Chapter 12
Managing Innovation and Fostering
Corporate Entrepreneurship……………………………………….….…. 380 (12-2)
Managing Innovation………………………………………………………………..….… 382 (12-4)
Types of Innovation…………………………………………………………………………………….….….. 382 (12-4)
Challenges of Innovation………………………………………………………………………..…….….… 384 (12-5)
Cultivating Innovation Skills……………………………………………………………………………….. 387 (12-7)
Defining the Scope of Innovation…………………………………………………………………………. 387 (12-8)
Managing the Pace of Innovation…………………………………………………………………….….. 389 (12-9)
Staffing to Capture Value from Innovation………………………………………..….….…….….…. 389 12-9)
Collaborating with Innovation Partners………………………………………………………………..
The Value of Unsuccessful Innovation ………………………………………..….….…….….…...
390 (12-10)
392 (12-12)
Corporate Entrepreneurship……………………………….….…….….…….….….. 393 (12-12)
Focused Approaches to Corporate Entrepreneurship…………………………….…….….…….. 394 (12-13)
Dispersed Approaches to Corporate Entrepreneurship…………………………………………… 395 (12-15)
Measuring the Success of Corporate Entrepreneurship Activities……….…….….…….…... 398 (12-18)
Real Options Analysis: A Useful Tool…………………………..…….….…….….. 399 (12-19)
Applications of Real Options Analysis to Strategic Decisions……………..…….….…….….. 399 (12-19)
Potential Pitfalls of Real Options Analysis………………………………………………………….... 400 (12-19)
Entrepreneurial Orientation………………………………………….….….…….….. 402 (12-20)
Autonomy………………………………………………………………………………………..….…….….….. 403 (12-21)
Innovativeness………………………………………………………………………………………………..…. 404 (12-22)
Proactiveness…………………………………………………………………………………….….….….…… 404 (12-24)
Competitive Aggressiveness……………………………………………………………………..….….….. 406 (12-24)
Risk Taking……………………………………………………………………………………………….….…... 407 (12-25)
Issue for Debate……………………………………………………………..….….…….…. 408 (12-27)
Reflecting on Career Implications……………………………………..….…….….. 409 (12-28)
Summary……………………………………………………………………………….…….… 410 (12-30)
Chapter 12
Managing Innovation and Fostering Corporate Entrepreneurship
Summary/Objectives
Strategic management and leadership are essential for entrepreneurial success. To remain
competitive, established firms must seek out opportunities for growth and avenues for strategic
renewal. Changes in customer needs, new technologies, and shifts in the competitive landscape
require that companies continually innovate and initiate corporate ventures. This chapter
addresses how innovation and corporate entrepreneurship help firms create competitive
advantages. The chapter is divided into three major sections:
1. The first section addresses the role of innovation in the venture creation and strategic
renewal process. We also discuss how firms can effectively manage the innovation
process and overcome impediments and challenges to successful innovation.
2. The second section addresses corporate entrepreneurship. It describes techniques used
by established firms to instill a spirit of entrepreneurship into corporate strategic
thinking. It also discusses the role of focused and dispersed approaches to the venture
development process.
3. The third section addresses the practical implications of real options theory (ROA) in
the context of corporate venturing. ROA has been found to be a useful tool to help
managers with resource allocation decisions. We also address some potential
drawbacks of ROA.
4. The third section describes the influence of an entrepreneurial orientation on the
venture creation processes. It outlines several practical applications of entrepreneurial
thinking to strategic decision making and cautions about some of the pitfalls
associated with an entrepreneurial frame of mind.
Lecture/Discussion Outline
The opening incident, in LEARNING FROM MISTAKES, refers to how Google, a firm
that has developed several successful innovative products, was unable to successfully innovate in
the radio advertising industry. This demonstrates the challenges even successful firms can have
when innovating.
Google has developed a very effective online-search advertising model for corporations.
By collecting data on user demographics, interests, and buying habits, Google is able to target
ads to users to increase click through rates and generate advertising revenue. Several years ago,
Google moved to expand its advertising model to radio and hoped to eventually enter print and
TV advertising. Their goal was to provide an entire suite of advertising options to corporations
and provide them with a dashboard with which to assess the effectiveness of their advertising
portfolio. This would allow Google to tailor an entire range of advertising options to provide a
comprehensive advertising solution to firms.
What Google found was that their business model did not translate well into other
advertising platforms, and after spending several hundred million dollars, they pulled the plug on
this entrepreneurial venture.
