENT below highlights the importance of managing the human resources that contribute to a company’s innovation efforts.  Extra Example: It Takes Time to Build Effective R&D Teams The human side of innovation is often overlooked, according to Harvard Professor Rosabeth Moss Kanter. Teams that are headed by technical experts rather than leaders often fail to emphasize external communications because they believe the strongest innovative ideas will “speak for themselves” and don’t need to be championed. Technical types also falter because they emphasize tasks rather than build the kind of internal relationships and chemistry that teams need to turn underdeveloped ideas into successful innovations. Another problem relates to the length of time organization members typically spend on innovation teams. Researchers at the Massachusetts Institute of Technology found that it takes at least two years for an R&D team member to be truly productive. Food manufacturing giant Pillsbury made a similar discovery about the time required to take a new product from the idea stage to commercialization—it takes 24 to 26 months. However, the average R&D team membership at Pillsbury was just 18 months. “No wonder the company was falling behind in innovation,” says Kanter. Source: Kanter, R. M. 2006. Innovation: The classic traps. Harvard Business Review, November: 72-83.  Discussion Question 14: What other factors determine how effectively an innovation team performs? Answer: Effective innovation teams benefit from clear goals, diverse skills, strong leadership, and a supportive culture. These factors ensure teams can effectively generate, develop, and implement innovative ideas. 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. STRATEGY SPOTLIGHT 12.5 discusses how Coke and Deka found that they could each bring complementary resources that are necessary to take on a bold global initiative. 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 15: 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? Answer: Companies like IBM and Pfizer have collaborated on innovations through partnerships and joint ventures. These collaborations often result in shared resources and expertise, enhancing innovation outcomes and market reach. Discussion Question 16: What is the downside of partnering for the purpose of product or process innovation? What are some of the reasons a company would chose to partner on an innovation project? Answer: Partnering for innovation can involve risks like intellectual property disputes and misaligned goals. Companies partner to leverage complementary strengths and resources, but they must manage these risks through clear agreements and effective communication. STRATEGY SPOTLIGHT 12.6 outlines the efforts of IBM to leverage crowdsourcing to collaborate with customers to enhance innovation.  Discussion Question 17: 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? Answer: Fears about crowdsourcing include concerns over intellectual property protection and quality control. These concerns are valid, but companies can mitigate them by setting clear guidelines and ensuring robust vetting processes. Traditional approaches may still be viable, but crowdsourcing offers diverse insights and innovation opportunities. In the SUPPLEMENT below, the CEO of a large design firm discusses how attention to design can enhance innovation and strategic marketing.  Extra Example: The Role of Design in Improving Innovation Tim Brown is the CEO and president of Ideo, one of the world’s leading product-design firms. Successful innovation, in his view, requires good design. In fact, according to Brown, strategy making in general can benefit from a design perspective. That is, in order to do a better job of developing, communicating, and pursuing a strategy, it helps to think like a designer. “It’s remarkable how often business strategy, the purpose of which is to direct action toward a desired outcome, leads to just the opposite: stasis and confusion. Strategy should bring clarity to an organization; it should be a signpost for showing people where you, the leader, are taking them – and what they need to do to get there. But the tools executives traditionally use to communicate strategy – spreadsheets and PowerPoint decks – are woefully inadequate for the task.” “People need to have a visceral understanding – an image in their minds – of why you’ve chosen a certain strategy and what you’re attempting to create with it. Design is ideally suited to this endeavor. It can’t help but create tangible, real outcomes.” “Designers, by making a film, scenario, or prototype, can help people emotionally experience the thing that the strategy seeks to describe. If, say, Motorola unveils a plan to create products that have never existed before, everyone in the organization will have a different idea of what that means. But if Motorola creates a video so people can see those products, or makes prototypes so people can touch them, everyone has the same view.” “Organizations need to take design thinking seriously…because design thinking is indisputably a catalyst for innovation productivity. That is, it can increase the rate at which you generate good ideas and bring them to market. Where you innovate, how you innovate, and what you innovate are design problems. When you bring design thinking into that strategic discussion, you join a powerful tool with the purpose of the entire endeavor, which is to grow.” Source: Brown, T. 2005. Strategy by design. Fast Company, June: 52-54.  Discussion Question 18: What are some examples of how a company might use product designs, prototypes, or service scenarios to improve the innovation process? How might design make a strategic initiative more vivid? Answer: Product designs and prototypes help visualize and test ideas before full-scale development. For example, using prototypes in automotive design allows for iterative improvements, making strategic initiatives more tangible and aligned with market needs. 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 via 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 19: What are some examples of major corporations that have a strong entrepreneurial spirit? Answer: Companies like Google and Amazon maintain a strong entrepreneurial spirit through continuous innovation and risk-taking. Their entrepreneurial actions include investing in new technologies and markets, which drives growth and maintains competitive advantage. Discussion Question 20: What actions have they taken that make them entrepreneurial? Answer: Actions such as fostering a culture of experimentation and rewarding risk-taking contribute to an entrepreneurial spirit. For example, Amazon’s leadership principles encourage innovation and customer obsession, driving entrepreneurial behavior across the organization. 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 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 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 21: What are the advantages and disadvantages of an innovation program such as the Samsung VIP Center? Answer: Samsung’s VIP Center fosters innovation by supporting high-potential projects with dedicated resources and strategic oversight. While it promotes focused innovation, it may also face challenges in integrating new ideas with existing operations. 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. STRATEGY SPOTLIGHT 12.7 describes how WD-40 used a product development team to spur entrepreneurial activity within the firm.  Discussion Question 22: What are the advantages and disadvantages of separating New Venture Group activities from other ongoing operations of the corporation? Explain. Answer: Separating new ventures from ongoing operations allows for focused innovation and risk-taking. However, it can create silos and reduce synergy with core business activities, requiring careful management to balance innovation with existing operations. The SUPPLEMENT below illustrates how Cisco is using acquisitions to pull in new business ideas and keep the firm entrepreneurial.  