1.1.5. Entrepreneurship in Established Firms

The question of whether established firms can be entrepreneurial is open to interpretation. On the one hand many practitioners, many scholars would argue that the concepts and techniques that we’re presenting in this specialization are equally applicable in larger established firms, perhaps even more important in those types of firms. Managers need to assess profitability, prototype and test, acquire and retain customers, acquire and retain talent. So of course, managers can be entrepreneurial even in larger firms. But on the other hand, lots of work in the popular press and in the academic literature suggests that new ventures and younger firms are more nimble than established firms. They have the ability to fundamentally change industries and technologies and this implies that established firms may struggle to adopt new opportunities and eventually lose their market dominance. The answer is both are true. There are struggles but there are also opportunities. And in this module we’ll examine why established firms can become inertial and struggle with this issue but at the same time, the practices that they’ll use to develop and pursue new opportunities. There has been a lot of attention in both the popular press and the academic literature on how managers in established firms can be entrepreneurial. There are many different terms and phrases that authors are using to describe this activity. So some of the terms and phrases you might search if you wanted to learn more beyond we discuss today would include entrepreneurial management, corporate entrepreneurship, intrapreneurship, ambidextrous innovation, working with both hands- doing both at the same time, balancing exploration- again that same idea. We’ll talk more about those in a minute. And also dynamic capabilities. So all of those have a host of literature associated with them if you’d like to look further. This graph represents the opportunity space for a firm. By opportunities I mean market technology combinations. Each time a firm, an established firm pursues an opportunity, they’re going to decide whether their technology embodies incremental versus discontinuous innovation, that’s our x-axis, and also whether that technology is going to be brought to existing or new markets, and that’s our y-axis. To give an illustration, incremental technology versus discontinuous, think about an iPhone. The original iPhone was a discontinuous innovation. Fundamental differences in the functionality of your mobile device, the manufacturer of the device etc. In contrast, an iPhone 6s would be incremental innovation. Still has some new features and feels a little bit different, but for the most part it’s building very much on the technology that’s already been established in the whole iPhone trajectory. When we think about markets, you can be bringing any particular product to an existing set of customers. So the iPhone 6s, probably many of those customers also bought say an iPhone 4 or you may be taking your technology to an entirely new market. Is there a new geography, for example, that you’re going to be bringing that technology to? So established firms are facing this sort of opportunity space and they have lots to do, lots of ideas, but at some point their resources are limited. They have thresholds for the amount of revenue that they’d like to be generating with any new opportunity and these thresholds are getting bigger and bigger as the firm is getting bigger and bigger. So what winds up hapening in many cases is that many established firms get stuck in the lower left corner of this graph. They’re looking at incremental innovations for existing customers. So they’re following the trajectories of their current products or services. And while there’s nothing wrong with this, this activity tends to be called exploitation because you’re making small exploitative changes to the existing technology and the existing customer base and how you reach them. And this is the source of many of the revenues for many of the firms that we know. But we know that for firms to hang on for the long haul that they need to be moving in some of the spaces outside of that green circle. So moving beyond exploitation and also doing some exploration. Either finding ways to incorporate very different technologies, or getting two very different markets, or some combination of both. And this is why you’ll hear scholars talk about balancing, exploration, and exploitation in the established firm, being ambidextrous because you can work with both hands and balance these two activities. Why is this hard to do? Why is it that so many firms get stuck in exploitation and don’t explore as much as they’d like? Another perspective on why incumbent firms can be inertial has been given by Clay Christensen’s well-known work on disruptive innovation. On this graph, the x-axis represents time, while the y-axis represents the performance of a particular product or service. There are two colors of lines within the graph. The green line represents the needs or the expected performance of the customer. And in fact, there’s not just one line for the average expected performance of the customer, but rather there are three lines: high, medium, and low, because there are different levels of needs that customers might have. For example, when I use word processing software, I’m only using a very small fraction of the features that are available, but