13
Strategic Chapter Entrepreneurship
Entrepreneurship is the economic engine driving many nations economies in the global competitive
landscape. Entrepreneurship and innovation have become important for young and old, large and
small
Strategic entrepreneurship is taking entrepreneurial actions using a strategic perspective. More
specifically, it involves engaging in simultaneous opportunity seeking and competitive advantage
seeking behaviors to design and implement entrepreneurial strategies to create wealth.
Because of todays uncertain environment (i.e., a complex global marketplace), firms cannot easily
predict the future. As a result, they must develop strategic flexibility to have a range of strategic
alternatives that they can implement as needed. Creating tomorrows business requires a constant
search for emerging opportunities.
ENTREPRENEURSHIP AND ENTREPRENEURIAL OPPORTUNITIES
Entrepreneurship is the process by which individuals or groups identify and pursue entrepreneurial
opportunities without being immediately constrained by the resources they currently control.
Entrepreneurial opportunities represent conditions in which new products or services can satisfy a
need in the market. The essence of entrepreneurship is to identify and exploit these opportunities.
After identifying opportunities, entrepreneurs take actions to exploit them and establish a
competitive advantage. To do that, actions must be valuable, rare, costly to imitate, and
nonsubstitutable.
INNOVATION
Peter Drucker argues that innovation is a function of entrepreneurship, as well as the means that an
entrepreneur uses to create wealth-producing resources or enhance the potential of existing resources
for creating wealth.
Entrepreneurship and innovation are important for large and small firms (and start-ups) as they compete in
the new competitive landscape. These are central to creativity, economic growth, productivity, and job
creation.
Note: Innovation has long been recognized as vital to competitive success. For example, Henry Ford,
founder of Ford Motor Company, observed that, The competitor to be feared is one who never
bothers about you at all, but goes on making his own business better all the time. Businesses that
grow by development and improvement do not die. But when a business ceases to be creative, when it
believes it has reached perfection and needs to do nothing but produceno improvement, no
developmentit is done.
Innovation has an impact on firm outcomes.
Innovation is a key source of competitive success for firms competing in turbulent, competitive
markets.
Innovation is intended to enhance a firms strategic competitiveness and financial performance.
Research shows that firms in global industries that invest more in innovation also achieve greater
returns.
Schumpeter suggested that firms generally engage in three types of innovative activity:
invention, the act of creating or developing a new product (good or service) or process idea
innovation, the process of creating a commercializable product from invention
imitation, the adoption of innovation by similar firms, which often leads to standardization of the
product or process and lower pricesall of this while maintaining many of the same features
In the United States in particular, innovation is the most critical of the three types of innovative
activity. Many companies are able to create ideas that lead to inventions, but commercializing those
inventions through innovation has, at times, proved difficult. This difficulty is suggested by the fact
that approximately 80 percent of R&D occurs in large firms, but these same firms produce fewer
than 50 percent of the patents.
ENTREPRENEURS
Entrepreneurs are individuals, acting independently or as part of an organization, who create a new
venture or develop an innovation and take on the risks involved in introducing it to the marketplace.
Entrepreneurs tend to demonstrate several characteristics, including those of being optimistic,
highly motivated, willing to take responsibility for their projects, and courageous. In addition,
entrepreneurs tend to be passionate and emotional about the value and importance of their
innovation-based ideas.
Evidence suggests that successful entrepreneurs have an entrepreneurial mind-set. The person with
an entrepreneurial mind-set values uncertainty in the marketplace and seeks to continuously
identify opportunities with the potential to lead to important innovations. Because it has the potential
to lead to continuous innovation, individuals entrepreneurial mind-sets can be a source of
competitive advantage for a firm.
Top-level managers should try to establish an entrepreneurial culture that inspires individuals and
groups to engage in corporate entrepreneurship. For example, Steve Jobs of Apple Computer
believes one of his key responsibilities is to help Apple become more entrepreneurial and more like a
start-up.
In most cases, knowledge must be transferred to others in the organization (even in smaller ventures)
to enhance the entrepreneurial competence of the firm. The transfer is likely to be more difficult in
larger firms. Research has shown, however, that units within firms are more innovative if they have
access to new knowledge.
Managers will need to develop the capabilities of their human capital to build on their current
knowledge base while incrementally expanding that knowledge.
Developing innovations and achieving success in the marketplace require effective human capital. In
particular, a firm must have strong human capital throughout its workforce if employees are to
develop an entrepreneurial mind-set.
INTERNATIONAL ENTREPRENEURSHIP
Entrepreneurship is a top priority in many countries of the world.
A recent study of 42 countries found that the percentage of adults involved in entrepreneurial activity
ranged from a high of over 40 percent in Peru to a low of slightly over 3 percent in Belgium. The
U.S. had a rate of about 10 percent. Importantly, this study also found a strong positive relationship
between the rate of entrepreneurial activity and economic development in the country.