Extra Example: Cisco’s Buying Binge of New Ventures For years, Cisco has looked at small technology firms as new venture groups for the computer networking titan. The recession and the associated decline in financing for technology ventures have increased the opportunities for the firm. Small technology firms with innovative ideas but limited financial resources are ripe for an offer from Cisco since the entrepreneurial firms have limited options to raise the financing they need to grow. With over $25B in cash, Cisco is on the prowl for acquisitions to provide innovations needed to grow market share in the thirty different markets Cisco is pursuing. This quest for innovative firms led Cisco to make seven acquisitions in 2009, five in 2010, and three in the first three months of 2011. Some of these acquisitions, such as their acquisition of Inlet Technologies – a manufacturer of digital media processing systems, provides products Cisco can integrate with existing products to strengthen their position in existing markets. Other acquisition targets, such as MOTO Development Group – a consulting firm specializing in consumer industries, provide the resources needed for Cisco to move into new product or customer segments. Cisco is just one of a number of technology leaders looking toward acquisitions as a means for innovation and growth. Source: Burrows, P. 2009. Cisco’s extreme ambitions. Business Week. November 30: 26-27. Copeland, M. 2008. Big tech goes bargain hunting. Fortune. November 10: 43-46. www.cisco.com.  Discussion Question 23: What are the advantages and disadvantages of acquiring existing companies as a way to expand corporate innovation activities? Teaching Tip: Even organizations that have New Venture Groups often fail to convert their efforts into profit-making successes. Ask students 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. Answer: Acquiring companies can accelerate innovation by bringing in new technologies and talent. However, it can also lead to integration challenges and cultural clashes, making effective post-acquisition management crucial for success. 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 stand alone 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 24: What are the advantages and disadvantages of company sponsored incubators as a way to support corporate entrepreneurial ventures? Answer: Company-sponsored incubators provide resources and support for entrepreneurial ventures, fostering innovation. They offer advantages like dedicated funding and mentoring but can face challenges in aligning incubator projects with the parent company’s strategic goals. 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 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 25: What are some examples of firms that you are familiar with that have an entrepreneurial culture? Answer: Firms like 3M and Google foster an entrepreneurial culture by encouraging experimentation and providing resources for new ideas. Their cultures emphasize innovation and agility, leading to successful new products and solutions. Discussion Question 26: 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? Answer: An entrepreneurial culture involves promoting risk-taking, offering rewards for innovation, and supporting open communication. Companies need to embed these elements into their values and practices to continuously seek and develop new opportunities. The SUPPLEMENT below presents the example of the Virgin Group a highly innovative company with a strong entrepreneurial culture.  Extra Example: Growing New Ventures at Virgin Group While most large companies have to work hard to stoke the fires of entrepreneurship, they burn with ferocious intensity at the Virgin Group. With worldwide revenues of $21 billion in 2011, the company that has created nearly 200 businesses provides clear evidence that ideas, capital, and talent can flow as freely in big, far-flung organizations as they can among the start-ups of Silicon Valley. The mix of businesses that Virgin has spawned is indicative of the fun-loving, eclectic culture that its chairman, Richard Branson, has developed. Branson and his deputies have worked hard to create a culture where employees speak up and share their ideas. There are no gleaming corporate headquarters or executive privileges, just a large house in London where meetings are held in a small room. “Rules and regulations are not our forte,” Branson said. “Analyzing things to death is not our kind of thing.” There aren’t even any job descriptions at Virgin because they are thought to place too many limits on what people can do. Instead, senior executives work shoulder to shoulder with first-line employees. Branson believes that employees should be given top priority and he has created a friendly, nonhierarchical, familylike environment in which people have fun and enjoy themselves. His advice to his employees reflects his personal philosophy: “Do things that you like. If your work and your hobby are the same, you will work long hours because you are motivated.” The result is that Virgin’s businesses include entertainment megastores, cinemas, a fun-to-fly airline, an all-in-one consumer banking system, a hip radio station, and a passenger train service. Smaller ventures have also been launched by persistent employees with good ideas. “We’ve got people all over the world who are coming up with great new ideas, and trying them doesn’t actually cost us a lot relative to the overall size of the group,” says Branson. Virgin’s latest ambitions are out of this world – literally. Branson teamed-up with Burt Rutan, winner of the X-Prize competition which awarded $10 million to the first non-government-funded flight to reach an altitude of 62 miles twice with the same vehicle. With Rutan’s help, Virgin wasted no time in forming a new spin-off: Virgin Galactic. The enterprise has developed SpaceShipTwo,a vehicle that can carry two pilots and six passengers outside the earth’s atmosphere and into lower space. As of June 2013, Virgin Galactic has sold 600 tickets for space travel at $250,000 each and plans to begin commercial flights in early 2014. According to Rutan, “Space tourism will be a multibillion-dollar industry.” It’s just that kind of vision—and risk taking—that has made the 56-year old Branson’s Virgin Group one of the most exciting and profitable examples of corporate entrepreneurship. Sources: Freedman, D. H. 2005. Burt Rutan, Entrepreneur of the Year. Inc. Magazine, January: 58-66; Hamel, G. 1999. Bringing Silicon Valley Inside, Harvard Business Review 77(5): 71–84; Hopkins, M. J. 2005. Richard Branson. Inc. Magazine, April: 100-102; Kets de Vries, M. F. R. 1998. The Transformational Abilities of Virgin’s Richard Branson and ABB’s Percy Barnevik. Organizational Dynamics 26 (3): 7–21; Port, O. 2004. SpaceShipOne’s heady flight path. BusinessWeek Online, October 1, Gerew, G. 2013. Virgin signs up 600th space traveler. www.bizjournals.com. June 20: np; www.businessweek.com; and www.virgin.com. 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 Google, 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 27: 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? Answer: Firms like Google’s “20% Time” and 3M’s Innovation Incubator provide resources for internal entrepreneurs. These programs have led to successful innovations like Gmail and Post-it Notes, demonstrating the effectiveness of supporting entrepreneurial initiatives. Discussion Question 28: 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? Answer: Providing time for entrepreneurial idea development works well in firms with a culture that supports innovation and risk-taking. It is particularly effective in technology and creative industries, where new ideas drive competitive advantage. 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 resources and stimulating interest in the project. Ken Kutagari, who championed the Sony Playstation, is presented as an example.  