Strategic entrepreneurship - Innovation as source of competitive advantage

Global organizations face the challenge of adapting frequently to meet the needs of their customers, suppliers, and share-holders. Creating value for stakeholders is becoming increasingly difficult even for leading players like General Motors (GM) and Ford. A stream of continuous value-creating innovations by global competitors (e.g., Toyota and Honda) has challenged GM & Ford to reinvent themselves continuously.

The challenge of continuous and dynamic change is affecting firms across multiple industries. These include even the IT Services Industry such as Accenture / IBM / Infosys & TCS and their business models & Service models are changing the nature of competition. The winners and losers resulting from changes in this particular industry remain unknown. Consider a situation where Complete Customer relationship management service for any organization ( which will have been implemented, supported & serviced ) by any of the traditional players being replaced by a cloud offering from an organization Salesforce.com for which payment can happen on pay-per–use model & supported by niche player whose entire business model is predicated on this.

Being able to create a more attractive value proposition for customers is making it quite difficult for some of the more traditional players like IBM or Accenture since that means cannibalization of their existing revenue stream, changing the Business model of service & delivery and altering the Relationship matrix with customers in complete linear model.

Challenging nature of competing in a global environment creates several tension-filled questions for firms: - In what markets should we compete? Should we offer standardized products across all markets or should we modify our products for local preferences? - How much risk are we willing to accept to compete in markets with which we are not deeply familiar? What kinds of skills should we develop in order to become more innovative?

The issues raised by these questions have the potential to create tensions in today’s firms. Though all of these tensions (and certainly few more) are important, What is of interest is a particular tension that change creates for firms; specifically, the need for a firm to learn how to simultaneously exploit today that which it does well relative to rivals, while also exploring to determine what it needs to do to be successful in the future. In essence, this tension is between doing what is necessary to exploit today’s competitive advantages and exploring today for innovations that can be the foundation for the firm’s future competitive advantages. We think that the abilityto effectively manage this tension is rapidly becoming a key differentiator between maintaining organizational success and facing dwindling performance over time. The Fortune 100 annual survey rankings indicate that only 26% of the 100 companies listed remained on the list after 20 years and managed to do this successfully.

Firms’ ability to manage this tension is the core of strategic entrepreneurship. First, we need to understand Strategic entrepreneurship as a concept with the potential to influence the degree of success organizations can achieve while engaging their rivals in competitive exchanges. Second – Strategic entrepreneurship hastwo components: exploration and exploitation, differences in operational activities, organizational structure, and organizational culture that contribute to effective strategic entrepreneurship.

What is Strategic entrepreneurship – Balance between Exploration & Exploitation

Strategic entrepreneurship (SE) is a term used to capture firms’ efforts to simultaneously exploit today’s competitive advantages while exploring for the innovations that will be the foundation for tomorrow’s competitive advantages. Effective SE practices result in a firm being able to form a balance between opportunity-seeking (i.e., exploration) and advantage-seeking (i.e., exploitation) behaviors. Effective SE helps a firm position itself such that it is capable of properly responding to the types of significant environmental changes that face many of today’s organizations and helps the firm develop relatively sustainable competitive advantages.

Sustainable advantages are not only rare & valuable, but also difficult for competitors to fully understand, and difficult to imitate as a result of that lack of understanding. As this initial discussion of SE suggests, continuous innovation is at the core of what firmsare able to achieve as a result of balancing exploitation and exploration.

2.1. The challenge of strategic entrepreneurship: In spite of its benefits, firms find it difficult to balance exploration and exploitation due to several reasons

1. The outcomes of investments made in the firm’s exploratory capabilities are uncertain. Stakeholders. For e.g. Sup-pliers often are uncertainty avoiders, exploratory actions may lack appeal, due to their experimental nature and the lack of certainty that positive outcomes will accrue from them. Employees initially find exploratory actions to be difficult and perhaps undesirable. In general, those working in companies prefer the known to the unknown. Exploitation, which takes place by exercising familiar organizational routines, is preferred at the expense of exploration.

