1. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Managing Innovation and Fostering Corporate Entrepreneurship chapter 12

2. Learning Objectives 12-2 After reading this chapter, you should have a good understanding of: LO12.1 The importance of implementing strategies and practices that foster innovation. LO12.2 The challenges and pitfalls of managing corporate innovation processes. LO12.3 How corporations use new venture teams, business incubators, and product champions to create an internal environment and culture that promote entrepreneurial development.

3. Learning Objectives LO12.4 How corporate entrepreneurship achieves both financial goals and strategic goals. LO12.5 The benefits and potential drawbacks of real options analysis in making resource deployment decisions in corporate entrepreneurship contexts. LO12.6 How an entrepreneurial orientation can enhance a firm’s efforts to develop promising corporate venture initiatives. 12-3

4. Managing Innovation Consider… To remain competitive, established firms must continually seek out opportunities for growth and develop new methods for strategically renewing their performance. How can entrepreneurial activities become an avenue for achieving competitive advantage? 12-4

5. Managing Innovation  Innovation allows for Transformation of organizational processes Creation of new & commercially viable products & services  Innovation requires new knowledge from The latest technology The results of experiments Creative insights Competitive information 12-5

6. Question?  Whereas _______ are often associated with the low-cost leader strategy, ________ are frequently an important aspect of the differentiation strategy. A. process innovations; product innovations B. product innovations; service innovations C. radical innovations; instrumental innovations D. marketing innovations; incremental innovations 12-6

7. Managing Innovation  Types of innovation include Product innovation Creates new product designs Applies technology to develop new products for end-users Common during early stages of an industry’s life cycle Associated with a differentiation strategy 12-7

8. Managing Innovation  Types of innovation also include Process innovation Improves the efficiency of an organizational process Improves materials utilization, shortens cycle time, increases quality Common during later stages of an industry’s lifecycle Associated with overall cost leadership strategies 12-8

9. Managing Innovation  Other types of innovation include Radical innovation A major departure from existing practices Usually as a result of technological change Can be highly disruptive Can transform or revolutionize a whole industry Incremental innovation Can enhance existing practices Make small improvements in products & processes Can create evolutionary applications of earlier innovations; provide new capabilities 12-9

10. Managing Innovation Exhibit 12.1 Continuum of Radical and Incremental Innovations 12-10

11. Managing Innovation  Additional types of innovation include Sustaining innovations Extend sales in an existing market Enable new products or services to be sold at higher margins, i.e. via the Internet Disruptive innovations Overturn markets with a new approach to meeting customer needs Are technologically simpler & less sophisticated Appeal to less demanding customers Take time to take effect 12-11

12. Managing Innovation: Challenges  Innovation dilemmas Seeds versus weeds Seeds are likely to bear fruit Weeds should be cast aside  Projects may require considerable investment before merit can be determined Experience versus initiative Who should lead an innovation project?  Senior managers have experience & credibility, but tend to be more risk averse  Mid-level employees may be the innovators themselves, and have more enthusiasm 12-12

13. Managing Innovation: Challenges  Innovation dilemmas, continued Internal versus external staffing Insiders may have greater social capital, may know the organization’s culture & routines, but may not be able to think outside the box Outsiders are costly to recruit, hire, & train, and may have difficulty building relationships Building capabilities versus collaborating Capabilities may come from internal departments Collaborators may come from other companies Dependencies may inhibit internal skills development or create conflict 12-13

14. Managing Innovation: Challenges  Innovation dilemmas, final choices Incremental versus preemptive launch An incremental launch is less risky, requires fewer resources, serves as a market test An incremental launch can undermine the project’s credibility if it is too tentative An incremental launch can open the door for a competitive response A large-scale launch requires more resources A large-scale launch can effectively preempt a competitive response 12-14

15. Managing Innovation: Improving the Process  Cultivating innovation skills Discovery skills allow leaders to see the potential in innovations Creative intelligence allows individuals to develop more creative, higher potential innovations by means of Associating patterns, information & insights Questioning common wisdom Observing behavior Experimenting with new possibilities Networking with a diverse set of individuals 12-15