Discussion Question 29: What are some examples of companies that have a favorable policy toward product champions? Answer: Companies like Google and 3M have favorable policies for product champions, allowing employees to pursue innovative projects. This support helps develop and launch new products, fostering a culture of entrepreneurship within the organization. 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 30: Should the same criteria that are used to evaluate corporate performance in general also apply to corporate entrepreneurship? Why or why not? Answer: Corporate entrepreneurship should be evaluated using criteria like innovation impact, market success, and alignment with strategic goals. While general performance metrics are relevant, entrepreneurial success also depends on creativity and strategic alignment. 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 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 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. The real options logic used by auto parts maker Johnson Controls provides an illustration. STRATEGY SPOTLIGHT 12.8 discusses how Intel has used real options logic in planning out capacity expansions. Teaching Tip: To illustrate the rather abstract concept of Real Options, you may ask students why companies provide business students with internships. You may probably give many answers that include reasons 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 31: What are the advantages and disadvantages of using a real options approach to evaluating entrepreneurial opportunities? Answer: A real options approach provides flexibility in evaluating entrepreneurial opportunities, allowing firms to adapt to changing conditions. It offers advantages in managing uncertainty but can be complex and may not suit all types of innovation projects. 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 32: 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.) Answer: Real options may not be ideal for scenarios requiring rapid decisions or substantial initial investments, such as acquiring a young firm or developing high-cost technologies. In such cases, other evaluation methods may be more appropriate. 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. EXHIBIT 12.3 summarizes the dimensions of an entrepreneurial orientation. The SUPPLEMENT below illustrates how Dell is trying to reinvigorate its business by increasing its entrepreneurial orientation.  Extra Example: Dell’s Attempt at Renewal Once upon a time, Dell was an innovative company that disrupted the computer industry with its build-to-order, direct sales business model. However, those heady days of Dell are long over. Dell’s market value peaked at $100 billion in 2005, but its value had declined to under $30 billion by 2009. Michael Dell, the firm’s founder, returned to run the company again in 2007 to try to renew it and return it to leadership in the computer industry. His changes have dramatically changed the strategic focus of Dell. Prior to the change, Dell’s focus had been on mastering the logistics of computer systems manufacturing and maximizing supply chain efficiencies. Michael Dell saw that the market had changed and that the firm needed to become more innovative. At the core, his efforts have been to increase the entrepreneurial orientation of the firm so that it can be an innovative leader in this market. We can see changes made that are designed to increase Dell’s EO. 1. To increase the autonomy in the firm, the heads of each of the firm’s divisions have been made responsible to meet their financial targets and have been given broad authority to take the actions necessary to meet those objectives. 2. To become more innovative, Dell has recruited new executives from other computer technology firms and other consumer product industries to bring in new perspectives and voices to increase the firm’s ability to the develop innovative products. 3. To increase proactiveness, Dell has restructured the firms, moving from product and technology divisions to customer segment divisions. The aim is to improve the focus on the needs of end customers and to become more responsive to the changing demand conditions in each customer market. 4. To raise the firm’s competitive aggressiveness, Dell has set challenging goals for each of the divisions, begun selling computers through retailers to more directly take on their PC manufacturing competitors, and acquired a number of firms so that they can provide the range of hardware, software, and service solutions to take on their larger competitors, such as IBM and HP. 5. To increase the firm’s risk taking, Dell has increased both its investment in and emphasis of research and development while also communicating, within the firm, the need to challenge the norms in the firm and the industry. For example, Michael Dell personally approved a plan to allow customers to customize the design on their laptops, a risky action for a firm that previously had built their image around cost efficiency and standardized supply chain activities. While the results to date have been mixed, Dell has seen some success lately with the firm’s net income growing by 32% in 2012 to hit $3.5B. But the makeover has not been fast enough for Wall Street. Its stock price has languished over the last five years and has led Michael Dell to lead an effort to take the firm private. Source: Edwards, C. 2009. Dell’s do-over. Business Week. October 26: 37-40. www.hoovers.com  Discussion Question 33. What are the challenges Dell is likely to face as the firm strives to improve its entrepreneurial orientation? In this section, we will describe the five EO dimensions and how they contribute to internal venture development. Answer: Dell may face challenges like integrating entrepreneurial initiatives with its established operations and maintaining agility while scaling innovations. Balancing innovation with core business efficiency will be crucial for enhancing its entrepreneurial orientation. 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. EXHIBIT 12.4 highlights two techniques often used to promote 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 34: How does autonomy help organizational members identify and develop entrepreneurial opportunities? Answer: Autonomy helps employees explore and develop entrepreneurial opportunities by providing freedom to experiment and make decisions. This fosters innovation and can lead to new solutions and improvements within the organization. The SUPPLEMENT 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 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 17th-century estate and remove villages surroundedby 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 35: 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? Answer: Skunkworks and physical separation stimulate entrepreneurial thinking by providing a dedicated space for innovation, away from the constraints of the main organization. This separation encourages creativity and reduces bureaucratic obstacles. 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. EXHIBIT 12.5 identifies 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 below, innovative practices from the domain of social entrepreneurship are highlighted.  Extra Example: Four Practices of Innovative Social Organizations 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 36: 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? Answer: Innovative practices in for-profit settings involve strategies like fostering creativity and investing in new technologies. Socially-oriented firms may prioritize different values, but the core principles of innovation—creativity, risk-taking, and resource allocation—apply across sectors. 