2. The fragility of the process used to transition from exploration to exploitation is a second reason. The operational, structural, and cultural changes must take place for a firm to transition from to exploiting current competitive advantages as the source of today’s competitive success to exploring for new opportunities (as well as new ways to take advantage of them). Thus, when transitioning, the firm moves from a concentration on diversity with the intent of creating newness (i.e., seeking new opportunities, new market space, and new advantages) to a concentration on successfully using current skills and routines as the source of today’s advantages.

Although SE has great promise, the complexity of the individual sets of actions, and the actions taken to transition fromexploration to exploitation and from exploitation to exploration, as well), poses significant challenges.

2.2. An expanded view of strategic entrepreneurship

Strategy is concerned with the firm’s - long-term development – no of elements such as decisions regarding scope, how resources are to be acquired and managed, and intended sources of competitive advantage, among others
Entrepreneurship is concerned with actions taken to create newness- results from actions framed around efforts to create new organizational units, to establish new organizations, or to renew existing organizations

Strategy and entrepreneurship (SE) results from combining attributes of strategy and entrepreneurship. The firm combines exploration-oriented attributes with exploitation-oriented attributes to develop consistent streams of innovation and to remain technologically ahead of competitors. Thus, SE is concerned with actions the firm intends to take to exploit the innovations that result from its efforts to continuously explore for innovation-based opportunities (i.e., new organizational forms, new products, new processes, etc.). An ability to anticipate and then properly respond to environmental change is one of the important outcomes of effective SE.

Indeed, through SE, the firm intends to rely on innovation and its exploitation as the source of sustainable competitive advantages and effective responses to continuous environmental changes. Between 30% and 50% of both a firm’s sales and its profits originate from products commercialized in the previous 5 years, highlighting the necessity to create consistent streams of innovation to maintain organizational success.

Exploitation maintains and hopefully enhances current levels of performance by incrementally extending the firm’s established knowledge base. In doing so, exploitation also supports the firm’s exploration efforts. Exploration occurs as the firm integrates diverse knowledge with existing knowledge stocks. Absorbing new knowledge to which the firm gains access while exploring becomes the foundation for future exploitation actions.

Effective SE leads to a combination of both effectiveness and efficiency-oriented forms of newness, and is the source of sustainable competitive advantages. New products, New processes used to produce products, and new ways to structure a firm to facilitate innovation are all examples of newness that SE can produce. Product innovations are the source of effectiveness as a result of satisfying market expectations, while process and structural innovations are the foundation for efficiency as the firm wisely uses its resources. Although new products highlight to the world a firm’s innovativeness and prestige, process and administrative innovations provide firms with greater competitive advantage than product innovations. The reason for this is that process and administrative innovations are hidden within the firm. Consequently, it is more difficult for competitors to reverse engineer and imitate these innovations, as is often easily and quickly achieved with product innovations.

As an example, Philip Morris held discovered that when tobacco was allowed to soak in liquid carbon dioxide and then passed through a stream of hot air, it would expand and pop, much like popcorn. By employing this technique, Philip Morris was able to fill the same amount of cigarettes with less tobacco, greatly enhancing its productivity and, subsequently, its profitability. The process through which Philip Morris expands tobacco remains safely housed behind the walls of its manufacturing facilities, hidden from those who may wish to imitate such value-creating activities.

Sustainable competitive advantage results from a combination of product, process, and administrative innovations, as firms cannot gain value from low-quality or outdated products, even when utilizing highly efficient processes.

3. Differentiating exploration and exploitation

In the following sections, we discuss in greater detail the processes of exploration and exploitation. To do this, we describe the operational, structural, and cultural characteristics enabling efficient and effective SE. As we will explain, firms can undertake effective SE practices by separating the exploration and exploitation activities, and supporting each with distinct operational, structural, and cultural mechanisms.

3.1. Exploration: Benefiting from diverse investments

Identifying ways to position a firm in one or more market spaces to deal with environmental change is a key outcome sought through exploration. Exploration’s success depends on the firm’s ability to acquire new, diverse knowledge and subsequently integrate it with existing knowledge. Knowledge breadth is achieved by seeking diverse knowledge from external sources to add to internal knowledge. Knowledge depth is achieved as the firm seeks to increase its store of both internal and external knowledge in focal areas.