Discussion Question 1. Why didn’t the lessons Google learned in the online advertising
market apply to the radio market?
Response guidelines: Google’s success in online advertising depends on its tracking
consumers’ responses to advertisements and subsequent buying behavior. These data enable
In addition, Google did not have the relationships needed to buy large blocks of radio
airtime. Radio stations already sold most of their airtime to media companies or advertising
Students should understand that radio advertising is a mature market that has a working
Discussion Question 2. Radio is increasingly moving to satellite and streaming systems. Is this a
new opportunity for Google, or should they steer clear of radio altogether?
Response guidelines:
One of Google’s advantages appears to be its ability to track consumers’ media usage,
advertising consumption, and buying behavior. It is able to combine these data, which enables it
The challenge is to get students to link Google’s advantage to the satellite and streaming
radio systems. If consumers listen to radio while they are on a screen, then their clicks on
advertisements could be recorded, and Google’s model has potential. Otherwise, it is not clear
Times change. If students are clicking on banner and sidebar ads while listening to radio
through their devices, then the Google model may apply. Other possibilities are that Google may
offer advertisers a better media targeting strategy than advertising agencies can due to its existing
I. Managing Innovation
Innovation involves using new knowledge to transform organizational processes or create
commercially viable products and services. The sources of new knowledge may include the latest
STRATEGY SPOTLIGHT 12.1 shows how a relatively low-tech innovation by Dutch
A. Types of Innovation
There are several ways to characterize innovations. One distinction that is often used is
between product and process innovation. Product innovation refers to efforts to create product
Discussion Question 3: What are some examples of product and process innovations?
What types of firms are most likely to favor product innovations? Process innovations?
Innovations can also be viewed in terms of their degree of innovativeness on a continuum
from radical to incremental.
1. Radical innovations. Produce fundamental changes by evoking major departures
2. Incremental Innovations. Enhance existing practices or make small
EXHIBIT 12.1 depicts an incremental-radical continuum and shows examples of several
innovations.
Another distinction (introduced by Harvard Professor Clayton Christensen) is between
sustaining and disruptive innovations. Sustaining innovations are those that extend sales in an
existing market and may be either radical or incremental. Disruptive innovations are those that
overturn markets by providing an alternative approach to meeting customer needs. Disruptive
innovations tend to:
Be technologically simpler.
Southwest Airlines and Wal-Mart are provided as examples of disruptive innovation.
Discussion Question 4: What can be learned from characterizing innovations in different
ways? How does this help to better understand the strategic implications of innovation?
STRATEGY SPOTLIGHT 12.2 discusses how a new technology, Graphene, may disrupt
the electronics and computer industries.
B. Challenges of Innovation
Innovation is essential to sustaining competitive advantages, but firms are often resistant
The SUPPLEMENT below discusses evidence on how much effective innovating firms
reallocate their innovation resources on an annual basis.
Extra Example: Is there a Sweet Spot for Reallocating R&D Resources?
When allocating investment resources to units in the corporations, many companies simply allocate the same level
of innovation resources to each unit year in and year out. On average, companies only alter about 13% of their R&D
allocations on a year-to-year basis. Thus, firms don’t allocate R&D resources actively based on the performance or
innovation prospects in different units. Instead, nearly 90% of the R&D resources a unit receives is based on last
year’s allocation.
However, research by McKinsey & Company suggests there may be a sweet spot for changes in R&D adjustments.
In a study of large corporations (over $1 billion in sales), this research found that successful innovators typically
reallocated between 6% and 30% of the corporate R&D budget from one division to another each year. In contrast,
unsuccessful innovators most commonly reallocated less than 5% of their R&D budgets year-to-year.
This research suggests that corporate managers who want to maximize the firm’s innovation potential should not see
the annual R&D budgeting cycle as a simple continuation of prior allocations. They should actively assess the
potential in corporate units and be willing to alter allocations to each unit to match that unit’s opportunities.
Source: Chan, V., de Jong, M., & Ranade, V. 2014. Finding the Sweet Spot for Allocating Innovation Resources.
McKinsey Quarterly. May.
Discussion Question 5: Why is it important for firms to consider reallocating R&D
resources on a regular basis?
