Strategic Entrepreneurship Hitt, Ireland, and Hoskisson Chapter 13 Strategic Entrepreneurship Hitt, Ireland, and Hoskisson In this chapter we will discuss strategic entrepreneurship. We will begin by examining entrepreneurship and innovation in a strategic context. We will discuss definitions of entrepreneurship, entrepreneurial opportunities, and entrepreneurs. We then describe international entrepreneurship, a phenomenon reflecting the increased use of entrepreneurship in economies throughout the world. After this discussion, the chapter shifts to descriptions of the three ways firms innovate. Internally, firms innovate through either autonomous or induced strategic behavior. We then describe actions firms take to implement the innovations resulting from those two types of strategic behavior.

Strategic entrepreneurship Taking entrepreneurial actions using a strategic perspective. Firms engaging in strategic entrepreneurship simultaneously engage in opportunity-seeking and advantage-seeking behaviors. The purpose is to continuously find new opportunities and quickly develop innovations to exploit them. Strategic entrepreneurship is taking entrepreneurial actions using a strategic perspective. When engaging in strategic entrepreneurship, the firm simultaneously focuses on finding opportunities in its external environment that it can try to exploit through innovations. Identifying opportunities to exploit through innovations is the entrepreneurship dimension of strategic entrepreneurship, while determining the best way to manage the firm’s innovation efforts is the strategic dimension. Thus, firms engaging in strategic entrepreneurship integrate their actions to find opportunities and to successfully innovate as a primary means of pursuing them. In the twenty-first century competitive landscape, firm survival and success depend on a firm’s ability to continuously find new opportunities and quickly produce innovations to pursue them. Copyright © 2008 Cengage

Definitions Entrepreneurship Corporate entrepreneurship A process used by individuals and groups to identify entrepreneurial opportunities without being immediately constrained by the resources they control. Corporate entrepreneurship Applying entrepreneurship (including the identification of entrepreneurial opportunities) within ongoing, established organizations. Entrepreneurial opportunities Conditions in which new goods or services can satisfy a need in the market. Increasingly, entrepreneurship positively contributes to individual firms’ performance and stimulates growth in countries’ economies. On this slide are definitions of entrepreneurship, corporate 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 are conditions in which new goods or services can satisfy a need in the market. These opportunities exist because of competitive imperfections in markets and among the factors of production used to produce them and when information about these imperfections is distributed asymmetrically (i.e., not equally) among individuals. Entrepreneurial opportunities come in a host of forms such as the chance to develop and sell a new product and the chance to sell an existing product in a new market. Firms should be receptive to pursuing entrepreneurial opportunities whenever and wherever they may surface. The essence of entrepreneurship is to identify and exploit entrepreneurial opportunities—that is, opportunities others do not see or for which they do not recognize the commercial potential. As a process, entrepreneurship results in the “creative destruction” of existing products (goods or services) or methods of producing them and replaces them with new products and production methods. Thus, firms engaging in entrepreneurship place high value on individual innovations as well as the ability to continuously innovate across time. Copyright © 2008 Cengage

Innovative activity Firms engage in three types of innovative activity Invention - the act of creating a new good or process Innovation - the process of creating a commercial product from an invention Imitation - the adoption of an similar innovations by different firms. Invention brings something new into being while innovation brings something new into use. Schumpeter argued that firms engage in three types of innovative activity: invention, innovation, and imitation. Invention is the act of creating or developing a new product or process. Innovation is the process of creating a commercial product from an invention. Innovation begins after an invention is chosen for development. Thus, an invention brings something new into being, while an innovation brings something new into use. Accordingly, technical criteria are used to determine the success of an invention, whereas commercial criteria are used to determine the success of an innovation. Finally, imitation is the adoption of a similar innovation by different firms. Imitation usually leads to product or process standardization, and products based on imitation often are offered at lower prices, but without as many features. Entrepreneurship is critical to innovative activity in that it acts as the linchpin between invention and innovation. Copyright © 2008 Cengage

Entrepreneurs Entrepreneurs see or envision entrepreneurial opportunities and then take actions to develop innovations to exploit them. The most successful entrepreneurs have an entrepreneurial mind-set, which is an orientation that values the potential opportunities available because of marketplace uncertainties. Entrepreneurs are individuals, acting independently or as part of an organization, who see an entrepreneurial opportunity and then take risks to develop an innovation to pursue it. Entrepreneurs are found throughout an organization—from top-level managers to those working to produce a firm’s goods or services. They are highly motivated, willing to take responsibility for their projects, and self-confident. Entrepreneurs also 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. Copyright © 2008 Cengage