Research indicates that there is a direct relationship between entrepreneurship and collectivism:
when collectivism is emphasized, entrepreneurship declines. However, extremely high levels of
individualism also can have a negative impact on entrepreneurship. Thus, it is important to balance
individualism and collectivism (or the spirit of cooperation and group ownership of innovation).
With increasing globalization, a growing number of new ventures are born global (i.e., started as
an international concern). New ventures that enter international markets to increase their
technological knowledge thereby enhance their performance.
The probability of entering international markets increases when the firm has top executives with
international experience. Furthermore, the firm has a higher likelihood of successfully competing in
international markets when its top executives have international experience.
Because of the learning and economies of scale and scope afforded by operating in international
markets, both young and established internationally diversified firms often are stronger competitors
in their domestic market as well. Additionally, as research has shown, internationally diversified
firms are generally more innovative.
INTERNAL INNOVATION
Most innovation is developed through Research and Development (R&D). In fact, R&D may be the
most critical factor in gaining and sustaining a competitive advantage in some industries (e.g.,
pharmaceuticals).
Effective R&D often leads to firms filing for patents to protect their innovative work. Increasingly,
successful R&D results from integrating the skills available in the global workforce. In the years to
come, the ability to have a competitive advantage based on innovation may accrue to firms that are
able to meld the talent of human capital from countries across the world.
Incremental and Radical Innovation
Most innovations are incremental. That is, they build on existing knowledge bases and provide small
improvements in the current product lines. Alternatively, radical innovations usually provide
significant technological breakthroughs and create new knowledge. Radical innovations are rare
because of the difficulty and risk involved in developing them.
Internal corporate venturing represents the set of activities used to create inventions and
innovations within a single organization. The internal corporate venturing process is illustrated in
Figure 13.1.
Induced Strategic Behavior
The second approach to creating internal corporate venturing is induced strategic behavior, a topdown process where the current strategy and structure foster product innovations that are associated
closely with the firms current strategy and structure. In other words, strategy is filtered through the
firms existing structural hierarchy, a process that leads to internal innovations that are highly
consistent with the firms current strategies.
IMPLEMENTING INTERNAL INNOVATIONS
Having processes and structures in place through which a firm can successfully implement the
outcomes of internal corporate ventures and commercialize innovations is critical. Indeed, the
successful introduction of innovations into the marketplace reflects implementation effectiveness.
Effective integration of the various functions involved in innovation processes is required to
implement the innovations resulting from internal corporate ventures. Increasingly, product
development teams are being used to integrate activities associated with different organizational
functions.
Cross-Functional Product Development Teams
Cross-functional teams facilitate efforts to integrate activities associated with different organizational
functions (e.g., design, manufacturing, and marketing). In addition, new product development
processes can be completed more and quickly the products more easily commercialized when crossfunctional teams work effectively.
Horizontal organization refers to changes in organizational processes where managing across
functional units becomes more critical than managing up and down functional hierarchies.
Note: Cross-functional teams group product development stages into parallel or overlapping
processes, which allows the firm to tailor its product development efforts to its unique core
competencies and to the needs of the market.
Some of the core horizontal processes that are critical to innovation efforts are formal; they may be
defined and documented as procedures and practices. More commonly, however, these processes are
informalthat is, these routines or ways of working evolve over time. Often invisible, informal
processes are critical to successful product innovations and are supported properly through
horizontal organizational structures more so than through vertical organizational structures.
There are two primary barriers that may prevent the use of cross-functional teams as a means of
integrating organizational functions: (1) independent frames of reference of team members and (2)
organizational politics.
Research suggests that functional departments vary along four dimensions: time orientation,
interpersonal orientation, goal orientation, and formality of structure. Thus, individuals from
different functional departments have different orientations on these dimensions and will view
product development activities in different ways.
Political activity may center on allocating resources to different functions. Interunit conflict may
result from aggressive competition for resources among those representing different organizational
functions.
Facilitating Integration and Innovation
Shared values and effective leadership are important to achieving cross-functional integration and
implementing innovation. Highly effective shared values are framed around the firms vision and
mission, and they become the glue that promotes integration between functional units. Thus, the
firms culture promotes unity and internal innovation.
Strategic leadership is also highly important for achieving cross-functional integration and
promoting innovation. Leaders set goals and allocate resources. The goals include integrated
development and commercialization of new goods and services. Effective strategic leaders also
ensure a high-quality communication system to facilitate cross-functional integration.
Creating Value from Internal Innovation
An entrepreneurial mind-set must be developed so that managers and employees will seek to identify
and exploit opportunities for new goods and services and new markets. Cross-functional teams are
important to promote integrated new product design ideas and commitment to their implementation
thereafter. Effective leadership and shared values promote integration and vision for innovation and
commitment to it. The end result for the firm is the creation of value for the customers and
shareholders through development and commercialization of new products.
INNOVATION THROUGH COOPERATIVE STRATEGIES
Virtually all firms lack the breadth and depth of resources (e.g., human capital and social capital) in
their R&D activities to develop internally a sufficient number of innovations. Firms frequently use
cooperative strategies to develop innovations and to quicken the pace at which some of their own
innovations are distributed. In other instances, they use cooperative strategies to align what they
believe are complementary assets with the potential to lead to future innovations.