someone who’s in publishing is going to use a much larger percentage of those features that are available. So we have customers at different levels of expected performance. Superimposed on this graph are red lines which represent the performance of the actual product or service. The top line, Christensen labels, “sustaining innovation.” So this is the performance that the established firm is able to achieve for their products. You can see at the beginning of time, the product is meeting the needs of the low need customer, and just starting to meet the needs of the more medium expectations of customers, but pretty quickly over time, the established firm is able to serve the needs of even the highest expectations of customers and then continues to improve well beyond the needs of customers. The bottom red line represents Christensen’s disruptive innovation. Here the startup firm is bringing a technology to market that at first doesn’t meet the needs of barely any customers, but as it continues to improve over time, it can slowly consume the lower segments of the market and then as you see on the graph, as we keep moving through time, it will soon continue to improve enough to meet the needs of medium expectation and high expectation users. And this is what puts the incumbent firm out of business at least with regard to this product. The example that Christensen uses is Mini Mill technology integrated steel producers made- all levels of quality of steel for many years in very large factories, Mini Mills emerged and at first they could only make the very very lowest quality steel, it was really scrap metal, so they couldn’t get many customers. But as they continued to improve, they kept taking the lower segments of the market until we got to the point where all steel can now be made in Mini Mills, so that’s disruption. With that said, let’s change gears and focus on how established firms can actually cultivate innovative practices and innovation within their boundaries. I’ll talk briefly about each of three categories here: internal development- doing things just within your own organization, partnerships- strategic opportunities to work with other firms, and then finally acquisitions- if a firm chooses to pursue exploitation in internal development on its own, we can think about what you ask your people to do and what you ask the organization to do more generally. Just thinking first of all about the simplest sort of approach, which is really a cultural intervention. That’s about dedicated time, you can say to your people we want you to spend a certain amount of time doing things that aren’t just exploitative projects, but rather are focused on exploration. 3M pioneered the use of what they called 15 percent time many years ago. Basically that was just telling their engineers, their technical people, their sales people, their marketing development people, that they could spend 15 percent of their time on these exploratory activities. And it isn’t like every day someone said, up, I got to find my 15 percent time, but rather that when a person wanted to pursue something innovative, if someone else would say, “Gee, here’s a fire you need to be fighting right now” they’d say, “No, you know what, I’m on my 15 percent time right now.” Google turned it into 20 percent time, used that technique for quite a few years. More recently they’ve moved away from a formal emphasis on 20 percent time, but yet it has really infused their culture and there’s many people who are consistently saying, “I have the time and the opportunity to pursue new projects.” More generally, many companies offer sabbaticals to their employees to pursue new ideas. So IBM and LinkedIn are both known for that sort of approach as well. Thinking about bigger organizational ways to encourage innovation, many larger companies are forming or have formed separate divisions or R&D labs in order to ensure that they are promoting the development research as well as development on products, processes, underlying technologies, that may enable innovation either in the short term or the long term. Microsoft, Yahoo, Intel, all these companies have R&D facilities that allow them to really pursue new technology somewhat separated from profit motives at least in the short term. Google X now just known as X, as a subsidiary of Alphabet, is known for pursuing what they call moonshot technologies where they’re looking for the really really out there sorts of technologies that would be fundamentally disruptive and really change the world as we know it. Thinking about strategic partnerships, now we’re moving beyond the boundaries of just the individual established firm and saying how can that firm cooperate with others. How can two firms come together to share their technology, their market access in order to generate more opportunities for each of the firms? A great example here is Tesla Motors. Tesla has a strategic partnership with Toyota where they are helping to develop and provide components for Toyota’s electric vehicles. So all of Tesla’s expertise in battery technology in the like can be used in that partnership and both companies are obviously benefiting from this exchange of ideas, intellectual property etc. At the same time, Tesla has a partnership also with Airbnb, and this is a fundamentally different set of issues that they’re pursuing with Airbnb. If you go to the site for Airbnb and Tesla, what you can see is that they’ve created