What makes innovation so difficult? Five dilemmas that companies must wrestle with
when pursuing innovation include
1. Seeds versus weeds—Companies must decide which of many ideas is most likely to bear
2. Experience versus initiative—Senior managers have experience and credibility but tend
3. Internal versus external staffing—Insiders may have social capital but fail to think
4. Building capabilities versus collaborating—Internal development is costly and time-
5. Incremental versus pre-emptive launch—Incremental launches are less risky but may
STRATEGY SPOTLIGHT 12.3 discusses how Procter & Gamble has been struggling
with these challenges to improve its innovativeness.
Discussion Question 6: What are some examples of other companies that you are
familiar with that have faced these dilemmas? Can you apply any of these dilemmas to
your own business life or life as a student?
The SUPPLEMENT below identifies a key idea for effectively managing innovation:
embracing the tension between creativity and efficiency rather than struggling with it.
Extra Example: Key to Managing Innovation? Make the Novel Routine
Former Apple Computer product designer Andrew Hargadon believes the key challenge in managing innovation is
being simultaneously innovative and efficient. Hargadon, who holds a PhD from Stanford’s School of Engineering,
makes a case that the best way to manage both creativity and efficiency is to build a bridge between them:
“Our obsession with the tension between the wild and crazy side of innovation and the button-downed
nature of ongoing operations is distracting us from one of the more real problems in managing innovation.”
“The big challenge in managing innovation lies, I would suggest, not in building up two very strong skills
in innovation and in operations, but rather in building the bridge between them–of developing the people
and processes that facilitate the routinization of novelty. Of turning good ideas into practical processes that
the larger organization can value, adopt, implement, and manage.”
“Forget 3M–think about Toyota. They are leaders in manufacturing efficiencies and also at exploring the
new frontiers of innovation automobiles. How have they managed the tension? Read any number of books
on them (but the original The Machine that Changed the World remains the best read) and you find that
they are extremely effective at recognizing those ideas that can be routinized and doing so before their
competition. Sometimes decades before. Consider the Prius. Ford and GM had many of the same
technologies lying around R&D, but having the ideas is not the same as converting them into
manufacturing routines, processes, supply chains, and ultimately customers. That’s execution.”
Sources: Deschene, L. 2007. Avoid complacency: How to manage innovation. BNET Intercom, www.bnet.com,
August 27; and Hargadon, A. 2007. Creative efficiency or efficient creativity?
Discussion Question 7: Recall from Chapter 8 that one of the keys to entrepreneurial
success is to “do more with less.” In your opinion, is it possible to be both highly
innovative and highly efficient? Why or why not?
Discussion Question 8: What are some examples of companies that you are familiar with
that have highly innovative products (or services) but relatively low costs. What accounts
for their ability to do that?
Successful firms often struggle to maintain creativeness and a drive to improve its
innovation. The SUPPLEMENT below discusses how Pixar Studios acts to limit complacency.
Extra Example: Pixar’s Steps to Push for Creativity and Improvement
Pixar has had a remarkable run of over a dozen hit animated films. Such a pattern of success could easily lead to
complacency and risk aversion in Pixar. To limit this tendency, Pixar undertakes a rigorous review of every film to
assess the process used to make the film—even though each of its films have been box office successes.
Top managers change the review process each time to limit the degree to which employees can game the system and
to keep them engaged in the process. One question they have asked participants is to identify the top five things they
would do again in a future movie project and the top five things they would not do again. Pixar also diligently
collects data on all aspects of the film production process and uses this data “to stimulate discussion and challenge
assumptions arising from personal impressions” during the postmortems. They also occasionally do a multi-project
review where they compare experiences across several productions to develop. Compare, and contrast assessments
and more general insights on what works and what doesn’t work. Sometimes, they use an outsider or a newly hired
manager to conduct these broad reviews to maintain an objective evaluation and to get a fresh perspective.
Sources: Gino, F. & Pisano, G. 2011. Why leaders don’t learn from success. Harvard Business Review. 89(4): 68–75.
The next four sections include steps that firms can take to address the dilemmas and
challenges of innovation.
C. Cultivating Innovation Skills
The ability to think innovatively can be developed in managers. Jeff Dyer and his
Associating: The ability to integrate questions and ideas that, to others, appear
Questioning: The practice of questioning the status quo and taken for granted
Observing: The behavior of regularly observing customers and potential customers
Experimenting: The willingness to try and fail regularly with new innovations.
Networking: Building diverse networks of friends and colleagues to get a range of
EXHIBIT 12.2 discusses the Innovator’s DNA and provides examples of each of the
underlying traits.
Discussion Question 9: Is it more important for entrepreneurs to develop these skills or
for managers of large, established firms?
