1. 12 Managing Innovation and Fostering Corporate Entrepreneurship Professor John Coy

2. 12 - 2 Learning Objectives After reading this chapter, you should have a good understanding of: -The importance of implementing strategies and practices that foster innovation. -The challenges and pitfalls of managing corporate innovation processes. -The role of product champions and exit champions in internal corporate venturing. -How independent venture teams and business incubators are used to develop corporate ventures.

3. 12 - 3 Learning Objectives After reading this chapter, you should have a good understanding of: -How corporations create an internal environment and culture that promotes entrepreneurial development. -The benefits and potential drawbacks of real options analysis in making resource deployment decisions in corporate entrepreneurship contexts. -How an entrepreneurial orientation can enhance a firm’s efforts to develop promising corporate venture initiatives.

4. 12 - 4 Question What is one of the most important sources of growth opportunities? A) The economy B) Labor capital C) Financial capital D) Innovation

5. 12 - 5 Managing Innovation Innovation: using new knowledge to transform organizational processes or create commercially viable products and services -Latest technology -Results of experiments -Creative insights -Competitive information

6. 12 - 6 Example Some Companies, such as Apple, are always innovating popular products, while others are constantly struggling for their one great idea. There are “five disciplines” for creating what customers want -Identify important customer needs -Create solutions that fill those needs -Build innovation teams -Empower "innovation champions" who keep the effort on track -Align the entire enterprise around creating value for customers Source: “Getting to ‘Aha!’,” Business Week. September 4, 2006.

7. 12 - 7 Types of Innovation Degree of innovativeness -Radical innovation -Fundamental changes and breakthroughs -Evoke major departures from existing practices -Can be highly disruptive -Can transform or revolutionize a whole industry -Incremental innovation -Enhance existing practices -Small improvements in products and processes -Evolutionary applications within existing paradigms

8. 12 - 8 Continuum of Radical and Incremental Innovations Exhibit 12.1 Continuum of Radical and Incremental Innovations

9. 12 - 9 Types of Innovation Product and process innovations -Product innovation Efforts to create product designs Applications of technology to develop new products for end users More radical and common during early stages of an industry’s life cycle Associated with differentiation strategies

10. 12 - 10 Types of Innovation Product and process innovations -Process innovations Improving efficiency of an organizational process -Manufacturing systems and operations Can improve materials utilization Shorten cycle time Increase quality More likely to occur in later stages of an industry’s life cycle Associated with cost leader strategies

11. 12 - 11 Challenges of Innovation Seeds versus Weeds -Deciding the merits of innovative ideas Seeds – likely to bear fruit Weeds – should be cast aside -Dilemma Some innovation projects require considerable level of investment before merit can be determined

12. 12 - 12 Challenges of Innovation Experience versus initiative -Deciding who will lead an innovation project Senior managers -Have experience and credibility -Tend to be more risk averse Midlevel employees -May be the innovators themselves -May have more enthusiasm

13. 12 - 13 Challenges of Innovation Internal versus external staffing -Innovation projects need competent staffs to succeed People drawn from inside the firm -May have greater social capital -Know the organization’s culture and routines -May not be able to think outside the box People drawn from outside the firm -Are costly to recruit, hire, train -May have difficulty building relationships

14. 12 - 14 Challenges of Innovation Building capabilities versus collaborating -Innovation projects often require building new sets of skills Firms can seek help -Other departments -Partner with other companies that bring resources and experience Partnerships -Create dependencies and inhibit internal skills development -Sharing benefits of innovation may create conflict

15. 12 - 15 Challenges of Innovation Incremental versus preemptive launch -Companies must manage the timing and scale of new innovation projects Incremental launch -Less risky -Requires few resources -Serves as a market test -Can undermine the project’s credibility if too tentative Large-scale launch -Requires more resources -Can effectively preempt a competitive response

16. 12 - 16 Defining the Scope of Innovation Firms must define the “strategic envelope” (scope of the innovation efforts) In defining the strategic envelope, a firm should answer several questions -How much will the innovation 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?

17. 12 - 17 Managing the Pace of Innovation Firms need to regulate the pace of innovation -Incremental innovation May be six months to two years May use a milestone approach driven by goals and deadlines -Radical innovation Typically long term – 10 years or more Often involves open-ended experimentation and time- consuming mistakes Strict timelines unrealistic

18. 12 - 18 Collaborating with Innovation Partners Innovation often requires collaborating with others who possess complementary knowledge and skills Partners can come from several sources -Other personnel within the department -Personnel within the firm but from another department -Partners outside the firm -Non-business sources, including research universities and the federal government

19. 12 - 19 Corporate Entrepreneurship Determining how entrepreneurial projects will be pursued Corporate culture Leadership Structural features that guide and constrain action Organizational systems that foster learning and manage rewards Use of teams in strategic decision making Whether the company is product or service oriented Whether the firm’s innovation efforts are aimed at product or process improvements The extent to which it is high-tech or low-tech

20. 12 - 20 Focused Approaches to Corporate Entrepreneurship Autonomous corporate venturing work group Autonomous corporate venturing (work) group -Frees entrepreneurial team members from constraints imposed by existing norms and routines -Facilitates open-minded creativity -But, does isolate the group from the corporate mainstream New venture groups (NVGs) Business incubators

21. 12 - 21 New Venture Groups (NVGs) Goal is to identify, evaluate, and cultivate venture opportunities Typically function as semi-autonomous units with little formal structure Involvement includes -Innovation and experimentation -Coordinating with other corporate divisions -Identifying potential venture partners -Gathering resources -Launching the venture