As an operational choice, mergers and acquisitions are a path firms use to increase their knowledge diversity. Although controversial, this path remains favored by a number of companies. Recently, for example - HCL acquired AXON (a leading provider of SAP solutions) to expand its knowledge base in package implementation business. - Cisco Systems acquired Scientific-Atlanta, a provider of television set-top boxes, video distribution networks, and video system integration, to establish expertise in video internet protocol networks. This offers CISCO the ability to take advantage of the expected integration of televisions with the capabilities of personal computers. In short, acquiring Scientific-Atlanta demonstrates Cisco’s recognition of a changing environment (i.e., the further integration of Internet and television technologies)

Some of recent corporate actions suggest that with increases in the rate and complexity of environ-mental changes find firms seeking more efficient operational means of exploration (compared to mergers and acquisitions). Strategic alliances and corporate venture capital programs are examples of means of operating that firms believe are efficient exploration paths.

Contributing to the perceived efficiency is the fact that alliances and corporate venture capital programs allow a firm to share, with one or more companies, the risks and uncertainty associated with exploration investments. Using these means enables a firm to stretch its constrained internal resources across a broad, diverse scope of opportunities.

Corning’s heritage is based on its own internal knowledge of glass and ceramics. Nonetheless, the company has successfully leveraged knowledge acquired from alliance partners with its own knowledge about glass and ceramics to generate new technologies to create new products. Corning’s alliances include major collaborative relationships with the likes of Dow Chemical, Samsung, and Mitsubishi.

Corporate venture capital programs represent a way of operating that firms use in order to mimic independent venture capital funds. Firms provide funding and expertise to a broad number of ventures; in return, they may become aware of attractive opportunities before their competitors. Having a first-mover advantage in terms of identifying one or more attractive opportunities can subsequently lead to exploitation actions that get launched before those of competitors.

A number of firms across a broad array of industries, including Intel, Reuters, Bertelsmann, and UPS, have established corporate venture capital programs. Of course, proponents of corporate venture capital programs assert that the strategic objectives outweigh potential financial losses. For example, Intel has invested over $130 million in 2004 in approximately 110 ventures, spanning mobile Internet products, digital home applications, enterprise hardware and soft-ware, and numerous other emerging technologies. Corporate venture capital programs can serve as an efficient means through which to invest across a broad range of opportunities

More comprehensively, our consideration of Corning’s and Intel’s actions demonstrates that a key purpose of exploration is creating new streams of knowledge as the source of radically different technologies and, subsequently, of new products and sources of competitive advantage. Benefits accrue to firms capable of efficiently handling the demands of different operational choices (mergers and acquisitions, alliances, and venture capital programs) as exploration investments.
Behavioral Aspects of strategic entrepreneurship

Exploration and exploitation demand different behaviors—behaviors that are facilitated by a firm’s structure and culture. Indeed, the structural and cultural mechanisms required to sup-port exploration differ from those needed to support exploitation.

The degree of centralization of authority, the standardization of procedures, and the formalization of processes are three structural mechanisms an organization uses to support exploration and exploitation. Organizational structures characterized by decentralized authority, semi-standardized procedures, and semi-formalized processes support exploration.

Decentralization of authority enhances the potential effectiveness of a firm’s exploration behaviors in that it makes it possible for the firm to examine a relatively large number of potentially attractive market-related opportunities.