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, 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. EXHIBIT 12.6 illustrates 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. Teaching Tip: Although many companies recognize the value of having an entrepreneurial orientation, not all seem to be able to develop one. Ask students to speculate on why so 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 chapter 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 (Chapters 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 their competitive position or aggressive to ensure their advantages from capitalizing on new technologies or serving new market needs. EXHIBIT 12.7 suggests 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 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 resources in order to grow. Risk is used in this context to refer to the risk/return tradeoff that is familiar in financial analysis. 3. Personal risk taking 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. EXHIBIT 12.8 indicates 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. A pitfall associated with risk taking is acting before the risks of a project are clearly understood. The SUPPLEMENT 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 37: How might the suggestions made in the example above be applied to your personal career planning and efforts? Answer: Applying innovative practices to personal career planning involves setting clear goals, seeking opportunities for growth, and being open to new ideas. Embracing these practices can help develop a proactive and entrepreneurial approach to career development. I V. Issue for Debate As a means to address its limited success in developing innovative products, Microsoft has set up a business incubator, the Bing Fund. Microsoft will supply the businesses it chooses to support with workspace, mentoring from Microsoft’s managers and programmers, access to Microsoft’s business network, and financial support.  Discussion Question 38: If you headed up a tech startup, would you want to work with the Bing Fund? Answer: There are a lot of potential positives here. Microsoft is willing to give space to the startups, access to software and expertise, and financial capital. Thus, they lessen the potential costs for startups as well as providing financial backing. Microsoft is also well embedded in the industry and may be able to provide key contacts for the startup firm. These are key positives for startup firms. Additionally, while Microsoft has struggled with its innovation, it is highly profitable and has deep pockets that potentially could provide significant financing if the startup’s products look highly promising. There are at least two potential negatives though. Students’ first reactions may be that Microsoft’s reputation as an innovator is so damaged at this point that a firm striving to be innovative would not want to be associated with Microsoft. This may be seen as a bad signal to potential customers and partners. More specifically, aligning with Microsoft may limit future potential partners for the firm. Other firms, such as Google and Apple, may not want to work with a firm that is closely linked with Microsoft. One view that may or may not come out is that the Bing Fund may be attractive to entrepreneurs who are looking to cash out quickly. Many technology entrepreneurs have relatively short timeframes in their minds for their firms and want to cash out within three to five years. Since Microsoft is in desperate need for innovative ideas, entrepreneurs with a short timeframe may want to work with Microsoft since the potential for a quick buyout is fairly likely.  Discussion Question 39: 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? Answer: The key for this question is to get students to think about why Microsoft has struggled with its own innovation efforts. The case mentions the dominance of Windows and Office within the core of Microsoft and its inability to attract and keep strong talent since its stock price has been relatively flat for years – limiting the potential for stock-based incentive compensation. Thus, the quest for Microsoft is to structure things so that these weaknesses don’t hamper startups with which Microsoft works. Microsoft may wish to leverage ideas that grow out of the Bing Fund as independent corporations and not part of Microsoft Corporation. This would help insulate the startups from the Windows and Office focused mindset of Microsoft. It would also allow the workers to benefit from the value they create by having their own firm’s stock, which will be partly owned by Microsoft but also openly traded on the stock market. If Microsoft wants to wholly own the technologies that grow out of the Bing Fund, they may want to develop them further in a New Venture Group within Microsoft. This would also partially insulate them from the Windows/Office dominance, but they would then need to develop other compensation structures, such as bonuses on sales growth, to reward employees of the NVG for their success.  Discussion Question 40: In the end, will the Bing Fund help Microsoft become more successful at corporate entrepreneurship? Answer: The students will likely be skeptical since Microsoft has struggled mightily in recent years to be innovative, but the instructor should push the students as to why this has been the case. This may lead to a discussion of the need for an entrepreneurial culture. Microsoft had been so successful with its core products that it lost its desire for change and renewal, and it has had difficulty re-instilling an entrepreneurial culture even with its recent struggles. Since the Bing Fund is only loosely tied into the core operations of Microsoft, it is unlikely to re-invigorate the culture of the larger firm in the near term. However, there is a key reason that the Bing Fund may help facilitate entrepreneurship at Microsoft. Since the fund broadens the potential range of technologies Microsoft has access to, Microsoft may benefit from looking at this as a Real Options play. They can make small investments in a number of technology investments within the firm as well as a number of Bing Fund firms, forestall making a full commitment until both the internal and external technologies reach a clear decision point, and then choose the best options. Thus, Microsoft may be more successful in their entrepreneurial actions since it will have more options to choose from. Also, the threat of “outsider” ideas getting funded may spur the internal technology development teams to be more innovative and entrepreneurial. The Bing Fund could help Microsoft by fostering a culture of innovation and providing access to new ideas and technologies. The success of this initiative would depend on how effectively Microsoft incorporates and scales these innovations within its operations.  VI. Reflecting on Career Implications Below, we provide some suggestions on how you can lead the discussion on the career implications for the material in Chapter 12.  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? Ask students to identify specific innovation initiatives in their companies. Some may not be able to, and that lack of awareness is an issue to be addressed. Instructors can supplement the discussion by noting the constant stream of new product innovations across all industries that characterize the business environment. Radical innovations are most obvious, but incremental innovations matter, such as fixing a defective software package, or making a smart phone more reliable. Process innovations are also common. Companies have to innovate both to succeed and to keep up with competitors. It may be relevant to give students an assignment of investigating their firms’ innovations. The point of the discussion is to increase students’ awareness of their companies’ innovation efforts. Awareness of their companies’ innovations is the first step in students’ efforts to contribute to the innovation effort. The ways to contribute are as varied and numerous as there are employees. Students could participate in focus groups that discuss new product designs, or do work on innovation initiatives. Usually, employees can make suggestions as to how to improve products and processes. Because innovation is so important to firms’ strategies, contributions from employees show initiative on the part of the students, and set them up for participating in projects that will contribute to their firms’ future growth.  