a sharing economy for electric vehicles and battery chargers. In essence, and Airbnb host can sign up to have a Tesla charger put into their home so that they can advertise that as an additional feature of their home, and by the same token the renters on Airbnb, if they drive a Tesla vehicle, can find a host that will provide this sort of service. So both sides of the market are being served by this, and Tesla is bringing that technology into this world of travelers in the sharing economy. On the topic of strategic partnerships, we should also talk about corporate venturing arms. In large corporations you’ll frequently find a separate subsidiary that’s devoted to finding partnerships and indeed creating equity investments in those partnerships. So in some ways this has some similarity to the pure venture capital that you’ll hear about many times during the class, but by the same token it also tends to have in contrast to traditional venture capital, corporate venture capital tends to have a more strategic focus on investments that I encompass technology that is more likely to be built in to the future products and services in the company. So in that way, these strategic alliances or these partnerships, these equity investments serve as a bridge or a gateway which may ultimately lead to corporate acquisitions. Let’s talk about corporate acquisitions then. Like partnerships, they’re providing access to resources. But of course, by acquiring the other entity, the established firm has full access as well as full control of those resources because they become a part of the organization. So again access to technology, talent, markets, customers, brands. I want to share with you a historical example of acquisitions which also illustrates the challenges for incumbents in obtaining and succeeding in new technologies. It’s the story of AT&T which was in the U.S., a regulated monopoly providing telephone service for most of the 20th century. It’s also called the Bell system. In 1992 AT&T made an equity investment in McCAW Cellular in order to start to access technology for cellular service for wireless phones as well as the customers that McCAW had. And this is very ironic because AT&T had a crown jewel research facility called Bell Laboratories which played a substantial role in the development of wireless and cellular technology throughout the 20th century. And even though they developed this technology, these sorts of incentives and cost structures that we’ve talked about earlier led them to never really enter the business until after the telephone service in the U.S. was deregulated in the 1980s. So in 1992 they make an equity investment in McCAW cellular and then in 1994 after they’ve evaluated this, they acquire the entire company and this is called AT&T Mobility. Ten years later, a company named Cingular wound up acquiring AT&T Mobility, and Cingular did this for scale purposes. Cingular already had a very big network. It was the mobility division of two of the Baby Bells, some of the companies that were spun out of AT&T when it was deregulated, and Cingular wounds up acquiring AT&T Mobility which was actually smaller for scale. But then the funniest part of the story of all is that in 2007, this company wounds up through additional industry consolidation and mergers and the like, It was re-branded AT&T Wireless. So the AT&T service that many of you may use now, that’s AT&T Wireless is actually a very very different company than the original AT&T which is so much a part of innovation folklore in the 20th century. But to move to a more recent example, let’s talk about Facebook. Let’s talk about a more recent example of acquisition activity to maintain innovative behavior in an established firm- in Facebook. Facebook has made over 50 acquisitions already, about 25 percent of them are outside the U.S. So while many of their acquisition targets are within the Silicon Valley region where their headquarters are, they’re also looking much further for the technologies that makes sense for them. One of their well-known acquisitions was of course, Instagram, that was a one billion dollar acquisition, and Facebook acquired Instagram for the technology, the app itself, to integrate with their app. For the people, 12- all 12 of them at Instagram and also of course this removed a potential competitor. Because Instagram was growing very rapidly at that time, and accumulating lots of customers, and so by acquiring them Facebook was able to consolidate this customer base and ensure that they wouldn’t get overtaken on that front. Facebook has made even bigger dollar acquisitions since then in Oculus VR- Virtual Reality technology. I think that was $2.5 billion, and then of course, the granddaddy WhatsApp for $19 billion. It’s easy to track acquisitions for any company you’re interested in- merely by going to Wikipedia you can search on Facebook and see all of Facebook’s acquisitions listed as well as the country of origin and the price of the acquisition when it is disclosed, so there’s lots of information available if you’re interested in understanding how any particular company, public company has really sought to build their technology through acquisitions. So, in this module we reviewed why it is hard for established firms to innovate, but then also a series of techniques and managerial approaches that they use to overcome these inertial tendencies in order to promote and sustain their growth over time.