In contrast, semi-standardization and semi-formalization contribute to the firm’s efforts to efficiently use resources when exploring. More specifically, standardizing and formalizing some of the decision rules used for guiding the exploration for opportunities creates routines of knowledge search that have the potential to reduce the amount of financial and human capital that is inappropriately used or wasted. However, standardization and formalization should not be used to the point that they stifle the creativity of individuals to whom authority to explore has been decentralized. The Organizational culture (i.e., the set of values and beliefs that are shared throughout a firm) supports a company’s structural characteristics. Unsatisfied with GE’s performance in exploration, CEO Jeffrey Immelt acquired British bioscience/diagnostics company Amersham. Previously, GE’s success rested upon successfully exploiting knowledge gained through acquisitions. Immelt believed that as the company grew continuously larger, relying on acquisitions as the primary means of exploring would not yield the levels of success the firm sought. Therefore, Immelt used the Amersham transaction to spur changes in GE’s culture and increase the firm’s exploration. Unlike prior acquisitions in which GE replaced target company executives, Immelt placed Amersham’s CEO in charge of GE’s existing healthcare unit. Further-more, Immelt invested over $100 million in R&D both domestically and internationally to promote the risk-taking behaviors of a successful exploration culture.

Exploration is a long-term, uncertain process. Pharmaceutical companies’ attempts to develop new drugs clearly demonstrate this. Even after spending years to develop a new drug, these companies are required to obtain regulatory approval through multiple stages of testing. (The requirements pharmaceutical companies must satisfy vary by country). On average, 8—12 years elapse from the time an opportunity is identified to when the medicinal product is successfully positioned in the market space for exploitation purposes (Biomedical Indus-try Advisory Group, 2005).

Furthermore, only one in five to ten thousand opportunities pursued by pharmaceutical firms actually survives this entire process. Although the numbers are elevated in the pharmaceutical industry, statistics weigh against success in exploration for a host of companies competing in other industries beyond pharmaceuticals. In all industries, however, the link between exploration and exploitation highlights the need for an organizational culture valuing experimentation, the acceptance of uncertainty, and a tolerance of failure. In Table 1, we highlight the fundamental, organizational characteristics of successful exploration.

3.2. Exploitation: Benefiting from focus

Radical changes are occurring rapidly in many of today’s competitive environments. Firms that learn how to use SE as a means of dealing with these changes may enjoy a reasonable amount of stability between changes. During periods of relative calm or stability, firms concentrate on incrementally extending their knowledge base as the source of exploiting current competitive advantages to address new market demands.

Consider digital cameras in the photography industry as an example of how this works. When introduced, digital cameras were a radical innovation relative to the use of film. Following initial competitive reactions to the introduction of the innovative digital product, however, competitors have settled into a pattern of competing primarily on the basis of incremental innovations, including such minor changes as improving the quality of the digital image (i.e., megapixels) and lens speed.

Because incremental innovations represent minor extensions to established bases of knowledge, how the firm efficiently and effectively processes knowledge to exploit new market demands differs substantially from exploration-related behaviors. Two major variables, the heightened certainty regarding market trends and the shorter duration between market introductions of successive innovations, create the differences. Exploitation rests on knowledge of a proven innovation (i.e., product, process, or administrative), making it possible for firms to be aware of present needs and demands. Companies that are able to meet these market opportunities early with high quality products and services enjoy competitive advantage by being able to gain market share and by forming entry barriers.

Through stages of exploration and subsequent exploitation, individuals within the firm build an intimate knowledge base of the product, process, and administrative attributes supporting an innovation. These individuals are often the source of valuable ideas to re-bundle resources and knowledge to create incremental innovations.

Much of Honda Motor Corporation’s success can be attributed to empowering individuals to stimulate positive change. For example, the company permits its employees to join teams that explore ideas they find interesting. Allowing such interactions has led to numerous innovations throughout the firm, from minor improvements in the type of rag used to wipe down dashboards to more technologically complex innovations involving how hood and hood frames are stamped.

Although firms can take advantage of internal resources and knowledge, they may also seek external partnerships when engaged in exploitation. When exploring, firms seek knowledge and resources primarily in order to increase diversity. In contrast, exploitation finds firms acquiring and bundling complementary knowledge and resources to extend their ability to leverage existing capabilities and competitive advantages. Firms may tap into external knowledge and resources to achieve several objectives, including those of increasing the breadth of their distribution channels and the speed at which they introduce incremental innovations to customers. For example, Apple Computer has partnered with Hewlett-Packard (HP) to expand the global reach of its iPod digital music player and its on-line music store. The alliance finds Apple leveraging HP’s established distribution channels and taking advantage of market opportunities in Asia. Thus, this alliance extends Apple’s distribution capabilities as a means of solidifying the iPod’s position as the world’s top digital music player. With extensive distribution capabilities established through a cooperative relationship with another firm, Apple is able to concentrate some of its resources on developing value-creating, incremental innovations for the iPod.