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. Ask students to self-assess their innovation skills. It may be useful to ask students what their strongest trait is, and defend their choice with a personal anecdote. Ask students if these innovation traits are worth building as they pursue their careers. The point is to emphasize the importance of innovation skills in the minds of students, and to get them to understand the five dimensions of the concept. People with strong innovation skills tend to question everything and bring new approaches to their activities. In organizations that are considered high on innovation, these traits may tend to be recognized and appreciated. Students who exhibit these skills in the interview may have an advantage. Ask students how they could prepare for the interview. Some relevant answers may be to examine the firm’s product offerings and suggest appropriate diversifications, or consider using new media for advertising and selling, or consider an effort to improve interaction between the firm’s divisions. Bringing these ideas to the interview may help to differentiate students from other, less well prepared candidates.  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. In today’s business environment, most executives have careers that involve multiple paths. And many successful people end up in rewarding careers that they did not intend on pursuing when they were in school. (Perhaps the instructor has a similar career story.) Ask students how these career changes could happen. To some extent, they happen because of personal crises such as losing a job and then taking a new one in a different field. But preparing for career path changes may be worth considering. Such preparations may include getting new certifications, participating in new entrepreneurial ventures, or taking a challenging new assignment such as an expatriate posting. These experiences will broaden students’ skill sets and capabilities, and expose them to new possibilities. Now, some such preparations will be worth considering, and some will not. Ask students how they can choose between a desirable and an undesirable career decision. What information will they need to consider? What trends would help them in their 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 students can develop and exploit their unique skills and capabilities. The costs of deciding to take a challenging new job, such as an expatriate posting, are significant and worth considering. Such a posting may take the employee away from headquarters and a seemingly stable career path. The major cost is the risk that the posting will not pay off in career success. Ask students what they can do to reduce the risk. Perhaps they could look at the careers of others who took similar postings in the past. They could seek a contractual guarantee of a position upon repatriation. During their posting, they could make efforts to keep up with events at the home office through a mentor. With today’s global communication technology, geographical distance is not the barrier it used to be.  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. On way to begin the discussion is to emphasize that entrepreneurs are the lifeblood of economic growth, so they are an important part of the economy. Then ask students if they want to be an entrepreneur, or maybe participate in an entrepreneurial venture at some point in their careers. Even if they do not want to participate, they may have to at some point. The point is that entrepreneurial activities are an ingrained part of business. Ask students to evaluate themselves on the five parts of the entrepreneurial orientation. Ask them which part is their strength, and support their claim with a personal anecdote. This exercise will establish that students understand the concept and can apply it to themselves. The next step may be to ask students what plans they may have for developing their entrepreneurial capabilities. Students may offer a range of answers, so ask them which plan would be most effective. During the discussion, it may be useful to point out that all entrepreneurial activities, even just dreaming about starting new ventures, are significant. The most effective plan may be to actually start a new business venture. The point here is to get students to think about incorporating entrepreneurial activities into their professional plans.  VII. 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 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 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. End of Chapter Teaching Notes Chapter 12: Managing Innovation and Fostering Corporate Entrepreneurship Summary Review Questions 1. What is meant by the concept of a continuum of radical and incremental innovations? Response: Innovations are the use of new knowledge to transform organizational processes or create commercially viable products and services. Radical innovations fundamentally change existing practices, and incremental innovations enhance existing practices or make small improvements in products and processes. Some innovations are barely incremental, such as frozen yogurt, which is a bit different from ice cream. More radical innovations include laparoscopic surgery, which radically changes the patient preparation and recovery, and surgeon skill set needed, for many surgical procedures. Most innovations fall in between these extremes along a continuum based on how much the innovation changes existing practices. There is no set formula for determining the extent of radicalness of an innovation. (Note to instructor) It may be interesting to engage students on the question of the degree of radicalness of an innovation. Debating different perspectives will reinforce the concept. Answer: The continuum of radical and incremental innovations represents the spectrum from groundbreaking changes (radical) to small, gradual improvements (incremental) in products or processes. Radical innovations often create new markets, while incremental innovations enhance existing ones. 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? Response: When firms pursue innovations, they have to make a number of choices that have uncertain outcomes, and can affect the innovation’s likelihood of success. Five of these choices involve critical tradeoffs and include: • Seeds versus weeds – or the choice between a likely successful innovation project (seed) and one that will not be successful (weed). • Experience versus initiative – or the choice in project manager between an experienced top executive, with credibility and knowledge, or a midlevel employee who has enthusiasm and perhaps more specialized expertise. • Internal versus external staffing – internal staffing will be closely connected with the organization and its culture, but may not have the best expertise and will have to have their current positions replaced. • • Building capabilities versus collaborating – internal development will minimize organizational disruptions, but will cost time and money to learn the innovation. Collaborating with partners will enable the firm to use the resources and skills of other firms, but can create dependencies, incur transaction costs, and reduce the potential benefit from the innovation because profits will be shared. • Incremental versus preemptive launch – incremental launch is less costly and enables firms to develop and test the innovation, but takes longer and gives competitors a chance to enter the market. Firms can use four methods to manage the innovation process and keep it from becoming too expensive, taking too long, and/or incurring too much risk. First is defining the scope of the innovation, which puts boundaries on the project to ensure that it does not develop into an area outside the firm’s interests and ability to support. Second is to manage the pace of innovation, which involves the firm’s timeline for developing the innovation, and committing appropriate funds, staff, and other resources to the project. Third is staffing to capture value from innovation – which involves identifying the skills, knowledge, and expertise needed to complete the project and committing the appropriate set of employees. Fourth is collaborating with innovative partners – or identifying the capabilities that the firm needs but does not have, and working with the right partners to access needed capabilities. Structuring the relationship to develop the innovation is an important part of the collaboration. Answer: Organizations face dilemmas such as resource allocation and strategic alignment when choosing innovation projects. Effective management involves prioritizing projects, setting clear goals, and maintaining flexibility to adapt to new insights and market conditions. 