16. Managing Innovation: Improving the Process  Defining the scope of innovation  Defining the strategic envelope Focus on a common technology? Focus on a market theme?  Evaluating results How much will the innovation initiative cost? How likely is it to actually become commercially viable? How much value will it add; what will it be worth if it works? What will be learned if it does not pan out? 12-16

17. Managing Innovation: Improving the Process  Managing the pace of innovation  Incremental innovations May take six months or two years; May use a milestone approach, goals & deadlines  Radical innovations May take 10 years or more; May involve open ended experimentation & time-consuming mistakes  “Time pacing” allows for control of the innovation process 12-17

18. Example: Pacing Innovation at Amazon  Amazon is well-known for innovative ideas, but what about selling groceries online? Webvan and others have failed.  Amazon is using its recent acquisition of Kiva robotics & former Webvan executives to grow AmazonFresh slowly Limit delivery to areas with a high concentration of potential customers Focus relentlessly on warehouse efficiency through technology 12-18

19. Managing Innovation: Improving the Process  Staffing to capture value from innovation  Effective human resource management practices for innovation projects include Use experienced players from diverse areas Require employees serve in the new venture group as part of career development Once people have new venture experience, transfer them to mainstream management positions to revitalize core businesses Separate individual performance from innovation performance so failure is not a stigma 12-19

20. Corporate Entrepreneurship  Corporate entrepreneurship Pursuit of new venture opportunities Strategic renewal via “intrapreneuring”  How to pursue entrepreneurial projects? Consider corporate culture & leadership Consider supportive structures & systems Consider using teams Consider whether the company is product or service oriented; high-tech or low-tech Is innovation aimed at product or process improvements? 12-20

21. Corporate Entrepreneurship  Focused approaches to corporate entrepreneurship Autonomous corporate venturing workgroup separated from the rest of the firm Frees entrepreneurial team members from constraints imposed by existing norms & routines; facilitates open-minded creativity Does isolate the group from the corporate mainstream via New venture groups Business incubators 12-21

22. Corporate Entrepreneurship  New venture groups Are semi-autonomous units with an informal structure Innovate and experiment Coordinate with other corporate divisions Identify potential venture partners Gather resources & launch the venture  Business incubators hatch new businesses Provide funding, physical space, business services, monitoring, networking 12-22

23. Corporate Entrepreneurship  Dispersed approaches to corporate entrepreneurship Entrepreneurship is spread throughout the firm Ability to change is a core capability Stakeholders can bring new ideas or venture opportunities to anyone in the organization Has three related aspects An entrepreneurial culture Resource allotments to support entrepreneurial activities Product champions 12-23

24. Corporate Entrepreneurship  An entrepreneurial culture exists when The search for venture opportunities permeates every part of the organization Every value chain activity is viewed as a source of competitive advantage Top leaders support programs & incentives, allowing ideas to come from the bottom up Strategic leadership & the culture encourages Innovation Risk-taking The search for new venture opportunities 12-24

25. Corporate Entrepreneurship  Resource allotments involve the firm’s investment in the generation & execution of innovative ideas Time investment – free time to work on developing new products Monetary investment – proposals are submitted for funding; further investments can come from operating divisions 12-25

26. Corporate Entrepreneurship  Product champions are useful to Bring entrepreneurial ideas forward Identify what kind of market exists for the product or service Find resources to support the venture Promote the venture concept to upper management  A new project must pass two critical stages Project definition Project impetus 12-26

27. Example: Corporate Entrepreneurship at Samsung  Samsung has gained the reputation of a being a “fast follower” – following Apple’s innovations with rapid product development  Samsung tried a dispersed approach to CE, but the culture wasn’t flexible enough  In December 2012 it began a more focused approach with the Creative Labs project  The South Korean government is even trying to cultivate more individual entrepreneurs by providing funding, access to investment capital, & offering tax break incentives 12-27

28. Corporate Entrepreneurship: Measuring Success  Is corporate entrepreneurship worth it?  Strategic reasons for undertaking a corporate venture include Strengthening competitive position Entering into new markets Expanding capabilities by learning & acquiring new knowledge Building & extending the corporation’s base of resources & experience 12-28

