Fostering Corporate Entrepreneurship and New Venture Creation Chapter 12 Fostering Corporate Entrepreneurship and New Venture Creation McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

After studying this chapter, you should have a good understanding of: Learning Objectives After studying this chapter, you should have a good understanding of: The importance of opportunity recognition in the venture development process How strategic concepts contribute to the competitive advantages of new ventures and small businesses The role of product champions and autonomous strategic behaviors in internal corporate venturing How corporations can develop an internal environment that promotes entrepreneurial development How an entrepreneurial orientation can enhance a firm’s efforts The pitfalls associated with new venture strategies and corporate entrepreneurship

Entrepreneurship Includes: Start-ups and new businesses Small businesses (< 500 employees) Characteristics that distinguish entrepreneurs from others New venture creation and development in large businesses (Intrapreneurship)

Techniques to Stimulate Creativity Exhibit 12.1 (adapted) Company Creative Technique Dupont In-housing training include brainstorming and avoiding creativity inhibitors. To create fresh perspectives, a mix of employees – high tech and low tech, management and staff– meet to create new product proposals. DoubleClick Encourages fun at work. Its New York City office includes a miniature version of Central Park and a rooftop basketball court where employees and bosses compete. The annual prize for the employee who brings in the most referrals is a motorcycle. Sources: Gundry, L.K., Kickul, J.R., & Prather, C.W. 1994. Buildingthe creative organization. Organization Dynamics: 22-37; Mackie, K. 1998. Ford RAPIDS helping UT departments streamline work processes. On Campus, April 14. Yaqub, R.M. 2000. The play’s the thing. Worth, November: 116-123.

All Small Companies*, By Industry Exhibit 12.2 Services (40%) 2,215,000 Agricultural Services (2%) 115,000 Retail Trade (20%) 1,094,000 Construction (12%) 662,000 Mining (0.4%) 20,000 Manufacturing (6.%) 329,000 Finance, Insurance, and Real Estate (8%) 457,000 Transportation, Communications, and Public Utilities (4%) 217,000 Wholesale Trade (7.4%) 410,000 Source: SBA’s Office of Advocacy, based on Data Provided by the U.S. Census Bureau, statistics of U.S. Businesses. (Percentages don’t add to 100% because of rounding.) * Businesses with 500 or fewer employees in 1997 (rounded)

Characteristics of Viable Opportunities Attractive Potential market demand. Achievable Practical and possible. Durable A sufficiently long window of opportunity exists. Value Creating There will be profit to justify the risk.

Traditional Sources of Financing Self/family/friends/associates Bank loans (Debt) Bonds (Debt) Venture capitalists (Equity) I.P.O.s – Initial Public Offerings (Equity)

Alternatives to Traditional Financing Exhibit 12.3 A non-cash means of exchanging products or services. Barter Reduces cash outflow, minimizes commitments to assets that might need updating as the company grows (or shrinks). Leasing DESCRIPTION METHOD Suppliers that let you pay for goods or services in 60 or 90 days rather than after only 10 to 30 days are, in effect, financing your purchase. Supplier Financing While a fast-growing technique for financing, high interest rates could make it risky. Credit Cards Factoring A method of raising cash by selling accounts receivables to a third party or financing against the value of receivables. Source: Fraser, J. A. 1998. A hitchhiker’s guide to capital resources. Inc. Magazine, February: 74-82; Owens, T. 1990. Getting financing in 1990. Small Business Reports, June:

Exemplars of Corporate Entrepreneurial Success and Failure Motorola Initially failed to recognize the migration from analog to digital technology. Hewlett Packard Uses know-how to improve people’s lives. Values employees while encouraging them to do better. Virgin Group Created over 200 businesses through a fun-loving, eclectic culture.

3M’s Rules for Successful Innovation Exhibit 12.4 IMPLICATIONS RULE Try and try again.. Encourage experimentation and risk taking, even when the outcome is unclear. Tolerate failure Ideas can be kept alive by individuals who believe in a project, even if it can’t find a home in one division. Don’t kill a project Product champions are challenged and rewarded. If a product takes off, its champion may run the product group. Motivate product champions Divisions have autonomy but are split up if too large. Division managers know staffers by their first names. Keep divisions small Open communication helps everyone benefit from the technological insights and breakthroughs of others. Share the wealth Customers are invited to brainstorm with researchers and marketers. Stay close to customers Sources: Collins, J. C., & Porras, J. I. 1997. Built to Last. NewYork: HarperBusiness; Graham, A. B. 1996. The Learning Organization: Managing Knowledge for Business Success; Mitchell, R. 1989. Masters of innovation. Business Week, April 10: 58-63; Osborn, T. 1988. The new product champions: How 3M manages for innovation. Marketing communications, 13(11): 17-22.

Dimensions of Entrepreneurial Orientation Exhibit 12.5 Dimensions of Entrepreneurial Orientation A forward-looking perspective characteristic of a market leader who has foresight. Proactive-ness Through experimentation and creativity, develop new and novel products, services, processes. Innovative-ness Independent action by an individual or team to bring forth and implement a business concept. Autonomy DEFINITION DIMENSION Making decisions and taking action without certain knowledge of probable outcomes. Risk taking An intense effort to outperform rivals, characterized by a combative posture or aggressive response. Competitive Aggressive-ness Source: Covin, J. G., & Slevin, D. P. 1991. A conceptual model of entrepreneurship as firm behavior. Entrepreneurship Theory & Practice, Fall: 7-25; Lumpkin, G. G., & Dess, G. G. 1996. Clarifying the entrepreneurial orientation construct and linking it to performance. Academy of Management Review, 21(1): 135-172; Miller, D. 1983. The correlates of entrepreneurship in three types of firms. Management Science, 29: 770-791.

Types of Entrepreneurial Risk Business Venturing without knowing the probability of success, often due to untested markets and technologies. Financial The risk/return trade-off. Includes heavy borrowing and large resource commitments. Personal Risks to personal reputation, career, and the company that occur by taking stands in favor of some actions.

Continuum of Radical and Incremental Innovations Exhibit 12.6 Continuum of Radical and Incremental Innovations RADICAL INNOVATION INCREMENTAL INNOVATION Laparoscopic “Keyhole” Surgery Bubble Wrap Fiber- optic Cable Speech Recognition Software Frozen Yogurt Enterprise Resource Planning (ERP) Online Auction Exchanges Polyester Internet Browser