3. What is the difference between focused and dispersed approaches to corporate entrepreneurship? Response: Corporate entrepreneurship is the creation of new value for a corporation through investments that create either new sources of competitive advantage or renewal of the value proposition. Focused approaches mean that the entrepreneurship activities are isolated from the rest of the corporation, and worked on in independent work units. Dispersed approaches have all parts of the organization engaged in intrapreneurial activities. Answer: Focused approaches center innovation efforts on specific strategic areas, while dispersed approaches spread innovation activities across various domains. Focused approaches can drive deep expertise, while dispersed approaches promote broader experimentation. 4. How are business incubators used to foster internal corporate venturing? Response: Business incubators, a type of focused corporate entrepreneurship, are corporate new venture groups that support and nurture fledgling entrepreneurial ventures until they can thrive on their own as stand-alone businesses. Business incubators are designed to “hatch” new businesses by providing support such as funding, physical space, business services, mentoring, and networking. Answer: Business incubators support internal corporate venturing by providing resources, mentorship, and a structured environment for developing new ideas. They help startups within the company navigate challenges and accelerate their growth. 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? Response: Product champions, a type of dispersed corporate entrepreneurship, are individuals working within corporations who bring entrepreneurial ideas forward, identify what kind of markets exist for the products or services, find resources to support the ventures, and promote the venture concepts to upper management. To be successful, product champions must clearly define the project, its potential to create value, and its fit within the existing corporate mission and other strategic objectives. And product champions must win project impetus, or support from senior managers who have experience with similar projects. Companies can use product champions to overcome reluctance or skepticism of innovative ventures. Champions can contact potential customers, demonstrate the need for the product or service, construct budgets, and contact a few sympathetic other managers. As a result, the product champion creates a bridge between product definition and product impetus. After sufficient time and development, the product champion can present top management with a convincing proposal in which the innovation has a market, a feasible design, and a fit within the company’s other strategic objectives. Answer: Product champions advocate for new products or services, driving their development and implementation. Companies can use them to navigate organizational hurdles, gather support, and ensure successful venture execution. 6. Explain the difference between proactiveness and competitive aggressiveness in terms of achieving and sustaining competitive advantage. Response: Entrepreneurial orientation is the strategy-making practices that businesses use in identifying and launching new ventures, consisting of autonomy, innovativeness, proactiveness, competitive aggressiveness, and risk taking. Proactiveness is a forward-looking perspective characteristic of a marketplace leader that has the foresight to seize opportunities in anticipation of future demand. Competitive aggressiveness is 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. Proactiveness achieves and sustains competitive advantage through first mover advantages. It is a response to market opportunities. First movers can establish brand identity with customers, prevent competitors from access to key resources, move down the experience curve, and set industry standards for technology, product performance, and distribution. Competitive aggressiveness is directed at threats in the environment, namely competitors. Rather than being forward-looking, competitive aggressiveness achieves and sustains competitive advantage by using a business model that enables either lower costs or higher quality than competitors can match. For example, a firm that uses open-source software will have lower software development costs than a competitor that develops software in house. With reference to SWOT analysis, proactiveness addresses the “O” part – opportunities. Competitive aggressiveness addresses the “T” part – threats. Answer: Proactiveness involves anticipating and acting on future opportunities, while competitive aggressiveness focuses on directly confronting competitors. Proactiveness creates long-term advantages, while competitive aggressiveness seeks immediate market position. 7. Describe how the entrepreneurial orientation (EO) dimensions of innovativeness, proactiveness, and risk taking can be combined to create competitive advantages for entrepreneurial firms. Response: Entrepreneurial orientation is the strategy-making practices that businesses use in identifying and launching new ventures, consisting of autonomy, innovativeness, proactiveness, competitive aggressiveness, and risk taking. Innovativeness is the willingness to introduce novelty through experimentation and creative processes aimed at developing new products and services as well as new processes. Proactiveness is a forward-looking perspective characteristic of a marketplace leader that has the foresight to seize opportunities in anticipation of future demand. Risk-taking is making decisions and taking action without certain knowledge o probably outcomes; some undertakings may also involve making substantial resource commitments in the process of venturing forward. Entrepreneurial firms can develop strategies of continuously developing new products and innovations that anticipate consumer demands. The strategy is to exploit first mover advantages for the new product. When competitors manage to enter the industry with similar products, the firm has learned enough about consumers to launch its next innovative product(s). This strategy is proactive because it is forward-looking and exploits opportunities in the marketplace. It is innovative because the products are new, experimental, and different. It is risk-taking, but not gambling, because the firm does careful research of customer preferences and latent needs, and uses its findings to develop educated guesses as to what customer needs it can feasibly meet with future innovations. Answer: Combining innovativeness, proactiveness, and risk-taking allows entrepreneurial firms to develop unique products, anticipate market trends, and adapt to changes. This combination fosters a dynamic approach to gaining and maintaining a competitive edge. 