Consider, again, the Honda Motor Corporation. Although the company gains huge benefits from its employees, as described above, it also forms alliances with some of its suppliers to identify opportunities for incremental improvements. Through the 1990s, these collaborative efforts rewarded Honda with a 25% reduction in the manufacturing costs of the Honda Accord. Rather than merely absorb these reduced costs in higher profits, Honda produced a larger Accord loaded with additional options, without raising the consumer’s price. Through successful exploitation, Honda has profitably increased its share of the global automobile market.

Firms also complete mergers and acquisitions to facilitate exploitation of chosen opportunities, although a less efficient means of acquiring external resources.

Many firms in the banking industry merge or acquire to exploit new geographic markets for just these reasons. For example, Wachovia Corporation, already one of the largest financial services providers in the nation, acquired South Trust Corporation to expand its geographical footprint in the southeastern United States, especially in the fast-growing Texas market.

Similar to exploration, merging or acquiring to exploit generates potential synergies by integrating complementary capabilities. These efforts are not risk free, though, in that rapidly changing environmental conditions have the potential to decrease the value of acquired knowledge and resources.

Exploitation is characterized by structural and cultural mechanisms that allow the firm to focus on a core set of knowledge and capabilities. As we discuss, there are differences in the structural and cultural mechanisms firms use when exploiting compared to when exploring.

Need for speed requires that the firm focus on established knowledge. Because of this, the incremental nature of exploitation also minimizes the need for extensive cross-divisional communication (although, as noted from the Honda example, some cross-functional cooperation can spark valuable, incremental innovations).

A centralized structure takes advantage of each of these factors. This structural mechanism makes it possible for organizations to implement decisions quickly and efficiently by limiting the extent to which diverse perspectives are addressed. There- fore, centralization deters the potential for internal conflict among separate divisions, divisions that may have different perspectives regarding how to best exploit an opportunity.

Highly-specialized and formalized routines also benefit a firm’s exploitation efforts. Exploitation’s success rests more primarily on the proper use of fast, simple routines. Firms that attempt to become a leader by honing numerous capabilities (as the sources of multiple competitive advantages) often find themselves, due to a resulting lack of focus, lagging behind competitors that, due to their concentrated efforts, precisely target customers’ needs. Formalization provides the authority individual employees require as the foundation for making decisions in a timely manner. Consistent managerial support for the formalized procedures, in turn, solidifies the employee behaviors in standardized routines.

Not surprisingly, exploitation is also culturally distinct from exploration. The system of shared values supporting exploitation include - A need for greater certainty regarding tasks and outcomes, a preference for meeting short-term goals, and a commitment to focus on existing competencies and competitive advantages. - Need for a heightened level of certainty regarding market trends. In providing necessary focus, centralization, standardization, and formalization limit the extent to which experimental behaviors may manifest in exploitation.

Even when the appropriate structural mechanisms are in place, individuals with a greater propensity for experimentation can side-track the focus of decision makers. Such behaviors slow down the exploitation process and introduce inefficiencies, both of which undermine the firm’s ability to effectively exploit market opportunities. Therefore, firms must engender a culture in which greater certainty and desire to focus on what is known, as opposed to what could be, is supported.

Exploitation’s incremental nature also implies that the time between milestones is much shorter than is the case when exploring. Indeed, the formalization characterizing exploitation demands specification of when and how outcomes should be delivered. The constant presence of new objectives can be stressful, especially given that competitors’ incremental innovations reduce the time available to a firm to achieve its specific objectives.

Firms able to prevent this type of stress from reducing their concentration on competitive advantages as the source of exploitation outperform those incapable of doing this.