D. Defining the Scope of Innovation
Firms must have a means to focus their innovation efforts. By defining the “strategic
envelope,” that is, the scope of a firm’s innovation efforts, firms ensure that their innovation
To maintain focus, a company needs to develop innovation questions to ask itself:
How much will the innovation initiative 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?
Discussion Question 10: If a company were to invest a large amount of time and money
on a potential innovation that did not work out, would you consider it a failure? Why or
why not? What factors would you consider to assess whether it was a failure?
The following SUPPLEMENT describes a five stage process that Corning, Inc., a leading
Extra Example: Corning’s Five Stage Innovation Process
Corning, Inc. has been a leading innovator since it was founded in the 1850s. It has made some risky moves and
some of its decisions have not paid off. But in periods of both success and failure, Corning has survived by using a
systematic management innovation process that has been effective for Corning and proven useful to many other
companies. The process consists of five steps that a firm can use to advance through the stages of innovation:
1. Build Knowledge. This involves establishing a shared view of trends, discontinuities and related events that
could shape the future. It often includes developing a road map of industry conditions and events that is useful
in formulating a portfolio of innovation projects.
2. Determine Feasibility. This includes experimenting with new ideas both in laboratory settings and with
potential customers and often involves developing a small working prototype. If proof of concept can be
achieved and the technology can accomplish the intended objectives, the prototype can be developed into a
product with significant market potential.
3. Test Practicality. This includes developing a larger prototype that reflects the initial product or process concept
and testing the prototype with customers and in the lab. At this stage, manufacturing costs and overall capital
requirements are estimated, potential competitive responses are assessed, and funds may be appropriated.
4. Prove Profitability. This involves determining if the product will satisfy a large market need, can be
manufactured reliably, and produced at a cost that generates a profit.
5. Manage Life Cycle. This involves building sales volume, gaining market share, and satisfying customer needs.
In order to keep the product from maturing too rapidly, it also includes efforts to continuously improve the
product and seek new growth markets.
Sources: Graham, M. B. W., & Shuldiner, A. T. 2001. Corning and the Craft of Innovation. New York: Oxford
University Press; www.1000ventures.com.
Discussion Question 11: How can the five stages of innovation used by Corning be used
to help address the first dilemma—defining the scope of innovation?
E. Managing the Pace of Innovation
Firms need to regulate the pace of innovation. Radical and incremental innovations need
different amounts of time to realistically come to fruition. The project time line of an incremental
innovation may be six months to two years, whereas a more radical innovation may take ten
F. Staffing to Capture Value from Innovation
People are central to the process of identifying, developing, and commercializing
This chapter’s INSIGHTS FROM RESEARCH discusses the actions a firm can take to
enhance the creativity of its employees in order to increase the innovative potential of the firm.
Four practices identified by researchers Rita McGrath and Thomas Keil include:
Include experienced staffers on innovation teams to mentor new staffers.
Transfer innovation members to mainstream activities to help revitalize core activities.
Separate performance of individuals from the performance of the innovation when
HR practices to avoid include:
Using only experienced mainstream players on innovation teams.
Discussion Question 12: What are examples that you are familiar with of other HR
practices that companies have used to enhance their innovation activities?
The SUPPLEMENT below highlights the importance of managing the human resources
that contribute to a company’s innovation efforts.
Extra Example: It Takes Time to Build Effective R&D Teams
The human side of innovation is often overlooked, according to Harvard Professor Rosabeth Moss Kanter. Teams
that are headed by technical experts rather than leaders often fail to emphasize external communications because
they believe the strongest innovative ideas will “speak for themselves” and don’t need to be championed. Technical
types also falter because they emphasize tasks rather than build the kind of internal relationships and chemistry that
teams need to turn underdeveloped ideas into successful innovations.
Another problem relates to the length of time organization members typically spend on innovation teams.
Researchers at the Massachusetts Institute of Technology found that it takes at least two years for an R&D team
member to be truly productive. Food manufacturing giant Pillsbury made a similar discovery about the time required
to take a new product from the idea stage to commercialization—it takes 24 to 26 months. However, the average
R&D team membership at Pillsbury was just 18 months. “No wonder the company was falling behind in
innovation,” says Kanter.
Source: Kanter, R. M. 2006. Innovation: The classic traps. Harvard Business Review, November: 72-83.
Discussion Question 13: What other factors determine how effectively an innovation
team performs?