29. Corporate Entrepreneurship: Measuring Success  Exit champions help avoid costly defeats by Questioning the viability of a venture project Reducing ambiguity by gathering hard data Developing a strong case for why a project should be killed Reasserting decision-making criteria to guide venture decisions Risking loss of status while opposing popular projects Saving a corporation’s finances & reputation 12-29

30. Question?  Real options analysis is most appropriate when A. the total investment required is small, but the environment is uncertain. B. the investment required could be justified by Discounted Cash Flow (DCF) techniques. C. a small investment upfront can be followed by a series of subsequent investments. D. there is no prospect of obtaining additional information before making subsequent investments. 12-30

31. Corporate Entrepreneurship: Measuring Success  Real options analysis is an investment tool  Helps manage the uncertainty associated with launching new ventures  ROA helps the firm decide whether to Invest additional funds to accelerate the activity Delay further investment in order to learn more Shrink the scale of the activity Abandon the activity  Requires a series of go or no-go decisions 12-31

32. Corporate Entrepreneurship: Measuring Success  Real options analysis has limitations Agency theory and the back solver dilemma Managers have an incentive to propose projects that might be successful, so Managers may “game the system” by back- solving any formula Managerial conceit: overconfidence and the illusion of control Managers believe they possess superior expertise for managing uncertainty, therefore Managers may believe they can solve any problem 12-32

33. Corporate Entrepreneurship: Measuring Success  Real options analysis has another limitation Managerial conceit: irrational escalation of commitment occurs when The exercise decision retains some uncertainty An option to exit requires reversing an initial decision Managers are invested in their original decision They feel they will lose face by reversing course They will try to make the existing decision work They will continue an existing project even if it should be ended 12-33

34. Entrepreneurial Orientation  An entrepreneurial orientation involves Strategy making practices used to identify & launch new ventures A unique frame of mind A perspective toward entrepreneurship Reflected in a firm’s ongoing processes Reflected in the corporate culture That permeates decision-making styles & practices of the firm’s members 12-34

35. Entrepreneurial Orientation Exhibit 12.3 Dimensions of Entrepreneurial Orientation Sources: Dess, G.G. & Lumkin, G.T. 2005. The Role of Entrepreneurial Orientation in Stimulating Effective Corporate Entrepreneurship. Academy of Management Executive, 19(1): 147-156; Covin, J.G. & Slevin, D.P. 1991. A Conceptual Model of Entrepreneurship as Firm Behavior. Entrepreneurship Theory & Practice, Fall: 7-25; Lumpkin, G.T. & Dess, G.G. 1996. Clarifying the Entrepreneurial Orientation Construct and Linking It to Performance. Academy of Management Review, 21: 135-172; Miller, D. 1983. The Correlates of Entrepreneurship in Three Types of Firms. Management Science, 29: 770-791. 12-35

36. Entrepreneurial Orientation  Autonomy refers to a willingness to act independently in order to carry forward an entrepreneurial vision or opportunity, and can be promoted by Using skunk works to foster entrepreneurial thinking Designing organizational structures that support independent action  Problems can include duplication of effort & wasting of resources 12-36

37. Entrepreneurial Orientation  Innovativeness refers to a firm’s efforts to find new opportunities & novel solutions, and can be promoted by Fostering creativity & experimentation Investing in new technology, R&D, & continuous improvement  Problems can include Waste of resources if no results Competitors may copy it more profitably The investment may not pay off 12-37

38. Entrepreneurial Orientation  Proactiveness refers to a firm’s efforts to seize new opportunities, and can be promoted by Introducing new products or technological capabilities ahead of the competition Continuously seeking out new product or service offerings  Problems can include First movers are not always successful Brand extensions can go too far 12-38

39. Entrepreneurial Orientation  Competitive aggressiveness refers to a firm’s efforts to outperform its industry rivals, & can be promoted by Entering markets with drastically lower prices Finding successful business models & copying them  Problems can include Being overly aggressive & damaging a firm’s reputation Trying to decimate rather than just defeat the competition 12-39

40. Entrepreneurial Orientation  Risk taking refers to a firm’s willingness to act boldly without knowing the consequences, and can be promoted by Researching & assessing risk factors to minimize uncertainty Using techniques that have worked in other domains  Problems can include Lack of forethought, research, & planning Failure to evaluate uncertainty 12-40