4. Implications for organizational actions

Dynamic, yet continuous environmental change is the rule of the day. The result of a host of conditions, including global competition and rapidly changing technological capabilities, change is a never-present and increasingly rigorous challenge facing today’s firms. If anything, the significance of the challenge to organizational success that constant change surfaces can be expected to increase in the decades ahead.

The reality of constant and challenging environmental change potentially creates a need for organizations to alter their approach to developing and using competitive advantages as the pathway to superior performance. In our view, strategic entrepreneurship (SE) is an approach that can serve firms well in their efforts to rely on competitive advantages as the path to superior performance, both today and in the future.

As the intersection between strategic management’s focus on exploiting competitive advantages and entrepreneurship’s concentration on exploring for opportunities as the building blocks around which future competitive advantages will be framed, we believe that strategic entrepreneurship captures a set of organizational actions with the capacity to strongly (and positively) contribute to a firm’s efforts to outperform competitors. More- over, continuous innovations are an outcome of effective SE. This is important, in that there is little debate regarding the position that newness (in the form of new products, new processes to produce those products, and new ways of organizing work in a firm to produce products) is critical to organizational success.

The decision to engage in SE is a vital but insufficient step to being able to consistently outperform competitors; indeed, firms reach SE’s potential only by balancing their actions between exploration and exploitation. In slightly different words, the most successful firms balance the efforts they expend to explore for tomorrow’s opportunities while exploiting today’s competitive advantages. Firms use three types of mechanisms (operational, structural, and cultural) to help balance exploration and exploitation; In Table 3, we present steps firms can take to get started with

Getting started

To date, few of today’s firms have been able to achieve an entrepreneurially-effective balance between exploration and exploitation. Interestingly, because each firm has unique resources and capabilities, the nature of the desired balance between exploration and exploitation also differs among firms.

3 key actions managers can take that positively contribute to firms’ efforts to achieve a better balance between exploration and exploitation:

1. Understanding the exploration and exploitation balance – A number of factors affect the appropriate balance between exploration and exploitation in a firm. These factors include the frequency and significance of changes taking place in the firm’s external environment, Stage of evolution of the firm, whether the firm competes in as low or fast-cycle market, and the firm’s resources and capabilities. For example, a firm competing in a dynamic market needs to emphasize exploration more than firms competing in stable environments.

2. Identifying the optimal balance - Effective analyses of external and internal environments are the foundation for discovering an ideal exploration / exploitation balance. External analysis should include Current as well as emerging trends in the technological, socio-cultural, economic, political / legal, demographic, and global arenas in which the firm competes. The internal environment analysis should examine the firm’s strengths and weaknesses to discern how external changes may lead to opportunities or threats. If the potential weaknesses and threats outweigh the strengths and opportunities, a firm likely needs to enhance its exploratory actions.

3. Reintroducing the middle-level manager - Middle-level managers play two vital roles in strategic entrepreneurship. First, these managers bridge the gap between operational-and strategic-level managers. Because of this, middle-level managers are instrumental in how a firm’s strategy becomes operationalized, as well as in keeping top management teams apprised of opportunities that have been identified in lower organizational levels. Second, middle-level managers are ideally positioned for separating the operationally, structurally, and culturally different processes of exploration and exploitation.

In the final analysis, successful organizations as ones in which strategic entrepreneurship will be used to deal with the organizational tension that surfaces as firms try to simultaneously emphasize today what they already do well (relative to competitors) while exploring for opportunities to build the foundation for their future success. Thus, we believe that’ superior firm performance will be a function of the degree to which firms learn how to combine the best of strategic management and entrepreneurship as the source of today’s and tomorrow’s competitive advantages.[pic]
-----------------------
Entrepreneurship

1. Creating newness, units

2. Organizational renewal

3. Opportunity seeking behaviors

Strategy

1. Design Firm’s scope, Manage firm’s resources

2. Develop competitive advantage

3. Enhance Advantage seeking behaviors

Strategic Entrepreneurship

4. Balancing Exploitation & Exploration

5. Balancing resources between the two

6. Continuous streams of innovation & adoption of technology