International entrepreneurship The process of identifying and exploiting entrepreneurial opportunities outside the firm’s domestic markets has become important to firms around the globe. Evidence suggests that firms capable of effectively engaging in international entrepreneurship outperform those competing only in their domestic markets. International entrepreneurship is a process in which firms creatively discover and exploit opportunities that are outside their domestic markets in order to develop a competitive advantage. As the practices suggested by this definition show, entrepreneurship is a global phenomenon. As noted earlier, approximately one-third of new ventures move into international markets early in their life cycle. Most large established companies have significant foreign operations and often start new ventures in domestic and international. A key reason that entrepreneurship has become a global phenomenon is that in general, internationalization leads to improved firm performance. Because of its positive benefits, entrepreneurship is at the top of public policy agendas in many of the world’s countries. Copyright © 2008 Cengage

Producing innovation 3 basic approaches used to produce innovation internal innovation R&D and forming internal corporate ventures cooperative strategies such as strategic alliances acquisitions Overall, firms produce more incremental innovations although radical innovations have a higher probability of significantly increasing sales revenue and profits. Increasingly, cross-functional integration is vital to a firm’s efforts to develop and implement internal corporate venturing activities and to commercialize the resulting innovation. Additionally, integration and innovation can be facilitated by developing shared values and effectively using strategic leadership. Firms produce innovation in three basic ways: internal innovation (typically research and development efforts as well as forming internal corporate ventures, cooperative strategies such as strategic alliances, and acquisitions. Internal innovation - In established organizations, most innovation comes from efforts in research and development (R&D). 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 contrast to incremental innovations, radical innovations usually provide significant technological breakthroughs and create new knowledge. Internally developed incremental and radical innovations result from deliberate efforts. These deliberate efforts are called internal corporate venturing, which is the set of activities firms use to develop internal inventions and especially innovations. Strategic alliances - Both entrepreneurial firms and established firms use cooperative strategies (e.g., strategic alliances and joint ventures) to innovate. An entrepreneurial firm, 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. Alliances between large pharmaceutical firms and biotechnology companies increasingly have been formed to integrate the knowledge and resources of both to develop new products and bring them to market. Acquisitions - Firms sometimes acquire companies to gain access to their innovations and to their innovative capabilities. One reason companies make these acquisitions is that the capital market values growth; acquisitions provide a means to rapidly extend one or more product lines and increase the firm’s revenues. Acquisitions pursued for this reason should, nonetheless, have a strategic rationale. Copyright © 2008 Cengage

2 types of innovation Firms create two types of innovation—incremental and radical—through internal innovation that takes place in the form of autonomous strategic behavior or induced strategic behavior. Most innovations are incremental—that is, they build on existing knowledge bases and provide small improvements in the current product lines. Incremental innovations are evolutionary and linear in nature. Radical innovations usually provide significant technological breakthroughs and create new knowledge. Copyright © 2008 Cengage

Cooperative relationship To gain access to the specialized knowledge that often is required to innovate in the complex global economy, firms may form a cooperative relationship such as a strategic alliance with other companies, some of which may be competitors. Firms use cooperative strategies to align what they believe are complementary assets with the potential to lead to future innovations. 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. Evidence shows that the skills and knowledge contributed by firms forming a cooperative strategy to innovate tend to be technology-based, a fact suggesting how technologies and their applications continue to influence the choices firms make while competing in the twenty-first–century competitive landscape. Copyright © 2008 Cengage

Acquisitions Acquisitions are another means firms use to obtain innovation. Innovation can be acquired through direct acquisition, or firms can learn new capabilities from an acquisition, thereby enriching their internal innovation abilities. Firms sometimes acquire companies to gain access to their innovations and to their innovative capabilities. One reason companies make these acquisitions is that the capital market values growth; acquisitions provide a means to rapidly extend one or more product lines and increase the firm’s revenues. Acquisitions pursued for this reason should, nonetheless, have a strategic rationale. Copyright © 2008 Cengage

Creating value The practice of strategic entrepreneurship by all types of firms, large and small, new and more established, creates value for all stakeholders, especially for shareholders and customers. Strategic entrepreneurship also contributes to the economic development of countries. Firms achieve competitive advantages 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. In so doing, they create value for their customers and shareholders. Copyright © 2008 Cengage