Managing Innovation

and Fostering Corporate

Entrepreneurship
Chapter Twelve

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning Objectives
After reading this chapter, you should have
a good understanding of:
LO1 The importance of implementing strategies
and practices that foster innovation.
LO2 The challenges and pitfalls of managing
corporate innovation processes.
LO3 How corporations use new venture teams,
business incubators, and product champions to
create an internal environment and culture that
promote entrepreneurial development.
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 Learning Objectives
LO4 How corporate entrepreneurship achieves
both financial goals and strategic goals.
LO5 The benefits and potential drawbacks of real
options analysis in making resource deployment
decisions in corporate entrepreneurship
contexts.
LO6 How an entrepreneurial orientation can
enhance a firm’s efforts to develop promising
corporate venture initiatives.

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 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

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 Example: Getting to ‘Aha’
• 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.

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 Types of Innovation
• 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

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 Types of Innovation
• Process innovations
 Improving efficiency of an organizational
process
 Manufacturing systems and operations
 More likely to occur in later stages of an
industry’s life cycle
 Associated with cost leader strategies

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 QUESTION
Radical innovations 
A. Often result in quick profits
B. Often represent technological
breakthroughs
C. Usually apply to products and
processes simultaneously
D. Usually cannot be patented

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 Types of Innovation
• Radical innovation
 Fundamental changes and breakthroughs
 Evoke major departures from existing
practices
 Can be highly disruptive
 Can transform or revolutionize a whole
industry

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 Types of Innovation
• Incremental innovation
 Enhance existing practices
 Small improvements in products and
processes
 Evolutionary applications within existing
paradigms

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Continuum of Radical and
Incremental Innovations

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 Types of Innovation
• Sustaining • Disruptive
innovations innovations
 extend sales in an  overturn markets by
existing market, providing an
usually by enabling altogether new
new products or approach to meeting
services to be sold at customer needs.
higher margins.

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 Challenges of Innovation
• Seeds versus Weeds
• Experience versus Initiative
• Internal versus External staffing
• Building capabilities versus Collaborating
• Incremental versus Preemptive launch

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 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

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 Experience versus Initiative
• Deciding who will lead an innovation
project
 Senior managers have experience and
credibility and tend to be more risk averse
 Midlevel employees may be the innovators
themselves and have more enthusiasm

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 Internal versus External Staffing
• 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

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 Building Capabilities versus
Collaborating
• 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

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Incremental versus Preemptive Launch
• Incremental launch
 Less risky
 Requires few resources
 Can undermine the project’s credibility if too
tentative
• Large-scale launch
 Requires more resources
 Can effectively preempt a competitive
response

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 Defining the Scope of Innovation
• Firms must define the “strategic envelope”
(scope of the innovation efforts)
• Firms ensure that their innovation efforts
are not wasted on projects that are outside
the firm’s domain
of interest.

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 Defining the Scope of Innovation
• 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?

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 Managing the Pace of Innovation
• Incremental • Radical innovation
innovation  Typically long term –
 May be six months to 10 years or more
two years  Often involves open-
 May use a milestone ended
approach driven by experimentation and
goals and deadlines time-consuming
mistakes

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 Staffing to Capture Value from
Innovation
• Create innovation teams with experienced
players
• Require that employees seeking to
advance their career serve in the new
venture group

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 Staffing to Capture Value from
Innovation (cont.)
• Once people have experience with the
new venture group, transfer them to
mainstream management positions
• Separate the performance of individuals
from the performance of the innovation.

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 Collaborating with Innovation
Partners
• To choose partners, • Knowledge of
firms need to ask markets
what competencies • Technology expertise
they are looking for • Contacts with key
and what the players in an industry
innovation partner will
contribute.

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 Corporate Entrepreneurship
• Corporate entrepreneurship
 the creation of new value for a corporation,
through investments that create either new
sources of competitive advantage or renewal
of the value proposition.

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 Factors affecting Entrepreneurial
Ventures
• The use of teams in strategic decision making
• Whether the company is product or service
oriented
• Whether its innovation efforts are aimed at
product or process improvements
• The extent to which it is high-tech or low-tech

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 Rules for
Fostering
Innovation

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 Focused Approaches to Corporate
Entrepreneurship
• New venture group
 a group of individuals, or a division within a
corporation, that identifies, evaluates, and
cultivates venture opportunities.

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 New Venture Groups
• Involvement includes
 Innovation and experimentation
 Coordinating with other corporate divisions
 Identifying potential venture partners
 Gathering resources
 Launching the venture

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 Focused Approaches to Corporate
Entrepreneurship
• Business incubator
 supports and nurtures
fledgling
entrepreneurial
ventures until they
can thrive on their
own as stand-alone
businesses.

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 Business Incubators
• Incubators provide some or all of the
following functions
 Funding
 Physical space
 Business services
 Monitoring
 Networking

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 Dispersed Approaches to
Corporate Entrepreneurship
• Dedication to • Stakeholders can
principles and bring new ideas or
practices of venture opportunities
entrepreneurship is to anyone in the
spread throughout the organization
firm • Entrepreneurial
• Ability to change is a culture, Product
core capability champions

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 Entrepreneurial Culture
• Culture of entrepreneurship
 Search for venture opportunities permeates
every part of the organization
 Strategic leaders and the culture generate a
strong impetus to innovate, take risks and
seek out new venture opportunities

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 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

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 Measuring the Success of Corporate
Entrepreneurship Activities
Comparing strategic and financial CE goals
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?

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 Measuring the Success of Corporate
Entrepreneurship Activities
• Exit champions
 individual working within a corporation who is
willing to question the viability of a venture
project by demanding hard evidence of
venture success and challenging the belief
system that carries a venture forward.

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 Real Options Analysis
• Real options analysis
 for each investment step the investor has the
option of (a) investing additional funds to
grow or accelerate, (b) delaying, (c) shrinking
the scale of, or (d) abandoning the activity.

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 Potential Pitfalls of Real Options
Analysis
• Agency Theory and the Back-Solver
Dilemma
• Managerial Conceit: Overconfidence and
the Illusion of Control
• Managerial Conceit: Irrational Escalation
of Commitment

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 QUESTION
On average, approximately what percentage
of corporate ventures reaches profitability
after six years? 
A. 80 percent
B. 65 percent
C. 50 percent
D. 35 percent

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Dimensions of Entrepreneurial
Orientation

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