Note: An alternative to internal innovation is to tap the resources available in other
organizations for the following reasons:
Knowledge is increasing rapidly, making it difficult for firms to remain up-to-date.
This vast knowledge base is also becoming increasingly specialized.
Firms may not possess the knowledge needed to commercialize goods and services.
Some countries may have access to resources and capabilities that enable firms located
there to create specialized products.
The rapidly changing technologies of the twenty-first century competitive landscape, globalization,
and the need to innovate at world-class levels are primary influences on firms decisions to innovate
by cooperating with other companies. Indeed, some believe that because of these conditions, firms
are becoming increasingly dependent on cooperative strategies as a path to successful competition in
the global economy.
Both entrepreneurial ventures and established firms use cooperative strategies (e.g., strategic
alliances and joint ventures) to innovate. Entrepreneurial ventures, for example, may seek
investment capital as well as established firms distribution capabilities to successfully introduce one
of its innovative products to the market. Alternatively, more established companies may need new
technological knowledge and can gain access to it by forming a cooperative strategy with
entrepreneurial ventures.
Because of the importance of alliances, particularly in the development of new technology and in
commercializing innovations, firms are beginning to build networks of alliances (a form of social
capital) to help them obtain the knowledge and other resources necessary to develop innovations.
Some firms now even allow external firms to participate in their internal new product development
processes.
Alliances formed for the purpose of innovation are not without risks. One important risk is that a
partner will appropriate a firms technology or knowledge and use it to enhance its own competitive
abilities. To prevent or at least minimize this risk, firms, particularly new ventures, need to select
their partners carefully.
INNOVATION THROUGH ACQUISITIONS
Firms sometimes acquire companies to gain access to their innovations and to their innovative
capabilities. One reason companies do this is that the capital markets value growth; acquisitions
provide a means to rapidly extend one or more product lines and increase the firms revenues.
A key risk of acquisitions is that a firm may substitute an ability to buy innovations for an ability to
produce innovations internally. In support of this contention, research shows that firms engaging in
acquisitions introduce fewer new products into the market.
CREATING VALUE THROUGH STRATEGIC ENTREPRENEURSHIP
Newer entrepreneurial firms often are more effective than larger firms in identifying opportunities.
These firms tend to be more innovative as well because of their flexibility and willingness to take
risks. Alternatively, larger and well-established firms often have more resources and capabilities to
exploit opportunities that are identified. In general, entrepreneurial ventures need to improve their
advantage-seeking behaviors while larger firms need to improve their opportunity-seeking skills.
Note: It is interestingcertainly worthwhileto note that individual entrepreneurs and small
firms are responsible for a significant amount of innovation as measured by the ratio of R&D
input to R&D output. To wit:
80 percent of R&D activity is concentrated in large firms (10,000+ employees).
Large firms account for less than 50 percent of technological activity (measured by
patenting).
To be entrepreneurial, firms must develop an entrepreneurial mind-set among their managers and
employees. Managers must emphasize the management of their resources, particularly human capital
and social capital. The importance of knowledge to identify and exploit opportunities as well as to
gain and sustain a competitive advantage suggests that firms must have strong human capital. Social
capital is critical for access to complementary resources from partners in order to compete
effectively in domestic and international markets.
By entering global markets that are new to them, firms can learn new technologies and management
practices and diffuse this knowledge throughout the entire enterprise. Furthermore, the knowledge
firms gain can contribute to their innovations. Research has shown that firms operating in
international markets tend to be more innovative.
By developing resources (human and social capital), taking advantage of opportunities in domestic
and international markets, and using the resources and knowledge gained in these markets to be
innovative, firms achieve competitive advantages. In so doing, they create value for their customers
and shareholders.
Research shows that because of its economic importance and individual motives, entrepreneurial
activity is increasing across the globe. Furthermore, more women are becoming entrepreneurs
because of the economic opportunity entrepreneurship provides and the individual independence it
affords. In the United States, for example, women are the nations fastest growing group of
entrepreneurs.
Note: Large firms can take several measures to act small and increase their innovative
capacity. These include the following:
Greater levels of individual autonomy can be created through the restructuring of a firm
into smaller and more manageable units (see Chapter 7).
The additional amounts of creativity and innovation that tend to be witnessed among those
granted more autonomy stimulates autonomous strategic behavior when a firm pursues
innovation through internal corporate ventures.
A firm can reengineer its operations to develop more efficient work-related processes and
to form channels through which customers interests can be expressed with greater clarity
and intensity.
Cross-functional teams provide opportunities for workers to think & act creatively.
When handled effectively, downsizing can create arrangements through which a firm is
able to focus efforts more on key taskse.g., those required for innovation.
Allocating significant levels of resources to R&D can stimulate innovation.
Cooperative arrangements can help to spawn innovations in the firm.