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. Response: The table below is suggestive. There are no right and wrong answers to the question. But the points are supported with examples. Entrepreneurial Orientation Company A (Wal-Mart) Company B (Google) Autonomy Low – most operations are centered in Bentonville, Arkansas High – independent divisions enter new businesses and operate them in different manners. All new businesses are complementary and fit the organizational mission. Innovativeness Moderate – new products frequently introduced, including pharmacies and photography studios. High – cutting edge technologies and services offered. New advertising-based business model developed. Proactiveness Moderate – some entrepreneurial activities are designed to respond to competitors. But basic strategy of offering low cost products remains. High – Very forward-looking in its approach to the industry. Working to set standards in areas such as advertising, and combining various types of information (from, ex. You Tube, Google Earth, and gmail). Competitive Aggressiveness High – Near fanatic devotion to offering lower prices than the competition. Moderate – aggressive in entering new markets and combining services, but has allowed competitors in the search engine business to catch up. Risk Taking High – New ventures are thoroughly investigated before launch Moderate – Perhaps because the customer base is so variable, and the technology uncertain, it is difficult to calculate risks. Some ventures do not seem reasonable and have hurt Google, such as the effort that led to recording of private information. Answer: Amazon (Retail/Tech): Amazon exhibits high entrepreneurial orientation with strong innovativeness, proactiveness, and risk-taking, evident in its continuous tech innovations and rapid market expansion. Johnson & Johnson (Healthcare): Johnson & Johnson shows a more cautious entrepreneurial orientation, focusing on incremental innovations and risk management, driven by regulatory constraints and a strong emphasis on maintaining product safety and efficacy. Based on Your Comparison: 1. How is the corporation’s entrepreneurial orientation reflected in its strategy? Response: In both cases, strategy does fit with EO. Wal-Mart is a cost-cutter, so it emphasized competitive aggressiveness. Google emphasizes innovativeness. (Note to instructor) We suggest you first establish the degree of entrepreneurial orientation in each firm. Ask students to identify each firm’s new ventures in the past two to three years. Then ask students to link the new venture activities with each of the five EO strategy-making practices. Answer: A corporation’s entrepreneurial orientation is reflected in its strategy through its emphasis on innovation, proactive market moves, and willingness to take risks to capture new opportunities. 2. Which corporation would you say has the stronger entrepreneurial orientation? Response: Google seems to be the more entrepreneurial firm. It is more reliant on a stream of new ventures for its success. Wal-Mart relies to a great extent on tried and true strategies for reducing costs. (Note to instructor) After the student answers this question, ask which of the EO strategy-making practices accounts for the firm’s overall EO strength. Then ask the student for examples that demonstrate the claim. Answer: Amazon has the stronger entrepreneurial orientation due to its aggressive pursuit of innovative technologies and market expansion strategies. 3. Is the corporation with the stronger entrepreneurial orientation also stronger in terms of financial performance? Response: No. Wal-Mart is much larger in terms of revenue and size of profits. It’s probably invalid to compare profitability metrics like return on sales due to industry differences. However, Google relies on its corporate entrepreneurship for profits more than Wel-Mart. (Note to instructor) The purpose of this question is to ask students to investigate the link between entrepreneurial orientation and financial performance. After hearing students’ answers to the question, ask them to identify the competitive advantages that generate each firm’s financial performance. For the more entrepreneurial firm, ask how entrepreneurial ventures contributed to revenues (usually firms breakdown revenues by product and geographic market, so students should be able to estimate an answer to this question). Then ask about the costs of the new ventures. (Usually, costs for new ventures exceed revenues early on, and only after a couple of years or so do new ventures generate profits.) Will the new ventures generate more profits in future years? Answer: Yes, Amazon’s stronger entrepreneurial orientation correlates with its robust financial performance, driven by its innovative approach and market leadership. 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. Response: (Note to instructor) Students should be able to tell if the firm has lower prices, higher quality products, brand equity, and first mover advantage. This competitive position will allow students to infer the firm’s entrepreneurial orientation, and the extent to which it exploits innovativeness, proactiveness, competitive aggressiveness, and risk taking. Students should be able to identify a strategic advantage. If not, then ask, “Why do customers buy the firm’s product or service, and not the competition’s?” Then ask, “How does the firm create and maintain that advantage?” and “Why can’t competitors imitate this advantage?” These questions should lead to discussion that will focus student’s thinking about how corporate entrepreneurship leads to competitive advantages. Answer: Google excels in corporate entrepreneurship with its innovation labs and diverse ventures, giving it a strategic edge over competitors through continuous technological advancements. However, its broad focus can dilute resources and complicate strategic alignment. 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? Response: Product innovations result in improvements to the product such as new features, new design, incorporation of new materials, or new functionality. These innovations are observable to customers and the market. Process innovations result in improvements to the manufacturing process, factory layout, use of automation, new logistics, or supply chain improvements. Process improvements are not generally observable to the market or to competitors. Product improvements associate with proactiveness. As a market leader, a proactive firm will be forward looking and offer the market improved products. Process improvements associate with competitive aggressiveness, as the result is often the firm’s ability to offer the same product at a lower price. An example would be a firm that uses open-source software instead of developing its own software, as a competitor might. This process improvement would lower costs. Competitive aggressiveness can also pertain to product improvements, as another way to compete is by offering products with higher quality than the competition. And autonomy, innovativeness, and risk taking can pertain to both product innovations and process innovations. Answer: Product innovations involve new or improved products, like Apple’s iPhone advancements. Process innovations focus on improving operational efficiency, such as Toyota’s production system improvements. Each type supports the firm's strategy—Apple's innovation drives market differentiation, while Toyota’s enhances production efficiency. 