22. 12 - 22 Business Incubators Business incubators are designed to “hatch” new businesses Incubators provide some or all of the following functions -Funding -Physical space -Business services -Monitoring -Networking

23. 12 - 23 Dispersed Approaches to Corporate Entrepreneurship Dedication to principles and practices of 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 Two related aspects of dispersed entrepreneurship -Entrepreneurial culture -Product champions

24. 12 - 24 Entrepreneurial Culture Culture of entrepreneurship -Search for venture opportunities permeates every part of the organization -Effect is strongest when it animates all parts of the organization -Strategic leaders and the culture generate a strong impetus To innovate Take risks Seek out new venture opportunities

25. 12 - 25 Product Champions Product (or project) champions -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 New project must pass two critical stages -Project definition -Project impetus

26. 12 - 26 Measuring the Success of Corporate Entrepreneurship Activities Techniques used to limit the expense of venturing or to cut losses when entrepreneurial initiatives (CE) appear doomed -Comparing strategic and financial CE goals Are the products or services offered by the venture accepted in the marketplace? Are the contributions of the venture to the corporation’s internal competencies and experience valuable? Is the venture able to sustain its basis of competitive advantage?

27. 12 - 27 Measuring the Success of Corporate Entrepreneurship Activities Techniques used to limit the expense of venturing or to cut losses when entrepreneurial initiatives (CE) appear doomed -Exit champions Willing to question the viability of a venture project Demand hard evidence and challenge the belief system that is carrying an idea forward Hold the line on ventures that appear shaky -Real options Managing the uncertainty associated with launching new ventures

28. 12 - 28 Real Options Analysis Real options analysis (ROA) is an investment tool from the field of finance. -The phrase “real options” applies to situations where options theory and valuation techniques are applied to real assets or physical things as opposed to financial assets. Potential pitfalls include -Agency theory and the back-solver dilemma -Managerial conceit: overconfidence and the illusion of control -Managerial conceit: irrational escalation of commitment

29. 12 - 29 Question Discuss the traps that can affect decision makers. Have you experienced any of these?

30. 12 - 30 Entrepreneurial Orientation DimensionDefinition AutonomyIndependent action by an individual or team aimed at bringing forth a business concept or vision and carrying it through to completion. Innovativeness A willingness to introduce novelty through experimentation and creative processes aimed at developing new products and services as well as new processes. ProactivenessA forward-looking perspective characteristic of a marketplace leader that has the foresight to seize opportunities in anticipation of future demand. Source: J. G. Covin and D. P. Sleving, “A conceptual Model of Entrepreneurship As Firm Behavior,” Entrepreneurship Theory & Practice, Fall 1991, pp. 7-25; G. T. Lumpkin and G. G. Dess, “Clarifying the Entrepreneurial Orientation Construct and Linking It to Performance,” Academy of Management Review 21, no. 1 (1996), pp. 135-72; D. Miller, “The Correlates of Entrepreneurship in Three Types of Firms,” Management Science 29 (1983), pp. 770-91. Adapted from Exhibit 12.3 Dimensions of Entrepreneurial Orientation

31. 12 - 31 Entrepreneurial Orientation DimensionDefinition Source: J. G. Covin and D. P. Sleving, “A conceptual Model of Entrepreneurship As Firm Behavior,” Entrepreneurship Theory & Practice, Fall 1991, pp. 7-25; G. T. Lumpkin and G. G. Dess, “Clarifying the Entrepreneurial Orientation Construct and Linking It to Performance,” Academy of Management Review 21, no. 1 (1996), pp. 135-72; D. Miller, “The Correlates of Entrepreneurship in Three Types of Firms,” Management Science 29 (1983), pp. 770-91. Adapted from Exhibit 12.3 Dimensions of Entrepreneurial Orientation CompetitiveAn intense effort to outperform industry rivals. It is characterized by a combative posture or an aggressive response aimed at improving position or overcoming a threat in a competitive marketplace. aggressiveness Risk takingMaking decisions and taking action without certain knowledge of probable outcomes; some undertakings may also involve making substantial resource commitments in the process of venturing forward.

32. 12 - 32 Entrepreneurial Orientation Autonomy -Two techniques often used to promote autonomy Using skunkworks to foster entrepreneurial thinking Designing organization structures that support independent action Innovativeness -Two methods used to enhance competitive position through innovativeness Fostering creativity and experimentation Investing in new technology, R&D, and continuous improvement

33. 12 - 33 Entrepreneurial Orientation Proactiveness -Two methods to promote acting proactively Introducing new products or technological capabilities ahead of the competition Continuously seeking out new product or service offerings Competitive aggressiveness -Two ways competitively aggressive firms enhance their entrepreneurial position Entering markets with drastically lower prices Finding successful business models and copying them.

34. 12 - 34 Entrepreneurial Orientation Risk taking -Three types of risks faced by organizations and their executives Business risk taking Financial risk taking Personal risk taking -Two methods to strengthen competitive position through risk taking Researching and assessing risk factors to minimize uncertainty Using techniques that have worked in other domains

35. 12 - 35 Example A design thinking approach can help you deal with risk. Here are seven ways to get started: -Cultivate an unreasonable obsession with desirability -Become more comfortable acting on your informed intuition -Prototype, prototype, prototype -Think big, but start small(er) -Treat money as a positive constraint -Make a list of the best things that could happen -Seek challenges Source: Rodriguea, Diego and Jacoby, Ryan. “Embracing Risk to Grow Innovation,” Business Week. May 16, 2007

36. 12 Managing Innovation and Fostering Corporate Entrepreneurship Professor John Coy