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? Response: (Note to instructor) In the discussion regarding product champions, ask the student how he or she identified the product champion? What products have benefited from product champions? What did the product champion do? Then link the activities of the product champion to the need for product definition and the need to convince others in the firm, especially top management, of the value of the product (or achieve project impetus). The question on corporate venture fund refers to business incubators. If the student identifies a corporate venture fund, ask about its activities. How many ventures and what types of ventures have been “hatched” by the fund? What other types of support has the firm provided, such as physical space, business services, mentoring, and networking. As for sustainable advantages, it might be useful to investigate three types, low cost, product quality (including perceived quality), and first mover advantages. For low cost, the advantage is not likely to be sustainable unless the firm can achieve and maintain greater market share than the competition and make sufficient investments in scale efficient facilities. For product quality, the advantage is sustainable to the extent that the firm can generate brand equity. But again, the advantage is likely to be imitated by competitors in most significant markets. For both low cost and product quality advantages, ask how entrepreneurial efforts contribute to the firm’s ability to compete. Usually students will realize that exploiting market power and brand equity have more to do with other types of competitive advantage than corporate entrepreneurship. First mover advantages have a different assessment. Entrepreneurial firms can generate new products and exploit first mover advantages such as (a) build a reputation, (b) control scarce resources, (c) patent innovations, (d) exploit experience curve effects, and (e) set industry standards. These first mover advantages should enable the firm to dominate the new market for enough time to recoup its investment. While the advantage in any particular product market may not be sustainable, the entrepreneurial activities may be. At any time, the firm will be developing new innovative products that will generate a stream of first mover advantages, and use the profits from its existing products to fund these new ventures. Answer: NVIDIA on the NASDAQ fosters an entrepreneurial culture with a corporate venture fund and encourages product champions. Its efforts support a sustainable competitive advantage by driving advancements in AI and graphics technology. 4. How can an established firm use an entrepreneurial orientation to enhance its overall strategic position? Provide examples. Response: An entrepreneurial orientation is designed to generate a stream of innovations. These innovations can support a number of strategies. To illustrate, we can look at the three generic strategies of overall cost leadership, differentiation, and focus. For overall cost leadership strategies, an entrepreneurial orientation can support efforts to reduce costs through experience curve effects. Incremental process innovations can facilitate these cost reductions. For differentiation strategies, an entrepreneurial orientation can facilitate keeping ahead of the competition in terms of product uniqueness. An entrepreneurial orientation can facilitate product innovation and exploring new markets. For focus strategies, an entrepreneurial orientation can facilitate both product and process innovations that enable firms to effectively and efficiently serve narrow market segments. And the entrepreneurial orientation dimensions of innovativeness, proactiveness, and risk taking facilitate first mover advantages that can contribute to the success of differentiation and focus strategies. (Note to instructor) The above discussion is structured by generic strategies. It may be useful to structure by the five dimensions of entrepreneurial orientation. The objective of the question is to have students think about how entrepreneurial orientation contributes to strategic position, and either the generic strategies or the entrepreneurial dimensions are suitable. In either case, it is useful to ask students to classify all of their examples into one of these taxonomies of strategies. Answer: An established firm can leverage an entrepreneurial orientation by fostering a culture of innovation, agility, and risk-taking, like 3M, which encourages employees to spend 15% of their time on personal projects, resulting in numerous product innovations and strategic advantages. 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? Response: Possible unethical practices related to innovation activities include violation of others’ intellectual property rights, pirating other companies’ personnel, inadequately developing an innovation to ensure that it is safe, and neglecting productive personnel. Violating others’ intellectual property rights means that the innovation incorporates patents, copyrights, trademarks, or trade secrets without the owners’ permission. Pirating other companies’ personnel means hiring talent from other companies. The primary problem with this practice is that the pirated personnel may share their former employers’ secrets, thus subjecting them and the firm to violation of trade secrets laws. Inadequately developing an innovation to ensure that it is safe would be a possible result of getting the innovation to market too quickly, and can result in injury or other harm to customers. And neglecting productive personnel means that key individuals in the firm are not properly rewarded and recognized for their innovative efforts. The potential long-term consequences of these unethical actions are generally a reduction in the firm’s ability to innovate in the future. Legal action from patent and trade secret infringement can be very costly and result in injunctions, corporate restructuring, and any action that courts think might be suitable. Harm to customers can also result in damaging lawsuits. And neglected personnel are likely to lose motivation and commitment to the firm, resulting in their possible migration to competitors. All these consequences are likely to carry a cost in reputation and the associated damage to brand equity, consumer goodwill, and investor confidence. Answer: Unethical practices in innovation can include patent infringement, plagiarism, and misrepresentation of research results. Long-term consequences may involve legal disputes, damaged reputation, and loss of trust among stakeholders. 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? Response: Best Buy can be used as an example. It has three entrepreneurial corporate social responsibility programs. First is recycling of old electronics equipment. Second is auditing suppliers to ensure that they don’t exploit workers or damage the environment. Third is promoting diversity among employees by setting up social networks for groups of employees such as women, Asian-Americans, African Americans, and gays & lesbians. There are multiple benefits of these policies. Best Buy is leveraging new technologies, environmentally friendly ventures, and entrepreneurial practices to motivate workers in their firm, meet the interests and demands of their customers, and differentiate themselves from their rivals—while also meeting their societal responsibilities. On the one hand, these policies have a business side. The recycling program generates traffic for Best Buy stores. The social networks are designed to also extend to customer groups. So these efforts are not all altruistic. Other examples of entrepreneurial policies and practices that pursue corporate social responsibility goals include Whirlpool’s development of energy-conserving appliances and partnership with NaturalStep, Interface, Inc.’s carpet recycling program that saves on materials, and Green Mountain Coffee Roasters efforts to promote coffee growers and fair trade. Utilities have also been accused of falsely promoting green power, or starting programs aimed at energy conservation or renewable energy, but that do not fulfill promises. In some cases, customers may pay extra for a green energy project, but the funds are largely diverted to other purposes. The ethical implications of firms making token social responsibility efforts include loss of reputation. There are savvy environmental groups and ethical authorities, such as Business Ethics magazine, that oversee and rate firms’ social responsibility efforts. Token efforts are likely to be criticized as attempts to deceive the public regarding the firm’s true (lack of) commitment to social responsibility. Answer: Using entrepreneurial policies to pursue corporate social responsibility (CSR) goals can be ethical if it aligns with genuine values and impacts. However, if perceived as merely a marketing ploy, it may lead to skepticism and undermine credibility. Solution Manual for Strategic Management: Creating Competitive Advantages Gregory G. Dess, Alan Eisner, G.T. (Tom) Lumpkin, Gerry McNamara 9780077636081, 9781259245558